International Business

International business is essentially all forms of commercials transactions that take between 2 more regions, countries or nations beyond their political boundary. In my previous post I talked about globalization, well international business is a direct effect from globalization.

There are a couple of reasons why people tend to bring their businesses overseas. Essentially each reason boils down to creating more revenue or profit for the company.

The 1^st reason would be to expand your consumer base so that you grow as a company and become better recognized all over the globe. In other words, expanding your company! This will only work if you can fully comprehend the market you wish to enter as misunderstanding your new market could have dire effects. An example would be Mattel, a free standing Barbie store was built in Shanghai and it had 900 display cases, a spa and a cocktail bar, and other various attractions. That’s quite a commitment in a market where Barbie is relatively unfamiliar and doesn’t have the audience base to guarantee a return on the investment. The 36,000-square-foot, six-story Barbie store was open only two years before Mattel decided to close up shop.

The next reason businesses go overseas would be to lower their cost of production. There are an uncountable number of examples on how outsourcing has made production costs drop for various companies. For example, we look at Apple, majority, if not all, of their products are made and assembled in China. However, the company has come under fire as news has leaked that their production practices are not ethical. As a result we see a strange phenomenon, where instead of outsourcing, companies like Apple are starting to insource back to their home country, in this case America. This is probably done to improve their public image in my opinion.

There are a number of ways a business can choose to go international.

1.     Outsource

This does not refer to the manufacturing process but could also be the management level being outsourced.

2.     Importing and Exporting

This essentially just requires a company to send goods from 1 point to another. The company’s location is also not important in this case. For example my dad’s company. He exports cameras from Dubai to Russia but his company is based in Singapore.

3.     Franchising

A franchise provides an established product or service that may already enjoy widespread brand-name recognition. This gives the franchisee the benefits of a pre-sold customer base that would ordinarily take years to establish. Popular examples of franchises would be McDonalds, Subway and Starbucks.

4.     Joint Venture

A joint venture is a strategic alliance where two or more parties, usually businesses, form a partnership to share markets, intellectual property, assets, knowledge, and, of course, profits. A joint venture differs from a merger in the sense that there is no transfer of ownership in the deal. An example could be Sony-Ericsson, a Japanese and Swedish telecommunications company respectively, to make mobile phones.

5.     Licensing

The final way I will talk about is Licensing, do not that there are other ways as well. Licensing lets you instantly tap the existing production, distribution and marketing systems that other companies may have spent decades building. In return, you get a percentage of the revenue from products or services sold under your license. Licensing fees typically amount to a small percentage of the sales price but can add up quickly. For example, about 90% of the $160 million a year in sales at Calvin Klein Inc. comes from licensing the designer's name to makers of underwear, jeans and perfume. The only merchandise the New York-based company makes itself, in fact, is its women's apparel line. 

Finally, to evaluate whether the company should expand overseas and where, we can use our old friend, the PESTLE tool.

Political

Is the government stable?

Economical

Is the business environment of the country conducive for your company?

Social

What is the socio-cultural aspect of the people in a targeted country.

Technological

Is the country able to provide the essential technological infrastructure to support your business?

Legal

Is there legitimate trade agreement with this other country? What about the trade union?

Environmental

Are there natural resources in the country?

I hope through my blog post, I have shown the reasons as well as the way and how to set up an International Business.

Material Links:

1. http://en.wikipedia.org/wiki/International_business

2. http://www.internationalbusinessguide.org/10-successful-american-businesses-that-have-failed-overseas/

3. http://www.forbes.com/sites/connieguglielmo/2012/12/08/apple-loop-tim-cook-talks-mac-in-the-usa-the-steve-jobs-patent-kutcher-in-jobs-costume/

4. http://ecommerce.hostip.info/pages/825/Outsourcing-OUTSOURCING-EXAMPLES.html

5. http://www.franchise.org//franchiseesecondary.aspx?id=52630

6. http://wiki.answers.com/Q/Examples_of_joint_ventures?#slide=12

7. http://www.entrepreneur.com/encyclopedia/licensing

Globalisation

GLOBALISATION. It’s a big word with an even bigger effect in the World we live in today. I do not need any form of conviction or evidence to state that what the world is today is hugely due to Globalisation. A revolutionary word in my opinion. So what is Globalisation? Well a simple check on Google will give you the definition, ‘The term Globalization refers to processes of international integration arising from the interchange of world views, products, ideas, and other aspects of culture.’ Essentially, globalisation is a way of making the world closer. News travels faster, people travel faster; we are more connected with the world now then ever before.

In an organizational context, globalisation is the interconnectedness and fusion of a company and culture. It allows for increase trade flows from all over the world and gives more opportunities to organisations to grow and expand in places previously thought difficult to succeed in. There are a few key drivers of Globalisation, namely, Political or Economical, Technological and lastly Markets and Costs.

Political and Economical

This becomes a factor when there is a removal of trade barriers and giving businesses the liberty to make their own decisions without the government controlling them. One major example would be Neo-Liberal Economics. Neoliberalism supports economic liberalizations, free trade and open markets as well as enhancing the role of the private sector in the current day and age. However there are many critics for Neoliberalism as the critics feel it is destroying welfare programs for the poor and sick, as well as attacking the rights of labour, specifically for low skilled immigrant workers, who are usually over worked and under paid. My opinion is that Neoliberalism should exist, however there should be a balance to ensure that there is still sufficient amount of resources to run welfare programs and that workers are fairly treated.

Technological

It is due to the rapid advancements in technology in communication and transport that has driven the rate of globalisation up. If we were to go to the early signs of globalisation, it would be when the Silk Road existed. People from all over Western Europe to India and China and even Africa would travel by foot, horses or camels to carry their goods and messages. This process could take months and years at times but today, we have container ships, cargo planes, bullet trains, emails and phones among others to speed up this process exorbitantly. Trading has never been easier. If I wanted a jacket only found in Africa, with the right price, it would magically appear at my doorstep within 24 hours. Communication advances enables business to be run and controlled despite you not being in that country physically. Such is the wonder of globalisation.  

Markets and Costs

A company might be saturated in their own country hence organizations looks into broadening their prospective and branching into overseas market. It might contribute as a boost in sales. Alternately, lower costs are a common ideology to move an organization abroad if it benefits them financially. An example would be the vast majority of clothes companies, Puma, Zara, Primark Etc., that shift their production like to countries like India and China where the labour costs are cheaper. Even more specialized work is done in cheaper countries like India. The video below shows an example. 

Material Links: 

1. http://www.corpwatch.org/article.php?id=376
2. http://en.wikipedia.org/wiki/Globalization
3. http://folk.uio.no/daget/neoliberalism.pdf

Organizations and Strategy

There are a variety of definitions for the term Strategy; however, the definition by Johnson and Scholes (2011) is very well balanced. They state that  ‘strategy is the long term direction of an organization’. This would require a process that the organization employs for the strategy, and the tools available to make it happen. We must also look at the current situation of the organization and question why it is no longer suitable in an organizations long-term direction.

There are 3 levels in strategy.

1.     Corporate Level

Decisions are usually made at the top. An overall scope of the organization.

2.     Business Level

How individual business units compete in their particular markets.

3.     Operational Level

How does the organisation actually deliver- in terms of resources, people and processes.

There are different sort of perspectives on strategy, as shown in the table below.

We will look into Mintzberg, Ansoff and SWOT theories in regards to strategies.

Mintzberg bends towards the learning approach as shown in the diagram below.

1^st the strategy would be intentional, however, rarely are all the goals achieved. So out of 10 goals, 4 may not be realized. With the learning approach, Mintzberg accounts for strategies organizations had no initial thought about, ensuring that this approach can adapt easily to make necessary changes. For instance, when developing a strategy, there should be flexibility to accept emergent strategies. Strategic development in the past used to be very formal and stringent, whereas nowadays, it is less formal planning. Instead of assuming and predicting the future, scenario planning is carried out instead. In addition, a 10 year plan has now been reduced to a 5 or maybe even lesser year plan. This is solely due to the fact that the external environment is constantly changing. Gone are the days where an organization is able to predict what might happen and work around it. 

Next we look at SWOT Analysis. SWOT stands for Strength, Weaknesses, Opportunities and Threats respectively. In my previous posts, I had talked about PESTLE and Porter’s 5 Forces, and these are all looking at external contexts. The SWOT allows us to look at both the internal and external contexts. The SWOT analysis can help managers find the fit between internal capabilities and external changes or opportunities.

Below is SWOT analysis of Starbucks.

Lastly we will look at Ansoff’s Matrix.

According to the organizations direction for its products and markets, Ansoff’s Matrix allows the organization to decide on the right form of strategy to achieve its desired goal.

Existing market and existing product – Generic Growth

Involves selling more established products into existing markets, often by increased promotion or price reductions or better routes to market, for example online. By doing so, the organization is playing safe and although that might be an appealing route to pursue, it might cause the organization to fall back in the race.

Existing market and new product – Product Development

Involves developing new products or services and placing them into existing markets. Being different has and always is a convenient and useful stepping stone in staying ahead in the game. For example, Starbucks coming up with newer flavours and tea products to add into their predominantly coffee menu is product development.

New market and existing product – Market Development 

Entails taking existing products or services and selling them in new markets. A method of this would be starting your business internationally, such as HnM opening up a new branch in South East Asia. 

New product and new market - Diversification

Involves developing new products and putting them into new markets at the same time. Diversification is considered the most risky strategy. This is because the business is expanding into areas outside its core activities and experience as well as targeting a new audience. It also has to bear the costs of new product development.

Material Links: 

1. http://www.syncresis.co.uk/emstrat.html
2. http://www.smartinsights.com/marketing-planning/create-a-marketing-plan/ansoff-model/
3. http://businesscasestudies.co.uk/enterprise-rent-a-car/marketing-and-product-strategies-for-growth/ansoffs-matrix.html#axzz2vuafOwwk

Organizational Context (Environment)

The environment is the surroundings or conditions in which a person, animal, or plant lives or operates. Now when we place that in an organizational context, environment basically means the surroundings or conditions in which a business operates. There is an internal environment as well as the external environment that can be further sub-divided into a micro and macro point of view.

It is important to understand the business environment so that you make sure you do not lose out to any newcomers or new products that is set to change the entire market. We see many examples such as Nokia vs Apple, MySpace vs Facebook, MSN vs Skype and many more. In each of these examples, the former lost out to the latter due to multiple factors that the latter had and the former chose to ignore initially only to bite them back harder.

In the internal environment, there are a number of aspects, namely,

•      Structure

•      Objectives

•      Culture

•      Technology

•      Leadership

•      Finance

•      People

Essentially, these are the conditions, entities, events and factors within an organization that influences its activities and choices, particularly the behavior of the employees.

Lets go on to the external environment.

Micro – PORTER’S FIVE FORCES

Macro - PESTle

In the Micro perspective, we can look at Porter’s 5 forces, which is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you're considering moving into. The collective strength of the 5 forces determines industry profitability.

The 5 forces are as follows:

·      Bargaining power of suppliers

·      Threats of substitute products

·      Bargaining power of buyers

·      Threats of new entrants

·      Intensity of rivalry within the industry

To better explain each of these points, I will be giving examples based on the railway industry.

The bargaining power of suppliers refers to how easily can suppliers of your product affect you. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are. In the railway industry, supplier power in higher as it highly dependable on companies that maintain railway tracks and its staff, without whom it cannot run.

Threats of substitutes refer to how easily consumers can find an alternative way of doing what you do. For example, planes and buses can be seen as substitutes to the railway, however, the railway may be slower than flights but is usually more convenient while buses are the most convenient but usually slower. Hence, the threat is neither high nor low.

Buyer power refers to the power direct consumers hold; whether they can demand cheaper prices, better products. Buyer power is likely to be high in the railway as there is a low switching cost from 1 form of transport to the next.

Threats of new entrants can be also seen as the industries barriers to entry. This can include access to supply and distribution channels, a strong barrier for new railway entrants as large amounts of resources will be needed to build new trains and tracks may be difficult to share with existing market players.

The intensity of rivalry within the industry: If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from you. On the other hand, if no one else can do what you do, then you can often have tremendous strength. From this point of view, the railway industry has a relatively low intensity of rivalry.

Now lets look at the Macro, PESTLE. This is an acronym for Political, Economic, Socio-Cultural, Technological, Legal and Environmental. These are all factors that have a direct influence on any organization and PESTLE aims to how these factors will affect the organization.

Political includes privatisation/ deregulation policies, health and safety as well as government stability. For example, it would not be a good time for an organization to focus on the Ukrainian market due to its current political turmoil.

Economic refers to, but not solely, inflation, unemployment, consumer activity. Low inflation rates and a strong employment market would drive organisations to invest more since their investments are unlikely to devalue.

Socio-Cultural can refer to changes in lifestyles, education and health as well as distribution of income. During an epidemic, organisations could benefit more from providing products and services related to health.

Technological changes happen very quickly these days with new patents and products out in the market quicker than you can read this blog! Organisations that can keep up with these changes stand to benefit in the short and long run.

Legal is essentially the laws that can have both a direct and indirect effect on an organization. An example would be certain laws to protect society, which would prevent many organizations from selling harmful drugs.

Environmental factors refer to renewable energy supplies, green issues, carbon footprints, etc. To curb global warming from worsening, more and more companies are required to be greener in their operations and this may affect their production costs among other things.

These are the various environmental factors in an organizational context.

“Business is like living in a jungle, you need to be constantly aware of your surroundings lest someone takes over you before you can react on time.”

                                                                                                                                      Nitin Bhagwan ;)

Material Links:

1. http://www.businessdictionary.com/definition/internal-environment.html
2. http://www.mindtools.com/pages/article/newTMC_08.htm