Specific issues to be considered by international firms in developing their international strategies that are distinct from those considered by firms not involved in international trade
Doole and Lowe (2008) consider a number of issues to play a significant role in developing international business strategies at industry and country levels. These issues include international trade agreements, trading policies, international economic policies, globalization, and world trading patterns. Others include barriers to international trade, social and cross-cultural issues, and communication technologies such as the internet, world learning, opportunity analysis, market potential, rivalries within firms, and risks. These factors influence the way business organizations design their strategies when internationalizing.
Though the effects of International trade agreements and cooperation between countries trickles down to local business organizations, they have a more significant impact on the way business organizations going international formulate their strategies.
International trade agreements are formulated by bodies such as the World Trade Organization (WTO) and operate on various principles. One of these principles includes the Most Favored Nation Principle (MFN) formulated with the view of enforcing multilateral trade agreements with the exception of poorer countries. MFN requirements include an exemption of countries that have signed regional economic integration agreements and approaches of lowering trade tariffs for poorer countries to facilitate their economic growth. This is a strategy of extending preferential treatment for these countries. A business organization intending to internationalize must critically evaluate these policies in view of its business goals. A critical approach in designing its strategy could place it at a position where conflict with these policies can not arise. Other approaches include Trade Related Investment Measures (TRIM) established to oversee the balance of trade and access to foreign exchange reserves and regulations. Foreign exchange and the controls imposed by the host country can significantly restrict the flow of cash which in turn may restrict a business organization’s trading activities.
Multinational firms design their alliances on theories such as the theory of the firm in which various advantages such as transaction costs are minimized, while economies of scale and industrial manufacturing are economically scaled.
Other issues include strategic approaches in dealing with different legal systems for different countries. Different legal requirements lay different restrictions on business organizations intending to go international. These may be on the host country’s currency and different financial accounting systems and restrictions that arise due to different political systems. China is one example of a political system that an internationalizing company must evaluate before investing there. Before the country became a WTO member, various restrictions were laid on foreign companies interested in investing in China. Till today, China still feuds with the US on its artificial evaluation of its currency, a factor that has unfavorably titled the balance of trade to its favor.
Some business environments may be in favor of business organizations going international. These include global efficiencies that depend on minimized costs of production, location and relocation manufacturing activities, marketing for experience, global distribution channels, advertising, pricing mechanisms, and economies of scope (Dhanaraj & Beamish, 2003).
Other issues to consider include volatility of exchange rates, international trade multipliers, and policy conflicts between different countries. In addition to that, growth speculations, different policy objectives, and other international business circles are significant factors in determining the approach to designing international strategies.
Opportunity analysis plays a key role in determining the strategic approach to investment. Opportunities when exploited may lead to rewarding benefits if the strategy to exploit them is relevant and cost effective.
World learning is a concept that relies on the transfer of knowledge and skills form the company or organization endowed with expertise to one with less skilled manpower and the need to fill the gap. This gap filling leads to mutual benefits for organizations pursuing a common goal.
The range of entry modes for an internationalizing country, circumstances specific to each entry mode, advantages and disadvantages of each entry mode
Firms which decide to internationalize their operations do so through a number of options. One of the entry modes into foreign markets is Foreign Directs Investment (FDI). FDI entry mode can be vertical or horizontal depending on market conditions and behavior. The demand and supply side significantly influence the FDI entry modes and strategies. Circumstances necessary for FDI entry mode includes micro-economic and micro-economic indicators. Macro-economic indicators include growth prospects of developed and developing countries, figures and the trends of the Gross Domestic Products (GDP) of these countries, and the flow of FDI on the demand and supply sides. On the other hand, micro-economic indicators span available stock of FDI, the working levels of assets, and the possibilities for the potential to grow. In addition to that, other circumstances for FDI includes FDI policy developments, leading economic indicators, industry patterns in the service sector, industry and manufacturing sectors, and the primary sector.
FDI encompasses various strategies. Among these is the Greenfield strategy. Greenfield strategy is where a business organization solely begins its business activities from scratch in a foreign market. Beginning from scratch comes with a variety of challenges. These challenges include direct penetration into the market, acquisition of a market share and a sustainable market growth rate, risks associated with losses that may arise if entry into the new market fails, and fierce competition from rival firms.
Another FDI mode of entry is the acquisition strategy. The internationalizing organization purchases an already existing firm in the target market or host country. While an organization may benefit from already available infrastructure and market, on the other hand, firms that purchase already available firms face the challenge of utilizing the purchased firm’s technology for profit maximization by minimizing the cost of production for a given level of inputs. Joint ventures form another internalization strategy for a business firms. One or more firms establish a joint venture to pursue a common goal in their area of operation.
The potential for high profits is a significant element in investing in the FDI entry mode into an international market. Business organizations that use this mode of entry have the ability to maintain and sustain control over their operations, have the ability to obtain sufficient knowledge about the characteristics of the market of operation, and benefit from the exemption from taxes. On the other hand, business organizations that use this strategy suffer from the disadvantages of high costs of financial investments which at times may be prohibitive in addition to high managerial costs.
Investing in foreign countries comes also with associated political risks. These risks may lead to big financial losses if the political environment disintegrates and becomes hostile to foreign investors. Other risks associated with political risks include loss of machinery or production plants, loss of revenue that may have accumulated from business operations prior to disintegration of a country, new laws regarding business operations enacted by the host country that may be hostile to a foreign business, and other problems that may come with the effects of a failed state.
Firms choosing to invest directly in foreign markets face the complex issue of the complex nature of foreign markets. This calls for complex management structures. This is a significant disadvantage of FDI entry mode into a foreign market.
Other modes include exporting that can be direct or indirect. This mode of entry has the advantages of allowing for gradual entry, enables the investing firm to acquaint itself with the local market, does not suffer from foreign restrictions, and is cheaper. On the other hand, disadvantages inherent in this approach include the high risk of conflicting with distributors, trade tariffs, and the complex nature of logistics.
Another mode is licensing. This mode of entry is advantaged by minimum financial risks, avoidance of tariffs, reduced risks, and a gain of knowledge for the local market. It has the disadvantages of high risks, conflicts, reliance on licenses, and the likelihood of rivalry.
Franchising is a mode of entry that with the advantages of low financial risks, better control mechanisms, ability to cheaply evaluate a market, and ability to acquire the information about the market of operation. Disadvantages include, reliance on franchise, possibility of a future competitor arising, and restricted market opportunities.
Other modes include contract manufacturing which has the advantages of minimal financial risks and product focus. Disadvantages for this mode include reduced quality, controls, learning, and conflicts with the public, and lack of information on working conditions. Turkey modes are advantaged by minimal risks and concentration. Disadvantages for this mode include cost overruns and construction costs.
Strategic alliances of internationalizing firms, their advantages, and risks associated with them, and approaches of minimizing them
Joint alliances and mergers are strategic tools companies employ to pursue business goals critical to their common interests while they retain their autonomy or independent. The synergy from such collaborations enables collaborating partners to gain more benefits that could not be obtained through individual efforts. These alliances and mergers span access to technology and transfer of expertise, the sharing of the burden of risks among collaborating partners, and economic specialization at various levels.
Alliances can either be comprehensive or functional. Comprehensive alliances cover those activities in which collaborating firms own specifically unique activities in the manufacturing and services offering processes for the market. On the other hand, functional alliances span capital, marketing, and production alliances. Each of these strategic alliances comes with their advantages and disadvantages. Management must agree on the strategic approaches on implementing these strategies be they public or private. Strategic alliances are characterized by common goals and objectives, interdependencies, a defined scope, and a defined period of collaboration. The duties and responsibilities of each party are clearly spelt and operate on a clearly defined separate management structure. A significant commitment of each other’s resources immensely contributes to the success of the collaboration (Knowles, 1980).
Advantages associated with comprehensive alliances include executive alignments, minimal overheads, availability and ready access to expertise, the ability to access the required capital for investment, product and service innovation, enhanced cash flow, ability to access new and appropriate technologies, and saving on costs. In addition to that, other strategic alliance benefits include low levels of risks since they can be shared across partners collaborating in the business venture. Other benefits include abilities to point out weak points in a business organization and set benchmarks for each partner to adhere to, lessens the cost of purchasing a new company or starting from scratch, avoids the duplication of inventions by avoiding to invent a product that has already been invented by another company, and enables companies to remain focused and emphasize on their core competencies. These benefits enable collaborating firms to move and increase the rate at with which they secure the share of the market, and ability to establish and maintain good relationships with their suppliers.
Among the disadvantages include the sharing of profits accruing from business operations. That disadvantage becomes greater when profit sharing methods are based on the ratio of their financial contributions and other factors that may deny smaller firms an equal share of profits. In addition to that, these firms may suffer from the foreclosure of strategic opportunities that may be in favor of other collaborating firm. Strategic alliances may limit financing opportunities if there is rivalry or perceived rivalry with likely financing sponsors.
A joint venture business strategy comes with associated risks. Among these risks include the risk of a partner abruptly opting out of a joint venture, risk of failure due to poor market planning, failure due to inadequate cultural considerations, risks due to fierce competition, and health and safety of the operating environment. A rapid rise in commodity prices may affect profits of these organizations and may diminish earnings of a partner to the extent of compelling it to opt out of the venture.
To overcome these risks, organizational managers need to identify and clearly spell the objectives of their organizations’ joint ventures. In addition to that, these organizations need to conduct thorough feasibility studies that span the cost of investment, technology costs, a thorough market analysis, patent laws, and limits to the use of technology. The supply chain utilities and staff requirements, waste treatment disposal technologies and requirements, and joint venture laws need to be thorough understood and evaluated before a venture is settled upon. A continuous evaluation on the relevance of products and services for the current market and fiscal risks can be overcome by appropriate evaluations of the venture and the operating market (Johansen & Vahlne, 2003).
Factors to consider in communicating with overseas partners and clients
Culture of the target market. Studies show that the target market’s culture spans
values and beliefs of a society that significantly influences the way a firm carries out its activities. In addition to that, culture bears a strong influence on the way individuals and members of the society communicate with each other. DuPont (1997) argues that culture can be learnt, adapted, and shared within and with other communities. Basically, culture is influenced by language, prevalent religious culture where an organization operates, the values, attitudes, and the social structure of the operating environment.
- Social structure. This spans individual families and groupings within a community. It also spans the manner in which individuals communicate and interact. This interaction and communication may lead organizations to gain an upper hand in gaining a market share.
- Language. Language is a vital component that brings together communities and a common understanding between them. When a variety of people from different backgrounds with different languages come together, it indicates diversity in many aspects.
- Communication methods. These abilities form the basis of a successful business in an international environment. The approach used by managers to communicate with partners and clients greatly influences the attitude and value that can be attached to a business organization. Communication can be verbal or non-verbal. Each communication approach should be carefully evaluated to convey the right impressions so as to create good understanding between communicating partners.
Organizational culture of collaborating partners
Business organizations are run by people who have adapted to a specific culture in running the affairs of the organization they work for (DuPont, 1997).
Corporate social responsibilities
It is important for organizations going international to incorporate elements of corporate social responsibilities. This approach ensures that companies not only become responsible for their actions, but also invest hospitality in the market in which they operate. The environment a business organization operates in and stakeholder interests should be catered for. Stakeholders may be customers, venture partners, employees, and other who may be directly or indirectly affected by the business organization’s activities.
Religion significantly determines the relationship between members of a society, attitudes, and constraints to business operations. An example is when trying to sell alcohol to a Muslim. Such substances are exclusively prohibited in Islamic communities. Therefore religion can restrict the type of business an organization conducts in a given community.
Factors to consider in motivating staff and handling workplace diversity
Goal orientation is one of the motivating factors that define the manner in which people endeavor to achieve different goals. The goal people strife to reach determines the kind of motivation that impels them towards achieving that goal. Another factor is the low context and high context culture. These contexts determine the meaning of words spoken and the meaning they convey to the listener. In addition to that, cultural meanings and clues may importantly communicate meaning to individuals.
Managers working in a multicultural environment should learn to avoid using their cultures in accessing standards to evaluate other cultures and pass resolutions based on their cultures. Cultural diversities can significantly influence the positive and negative outcomes from workers and organizations operating in a diverse environment. The impact on employee productivity and innovation can be either positive or negative.
Managers should identify and remove artificial cultural barriers that impede the way organizations recruit employees and manage them. Employees and managers should undergo training on the kind of environment they are operating in to avert issues of discrimination and offensive behavior. Diversity should also be incorporated at different levels of an organization to create a heterogeneous environment.
Other issues to consider include the need to appreciate and respect cultural differences, being assertive by allowing others to understand your preferences and the way you may want to be treated, and the way others should be treated.
The range of control issues and recommendations on how to handle such issues in an international business
The range of controls spans strategic controls, organizational controls, and operational controls. Strategic controls revolve around the effectiveness of strategy formulation and how formulated strategies drive organizations towards achieving their business goals. These controls determine how well these strategies are implemented to effectively achieve organizational goals and objectives. Organizational controls on the other hand emphasize on the need for a well designed control to ensure the designed control leads to effective control of a business organization. In addition to that, operational controls span the control of activities within a firm and the processes that occur within a firm, its partners, and the environment.
Managers need to critically identify control processes within the firms they take control of and the approaches they employ to design and implement control systems, and the types of control systems available. Managers are the key implementers of control measures. Therefore, they should be skilled in control systems techniques and should identify strategies to avoid resistance to implementing these control measures. Some of the control techniques span accounting systems which are as diverse as the countries of operation, procedures that are specific to a specific environment, and performance ratios that determine the degree of effectiveness of a control.
In the international business environment, various methods available for controlling these issues includes identifying and incorporating control mechanisms that effectively address these issues. One such approach is incorporating others in the designing process of a control and creating mechanisms to identify control issues and relevant controls.
Johnson, Lenartowicz, and Apud (2006) assert that managers of business organizations operating in an international environment that is multicultural should identify the manner of formulating business strategies against their organizations’ business objectives and goals.
The international business environment is volatile and business organizations should always stay alert over new changes to the business environment and the implications they have towards their operations. To address that, these business organizations should always tailor and re-tailor their strategies to counter emerging business trends and environments so as to stay afloat and competitive in business.
Another approach is to identify the level of generic organizational controls. When combined with responsible center controls, these elements converge to the planning process controls. This eventually leads to the approach international business organizations conduct their internal and external activities (Kanter, 1995).
Handling these issues also involves setting standards or benchmarks against which the abilities and the performance of managers are evaluated. These standards hold managers to account and ensure their efficient executions of duty. When these standards have been established, actual performance is assessed against established benchmarks to identify gaps that may have occurred in the implementation process to design better approaches of bridging such gaps. In addition to that, actual performance
is measured and evaluated in designing a control component. Once the control component has been designed and performance deviations identified, managers set down to design and establish strategies for responding to these gaps.
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DuPont, K. (1997). Managing Diversity at the workplace: Communication is the Key. Coastal Training Technologies, Virginia Beach. VA 23452. Web.
Johansen, J., & Vahlne, J.-E. (2003). Business Relationship Learning and Commitment in the Internationalization Process, Journal of International Entrepreneurship 1, pp. 83-101.
Johnson, J.P., Lenartowicz, T., & Apud, S. (2006). Cross-cultural competence in international business: toward a definition and a model, Journal of International Business Studies 37, pp.525-543.
Kanter, R.M. (1995). Thriving Locally in the Global Economy, Harvard Business Review Harvard Business Review.
Knowles, M. (1980). The Modern Practice of Adult Education. From pedagogy to andragogy, 2nd ed, Englewood Cliffs: Prentice Hall/Cambridge.