INTERNATIONAL BUSINESS INTRODUCTION
INTERNATIONAL
BUSINESS
INTRODUCTION
The beverages you drink might be produced in
India, but with the collaboration of a USA company. The tea you drink is
prepared from the tea powder produced in Sri Lanka. The spares and hard-disk of
the computer you operate might have been produced in the United States of
America. The perfume you apply might have been produced in France. The
television you watch might have been produced with the Japanese technology. The
shoe you wear might have been produced in Taiwan, but remarketed by an Italian
company. Air France and so on so forth might have provided your air-travel
services to you. Most of you have the experience of browsing Internet and
visiting different web sites, knowing the products and services offered by
various companies across the globe. Some of you might have the experience of
'even ordering and buying the products through Internet. This process 6 gives
you the opportunity of transacting in the international business arena without
visiting or knowing the various countries and companies across the globe. You
get all these even without visiting or knowing the country of the company where
they are produced. All these activities have become a reality due to the
operations and activities of international business. Thus, international
business is the process of focusing on the resources of the globe and
objectives of the organizations on global business opportunities and threats.
We can also say that International Business is all business transactions -
private & governmental – that involve two or more countries. Private
companies undertake such transactions for profit; governments may or may not do
the same in their transactions. It involves performance of business activities
designed to plan, price, promote and direct the flow of a company’s goods and
services to consumers or users in more than one nation for a profit. This
apparently minor difference “in more than one nation” accounts for the
complexity and diversity found in international marketing operations although
the concepts of marketing remain basically the same for both domestic &
international business.
Evolution of International Business The business across the borders of the countries had
been carried on since times immemorial. But, the business had been limited to
the international trade until the recent past. The post-World War If period
witnessed an unexpected expansion of national companies into international or
multinational companies. The post 1990s period has given greater fillip to
international business. In fact, the term international business was not in
existence before two decades. The term international business has emerged from
the term international marketing, which in turn, emerged from the term ‘export
marketing’. International Trade to International Marketing: Originally, the
producers used to export their products to the nearby countries and gradually
extended the exports to far-off countries. Gradually, the companies extended
the operations beyond trade. For example, India used to export raw cotton, raw
jute and iron ore during the early 1900s. The massive industrialization in the
country enabled us to export jute products, cotton garments and steel during
1960s. India, during 1980s could create markets for its products, in addition
to mere exporting. The export marketing efforts include creation of demand for
Indian products like textiles, electronics, leather products, tea, coffee etc.,
arranging for appropriate distribution channels, attractive package, product
development, pricing etc. This process is true not only with India, but also
with almost all developed and developing economies. International Marketing to
International Business: The multinational companies which were producing the
products in their home countries and marketing them in various foreign
countries before 1980s started locating their plants and other manufacturing
facilities in foreign/host countries. Later, they started producing in one
foreign country and marketing in other foreign countries. For example, Uni
Lever established its subsidiary company in India, i.e., Hindustan 7 Lever
Limited (HLL). HLL produces its products in India and markets them in
Bangladesh, Sri Lanka, Nepal etc. Thus, the scope of the international trade is
expanded into international marketing and international marketing is expanded
into international business.
Why do the Business firms of a country
go to other countywide?
The basic question of "why do the
Business firms of a country go to other countywide?" might have been in
your mind. The answer is to achieve Higher Rate of Profits. We have discussed
in various courses/ subjects like Principles and Practice of Management,
Managerial Economics and Financial Management that the basic objective of the
business firms is to earn profits. When the domestic markets do not promise a higher
rate of profits, business firms search for foreign markets, which promise for
higher rate of profits. For example, Hewlett Packard earned 85.4% of its
profits from the foreign markets compared to that of domestic markets in 1994.
Apple earned US $ 390 million as net profit from the foreign markets and only
US $ 310 millions as net profit from its domestic market in 1994. Some of the
domestic companies expanded their production capacities more than the demand
for the product in the domestic countries. These companies, in such cases, are
forced to sell their excess production in foreign developed countries. Toyota
of Japan is an example.
SIGNIFICANCE
What differentiates international
business from domestic ones? It is
the environment within which the marketing plans have to be implemented. Each
market is unique & so varieties of strategies have to be formulated for the
wide range of unfamiliar problems encountered in foreign markets. Competition,
legal restraints, government controls, weather, fickle consumers and a number
of other factors can, and frequently do, affect the profitable outcome of good
sound marketing plans. What then makes Internationalization of Business
challenging? The task of molding the controllable elements of the marketing
decisions (home country environment) within the frame work of uncontrollable
elements of the marketplace (home & host country environments) in such a
way that the marketing objectives are achieved. Home country environment
controllable activities are Price; Promotion, Product, Channels of
Distribution. Assuming the necessary overall corporate resources, the
businessman blends the above stated controllable activities to capitalize on
the anticipated demand. They can be altered in the long run and, usually, in
the short run, to adjust to changing market conditions, consumer tastes, or
corporate objectives. Home Country Environment Uncontrollable Factors: The
factors are Political / Legal Forces, Competitive Structures, Economic Climate
etc. These factors include home country elements that have a direct effect on
the success of a foreign venture and are immediate control of the marketer.
Political Decision: Political Decision involving domestic foreign policy can
have a direct effect on a firm’s international business operations
Domestic Economic Climate: Domestic Economic Climate is another important home
– based uncontrollable variable with far-reaching effects on a company’s
competitive position in foreign markets. The capacity to invest in plants and
facilities, either in domestic or foreign markets, is to a large extent a
function of the domestic economic vitality. If economic conditions deteriorate,
restrictions against foreign investment and purchasing may be imposed to
strengthen the domestic economy. Domestic Competition: Domestic Competition can
also have a profound effect upon the international marketer’s task. Eastman
Kodak dominated the U.S film market and could depend on achieving profit goals
that provided capital to invest in foreign markets. Without having to worry
about the company’s lucrative base, management had the time & resources to
devise aggressive international marketing programs. However, the competitive
structure changed when Fuji Photo Film became a formidable competitor by
lowering film prices in the United States, opening a $ 300 million plant, and
gaining 12 % of the U.S market. As a result, Kodak had a direct energy and the
resources back to the United States. Competitive within their home country
affects a company’s domestic as well as international plans. Inextricably
entwined with the effects of the domestic environment are the constraints
imposed by the environment of each foreign country. Foreign Country Environment
Uncontrollable Factors: Foreign Country Environment Uncontrollable Factors are
Political / Legal forces, Economic forces, Competitive forces, Level of
Technology, Structure of Distribution, Geography & Distribution, Cultural
forces etc. A business operating in its home country undoubtedly feels
comfortable in forecasting the business climate and adjusting the business
decisions to these elements. The process of evaluating the uncontrollable
elements in an international marketing program, however involves substantial
doses of cultural, political and economic shock. A business operating in a
number of foreign countries might find polar extremes in political stability,
class structure, and economic climate – critical elements in business
decisions. Let us now discuss some illustrations of the nature of foreign
uncontrollable factors
Why do Companies engage in International
Business?
In operating internationally, a company should
consider its mission (what the company will seek to do and become over the long
run), its objectives [specific performance targets to fulfill its mission] and
strategy (the means to fulfill its objectives). There are four major operating
objectives that may influence companies to engage in international business.
These are: • To achieve more sales; • To acquire resources; • To diversify
their sources of sales and supplies & minimize risk; • To counter – attack
foreign competition.
Expand Sales: Any company’s Sales are
dependent on two factors:
The Consumer’s interest in the
product/services & Consumer’s willingness & ability to buy them
Acquire Resources:
Manufacturers and distributors seek out
products, services and components produced in foreign countries. They also look
for foreign capital, technologies and information they can use at home.
Sometimes they use this to reduce their costs. For example, Disney relies on
cheap manufacturing bases in China & Taiwan to supply clothing to its
souvenir outlets. The potential benefits of this practice are obvious: • Either
the profit margin may be increased; or • The cost savings may be passed on to
consumers, who will in turn buy more products thus producing more profits
through greater sales volume.
Inter-country Comparative Study: International business studies the business
opportunities, threats, consumers' preferences, behavior, cultures of the
societies, employees, business environmental factors, manufacturing locations,
management styles, inputs and human resource management practices in various
countries. International business seeks to identify, classify and interpret the
similarities and dissimilarities among the systems used to anticipate demand
and market products'. The system presents inter-country comparison and
inter-continental comparison/comparative analysis helps the management to
evaluate the markets, finances, human resources, consumers etc. of various
countries. The comparative study also helps the management to evaluate the
market potentials of various countries
Differences in Government Policies, Laws and Regulations: Sovereign governments enact
and implement the laws, and formulate and implement policies and regulations.
The international business houses should follow these laws, policies and
regulations. MNCs operating in India follow our labor laws, business laws and
policies and regulations formulated by the Indian Government. Host Country's Monetary System: Countries regulate the
price level, flow of money, production levels etc. through their monetary
systems. In addition, they regulate foreign exchange rates also through the
monetary system. The tools of monetary system include bank rate, cash reserve
ratio, statutory liquidity ratio etc.
National Security Policies of the Host
Countries: Every country formulates
the policies for its national security. Multinational companies should abide by
these national security policies. For example, USA is a free economy as far as
carrying out the business compared to many other countries in the world.
However, USA also imposes restrictions regarding the business operations, which
affect the national security.
Cultural
Factors: Cultural and custom factors vary widely from one country to the.
These factors include dressing habits, eating habits, religious factors and the
like. Multinational companies should consider these factors of the host country
while operating in that country. For example, the culture of the Fiji people is
that they attend to the family activities at least three 16 times a day.
Therefore, the companies operating in that country allow their workers to go
home three times a day
Approaches to International Human Resource Management
Corporate management philosophy is an important issue
because it decides how a firm views the world in relation to itself and how it
wants to manage human resources in different countries. HR manager at
international level must not only select people with skills, but also employees
who can mix with the organisations’ culture. General Electric, for
example, is not just hiring people who have skills required to perform
particular jobs, it wants to hire employees whose style, beliefs, and value
system are consentient with those of the firm. Corporate culture and management
philosophy, to a great extent decide the formulation and implementation of
corporate and operational strategies and their evolution into various stages of
internationalization. Companies involved in world trade and investment can be
divided into four types based on their management approach and corporate
philosophy:
- Ethnocentric
- Polycentric
- Regiocentric
- Geocentric
Ethnocentric Organisation:
There motto is ‘this work in my country therefore, it
must work in other countries also’. These are home country oriented
organization. Example, when a Japanese corporation invests in Mexico, Japan is
the home country and Mexico is the host country. If the Japanese Corporation is
ethnocentric, it will except Mexicans to accept the inherent superiority of
Japan. Investments will be made on the Japanese methods of conducting business.
In this approach, all key management positions are
held by parent country nationals, e.g., Toyota, Matsushita, Samsung etc. this
strategy may be appropriate during the early phases of international business,
because firms at that stage are concerned with transplanting a part well in
their home country. Ethnocentric corporations believe that home country
nationals are more intelligent, reliable and trust worthy than foreign
nationals. Firms such as Procter and Gamble, Philips, and Matsushita originally
followed the ethnocentric approach.
In this approach, all important positions in MNCs are
filled up by PCNs in the early stages of internalization. Apart from this, for
certain business-related reasons which are as follows:
- A
perception that qualified HCNs may not be available for the units;
- To
ensure that coordination and communication are maintained adequately in headquarters.
But, these are several problems in adopting the approach. Some of them
have been pointed below:
- An
ethnocentric staffing policy limits the promotion opportunities of HCNs,
which may lead to reduced productivity and increased turnover among that
group.
- The
adaptation of expatriate managers to host countries often takes a long
time during which PCNs make mistakes and make poor decisions.
- When
PCN and HCN compensation packages are compared, the often considerable
income gap in favour of PCNs is viewed by HCN, as unjustified.
- For
many expatriates, a key international position means new status, authority
and an increase in standard of living. These changes may affect
expatriates sensitivity to the needs and expectations of their host
country subordinates.Apart from, this the cost of maintenance of
expatriates is quite high. This approach is not only reflected in the
staffing policy but in all other areas such as performance appraisal where
evaluation format is designed and administered by parent nationals and new
product development is done in the home country. Many international
companies exhibit this ethnocentric philosophy. They have difficulty in
communicating in different languages and accepting cultural differences.
But ethnocentrism limits strategic alternatives to entry modes, such as
exporting, licensing and than key operations.
Polycentric Organisations:
These motto is ‘when in Rome do as the Romans do’.
When you are elsewhere lives as they live elsewhere. The polycentric staffing
requires host country nationals to be hired to manage subsidiaries, while
parent-country nationals occupy key positions at corporate headquarters.
Although top management positions are filled by home-country personnel, this is
not always the case. They see profit potential in a foreign country but find
the foreign market difficult to understand.
The polycentric message is: ‘Local people know what is
best for them. Let’s give them some money and leave them alone as long as they
make us a profit.’ Governmental pressure and foreign laws often necessitate
polycentric approach. The local government may be a major customer and insist
on local ways to be adopted. Many multinationals adopt this approach because
they face the heterogeneous environments in which product preferences may be
the deciding factors and strategies are to be developed on a market by market
basis. There are several advantages with this approach are outlined below:
- Employing
HCNs eliminate language problems for the expatriates and their family
members, reduces cost on costly awareness training programs, and takes
care of the adjustment problems to a large extent.
- In
politically sensitive situations, it helps the MNCs to maintain a low
profile.
- Even
though high salaries may have to be given to attract HCN applicants, it
still works out cheaper for the company in the long run as compared to
employing PCNs.
- The
crucial problem of turnover experienced when employing PCNs can be avoided
effectively by employing HCNs, since they are more stable and can help in
maintaining the continuity in managing subsidiaries more efficiently
Regiocentric Organization
These are regionally oriented organizations.
A Corporation implements a regional strategy when synergistic benefits can be
obtained by sharing functions across regions. The international staff is transferred
with in the same region they work, example, for a global firm having a number
Asia-Pacific, European and US, a manager working in Asia-Pacific region will be
moving within the same region only, if the company adopts regiocentric
approach. Regional headquarter organizes collaborative efforts among local
subsidiaries, it is responsible for the regional plan, local research and
development, local executive selection and training, product innovation, cash
management, brand policy, capital expenditure and public relations
- It
allows interaction between executives transferred to regional headquarters
from subsidiaries in the region and PCNs, posted to the regional
headquarters.
- It
reflects some sensitivity to local conditions, since local subsidiaries are
staffed almost totally by HCNs.
- It can
be a way for a multinational to more gradually from a purely ethnocentric
or polycentric approach to a geocentric approach.
Disadvantages of regiocentric policy.
- It can
produce federalism at a regional rather than a country basis and constrain
the organization from taking a global stance.
- While
this approach does improve career prospects at the national level it only
moves the barrier to regional level staff may advance to regional
headquarters but seldom to positions at the parent headquarters.
Geocentric Organisation:
This staffing philosophy seeks the best people for key
jobs throughout the organization, regardless of nationality, selecting the best
person for the job, irrespective of nationality is most consistent with the
underlying philosophy of a global corporation. The MNC is taking a global
approach to its operation, recognizing that each part (subsidiaries and
headquarters) makes a unique contribution with its unique competence. It is
accompanied by a worldwide integrated business and nationality is ignored in
favour of ability. There are three main advantages to its approach:
- It
enables a multinational firm to develop an international executive team
which assists in developing a global perspective and an internal pool of
labour for deployment throughout the global organization.
- It
overcomes the federation drawback of the polycentric approach.
- It
supports cooperation and resource sharing across units.
There are disadvantages associated with a geocentric
policy.
- Bridging
the gap between HCN subsidiary managers and the PCN managers at
headquarters is a major problem, especially with regard to language
barriers, conflicting national loyalties and differences emanating from
personal values attitudes to business and so on.
- Host
government want a high number of their citizens employed and may utilize
immigration controls in order to force HCN employment if enough people and
adequate skills are unavailable.
- Many
western countries need extensive documentation if they wishes to hire a
foreign national instead of a local national, which is time consuming,
expensive and at times, futile.
- A
geocentric policy can be expensive to implement because of increased
training and relocation costs. A related factors is the need to have a
compensation structure with may be higher than national levels in many
countries.
- Lack of
exposure to international assignments among PCN managers at headquarters
and lack of career mobility among HCN managers due to their stagnation in
subsidiaries will ultimately affect the strategic decision-making
capabilities of both the groups of managers, thereby affecting the firms,
and the quality of their business decisions and their resource allocation
capabilities, reducing their market share and customer base and their
position in the foreign country, vis-à-vis their competitors.
- Large
numbers of PCNs, TCNs and HCNs need to be sent abroad in order to build
and maintain the international team required to support a geocentric
staffing policy. To implement a geocentric staffing policy successfully,
therefore, requires a longer lead time and more centralized control of the
staffing process. This necessarily reduces the independence of subsidiary
management in these issues, and this loss of customarily may be resisted
by the subsidiary.
globalization
relate to strategy
From a
business perspective, globalization has two prime characteristics: first, it
involves growing interdependency between countries and, second, it is
multi-faceted with many different business aspects.
In spite of its growth, globalization is only one of
many aspects in the development of international and global business strategy.
For many organisations attempting to develop an international or global
strategy, globalization is not the prime strategic focus.
The
growth of interdependence and globalization
There can be no
doubt that both world trade and foreign direct investment have been growing
over the last twenty years:
World trade exports
amounted to US$ 4,261 billion in 1990, US$ 7,036 billion in year 2000 and US$
12,461 billion in 2005
Foreign direct investment outflows
were US$ 230 billion in 1992 and US$ 779 billion in 2005
Such data does not
prove interdependency between countries but certainly supports greater
cross-border activity.But if we look in more
depth at the nature of world trade activity, we find that some countries are
strong exporters of manufactured goods – specifically, Germany and China –
while other countries are net importers – the USA and the UK. This suggests
that there is a considerable imbalance in such trade and does not support
interdependency at country level.
The
multifaceted nature of globalization
Globalization has
many different facets, including such areas as political, economic,
sociological, technology, culture, finance and production. But if we take each
of these areas, it will be clear that there are still major differences between
countries and their people:
Political: contrast the major
democracies of some western countries with other forms of political activity in
some other countries. This website makes no comment about the merits of
different systems. Simply that globalization has not yet extended to such
matters.
Economic: the country data
above illustrates the significant differences here.
Sociological: the World Bank
Annual Reports provide data that shows vast differences in family size,
education, health and other matters between countries. There is little evidence
that globalization has become a driving force here.
Technology: it is argued
elsewhere in this website that changes in technology have been one of the
driving forces for globalization – Google, Facebook, etc. But there are still
major differences between countries around the world – hardly suggesting that
what happens in one country will have a strong influence on what happens in
other countries. Moreover, the wider spread of technology is arguably ab
international rather than a global activity: for example, Facebook spread from
the USA to other countries internationally but many of its networks remain
within one nation.
Culture: the substantial
differences in national cultures have been well-documented by many researchers,
e.g. Hofstede. However, from a business strategy perspective, it is the organisational culture of an
individual company, not the national culture of a country,
that is particularly important in developing business strategy. Globalization
plays a secondary, or even tertiary, role in such matters.
finance: there can be no doubt that
international financial issues can have a major impact on the outcome of an
organisation’s international and global activities. This is not just about
currency fluctuations causing sales and profits to rise and fall. Some
companies centralise international cash flow activities on a daily basis to
maximise their profits.
Other companies will employ international bankers,
like Morgan Stanley, to negotiate foreign purchases, joint ventures,
cross-border loans and other financial activities. But all these matters are
secondary to the more basic factors involved in international and global
strategy – such as economies of scale and the local customization of
international products.
Production:
Some car companies have been working for many years to interlink their
production activities. For example, Ford produces diesel engines in the United
Kingdom for installation in its cars across many of its Europeand and world car
assembly plants. Such activities are a clear demonstration of the power of
interlinked globalization. In this case, they demonstrate the contribution that
globalization can make to global strategy. But they still remain only one
aspect of such strategy.
International
and global business strategy
While globalization
may be one factor in developing strategy in large companies, it is not
necessarily so important. For example:
§ Large markets may
deliver economies of scale and scope but they do not need to be interdependent
– just possess low barriers to trade, low labour costs, etc.
§ Common customer
tastes are an important aspect of a truly global strategy. Globalization may be
a useful factor in relation to this but globalization is not necessarily the
main driving force. For example, McDonalds’ Big Mac relies on common customer
tastes but its success has not been the result of increased globalization –
though it has perhaps supported globalization.
§ Research and
development in large companies like Sony and Volkswagen is often still located
primarily in the home country of such companies. There is only limited
interdependence across the many subsidiaries of such companies located around
the world. Network and interdependent strategies certainly happen in some
multinationals. But globalization is not the driving force for such activity.
§ Some major
international companies – like pharmaceutical companies and aircraft
manufacturing companies – need to sell their products worldwide in order to
support the high levels of capital investment in the development of such
products. But this does not mean that globalization is the main factor in driving
such sales – low barriers to trade and other similar matters are far more
important.
§ Set against such
evidence, we have seen that the growing interlinks of globalization can be
important for some financial aspects of international activity – for example,
Morgan Stanley. Equally, we have seen its importance in some aspects of
production activity – Ford, for example. But, as explored elsewhere in this
website, there are many other aspects to international and global strategy.
§
Conclusions
§ Beyond making it
easier to trade, globalization is only one of many drivers in international and
global strategy development. It may be important but it is not necessarily the
prime focus.
§ Nevertheless,
globalization has been increasing as result of the increased use of the
internet, mobile phones, satellite tracking technology and other factors that
make it easier to communicate around the world. It is possible that
globalization will become more important in the future.
§ Importantly and in
spite of its use by some commentators and companies, ‘globalization’ is not the
same as ‘global strategy
The contemporary
required for the International Manager in Global
Organizations
Managers need to be able to plan, control, organize, and lead their companies and departments. When we look at international business, there are some additional aspects that come into play for a manager to be successful.
Different Yet the Same
Every manager has to have a wide range of skills to truly be
successful. When we say skills, we do not mean the ability to walk on a high
wire or make animal balloons. While those might be pretty impressive skills,
the truth is that in order to be successful, a manager has to be able to:
- Plan: Have a specific outline of the steps
that it will take to be successful or have their department or company be
successful.
- Control: Be able to keep
all the pieces and parts of the plan moving together.
- Organize: Get all the
people and equipment together to support the plan.
- Lead: Show vision and enthusiasm to reach the
goal of the plan.
Now, we have all had managers that were good, and we have probably
had some that were bad. What made those managers good or bad probably also
contributed to their overall success. If all these areas were part of their
success or failure, just think how much more comes into play when a manager is
working in a global company.
When we look at the characteristics of successful global managers,
we are looking at characteristics that managers who work only for domestic (or
U.S. companies) probably lack. While there are certain skill sets that a global
manager needs that a domestic manager may indeed have, they will not use them
as detailed or as frequently as the global manager will. Let's take a look at
the specific characteristics a global manager needs to be successful.
Cultural awareness is
the ability to understand the intricacies of a specific culture. Now, it could be argued that a manager that
works for a company in the U.S. needs to be culturally aware (and they do), but
think for a moment the depth of cultural awareness needed when dealing with a
different country. A manager would have to understand how the entire culture
views business. That would include negotiating, the work environment, and
communication, among other things.
It's one thing to work with someone that is of a different culture;
it's another thing to manage someone working in a different culture where all
aspects of how they work are accepted as the norm. The thought process here is,
'Toto, I have a feeling we're not in Kansas anymore,' and truly, we are in
their world.
A smart global manager will review and understand
the culture from different perspectives (religion, culture, etc.) so they have
a better chance of being successful.
INTERNATIONAL
BUSINESS
INTRODUCTION
The beverages you drink might be produced in
India, but with the collaboration of a USA company. The tea you drink is
prepared from the tea powder produced in Sri Lanka. The spares and hard-disk of
the computer you operate might have been produced in the United States of
America. The perfume you apply might have been produced in France. The
television you watch might have been produced with the Japanese technology. The
shoe you wear might have been produced in Taiwan, but remarketed by an Italian
company. Air France and so on so forth might have provided your air-travel
services to you. Most of you have the experience of browsing Internet and
visiting different web sites, knowing the products and services offered by
various companies across the globe. Some of you might have the experience of
'even ordering and buying the products through Internet. This process 6 gives
you the opportunity of transacting in the international business arena without
visiting or knowing the various countries and companies across the globe. You
get all these even without visiting or knowing the country of the company where
they are produced. All these activities have become a reality due to the
operations and activities of international business. Thus, international
business is the process of focusing on the resources of the globe and
objectives of the organizations on global business opportunities and threats.
We can also say that International Business is all business transactions -
private & governmental – that involve two or more countries. Private
companies undertake such transactions for profit; governments may or may not do
the same in their transactions. It involves performance of business activities
designed to plan, price, promote and direct the flow of a company’s goods and
services to consumers or users in more than one nation for a profit. This
apparently minor difference “in more than one nation” accounts for the
complexity and diversity found in international marketing operations although
the concepts of marketing remain basically the same for both domestic &
international business.
Evolution of International Business The business across the borders of the countries had
been carried on since times immemorial. But, the business had been limited to
the international trade until the recent past. The post-World War If period
witnessed an unexpected expansion of national companies into international or
multinational companies. The post 1990s period has given greater fillip to
international business. In fact, the term international business was not in
existence before two decades. The term international business has emerged from
the term international marketing, which in turn, emerged from the term ‘export
marketing’. International Trade to International Marketing: Originally, the
producers used to export their products to the nearby countries and gradually
extended the exports to far-off countries. Gradually, the companies extended
the operations beyond trade. For example, India used to export raw cotton, raw
jute and iron ore during the early 1900s. The massive industrialization in the
country enabled us to export jute products, cotton garments and steel during
1960s. India, during 1980s could create markets for its products, in addition
to mere exporting. The export marketing efforts include creation of demand for
Indian products like textiles, electronics, leather products, tea, coffee etc.,
arranging for appropriate distribution channels, attractive package, product
development, pricing etc. This process is true not only with India, but also
with almost all developed and developing economies. International Marketing to
International Business: The multinational companies which were producing the
products in their home countries and marketing them in various foreign
countries before 1980s started locating their plants and other manufacturing
facilities in foreign/host countries. Later, they started producing in one
foreign country and marketing in other foreign countries. For example, Uni
Lever established its subsidiary company in India, i.e., Hindustan 7 Lever
Limited (HLL). HLL produces its products in India and markets them in
Bangladesh, Sri Lanka, Nepal etc. Thus, the scope of the international trade is
expanded into international marketing and international marketing is expanded
into international business.
Why do the Business firms of a country
go to other countywide?
The basic question of "why do the
Business firms of a country go to other countywide?" might have been in
your mind. The answer is to achieve Higher Rate of Profits. We have discussed
in various courses/ subjects like Principles and Practice of Management,
Managerial Economics and Financial Management that the basic objective of the
business firms is to earn profits. When the domestic markets do not promise a higher
rate of profits, business firms search for foreign markets, which promise for
higher rate of profits. For example, Hewlett Packard earned 85.4% of its
profits from the foreign markets compared to that of domestic markets in 1994.
Apple earned US $ 390 million as net profit from the foreign markets and only
US $ 310 millions as net profit from its domestic market in 1994. Some of the
domestic companies expanded their production capacities more than the demand
for the product in the domestic countries. These companies, in such cases, are
forced to sell their excess production in foreign developed countries. Toyota
of Japan is an example.
SIGNIFICANCE
What differentiates international
business from domestic ones? It is
the environment within which the marketing plans have to be implemented. Each
market is unique & so varieties of strategies have to be formulated for the
wide range of unfamiliar problems encountered in foreign markets. Competition,
legal restraints, government controls, weather, fickle consumers and a number
of other factors can, and frequently do, affect the profitable outcome of good
sound marketing plans. What then makes Internationalization of Business
challenging? The task of molding the controllable elements of the marketing
decisions (home country environment) within the frame work of uncontrollable
elements of the marketplace (home & host country environments) in such a
way that the marketing objectives are achieved. Home country environment
controllable activities are Price; Promotion, Product, Channels of
Distribution. Assuming the necessary overall corporate resources, the
businessman blends the above stated controllable activities to capitalize on
the anticipated demand. They can be altered in the long run and, usually, in
the short run, to adjust to changing market conditions, consumer tastes, or
corporate objectives. Home Country Environment Uncontrollable Factors: The
factors are Political / Legal Forces, Competitive Structures, Economic Climate
etc. These factors include home country elements that have a direct effect on
the success of a foreign venture and are immediate control of the marketer.
Political Decision: Political Decision involving domestic foreign policy can
have a direct effect on a firm’s international business operations
Domestic Economic Climate: Domestic Economic Climate is another important home
– based uncontrollable variable with far-reaching effects on a company’s
competitive position in foreign markets. The capacity to invest in plants and
facilities, either in domestic or foreign markets, is to a large extent a
function of the domestic economic vitality. If economic conditions deteriorate,
restrictions against foreign investment and purchasing may be imposed to
strengthen the domestic economy. Domestic Competition: Domestic Competition can
also have a profound effect upon the international marketer’s task. Eastman
Kodak dominated the U.S film market and could depend on achieving profit goals
that provided capital to invest in foreign markets. Without having to worry
about the company’s lucrative base, management had the time & resources to
devise aggressive international marketing programs. However, the competitive
structure changed when Fuji Photo Film became a formidable competitor by
lowering film prices in the United States, opening a $ 300 million plant, and
gaining 12 % of the U.S market. As a result, Kodak had a direct energy and the
resources back to the United States. Competitive within their home country
affects a company’s domestic as well as international plans. Inextricably
entwined with the effects of the domestic environment are the constraints
imposed by the environment of each foreign country. Foreign Country Environment
Uncontrollable Factors: Foreign Country Environment Uncontrollable Factors are
Political / Legal forces, Economic forces, Competitive forces, Level of
Technology, Structure of Distribution, Geography & Distribution, Cultural
forces etc. A business operating in its home country undoubtedly feels
comfortable in forecasting the business climate and adjusting the business
decisions to these elements. The process of evaluating the uncontrollable
elements in an international marketing program, however involves substantial
doses of cultural, political and economic shock. A business operating in a
number of foreign countries might find polar extremes in political stability,
class structure, and economic climate – critical elements in business
decisions. Let us now discuss some illustrations of the nature of foreign
uncontrollable factors
Why do Companies engage in International
Business?
In operating internationally, a company should
consider its mission (what the company will seek to do and become over the long
run), its objectives [specific performance targets to fulfill its mission] and
strategy (the means to fulfill its objectives). There are four major operating
objectives that may influence companies to engage in international business.
These are: • To achieve more sales; • To acquire resources; • To diversify
their sources of sales and supplies & minimize risk; • To counter – attack
foreign competition.
Expand Sales: Any company’s Sales are
dependent on two factors:
The Consumer’s interest in the
product/services & Consumer’s willingness & ability to buy them
Acquire Resources:
Manufacturers and distributors seek out
products, services and components produced in foreign countries. They also look
for foreign capital, technologies and information they can use at home.
Sometimes they use this to reduce their costs. For example, Disney relies on
cheap manufacturing bases in China & Taiwan to supply clothing to its
souvenir outlets. The potential benefits of this practice are obvious: • Either
the profit margin may be increased; or • The cost savings may be passed on to
consumers, who will in turn buy more products thus producing more profits
through greater sales volume.
Inter-country Comparative Study: International business studies the business
opportunities, threats, consumers' preferences, behavior, cultures of the
societies, employees, business environmental factors, manufacturing locations,
management styles, inputs and human resource management practices in various
countries. International business seeks to identify, classify and interpret the
similarities and dissimilarities among the systems used to anticipate demand
and market products'. The system presents inter-country comparison and
inter-continental comparison/comparative analysis helps the management to
evaluate the markets, finances, human resources, consumers etc. of various
countries. The comparative study also helps the management to evaluate the
market potentials of various countries
Differences in Government Policies, Laws and Regulations: Sovereign governments enact
and implement the laws, and formulate and implement policies and regulations.
The international business houses should follow these laws, policies and
regulations. MNCs operating in India follow our labor laws, business laws and
policies and regulations formulated by the Indian Government. Host Country's Monetary System: Countries regulate the
price level, flow of money, production levels etc. through their monetary
systems. In addition, they regulate foreign exchange rates also through the
monetary system. The tools of monetary system include bank rate, cash reserve
ratio, statutory liquidity ratio etc.
National Security Policies of the Host
Countries: Every country formulates
the policies for its national security. Multinational companies should abide by
these national security policies. For example, USA is a free economy as far as
carrying out the business compared to many other countries in the world.
However, USA also imposes restrictions regarding the business operations, which
affect the national security.
Cultural
Factors: Cultural and custom factors vary widely from one country to the.
These factors include dressing habits, eating habits, religious factors and the
like. Multinational companies should consider these factors of the host country
while operating in that country. For example, the culture of the Fiji people is
that they attend to the family activities at least three 16 times a day.
Therefore, the companies operating in that country allow their workers to go
home three times a day
Approaches to International Human Resource Management
Corporate management philosophy is an important issue
because it decides how a firm views the world in relation to itself and how it
wants to manage human resources in different countries. HR manager at
international level must not only select people with skills, but also employees
who can mix with the organisations’ culture. General Electric, for
example, is not just hiring people who have skills required to perform
particular jobs, it wants to hire employees whose style, beliefs, and value
system are consentient with those of the firm. Corporate culture and management
philosophy, to a great extent decide the formulation and implementation of
corporate and operational strategies and their evolution into various stages of
internationalization. Companies involved in world trade and investment can be
divided into four types based on their management approach and corporate
philosophy:
- Ethnocentric
- Polycentric
- Regiocentric
- Geocentric
Ethnocentric Organisation:
There motto is ‘this work in my country therefore, it
must work in other countries also’. These are home country oriented
organization. Example, when a Japanese corporation invests in Mexico, Japan is
the home country and Mexico is the host country. If the Japanese Corporation is
ethnocentric, it will except Mexicans to accept the inherent superiority of
Japan. Investments will be made on the Japanese methods of conducting business.
In this approach, all key management positions are
held by parent country nationals, e.g., Toyota, Matsushita, Samsung etc. this
strategy may be appropriate during the early phases of international business,
because firms at that stage are concerned with transplanting a part well in
their home country. Ethnocentric corporations believe that home country
nationals are more intelligent, reliable and trust worthy than foreign
nationals. Firms such as Procter and Gamble, Philips, and Matsushita originally
followed the ethnocentric approach.
In this approach, all important positions in MNCs are
filled up by PCNs in the early stages of internalization. Apart from this, for
certain business-related reasons which are as follows:
- A
perception that qualified HCNs may not be available for the units;
- To
ensure that coordination and communication are maintained adequately in headquarters.
But, these are several problems in adopting the approach. Some of them
have been pointed below:
- An
ethnocentric staffing policy limits the promotion opportunities of HCNs,
which may lead to reduced productivity and increased turnover among that
group.
- The
adaptation of expatriate managers to host countries often takes a long
time during which PCNs make mistakes and make poor decisions.
- When
PCN and HCN compensation packages are compared, the often considerable
income gap in favour of PCNs is viewed by HCN, as unjustified.
- For
many expatriates, a key international position means new status, authority
and an increase in standard of living. These changes may affect
expatriates sensitivity to the needs and expectations of their host
country subordinates.Apart from, this the cost of maintenance of
expatriates is quite high. This approach is not only reflected in the
staffing policy but in all other areas such as performance appraisal where
evaluation format is designed and administered by parent nationals and new
product development is done in the home country. Many international
companies exhibit this ethnocentric philosophy. They have difficulty in
communicating in different languages and accepting cultural differences.
But ethnocentrism limits strategic alternatives to entry modes, such as
exporting, licensing and than key operations.
Polycentric Organisations:
These motto is ‘when in Rome do as the Romans do’.
When you are elsewhere lives as they live elsewhere. The polycentric staffing
requires host country nationals to be hired to manage subsidiaries, while
parent-country nationals occupy key positions at corporate headquarters.
Although top management positions are filled by home-country personnel, this is
not always the case. They see profit potential in a foreign country but find
the foreign market difficult to understand.
The polycentric message is: ‘Local people know what is
best for them. Let’s give them some money and leave them alone as long as they
make us a profit.’ Governmental pressure and foreign laws often necessitate
polycentric approach. The local government may be a major customer and insist
on local ways to be adopted. Many multinationals adopt this approach because
they face the heterogeneous environments in which product preferences may be
the deciding factors and strategies are to be developed on a market by market
basis. There are several advantages with this approach are outlined below:
- Employing
HCNs eliminate language problems for the expatriates and their family
members, reduces cost on costly awareness training programs, and takes
care of the adjustment problems to a large extent.
- In
politically sensitive situations, it helps the MNCs to maintain a low
profile.
- Even
though high salaries may have to be given to attract HCN applicants, it
still works out cheaper for the company in the long run as compared to
employing PCNs.
- The
crucial problem of turnover experienced when employing PCNs can be avoided
effectively by employing HCNs, since they are more stable and can help in
maintaining the continuity in managing subsidiaries more efficiently
Regiocentric Organization
These are regionally oriented organizations.
A Corporation implements a regional strategy when synergistic benefits can be
obtained by sharing functions across regions. The international staff is transferred
with in the same region they work, example, for a global firm having a number
Asia-Pacific, European and US, a manager working in Asia-Pacific region will be
moving within the same region only, if the company adopts regiocentric
approach. Regional headquarter organizes collaborative efforts among local
subsidiaries, it is responsible for the regional plan, local research and
development, local executive selection and training, product innovation, cash
management, brand policy, capital expenditure and public relations
- It
allows interaction between executives transferred to regional headquarters
from subsidiaries in the region and PCNs, posted to the regional
headquarters.
- It
reflects some sensitivity to local conditions, since local subsidiaries are
staffed almost totally by HCNs.
- It can
be a way for a multinational to more gradually from a purely ethnocentric
or polycentric approach to a geocentric approach.
Disadvantages of regiocentric policy.
- It can
produce federalism at a regional rather than a country basis and constrain
the organization from taking a global stance.
- While
this approach does improve career prospects at the national level it only
moves the barrier to regional level staff may advance to regional
headquarters but seldom to positions at the parent headquarters.
Geocentric Organisation:
This staffing philosophy seeks the best people for key
jobs throughout the organization, regardless of nationality, selecting the best
person for the job, irrespective of nationality is most consistent with the
underlying philosophy of a global corporation. The MNC is taking a global
approach to its operation, recognizing that each part (subsidiaries and
headquarters) makes a unique contribution with its unique competence. It is
accompanied by a worldwide integrated business and nationality is ignored in
favour of ability. There are three main advantages to its approach:
- It
enables a multinational firm to develop an international executive team
which assists in developing a global perspective and an internal pool of
labour for deployment throughout the global organization.
- It
overcomes the federation drawback of the polycentric approach.
- It
supports cooperation and resource sharing across units.
There are disadvantages associated with a geocentric
policy.
- Bridging
the gap between HCN subsidiary managers and the PCN managers at
headquarters is a major problem, especially with regard to language
barriers, conflicting national loyalties and differences emanating from
personal values attitudes to business and so on.
- Host
government want a high number of their citizens employed and may utilize
immigration controls in order to force HCN employment if enough people and
adequate skills are unavailable.
- Many
western countries need extensive documentation if they wishes to hire a
foreign national instead of a local national, which is time consuming,
expensive and at times, futile.
- A
geocentric policy can be expensive to implement because of increased
training and relocation costs. A related factors is the need to have a
compensation structure with may be higher than national levels in many
countries.
- Lack of
exposure to international assignments among PCN managers at headquarters
and lack of career mobility among HCN managers due to their stagnation in
subsidiaries will ultimately affect the strategic decision-making
capabilities of both the groups of managers, thereby affecting the firms,
and the quality of their business decisions and their resource allocation
capabilities, reducing their market share and customer base and their
position in the foreign country, vis-à-vis their competitors.
- Large
numbers of PCNs, TCNs and HCNs need to be sent abroad in order to build
and maintain the international team required to support a geocentric
staffing policy. To implement a geocentric staffing policy successfully,
therefore, requires a longer lead time and more centralized control of the
staffing process. This necessarily reduces the independence of subsidiary
management in these issues, and this loss of customarily may be resisted
by the subsidiary.
globalization
relate to strategy
From a
business perspective, globalization has two prime characteristics: first, it
involves growing interdependency between countries and, second, it is
multi-faceted with many different business aspects.
In spite of its growth, globalization is only one of
many aspects in the development of international and global business strategy.
For many organisations attempting to develop an international or global
strategy, globalization is not the prime strategic focus.
The
growth of interdependence and globalization
There can be no
doubt that both world trade and foreign direct investment have been growing
over the last twenty years:
World trade exports
amounted to US$ 4,261 billion in 1990, US$ 7,036 billion in year 2000 and US$
12,461 billion in 2005
Foreign direct investment outflows
were US$ 230 billion in 1992 and US$ 779 billion in 2005
Such data does not
prove interdependency between countries but certainly supports greater
cross-border activity.But if we look in more
depth at the nature of world trade activity, we find that some countries are
strong exporters of manufactured goods – specifically, Germany and China –
while other countries are net importers – the USA and the UK. This suggests
that there is a considerable imbalance in such trade and does not support
interdependency at country level.
The
multifaceted nature of globalization
Globalization has
many different facets, including such areas as political, economic,
sociological, technology, culture, finance and production. But if we take each
of these areas, it will be clear that there are still major differences between
countries and their people:
Political: contrast the major
democracies of some western countries with other forms of political activity in
some other countries. This website makes no comment about the merits of
different systems. Simply that globalization has not yet extended to such
matters.
Economic: the country data
above illustrates the significant differences here.
Sociological: the World Bank
Annual Reports provide data that shows vast differences in family size,
education, health and other matters between countries. There is little evidence
that globalization has become a driving force here.
Technology: it is argued
elsewhere in this website that changes in technology have been one of the
driving forces for globalization – Google, Facebook, etc. But there are still
major differences between countries around the world – hardly suggesting that
what happens in one country will have a strong influence on what happens in
other countries. Moreover, the wider spread of technology is arguably ab
international rather than a global activity: for example, Facebook spread from
the USA to other countries internationally but many of its networks remain
within one nation.
Culture: the substantial
differences in national cultures have been well-documented by many researchers,
e.g. Hofstede. However, from a business strategy perspective, it is the organisational culture of an
individual company, not the national culture of a country,
that is particularly important in developing business strategy. Globalization
plays a secondary, or even tertiary, role in such matters.
finance: there can be no doubt that
international financial issues can have a major impact on the outcome of an
organisation’s international and global activities. This is not just about
currency fluctuations causing sales and profits to rise and fall. Some
companies centralise international cash flow activities on a daily basis to
maximise their profits.
Other companies will employ international bankers,
like Morgan Stanley, to negotiate foreign purchases, joint ventures,
cross-border loans and other financial activities. But all these matters are
secondary to the more basic factors involved in international and global
strategy – such as economies of scale and the local customization of
international products.
Production:
Some car companies have been working for many years to interlink their
production activities. For example, Ford produces diesel engines in the United
Kingdom for installation in its cars across many of its Europeand and world car
assembly plants. Such activities are a clear demonstration of the power of
interlinked globalization. In this case, they demonstrate the contribution that
globalization can make to global strategy. But they still remain only one
aspect of such strategy.
International
and global business strategy
While globalization
may be one factor in developing strategy in large companies, it is not
necessarily so important. For example:
§ Large markets may
deliver economies of scale and scope but they do not need to be interdependent
– just possess low barriers to trade, low labour costs, etc.
§ Common customer
tastes are an important aspect of a truly global strategy. Globalization may be
a useful factor in relation to this but globalization is not necessarily the
main driving force. For example, McDonalds’ Big Mac relies on common customer
tastes but its success has not been the result of increased globalization –
though it has perhaps supported globalization.
§ Research and
development in large companies like Sony and Volkswagen is often still located
primarily in the home country of such companies. There is only limited
interdependence across the many subsidiaries of such companies located around
the world. Network and interdependent strategies certainly happen in some
multinationals. But globalization is not the driving force for such activity.
§ Some major
international companies – like pharmaceutical companies and aircraft
manufacturing companies – need to sell their products worldwide in order to
support the high levels of capital investment in the development of such
products. But this does not mean that globalization is the main factor in driving
such sales – low barriers to trade and other similar matters are far more
important.
§ Set against such
evidence, we have seen that the growing interlinks of globalization can be
important for some financial aspects of international activity – for example,
Morgan Stanley. Equally, we have seen its importance in some aspects of
production activity – Ford, for example. But, as explored elsewhere in this
website, there are many other aspects to international and global strategy.
§
Conclusions
§ Beyond making it
easier to trade, globalization is only one of many drivers in international and
global strategy development. It may be important but it is not necessarily the
prime focus.
§ Nevertheless,
globalization has been increasing as result of the increased use of the
internet, mobile phones, satellite tracking technology and other factors that
make it easier to communicate around the world. It is possible that
globalization will become more important in the future.
§ Importantly and in
spite of its use by some commentators and companies, ‘globalization’ is not the
same as ‘global strategy
The contemporary
required for the International Manager in Global
Organizations
Managers need to be able to plan, control, organize, and lead their companies and departments. When we look at international business, there are some additional aspects that come into play for a manager to be successful.
Different Yet the Same
Every manager has to have a wide range of skills to truly be
successful. When we say skills, we do not mean the ability to walk on a high
wire or make animal balloons. While those might be pretty impressive skills,
the truth is that in order to be successful, a manager has to be able to:
- Plan: Have a specific outline of the steps
that it will take to be successful or have their department or company be
successful.
- Control: Be able to keep
all the pieces and parts of the plan moving together.
- Organize: Get all the
people and equipment together to support the plan.
- Lead: Show vision and enthusiasm to reach the
goal of the plan.
Now, we have all had managers that were good, and we have probably
had some that were bad. What made those managers good or bad probably also
contributed to their overall success. If all these areas were part of their
success or failure, just think how much more comes into play when a manager is
working in a global company.
When we look at the characteristics of successful global managers,
we are looking at characteristics that managers who work only for domestic (or
U.S. companies) probably lack. While there are certain skill sets that a global
manager needs that a domestic manager may indeed have, they will not use them
as detailed or as frequently as the global manager will. Let's take a look at
the specific characteristics a global manager needs to be successful.
Cultural awareness is
the ability to understand the intricacies of a specific culture. Now, it could be argued that a manager that
works for a company in the U.S. needs to be culturally aware (and they do), but
think for a moment the depth of cultural awareness needed when dealing with a
different country. A manager would have to understand how the entire culture
views business. That would include negotiating, the work environment, and
communication, among other things.
It's one thing to work with someone that is of a different culture;
it's another thing to manage someone working in a different culture where all
aspects of how they work are accepted as the norm. The thought process here is,
'Toto, I have a feeling we're not in Kansas anymore,' and truly, we are in
their world.
A smart global manager will review and understand
the culture from different perspectives (religion, culture, etc.) so they have
a better chance of being successful.
Comments
Post a Comment