International Business Free Essay Sample
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International Business Free Essay Sample
The current business environment is characterized by a considerable level of competitive rivalry and as a result businesses have to constantly reengineer their internal operations in order to build and maintain a competitive advantage. This is a critical consideration in the current business environment which is characterized by a constant pace of change. Therefore businesses have to assess the industry attractiveness. In this respect, Michael Porter’s five forces analysis is the best strategy available. The five forces are related to five areas: threat of new entrants, threat of substitute products and the threat of competitive rivalry, bargaining power of buyers and bargaining power of suppliers. This analysis focuses on the external environment. However this analysis may not be effective when it comes to international business. This is because international businesses have to deal with the issue of cultural variations across political borders. As a result, the issue of standardization and customization becomes relevant. In this respect, the company needs to address issues that may not be covered by the five forces analysis.
The threat of new entrants increases as constant returns to scale changes to increasing returns to scale. The ultimate objective of every business organization is to maximize the level of profits. Therefore when the management considers the initiative of entering a new industry, then it has to consider the return on investment. In this respect, the concept of returns to scale becomes relevant. In the event that the industry exhibits patterns which are supportive of increasing returns to scale, then there will be greater threat of new entrants because entry barriers are reduced. This is because industry attractiveness is greater and therefore the incentive to enter the industry is greater. This is particularly the case if the business achieves a first mover advantage through business process reengineering. In this respect, the production process might be structured such that increasing returns to scale becomes possible for that company. Therefore it becomes a feasible solution for that company to enter the new industry.
The concept of increasing returns to scale also becomes relevant when it comes to the threat of substitute products. In the situation where there are increasing returns to scale, the business has to invest less for the same level of output. Therefore, regardless of the threat of competitive rivalry currently existing in the industry, competitor organizations will be motivated to invest in building a production system which manufactures the product which has substitutes in the industry. Because of the effects on the threat of new entrants and the threat of substitute products, the threat of competitive rivalry is also affected accordingly. As mentioned before, the ultimate objective in every business operation is to maximize the level of profitability. However profitability is directly impacted by the existing level of competitive rivalry. This is the central issue in Porter’s five forces analysis. However this aspect is relevant only when it comes to constant returns to scale. Once the assumptions change from constant returns to scale to increasing returns to scale, the threat of high competitive rivalry no longer serves as an effective deterrent to new entry.
The last two forces in the five forces analysis are the bargaining powers of buyers and the bargaining powers of suppliers. The two forces are also related to whether the industry operates on the basis of constant returns to scale or increasing returns to scale. For example, in the case of high bargaining power on the part of suppliers, the manufacturing organization might invest in technological solutions that enhance the productivity of its manufacturing system. As a result, the manufacturing organization can produce double the output for the same level of input. In this situation, the manufacturing organization’s reliance on the suppliers is reduced since it does not require the same level of inputs as before. In this respect, the bargaining power of the manufacturer as the buyer goes up. Therefore, in the absence of the concepts of returns to scale, the five forces as static forces hold true. However in the event that the industry is characterized by changing returns to scale, the five forces become dynamic entities.
Employees are the most important assets of an organization. As a result, it is a critical success factor for the management to build the right working conditions. However this objective may be difficult to meet when it comes to international business. This is because employee expectations vary based on national cultures. Therefore the multinational company has to practice international human resource management. In this respect, the critical consideration becomes the delegation of authority. This is related to the issue of maintaining employee motivation. This is also related to the issue of learning and growth. In this respect, for an international business, implementing the balanced scorecard methodology may be the best option. According to the balanced scorecard, an organization may be viewed from four perspectives: financial, customer, learning and growth and internal business processes (cited in Hill & Jones, 2007). The balanced scorecard is an example of total quality management. This methodology emphasizes the interconnectedness between different internal processes in an organization.
The issue of interconnectedness becomes more relevant in the context of international business. This is because when it comes to international business, the process of coordination between the production plant and the suppliers becomes the critical success factor. In order to facilitate this process of coordination, multinational companies invest in techno-structural interventions that facilitate the building of an effective information-sharing infrastructure. The process of sharing information also has to take place between the subsidiaries and the headquarters in order to facilitate the process of decision making. In this respect, delegation of the decision making authority becomes relevant. However delegation of authority cannot be facilitated fully. At some level, the decision making process has to be centralized. This is to ensure alignment with the strategic focus of the organization. However formulation of strategies has to be customized to the existing market conditions in a particular country. Therefore the local management has to gather information on the local market conditions. In this respect, the entry strategy becomes relevant.
When it comes to entering a foreign market, an international business has three strategies available: acquisitions, joint ventures and Greenfield projects. An acquisition is made by a multinational company of a local company in the host country. The joint venture format facilitates the process of sharing resources. Greenfield projects allow the multinational company to establish its operations in entirety. The choice of entry strategy depends on the cultural orientation in the host country. In the cultural orientation which is characterized by high uncertainty avoidance, a multinational company might go for the strategy of joint ventures or that of Greenfield projects. The choice of entry is also characterized by the degree of cultural distance between the country of the investing firm and the country in which the investment is being made. This is because the international business environment is characterized by a high pace of change. As a result, international businesses have to build a flexible organizational structure. Building the right organizational structure becomes facilitated with the right entry mode.
As mentioned before, the current business environment is characterized by a high level of competitive rivalry. This is even more so in the international business environment. As a result, international businesses have to change on a continuous basis. This is part of the continuous improvement program. However managing change may be a difficult process because of the existing cultural orientation. According to research findings, most projects related to managing change fail because of employee resistance. As a result, the top management must build the right communications structure so that they can stay in constant touch with the employees. This is a critical consideration in view of the fact that employees are nervous about their future careers with the company during transition periods. As a result, the top management must assure them accordingly in order to motivate them to participate in the process. However, since this is dependent on building the right communications structure, the challenge can be even more difficult for the management of an international business because of cultural variations.
According to Michael Porter’s framework for strategy formulation, a business organization has three strategies at its disposal: differentiation, cost minimization and focus. Differentiation is the process of adding new features to the existing product line so that its appeal can be widened to additional segments of the market. Cost minimization is the process of business process reengineering in order to maximize the efficiency of resource allocation. Focus is the process of developing a niche market. All three strategies can be adopted by an international business. However in the context of the international market, the management has to pay particular attention to the strategy of differentiation because it has to address the issue of standardization and customization. In this respect, the issue of returns to scale also becomes a critical consideration. This is because the objective of differentiation must be met with keeping costs in perspective. Therefore the strategies of differentiation and cost minimization are interconnected.
The managerial framework of total quality management emphasizes the interconnectedness between different process chains in an organization. The balanced scorecard is an example of this framework. According to the balanced scorecard methodology, the financial and the customer-related perspectives are related to the perspectives of learning and growth and internal business processes. The balanced scorecard methodology creates a forward looking performance management system (cited in Fred, 2006). This is a particularly relevant consideration in the context of international business because of the high pace of change. As a result, practices that were effective in the past can no longer be considered as sufficient. This is because of the process of technological sophistication. An example is the process of automation. Automation is a fundamental reengineering of existing business processes so that returns to scale are changed. This can happen on an industry-wide basis so that all business organizations have to change their existing processes fundamentally. This is particularly relevant in the context of international business.
The age of globalization enables businesses to move their operations offshore with the minimum of fuss. For example, businesses in the West are moving en masse to China to take advantage of the low cost of production there (cited in Hitt, 2007). China has the largest reserve of manpower in the world. As a result, the cost of manpower in China is one of the lowest in the world. This enables businesses from the west to keep costs down. If it had not been for the process of globalization and China joining the World Trade Organization as a result of that process then the massive economic opportunities arising out of China’s meteoric rise to economic excellence would never have emerged. Because wages and salaries are very high in the West, the mature economies of the West are stagnating and not generating enough demand.
Rather than generating demand for traditional goods and services, these advanced economies are creating new patterns of demand that require companies to constantly innovate on their product lines (cited in Hill and Jones, 2007). The innovation is mostly in the form of differentiation, cost minimization and quick response. Companies that can differentiate their products or price their products less or deliver customer wants quickest are the ones which can survive. That is why competitive rivalry in the West is intense. It is not easy for the management of businesses limiting themselves to the mature economies of the West to reduce the cost of their operations because the wages and salaries are very high and they are going up all the time as a result of inflation (cited in Griffin, 2007). The only way for these businesses to constantly keep their costs down is to fund capital intensive research in order to restructure all the time for cutting costs. International business provides the opportunities for avoiding these expensive trends of business process reengineering.
As mentioned before, China has been experiencing phenomenal economic growth as a result of the gradual process of economic liberalization that the Chinese government has undertaken. An aspect of this liberalization has been on the part of the Chinese government to allow foreign businesses to set up operations in China. This strategy has succeeded because the infrastructure within China has developed to the point that it can handle the logistics requirements of manufacturing operations that businesses around the world have been setting up in China (cited in Naughton, 2005). The benefits of expanding to China are no secret to anyone.
The rise of the middle class in China and likewise in India means that these countries are generating new patterns of demand for goods and services that businesses in the west have been manufacturing for a long time. Because wages and salaries have soared in the West, these goods and services manufactured there have become prohibitively expensive. However they become affordable when manufactured in China. India has been developing a vast pool of technically trained manpower which can address the rising needs in information technology that the West has been experiencing. Once again, technical expertise is very expensive to hire in the West which it is not in India (cited in Naughton, 2005). However benefits flow in both directions. Exports to the West from China and India have been the main engine of economic growth for these two countries as they were for the Pacific Rim nations. Therefore, international business has been the engine of growth for both the West and the East (cited in Hill, 2005). However businesses expanding offshore have to face a number of challenges, political, economic and legal, that are best showcased by the South East Asian financial crisis in 1997 (cited in Wild, 2005).
The liberalization of the international financial system led to the onset of the South East Asian financial crisis. South Korea, Indonesia and Thailand were liberalizing their economies during the latter part of the 80’s and during the 90s in an effort to attract foreign direct investment. They succeeded only too well and the massive surge of investments that characterized these three countries at the time received their financing through foreign debt. The three governments were buying massive amounts of the US dollar to keep their currencies pegged to the US dollar. This was in response to the intense demand for the South Korean, Indonesian and Thai currencies prevalent at the time in the international investor circles.
The three countries at the time were showing the world an economic recipe which seemed to be immune to any sort of economic shocks. As far as the international investor was concerned, the only safe bet for their money was to invest in the assets of these three countries because the economic growth in the three countries seemed to have no strings attached. However the unregulated nature of the international financial system ensured that it was completely vulnerable to the vagaries of the international investor psychology. The investors who had been investing in the Thai currency changed their minds overnight and decided that the Thai currency was overvalued. In fairness to them, they did ask the Thai government to devalue the currency and the Thai government refused. As a result international investors fled and the Thai currency plunged leaving the government with a pile of foreign debt that it was unable to finance. The same catastrophe played out in South Korea and Indonesia and before these economies could get back on the path of growth, they had to substantially restructure different sectors of the economy that had contributed to the development of the crisis. For example the banking sectors in all three countries suffered from unmitigated cronyism where borrowing and lending decisions were dictated to rather by relationships than by economic feasibility.
The financial crisis in 1997 presents the challenges that an international investor faces when moving his or her businesses offshore. There are political challenges in the form of government control over lending and borrowing decisions which the management of a multinational company must take into account. When doing business in a foreign country, multinational companies have to develop a firm grasp of the government rules and regulations. This is particularly relevant when it comes to the oil and gas companies moving their drilling operations offshore. The government in each country will lay down some rules and regulations regarding activities that might have a harmful effect on the state of the environment (cited in Fred, 2006)). This is however not a problem because governments want to make it easy for foreign companies to invest in their countries. This is related to the issue of attracting foreign direct investment. One of the factors contributing to the development of international business is the move towards foreign direct investment that international financial organizations have been promoting as the economic fix for economically backward regions of the world.
Most of these regions have corrupt governments which will inevitably succumb to misuse of funds as a result of internal pressure from corrupt government officials. However such corruption becomes irrelevant when it comes to foreign direct investment because the ownership of funds remains firmly in the hands of the investor. As a result corrupt governments have to clean up their act in order to attract international business the owners of which will value political stability as one of most important factors influencing their investment decision. But even in the case of foreign direct investment, the management of an international business will have to deal with government intervention in their businesses. For example, multinational companies from many countries are free to bribe local governments because their home countries have no rules to address the issue. However US multinational companies are prohibited from bribing local governments. As a result, they have to follow other means of gaining local government support which they must have if they are to conduct their operations profitably (cited in Evans, 2004)).
International business can take many forms and the challenges vary according to type followed. For example, an American business organization might set up its production facilities elsewhere. Another form of international business might be limited to sales and marketing being moved offshore while production facilities are confined to the home country. Some companies might decide to sell franchises. These are some of the patterns most prevalent in international business. All these patterns however share one feature in common: they have to take into account considerations related to the socio-cultural impact of their operations abroad (cited in Hill, 2005). The critical consideration for the management in this regard is to recognize the fact that patterns of demand are affected most strongly by cultural considerations. This is critical because this ties in directly with their promotional activities which directly affect the profitability of their multinational corporations. In order to sell their goods and services in a foreign country, the management of multinational corporations must sell their products and services in a way that takes cultural differences into account. Logos and slogans are an important part of the promotional messages and the management must make sure that these components of their promotional activities are translated into the correct meanings.
It has been known to happen that a message that catapulted the associated products and services to peak demand in one country suffered disastrously in another because the translation was done literally so that the message was misinterpreted. These are some of the socio-cultural complexities that arise as a result of the international expansion of businesses (cited in Wild, 2005). These complexities arise because of sociological and cultural considerations that vary from one country to another. Therefore it is not just the promotional campaigns that have to be redesigned in order for them to be effective in different countries. The products and services that are offered by a multinational company in different countries have to be customized as well to different customer expectations. As a result, marketing complexities multiply. In their domestic operations, business establishments can limit their worries to behavioral and psychographic segmentation. When it comes to international operations, business establishments have to take into account geographical and demographic segmentation as well (cited in Daniels, 2004).
A critical component of any business operation is to develop a vision and a mission and translate them into statements that will guide strategic focus of the company (cited in Wild, 2005). Without strategic focus, a business organization will have no means by which to define organizational effectiveness. As a result, in order to stay on top of competition, international businesses in particular must set a clear strategic direction according to which the management will conduct its operations. This is not an easy task because of the sociological and cultural differences which are found from one country to another. In this respect, the human resource department has a role to play in that it has to design the compensation policies for employees who are going abroad to work in foreign plants. International businesses must have an international compensation system and developing that is the task of strategic human resource management. This is once again fraught with complicacies because different countries have different taxation policies and different cost of living indexes. Therefore the international pay system has to take those differences into account.
The human resource department usually follows two approaches when designing the international pay system. One is the going rate approach and the other is the balance sheet approach. According to the going rate approach, the parent company employs an international consultancy service which conducts a survey in the host country to assess what the employees in certain positions are paid. The parent company then designs the pay system accordingly when it sends its employees to that country. As a result employees moving from rich countries to poor will stand to lose financially. For example, managerial salaries in the US are the highest in the world (cited in Dess, 2007). According to the going rate approach, any US national moving to Japan as an expatriate will get a lower salary. This problem is corrected in the balance sheet approach because the international salaries are pegged to what the expatriates earned in their home countries. As a result, purchasing power parity is maintained in respect of the home country. However, according to the balance sheet approach, the pay system is not equitable with that of the host country nationals.
The international compensation system is directly related to the strategic management of international business. The management community these days is focusing on those cultural aspects internationally which are aligned with the strategic focus of their companies and they are designing the compensation system to motivate employee behavior connected to those aspects. As a result, strategic human resource management can no longer afford to keep things as simple as following either the going rate approach or the balance sheet approach. Instead they are following a flexible method to align with the strategic focus of their organizations. These are complex issues and trading blocs such as NAFTA or GATT were formed to give these issues a wide berth (cited in Griffin, 2007). The North American Free Trade Agreement includes the US, Canada and Mexico and, measured according to the combined GDP of the three countries, is the largest trade bloc in the world. Its effect therefore is massive. The NAFTA experience shows both the positive and the negative consequences of promoting globalization. For example, Mexican farmers have lost profitability in their farming business as a result of the agreement because food imports from the US and Canada are heavily subsidized.
American and Canadian businesses have also lost their economic potential as a result of business operations being moved to low-cost Mexico. A lot of employees at American and Canadian plants have lost their jobs. However Mexican citizens have gained a lot because of the greater employment opportunities in their country arising out of the agreement. So opinions on whether NAFTA is good or bad for the region are divided among economists. The effects of GATT similarly suffer from a lack of agreement in the economist circles. Some economists argue that this will improve transparency of government operations worldwide as they will have to defer to the free market for their economies to survive. Others ague argue that GATT only widens the disparity between the rich and the poor because economically backward regions, suddenly left defenseless against foreign hordes of ruthless competitors will not have the necessary infrastructure in place to adjust to the new state of affairs.
However there are positive consequences in the form of international businesses being able to move to low-cost regions at a minimum of friction thereby creating new employment opportunities as the North American Free Trade Agreement did for Mexico. Countries such as China and India which liberalized gradually to the influence of GATT have performed miraculous feats of economic prosperity. The success stories in China and India are tributes to the growth potential of international business and these success stories have been made possible more or less by agreements such as GATT. At the very least, multinational organizations, which are the agents of international business, make a considerable difference not only to their own profitability, but also to the political, economic and socio-cultural framework of their host countries by globalizing their operations.
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