Strategic management of a global company requires an understanding and analysis of international business environment in order to assess opportunities and threats. The management has to formulate alternative strategies to exploit the opportunities provided by the environment by using company strengths. Many MNCs having the strength of technology and the environment of developing countries provide the opportunities of high quality and low priced products. Therefore, it is necessary to study the competitiveness of global business.
The comparative cost theory concludes that the countries can specialize in producing certain products in which they have the competitive advantage of producing goods at low cost. It means that the customers in all the countries can have the goods at low price. Comparative cost theory also indicates that the countries which have the advantage of raw materials, labor, natural resources in producing particular goods can produce the goods at low cost with good quality. Thus, the customers in various countries can buy more goods with the same money. It can enhance the living standard of the people to enhance purchasing power and by consuming high quality goods.
International business also enhances the consumption level and economic welfare of the people of the trading countries. It also widens the markets and increase the market size. Therefore, the companies need not depend upon the demand for the product in a single country or customer’s tastes and preferences of a single country. International business provides the chance of exploring and exploiting the potential markets which are untapped. These markets provide the opportunity of selling the product at higher price as compared to the domestic markets. Multinational companies provide the benefit of large scale economies like reduced cost of production, availability of expertise and quality.
Technology plays a major role in the global business. Some developing countries expect from the technologically advanced foreign companies assistance to local entrepreneurs, establishment of research and development facilities and introduction of products relevant to the home country. These relationships provide on the job training to local employees but the overall long term contribution to the host countries is questionable in the minds of some leaders of developing countries. The developing world needs labor-intensive technology to solve their problems of unemployment. Therefore, MNCs should think about the technology appropriate for the conditions of the host country. Sometimes, technology is developed just accidentally.
Every country has its own culture. This indicated the generally accepted values, traditions, patterns of behavior etc. Different social and cultural factors of different countries may affect the marketing mix for a particular county. Cross-cultural differences in norms and values require modifications in managerial behaviors. Social norms that are not well understood by outsiders often affect the business transaction adversely. These social settings are also the important requirements for serious business relationships.
The country and company competitiveness
Formulation of corporate level strategies of a global business is different from those of domestic company. The global company first decides the country to enter and then formulates the corporate level strategies. Thus, the companies, before deciding which markets to go should know the risks involved in a nations market. There are many risks involved in going internationally including shifting borders, unstable governments, foreign exchange problems, corruption and technology. Some companies operate in a number of countries while some of them operate in a few countries with a deeper commitment. Normally, a company should enter the fewer markets when:
- Market entry and market control costs are higher.
- Product and communication adaption costs are high.
- Population and income size and growth are high in the initial countries chosen.
- Dominant foreign firms can establish high barriers to entry.
The firms can choose to enter the markets with high markets attractiveness, high competitive advantage and low risk.
International business firms have the goals of expanding market share sales revenue and increase in profits. Expanding markets in the overseas countries is one of the strategies to achieve these goals the firms have alternative markets to enter in order to analyse the suitable market, the firms have to analyse alternative foreign markets, evaluate the respective costs, benefits and risks and select the best alternative market for expansion of business.
The company has to analyse the alternative foreign market by taking the following factors into consideration.
- Current and potential size of the alternative market.
- Level of competition the firm will face in each of these alternative markets.
- Legal and political environment.
- Sociocultural environment.
The firms have to assess the markets potential based on the following factors:
- Size of the population of the country.
- Overall GDP and Per capita GDP.
- Spread of urban and rural areas.
- Purchasing powers of the people in that country.
The concentration of the population in urban areas with high purchasing power provides marketing opportunities for consumer durables like automobiles, washing machines, refrigerators etc. on the other hand the spread of population in rural areas with low purchasing power provides marketing opportunities for low-cost consumer goods. The companies planning to enter global markets should know the trade policies, legal and political environment of the foreign markets. They should also consider the socio-cultural factors carefully while deciding to expand business in foreign markets.
Another step in entering foreign market is to assess cost-benefits and risks associated with carrying out business in a particular country. The costs to be considered are direct costs and opportunity costs. Direct costs are incurred in entering and setting up of operations in the global market. The opportunity costs are the profits that the company would have earned by entering in the alternative market. The befits to be considered are higher sales, and profits, lower acquisition and manufacturing costs, competitive advantage, access to new technology, cheap labor and other resources in the host country.
Credit: International Business Basics-MGU MBA