Feasibility of a Multi National Manufacturing Organization: Setting up a new plant in a country in which it has not operated before.
Multinational corporations have existed since the beginning of overseas trade. They have remained a part of the business scene throughout history, entering their modern form in the 17th and 18th centuries with the creation of large, European-based monopolistic concerns such as the British East India Company during the age of colonization. Multinational concerns were viewed at that time as agents of civilization and played a pivotal role in the commercial and industrial development of Asia, South America, and Africa. By the end of the 19th century, advances in communications had more closely linked world markets, and multinational corporations retained their favorable image as instruments of improved global relations through commercial ties. The existence of close international trading relations did not prevent the outbreak of two world wars in the first half of the twentieth century, but an even more closely bound world economy emerged in the aftermath of the period of conflict.
In more recent times, multinational corporations have grown in power and visibility, but have come to be viewed more ambivalently by both governments and consumers worldwide. Indeed, multinationals today are viewed with increased suspicion given their perceived lack of concern for the economic well-being of particular geographic regions and the public impression that multinationals are gaining power in relation to national government agencies, international trade federations and organizations, and local, national, and international labor organizations.
Despite such concerns, multinational corporations appear poised to expand their power and influence as barriers to international trade continue to be removed. Furthermore, the actual nature and methods of multinationals are in large measure misunderstood by the public, and their long-term influence is likely to be less sinister than imagined. Multinational corporations share many common traits, including the methods they use to penetrate new markets, the manner in which their overseas subsidiaries are tied to their headquarters operations, and their interaction with national governmental agencies and national and international labor organizations.
WHAT IS A MULTINATIONAL
CORPORATION?
As the name implies, a multinational corporation is a business concern with operations in more than one country. These operations outside the company’s home country may be linked to the parent by merger, operated as subsidiaries, or have considerable autonomy. Multinational corporations are sometimes perceived as large, utilitarian enterprises with little or no regard for the social and economic well-being of the countries in which they operate, but the reality of their situation is more complicated.
There are over 40,000 multinational corporations currently operating in the global economy, in addition to approximately 250,000 overseas affiliates running cross-continental businesses. In 1995, the top 200 multinational corporations had combined sales of .1 trillion, which is equivalent to 28.3 percent of the world’s gross domestic product. The top multinational corporations are headquartered in the United States, Western Europe, and Japan; they have the capacity to shape global trade, production, and financial transactions. Multinational corporations are viewed by many as favoring their home operations when making difficult economic decisions, but this tendency is declining as companies are forced to respond to increasing global competition.
The World Trade Organization (WTO), the International Monetary Fund (IMF), and the World Bank are the three institutions that underwrite the basic rules and regulations of economic, monetary, and trade relations between countries. Many developing nations have loosened trade rules under pressure from the IMF and the World Bank. The domestic financial markets in these countries have not been developed and do not have appropriate laws in place to enable domestic financial institutions to stand up to foreign competition. The administrative setup, judicial systems, and law-enforcing agencies generally cannot guarantee the social discipline and political stability that are necessary in order to support a growth-friendly atmosphere. As a result, most multinational corporations are investing in certain geographic locations only. In the 1990s, most foreign investment was in high-income countries and a few geographic locations in the South like East Asia and Latin America. According to the World Bank’s 2002 World Development Indicators, there are 63 countries considered to be low-income countries. The share of these low-income countries in which foreign countries are making direct investments is very small; it rose from 0.5 percent 1990 to only 1.6 percent in 2000.
Although foreign direct investment in developing countries rose considerably in the 1990s, not all developing countries benefited from these investments. Most of the foreign direct investment went to a very small number of lower and upper middle income developing countries in East Asia and Latin America. In these countries, the rate of economic growth is increasing and the number of people living at poverty level is falling. However, there are still nearly 140 developing countries that are showing very slow growth rates while the 24 richest, developed countries (plus another 10 to 12 newly industrialized countries) are benefiting from most of the economic growth and prosperity. Therefore, many people in the developing countries are still living in poverty.
Similarly, multinational corporations are viewed as being exploitative of both their workers and the local environment, given their relative lack of association with any given locality. This criticism of multinationals is valid to a point, but it must be remembered that no corporation can successfully operate without regard to local social, labor, and environmental standards, and that multinationals in large measure do conform to local standards in these regards.
Multinational corporations are also seen as acquiring too much political and economic power in the modern business environment. Indeed, corporations are able to influence public policy to some degree by threatening to move jobs overseas, but companies are often prevented from employing this tactic given the need for highly trained workers to produce many products. Such workers can seldom be found in low-wage countries. Furthermore, once they enter a market, multinationals are bound by the same constraints as domestically owned concerns, and find it difficult to abandon the infrastructure they produced to enter the market in the first place.
The modern multinational corporation is not necessarily headquartered in a wealthy nation. Many countries that were recently classified as part of the developing world, including Brazil, Taiwan, Kuwait, and Venezuela, are now home to large multinational concerns. The days of corporate colonization seem to be nearing an end.
ENTRY OF MULTINATIONAL
CORPORATIONS INTO NEW MARKETS
Multinational corporations follow three general procedures when seeking to access new markets: merger with or direct acquisition of existing concerns; sequential market entry; and joint ventures.
Merger or direct acquisition of existing companies in a new market is the most straightforward method of new market penetration employed by multinational corporations. Such an entry, known as foreign direct investment, allows multinationals, especially the larger ones, to take full advantage of their size and the economies of scale that this provides. The rash of mergers within the global automotive industries during the late 1990s are illustrative of this method of gaining access to new markets and, significantly, were made in response to increased global competition.
Multinational corporations also make use of a procedure known as sequential market entry when seeking to penetrate a new market. Sequential market entry often also includes foreign direct investment, and involves the establishment or acquisition of concerns operating in niche markets related to the parent company’s product lines in the new country of operation. Japan’s Sony Corporation made use of sequential market entry in the United States, beginning with the establishment of a small television assembly plant in San Diego, California, in 1972. For the next two years, Sony’s U.S. operations remained confined to the manufacture of televisions, the parent company’s leading product line. Sony branched out in 1974 with the creation of a magnetic tape plant in Dothan, Alabama, and expanded further by opening an audio equipment plant in Delano, Pennsylvania, in 1977.
After a period of consolidation brought on by an unfavorable exchange rate between the yen and dollar, Sony continued to expand and diversify its U.S. operations, adding facilities for the production of computer displays and data storage systems during the 1980s. In the 1990s, Sony further diversified it U.S. facilities and now also produces semiconductors and personal telecommunications products in the United States. Sony’s example is a classic case of a multinational using its core product line to defeat indigenous competition and lay the foundation for the sequential expansion of corporate activities into related areas.
Finally, multinational corporations often access new markets by creating joint ventures with firms already operating in these markets. This has particularly been the case in countries formerly or presently under communist rule, including those of the former Soviet Union, eastern Europe, and the People’s Republic of China. In such joint ventures, the venture partner in the market to be entered retains considerable or even complete autonomy, while realizing the advantages of technology transfer and management and production expertise from the parent concern. The establishment of joint ventures has often proved awkward in the long run for multinational corporations, which are likely to find their venture partners are formidable competitors when a more direct penetration of the new market is attempted.
Multinational corporations are thus able to penetrate new markets in a variety of ways, which allow existing concerns in the market to be accessed a varying degree of autonomy and control over operations.
CONCERNS ABOUT MULTINATIONAL
CORPORATIONS
While no one doubts the economic success and pervasiveness of multinational corporations, their motives and actions have been called into question by social welfare, environmental protection, and labor organizations and government agencies worldwide.
National and international labor unions have expressed concern that multinational corporations in economically developed countries can avoid labor negotiations by simply moving their jobs to developing countries where labor costs are markedly less. Labor organizations in developing countries face the converse of the same problem, as they are usually obliged to negotiate with the national subsidiary of the multinational corporation in their country, which is usually willing to negotiate contract terms only on the basis of domestic wage standards, which may be well below those in the parent company’s country.
Offshore outsourcing, or offshoring, is a term used to describe the practice of using cheap foreign labor to manufacture goods or provide services only to sell them back into the domestic marketplace. Today, many Americans are concerned about the issue of whether American multinational companies will continue to export jobs to cheap overseas labor markets. In the fall of 2003, the University of California-Berkeley showed that as many as 14 million American jobs were potentially at risk over the next decade. In 2004, the United States faced a half-trillion-dollar trade deficit, with a surplus in services. Opponents of offshoring claim that it takes jobs away from Americans, while also increasing the imbalance of trade.
When foreign companies set up operations in America, they usually sell the products manufactured in the U.S. to American consumers. However, when U.S. companies outsource jobs to cheap overseas labor markets, they usually sell the goods they produce to Americans, rather than to the consumers in the country in which they are made. In 2004, the states of Illinois and Tennessee passed legislation aimed at limiting offshoring; in 2005, another 16 states considered bills that would limit state aid and tax breaks to firms that outsource abroad.
In sourcing, on the other hand, is a term used to describe the practice of foreign companies employing U.S. workers. Foreign automakers are among the largest insourcers. Many non-U.S. auto manufacturers have built plants in the United States, thus ensuring access to American consumers. Auto manufacturers such as Toyota now make approximately one third of its profits from U.S. car sales.
Social welfare organizations are similarly concerned about the actions of multinationals, which are presumably less interested in social matters in countries in which they maintain subsidiary operations. Environmental protection agencies are equally concerned about the activities of multinationals, which often maintain environmentally hazardous operations in countries with minimal environmental protection statutes.
Finally, government agencies fear the growing power of multinationals, which once again can use the threat of removing their operations from a country to secure favorable regulation and legislation.
All of these concerns are valid, and abuses have undoubtedly occurred, but many forces are also at work to keep multinational corporations from wielding unlimited power over even their own operations. Increased consumer awareness of environmental and social issues and the impact of commercial activity on social welfare and environmental quality have greatly influenced the actions of all corporations in recent years, and this trend shows every sign of continuing. Multinational corporations are constrained from moving their operations into areas with excessively low labor costs given the relative lack of skilled laborers available for work in such areas. Furthermore, the sensitivity of the modern consumer to the plight of individuals in countries with repressive governments mitigates the removal of multinational business operations to areas where legal protection of workers is minimal. Examples of consumer reaction to unpopular action by multinationals are plentiful, and include the outcry against the use of sweatshop labor by Nike and activism against operations by the Shell Oil Company in Nigeria and PepsiCo in Myanmar (formerly Burma) due to the repressive nature of the governments in those countries.
Multinational corporations are also constrained by consumer attitudes in environmental matters. Environmental disasters such as those which occurred in Bhopal, India (the explosion of an unsafe chemical plant operated by Union Carbide, resulting in great loss of life in surrounding areas) and Prince William Sound, Alaska (the rupture of a single-hulled tanker, the Exxon Valdez, causing an environmental catastrophe) led to ceaseless bad publicity for the corporations involved and continue to serve as a reminder of the long-term cost in consumer approval of ignoring environmental, labor, and safety concerns.
Similarly, consumer awareness of global issues lessens the power of multinational corporations in their dealings with government agencies. International conventions of governments are also able to regulate the activities of multinational corporations without fear of economic reprisal, with examples including the 1987 Montreal Protocol limiting global production and use of chlorofluorocarbons and the 1989 Basel Convention regulating the treatment of and trade in chemical wastes.
In fact, despite worries over the impact of multinational corporations in environmentally sensitive and economically developing areas, the corporate social performance of multinationals has been surprisingly favorable to date. The activities of multinational corporations encourage technology transfer from the developed to the developing world, and the wages paid to multinational employees in developing countries are generally above the national average. When the actions of multinationals do cause a loss of jobs in a given country, it is often the case that another multinational will move into the resulting vacuum, with little net loss of jobs in the long run. Subsidiaries of multinationals are also likely to adhere to the corporate standard of environmental protection even if this is more stringent than the regulations in place in their country of operation, and so in most cases create less pollution than similar indigenous industries.
THE FUTURE FOR MULTINATIONAL
CORPORATIONS
Current trends in the international marketplace favor the continued development of multinational corporations. Countries worldwide are privatizing government-run industries, and the development of regional trading partnerships such as the North American Free Trade Agreement (a 1993 agreement between Canada, Mexico, and United States) and the European Union have the overall effect of removing barriers to international trade. Privatization efforts result in the availability of existing infrastructure for use by multinationals seeking to enter a new market, while removal of international trade barriers is obviously a boon to multinational operations.
Perhaps the greatest potential threat posed by multinational corporations would be their continued success in a still underdeveloped world market. As the productive capacity of multinationals increases, the buying power of people in much of the world remains relatively unchanged, which could lead to the production of a worldwide glut of goods and services. Such a glut, which has occurred periodically throughout the history of industrialized economies, can in turn lead to wage and price deflation, contraction of corporate activities, and a rapid slowdown in all phases of economic life. Such a possibility is purely hypothetical, however, and for the foreseeable future the operations of multinational corporations worldwide are likely to continue to expand.
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Globalization was the buzzword of the 1990s, and in the twenty first century, there is no evidence that globalization will diminish. Essentially, globalization refers to growth of trade and investment, accompanied by the growth in international businesses, and the integration of economies around the world. According to Punnett (2004) the globalization concept is based on a number of relatively simple premises:
Technological developments have increased the ease and speed of international communication and travel.
Increased communication and travel have made the world smaller.
A smaller world means that people are more aware of events outside of their home country, and are more likely to travel to other countries.
Increased awareness and travel result in a better understanding of foreign opportunities.
A better understanding of opportunities leads to increases in international trade and investment, and the number of businesses operating across national borders.
These increases mean that the economies around the world are more closely integrated.
Managers must be conscious that markets, supplies, investors, locations, partners, and competitors can be anywhere in the world. Successful businesses will take advantage of opportunities wherever they are and will be prepared for downfalls. Successful managers, in this environment, need to understand the similarities and differences across national boundaries, in order to utilize the opportunities and deal with the potential downfalls.
The globalization of business is easy to recognize in the spread of many brands and services throughout the world. For example, Japanese electronics and automobiles are common in Asia, Europe, and North America, while U.S. automobiles, entertainment, and financial services are also common in Asia, Europe, and North America. Moreover, companies have become transnational or multinational-that is, they are based in one country but have operations in others. For example, Japan-based automaker Honda operates the largest single factory in the United States, while U.S. based Coca-Cola operates plants in other countries including France and Belgium—with about 80 percent of that company’s profits come from overseas sales.
During the early1990s, there were reasons to feel that globalization was working. The economic success of Singapore, the rapid economic growth in the Asian Tigers (as the Asian countries that grew rapidly were called), the industrializing of countries, such as Brazil and Mexico, and a variety of other positive economic events around the world suggested that the results of globalization were indeed good for development in poorer countries, as well as in richer ones. During the 1990s, the United States experienced one of its most sustained periods of growth as well, and there was much talk of a “new economy”, based on globalization, which was immune to economic shocks and recession.
Unfortunately, this rapid growth was not without consequences. The Seattle meetings of the World Trade Organization turned into a fiasco, with anti-globalization groups demonstrating against globalization on all fronts—from animal rights to environmental concerns, poverty alleviation, and jobs for Americans. The anti-globalization forces have not coalesced into a coherent whole because they represent such diverse and often contradictory views. The vehemence of their protests, however, make it clear that globalization is not a panacea for the world’s problems. In addition, the Asian Tigers suffered major economic setbacks in the late 1990s. In 2002, Argentina’s economy, which had been one of the stars of the 1990s, crashed, when the country could no longer maintain its currency at par with the U.S. dollar.
Further problems occurred in the Triad economies. Japan, Europe, and the United States, often referred to as the Triad, dominated international trade and investment for much of the second half of the twentieth century. The Japanese economy went into a severe period of recession and deflation in the late 1990s, and in 2001 both the European and the U.S. economies took a downward turn as well. In turn, the rest of the world was negatively affected by the economic situation in the Triad. The terrorist attacks in the United States in September, 2001, exacerbated this already negative economic situation.
In developing appropriate global strategies, managers need to take the benefits and drawbacks of globalization into account. A global strategy must be in the context of events around the globe, as well as those at home.
International strategy is the continuous and comprehensive management technique designed to help companies operate and compete effectively across national boundaries. While companies’ top managers typically develop global strategies, they rely on all levels of management in order to implement these strategies successfully. The methods companies use to accomplish the goals of these strategies take a host of forms. For example, some companies form partnerships with companies in other countries, others acquire companies in other countries, others still develop products, services, and marketing campaigns designed to
Table 1
Differences Between Domestic and International Strategy
Source: World Bank
Factors
Domestic Conditions
Global Conditions
Culture
Homogeneous
Heterogeneous
Currency
Uniform
Different currencies and exchange rates
Economy
Stable and uniform
May be variable and unpredictable
Government
Stable
May be unstable
Labor
Skilled workers available
Skilled workers may be hard to find
Language
Generally a single language
Different languages and dialects
Marketing
Many media, few restrictions
May be fewer media and more restrictions
Transport
Several competitive modes
May be inadequate
appeal to customers in other countries. Some rudimentary aspects of international strategies mirror domestic strategies in that companies must determine what products or services to sell, where and how to sell them, where and how they will produce or provide them, and how they will compete with other companies in the industry in accordance with company goals.
The development of international strategies entails attention to other details that seldom, if ever, come into play in the domestic market. These other areas of concern stem from cultural, geographic, and political differences. Consequently, while a company only has to develop a strategy taking into account known governmental regulations, one language (generally), and one currency in a domestic market, it must consider and plan for different levels and kinds of governmental regulation, multiple currencies, and several languages in the global market.
The most recent wave of globalization by U.S. companies began in the 1980s, as companies began to realize that concentrating on the domestic market alone would lead to stagnant sales and profits and that emerging markets offered many opportunities for growth. Part of the motivation for this globalization stemmed from the lost market share in the 1970s to multinational companies from other countries, especially those from Japan. Initially, these U.S. companies tried to emulate their Japanese counterparts by implementing Japanese-style management structures and quality circles. After adapting these practices to meet the needs of U.S. companies and recapturing market share, these companies began to move into new markets to spur growth, enable the acquisition of resources (often at a cost advantage), and gain competitive advantage by achieving greater economies of scale.
The globalization of U.S. companies has not been without concerns and detractors. Exporting U.S. jobs, exploiting child labor, and contributing to poverty have all been charges laid at the doors of U.S. companies. These charges have been accompanied by demonstrations and consumer boycotts.
Nor have U.S. companies been the only ones affected. Companies in the rest of the developed world have globalized along with U.S. companies, and they have also faced the sometimes negative consequences.
Interestingly, in the late twentieth and early twenty-first century, there has also been a growth in international companies from developing and transitional countries, and this trend can be expected to continue and increase. Exports and investment from the People’s Republic of China are a notable example, but companies from Southeast Asia, India, South Africa, and Latin America, to name some countries and regions, are making themselves known around the world.
TYPES OF GLOBAL BUSINESS ACTIVITIES
Businesses may choose to globalize or operate in different countries in four distinct ways: through trade, investment, strategic alliances, and licensing or franchising. Companies may decide to trade tangible goods such as automobiles and electronics (merchandise exports and imports). Alternatively, companies may decide to trade intangible products such as financial or legal services (service exports and imports).
Companies may enter the global market through various kinds of international investments. Companies may choose to make foreign direct investments, which allow them to control companies and assets in other countries. In addition, companies may elect to make portfolio investments, by acquiring the stock of companies in other countries in order to gain control of these companies.
Another way companies tap into the global market is by forming strategic alliances with companies in other countries. While strategic alliances come in many forms, some enable each company to access the home market of the other and thereby market their products as being affiliated with the well-known host company. This method of international business also enables a company to bypass some of the difficulties associated with internationalization such as different political, regulatory, and social conditions. The home company can help the multinational company address and overcome these difficulties because it is accustomed to them.
Finally, companies may participate in the international market by either licensing or franchising. Licensing involves granting another company the right to use its brand names, trademarks, copyrights, or patents in exchange for royalty payments. Franchising, on the other hand, is when one company agrees to allow a company in another country to use its name and methods of operations in exchange for royalty payments.
OVERVIEW OF INTERNATIONAL
STRATEGY DEVELOPMENT
Generally, a company develops its international strategy by considering its overall strategy, which includes its operations at home and abroad. we can consider four aspects of strategy: (1) scope of operations, (2) resource allocation, (3) competitive advantage, and (4) synergy. The first component encompasses the geographic locations—countries and regions—of possible operations as well as possible markets or niches in various regions. Since companies have limited resources and since different regions offer different advantages, managers must select the markets that offer the company the optimal opportunities.
The second component of the global strategy focuses on use of company resources so that a company can compete successfully in the chosen markets. This component of strategy planning also determines the relative importance of various company functions and bases the allocation of resources on the relative importance of each function. For instance, a company may decide to allocate its resources based on product lines or geographical locations.
Next, management must decide where the company can achieve competitive advantage over other companies in the industry. Management can identify their competitive advantage by determining what the company does better (or can do better) than its competitors. Companies may realize this advantage through a host of techniques such as using superior technology, implementing more efficient organizational practices and distribution systems, and cultivating well-known brands. This component of the strategy involves not only identifying existing or potential areas of competitive advantage but also developing a plan for sustaining areas of competitive advantage. Finally, global strategy should involve establishing a plan for the company that enables its various functions and operations to benefit one another. For example, a company can use one line of products to encourage sales of another line of products and thereby enabling different parts of a business to benefit from each other.
Many companies are now outsourcing many of their operations internationally. For example, if you call to get information on your credit card, you may well be talking to someone in India or Mexico. Equally, manufacturers often outsource production to low labor cost countries. Concerns over ethical issues, such as slave and child labor, have led to companies outsourcing under controlled conditions—offshore production may be subject to surprise visits and searches and outsourced factories are required to conform to specific criteria.
STAGES OF INTERNATIONAL
STRATEGY DEVELOPMENT
Strategy development itself generally takes places in two stages: strategy formulation and strategy implementation. When planning a strategy, companies identify their international objectives and put together a strategy that will enable them to realize their goals. During the planning stage managers propose, revise, and finally ratify plans for entering new markets and competing in them.
After a strategy has been agreed on, managers must take steps to have it implemented. Consequently, this stage involves determining when to begin global operations as well as actually starting operations and putting into action the other components of the global strategy.
More specifically, the first stage—strategy formulation—entails analysis of the company and its environment, establishing strategic goals, and developing plans to achieve goals as well as a control framework. By assessing itself and the global business environment, a company can determine what markets, products, services, etc. offer opportunities for growth. This process involves the collection of data on a company and its environment, including information on global markets, regulation, productivity, costs, and competitors. Therefore, the collection of data should supply managers with economic, financial, political, legal, and social information on various countries and their markets for different products or services. Based on this information, managers can determine what markets and products offer economically feasible opportunities for global expansion.
Once this analysis is complete, managers must establish strategic goals, which are the significant goals a company seeks to achieve through a particular pursuit such as entering a new regional market. These goals must be practicable, measurable, and limited to a specific time frame. After the strategic goals have been established, companies should develop plans that allow them to accomplish their goals, and these plans should concentrate on how to implement strategic plans. Finally, strategy formulation involves a control framework, which is a process management uses to help ensure that a company remains on the right course when implementing its strategic plans. The control framework essentially responds to various developments while the strategic plans are being implemented. For example, if sales are lower than the projected sales that are part of the strategic goals, then a company might increase its marketing efforts and temporarily lower its prices to stimulate additional sales.
INTERNATIONAL MARKET EVALUATION
While many aspects of international strategy and its formulation are similar to their domestic counterparts, some key aspects are not, and hence call for different methods and different kinds of information. Gaining knowledge of international markets is one of these key differences—and a crucial part of developing an international strategy. In order for a company to enter a new market, capture market share, and thereby increase sales and profits, it must know what that market is like. At a basic level, a company must examine different markets, evaluate the advantages and disadvantages of entering each, and select only the markets that show the greatest potential for entry and growth.
When examining different international markets, a company should consider the market potential, competition, regulation, and cultural factors of each. Company managers can assess market potential by collecting data on the gross domestic product (GDP), per capita GDP, population, transportation, and other figures of various countries. This kind of information will enable managers to determine the spending power of the consumers in each country and determine if that spending power allows them to purchase a company’s
Table 2
Differences Between Domestic and
International Strategy
Country
GDP per Capita (2003 Estimate in US$)
Luxembourg
55,100
United States
37,800
Norway
37,700
Bermuda
36,000
Cayman Islands
35,000
San Marino
34,600
Switzerland
32,800
Denmark
31,200
Iceland
30,900
Austria
30,000
products or services. Managers also should consider the currency stability of the different markets, which can be done by using documents from the home countries to determine currency value and fluctuation over a period of years.
To select the best markets for entry, managers also should consider the degree of competition within different markets and should anticipate future competition in them as well. Determining the degree of competition involves the identification of all the companies competing in the prospective markets as well as their sizes, market shares, and prices. Managers then should evaluate a prospective market by considering the number of competitors and their characteristics as well as the market conditions—that is, whether the market is saturated with competition and cannot support any new entrants.
Next, managers should evaluate the regulatory environment of the prospective markets, since knowing tax, trade, other related policies is essential for a successful international business. This step entails determining the respective tariffs and trade barriers of prospective markets. Different types of trade barriers may influence the kind of business activity a company chooses for a particular market. For example, if a prospective market has trade barriers that restrict the entry of foreign-made goods, a company might decide to access the market through foreign direct investment and manufacture its products in that country itself. Ownership restrictions also may limit a company’s interest in a particular market; some countries permit foreign companies to set up local operations only if they establish a partnership with a local company. In addition, managers should find out if prospective countries charge foreign companies higher taxes or if they offer tax breaks and incentive to encourage economic development. A final consideration companies must make concerning government is stability. Since some countries have rough government transitions resulting from coups and uprisings, companies must countenance the possibility of political turmoil that could substantially disrupt business.
The last step in international market evaluation is the assessment of cultural factors. To avoid difficulties associated with cultural differences, some managers look for new markets that have cultural similarities to their home market, especially for initial international market penetration endeavors. Unlike market potential, competition, and regulation, cultural differences are more difficult to evaluate. Nevertheless, managers must try to determine the consumer needs and preferences in the prospective markets. Managers must also account for cultural differences in labor relations such as worker motivation, compensation, hours, etc. if planning foreign direct investment in an overseas company. Moreover, a thorough understanding of a prospective country’s culture will greatly facilitate any kind of global business enterprise. This cultural knowledge should include a basic understanding of a prospective country’s beliefs and attitudes, language and communication styles, dress, food preferences and customs, time and time consciousness, relationships, values, and work ethic. This kind of cultural information is essential for developing an effective and realistic global strategy.
Since conducting primary research is labor intensive and time consuming, managers may obtain preliminary information on prospective markets from books such as Dun & Bradstreet’s Guide to Doing Business Around the World and Business Protocol: How to Survive and Succeed in Business, or the Economist’s “Doing Business in…” series, which list potential trade opportunities, policies, etiquette, taxes, and so on for various countries.
After examining the prospective markets in this manner, managers are ready to evaluate the advantages and disadvantages of each potential market. One way of doing so is the determination of costs, advantages, and disadvantages of each prospective market. The costs of each market include direct costs and opportunity costs. Direct costs are those a company pays when establishing a business in a new market, such as costs associated with purchasing property and equipment and producing and shipping goods. Opportunity costs, on the other hand, refer to the costs associated with the loss of other opportunities, since entering one market rules out or postpones entering another because of a company’s limited resources. Hence, the profits that could have been earned in the alternative market constitute the opportunity costs.
Each prospective market usually has a variety of advantages, such as the possibility for growth, which will lead to greater revenues and profits. Other advantages include relatively low material and labor costs, new technology gaining strategic advantage over competitors, and matching competitors’ actions. However, each prospective market also usually has a number of disadvantages, including opportunity costs, greater business complexity, and potential losses stemming from unforeseen aspects of prospective markets and from currency fluctuations. Other disadvantages might result from potential losses associated with unstable political conditions.
ANALYSIS OF TWO INTERNATIONAL
STRATEGIES
In the late 1990s after a significant amount of globalization had taken place, business analysts began to examine the success of various strategies for doing business in other countries. This examination led to the distinction between various orientations of international strategies. The main distinction was between multi-domestic (also called multi-local) international strategies and global strategies. Multi-domestic international strategies refer to those that address competition in each country or region on an individual basis, whereas global strategy refers to addressing competition in an integrated and holistic manner across country and regional boundaries. Hence, multi-domestic international strategies attempt to appeal to the needs of customers in different countries or regions, while global strategies attempt to standardize products and marketing to work across boundaries. Instead of relying on one of these strategies, multinational companies might adopt a different strategy for different products or services. For example, a company might use a global strategy for its electronics and a multi-domestic strategy for its appliances.
Critics of the standardization approach argue that it makes two questionable assumptions: that consumers’ needs are becoming more homogenous throughout the world and that consumers prefer high quality and low prices over advanced features and functions. Nevertheless, standardized global strategies have some significant benefits. Companies can reduce their marketing expenditures, for example, if they use the same ads in all their markets. PepsiCo, for example, uses the same televisions ads in all of its national markets, saving an estimated million a year. Besides marketing savings, global strategies can lead to other kinds of benefits and advantages in areas such as design, packaging, manufacturing, distribution, customer service, and software development.
Some people argue that companies must customize their products or services to meet the needs of various international markets, and hence must use a multi-domestic strategy at least in part. For example, KFC planned a standardized approach to its foray into the Japanese market, but the company soon realized it had to change its strategy to meet the needs of Japanese consumers and customize its operations in Japan. Consequently, KFC introduced smaller pieces of foods to cater to a Japanese preference, and located restaurants in crowded areas along with other restaurants, moving away from independent sites. As a result of these changes, the fast-food restaurant experienced stronger demand in Japan.
The development of regional trading blocs has promoted an emphasis regional strategies as companies develop plans to take advantage of the conditions within various trading blocs such as the North American Free Trade Agreement (NAFTA), the European Union, the Asia-Pacific Economic Cooperation (APEC) and the Association of Southeast Asian Nations (ASEAN). In addition, the United States has signed 16 different trade agreements with South American countries, creating a foundation for a trading bloc consisting of all North and South American countries. Consequently, companies have been establishing regional strategies designed around these trading blocs. Nike, for example, established central warehouses for its European distribution, just as it has a central warehouse for its U.S. distribution. This strategy has enabled Nike to reduce its inventory, cut down on redundancy, reduce costs, and enhance availability. In addition, News Corporation originally relied on a global strategy with its STAR-TV satellite television network; attempting to provide the same television shows across Asia in English. The company quickly switched to a multi-domestic strategy, providing programming in local languages after receiving low ratings and advertising dollars with its first approach.
A variety of corporate collapses, and the revelation of unethical and illegal practices in many international companies, has led to a focus on Corporate Governance and Ethics in the early twenty first century. Issues of what constitutes socially responsible behavior are likely to be a major part of global strategy for the coming years.
http://www.referenceforbusiness.com/management/Str-Ti/Strategy-in-the-Global-Environment.html
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