Ha Tong

BUS 367: International Business

Professor Craig Wright

How to do business internationally?

I. Why go international?

As you may know, many companies nowadays are trying to do business internationally because of some important criteria that benefit their own business development; or in the other word, to earn profits in the most efficient way.

Cheap labor, material, exporting costs: Many developing countries appear attractive to foreign businesses because of their inexpensive materials and labor force, especially in developing countries like China, India, Mexico, etc in order to achieve economies of scale.

Higher demand: Since their current markets are going to be saturate, going international is the best solution to save and earn money.

Better government regulations: This one seems rare; however, does not mean “can-not-happen”. The government regulations in some developing countries are in favor of foreign businesses in order to boost the country’s economic growth. Moreover, the local country also wants to learn new technologies as well as manufacturing methods from foreign businesses to boost efficiency

Access to more talented workforce: Foreign business can have more flexibility in recruiting talented engineers, workers, and employees.

Improving industry attractiveness: Obviously, doing in business in one country will limit the company itself. Whereas if the company goes international, its products are exposed to consumers with different tastes, opinions, favorites. By introducing their products to other customers, the company will have several opportunities to bring its image to the world by advertising campaigns.

Differentiating products: The company’s products will be changed and differentiated to meet the consumers’ needs better, which provides chances for the company to raise prices to earn more profits.

Normalizing risks: Companies would have a chance to have a diversified portfolio to reduce their risks.

Generating knowledge: obviously, a foreign company could learn new things to produce better products if going international.

II. Things to consider if going international1. Culture

Culture is considered to be the most important thing if you want to make profits in foreign countries. In the Hofstede model, there are five dimensions of the culture to think about: power distance, individualism/collectivism, masculinity/femininity, uncertainty avoidance, and long-/short-term orientation. Clearly, Western cultures are different from Eastern ones. By understanding these concepts, a business can know how to do things in the most appropriate ways in order to come up with suitable negotiation, communication, advertising, etc. For example, Japanese people do not have the word, self-respect, in their

1

dictionary; but American people do have. This could mean that Japanese people are interested in working in a team: everybody has to do things that favor the team’s goal, not individual’s benefit.

First, regarding the company’s products and services, by understanding the culture, the business can have knowledge of consumer behavior differences across cultures. This definitely helps them to make suitable branding and advertising strategies. Also, by understanding different consumers’ tastes, favorites, and opinions, the company can differentiate its own products and services directing different consumer segments to gain higher profits. Wipro Technologies in Europe, which was originally from Indian, had some problems of understanding and building relationships with its customers. They just brought their Indian culture, which focuses on collectivism, to its new European environment, which is all about individualism.

Second, by spending time to study what the other side of the world thinking, the mother company could have better oversea strategic management. Danone and Wahaha is a typical example of a failure in international management due to dissimilar visions and cultural perspectives. Danone was too dependent on the management control of the joint venture by Zong, the president of Wahaha. The mother one, Danone, did not communicate effectively with Wahaha about strategies to capture the Chinese market share effectively; but let Zong do whatever he wanted.

Case related: Danone and Wahaha: A bitter-sweet partnership

Third, communication is what the mother company and the local one needs to do in order to guarantee the development of the local and goal of the headquarter as a whole. Lacks of communication could lead to misunderstandings in management, development, visions, and profitability of the company. For example, Wipro Technologies in Europe and its headquarter in India faced the communication problem: the India-based people would periodically come to Europe for meetings or discussions; otherwise, they just do email, telephone, and video-conferencing to keep track on what going on. Moreover, the company’s structure seemed to be fragile since European and Indian employees have some conflicts in operating and hiring processes.

Case related: Cisco Systems, Inc: collaboration on new product introduction; Wipro Technologies in Europe, Levendary Café

2. Government regulations Besides culture, government regulations seem to be the most difficult obstacle

that a business has to overcome. The foreign business has no choice but apply the complex local laws and regulations regarding taxes, accounting systems, such restrictions. As a result, this would cause inconsistency in the company’s management and goals. For example, in the case Levendary Café: Challenge in China, the US headquarter faced serious problems regarding its recent entry into the fast-growing market in China, including the company’s inconsistent accounting system. This definitely caused problem to the company in the long-run. There should be consistent reporting system between the Levendary China and the corporate in order to guarantee transparency in management and operation. The second example is regarding the challenge of Google with the Chinese government in entering China. Obviously, the Chinese government controlled the Internet strictly because they believed that they have to stabilize the country for the economic development. They tried to make their citizens

2

blind on everything, which is kind of stupid, but very smart and cruel strategy to rule the country. Therefore, Google had no choice but obeying the “stupid” rules.

Corruptions: As a company is doing business in a foreign country, it has to meet every “under-table” laws, known as corruptions. Corruptions include bribery, tunneling, embezzlement, fraud, nepotism, and cronyism. Some countries consider these things as their customs.

Case related: Google and the Government in China, Levendary Cafes: Challenge in China

3. PatentPatent is very sensitive problem in developing countries, especially China, where individual’s intelligence is sold with cheap price everywhere without permission of the author. Danone and Wahaha also faced this problem regarding Danone manufacturing technology, which was transferred to Wahaha joint ventures for production. Wahaha used the brand and formula owned by the JVs without proper authorization to benefit its non-joint ventures. Obviously, the company’s core competency is the most crucial thing of the company to set it apart from others and earn money. Losing core competency means losing business. Case related: Cameron Auto Parts, Danone and Wahaha

4. Financial situationThe local financial situation should be taken into consideration if a business decides to go international, especially the local country’s growth rates, exchange rates, etc.

5. GeographyThis criterion is always a problem. Long distance can cause higher shipping costs, freight costs, lead time issues, and time zone differences. For example, Scotts Miracle-Gro tried to make a decision whether or not to outsource to China. There existed several problems relating supply chain operation and associated costs, such as overhead costs, transition costs, general and administrative costs.Case related: Polaris Industries, Scotts Miracle Gro

6. Oversea Operation/ManagementOne of the costs relating to this is transition costs. There could exist moral hazard, in which one side cheat on the other for benefits; or adverse selection, in which the foreign company may make the contract with bad companies due to lack of information. Moreover, foreign operation can cause distraction and time-consuming.

7. Managing operating exposureSince a business may have foreign currency-denominated costs/revenues, it is more difficult to approximate the amount of future cash flows. One example is the Baker Adhesives and a Brazilian Novo ’s problem. Two companies signed a contract agreeing in a per gallon price; however, the value of payment was lower than anticipated due to appreciation in Brazilian reais. In order to solve this problem, the company can use forward market and money market to reduce additional losta. Revenue management

Market selection is the most important thing to consider. One suggestion is that a company can export its products to a stable country (in exchange rate term) or sell to a market within a country that is not very price-sensitive

b. Cost management

3

Building facilities, and making any related decision of selecting their number and size should be done in such a way that a firm and adjust to currency movements. A giant factory can be less efficient; and smaller plants might allow better management of currency exposure

c. Financial managementFinancial cash flows could be used to offset local currency exposure.

However, these methods depend upon several criteria such as power of the industry and trust between each other. A company should acknowledge the associated risks, and who pays for the risks, etc in order to minimize the risks as much as possible.

Case related: Baker Adhesives

III. Types of going outside your homeThere are several ways to set your foot in foreign countries as following.

Transnational (most complex)

Global Multinational International

Definition A bunch of difference subsidiaries all trading or networking with one another

Core competency used over and over (Coca Cola) => everyone doing the same thing, one great idea used over and over again

Lots of independent subsidiaries (separate companies in diff. countries => country manager)

Import/export (sell products elsewhere, buys materials elsewhere, head quarter in home country

Disadvantages - Hard to keep track of

- Make decision to the world

- Don’t need to talk to each other

- Inconsistent management, operations => different goals, visions

- Lack of communication

- Hard to keep track of

Advantages - Reduce risks - Reduce risks and associated costs

- Reduce risks-

- Reduce risks

Case related: Chabros International Group: A world of wood

IV. Adaptation of Globalization1. Adaptation

Adaptation is one way to achieve success if the business decides to go international. A foreign business should adapt their products and services to local consumers if the products are related to their daily habits and cultures. Therefore, the company has to understand characteristics of the products and services; in the other words, they have to know local consumers’ habits and behaviors in using similar products in order to change their products if necessary. These products and services usually are food, convenient

4

stores, etc, which are cultural-rooted. In the case 7-Eleven in Taiwan: Adaptation of convenience stores to new market environments, the company has successfully set up and adapted its store chains in Asian countries by its intelligent strategies. Since the structures in Taiwan and most of the countries in Asia are vertical with high density. The company built up the store chains for mainstream needs, which is unlike the 7-eleven convenient stores in the US with full of supplementary stuffs for urgent needs. According to Hsieh, the growth of 7-Eleven in Taiwan since 1980 could be divided into three distinct phases of about a decade each as following.

Phase one: ImitationAt this stage, its immediate priority was to establish a good working relationship with the America partner, and was characterized by President Chain Store Corp.’s conformity with the tried and tested US model.

Phase two: LocalizationThe second decade marked the beginnings of the realization that the “mistakes” of the first decade needed to be undone. The President Chain started to loosen up some of the established systems and structures, principally those that pertained to ownership, location and merchandise. The company had begun taking steps to provide a local flavor in its stores.

Phase three: InnovationsThe company reinforced the concept of customer convenience not only at the level of operation, but also at the level of technology. This one required the company to do things that are untested but workable ideas around products and services offered at the store. Therefore, the company had to understand its own customers’ habits and behaviors deeply.

There are many company succeeded in adapting their adaptation into local markets, such as Pizza Huts, McDonald, KFC, etc. However, there some companies faced failures. For example, Grosch, a brewery originating from Netherland, produced too many different products with efforts to adapt the products to every local markets in Germany, UK, Poland. However, the company seemed to be short of knowledge of consumers’ behaviors and the products’ characteristics.

2. GlobalizationGlobalization is another way to set a foot step into foreign markets. Many corporations are successfully standardizing their products, such as Unilever, P&G, Coca Cola, Samsung, Apple etc. An excellent example could be Samsung. Samsung, known as having traditionally production-oriented strategies, has changed to marketing-oriented strategies. Since technology is changed day by day, the electronic products usually have short life cycle. Samsung was smart in making products that meet consumers’ needs: advanced and cheap products. The company also spent lots of efforts on global marketing campaigns by establishing product, regional, and marketing strategy teams. Overall, these products and services are designed and developed with multiple functions to meet most of the consumers’ needs.

5

Advantages and Disadvantages

Adaptation GlobalizationAdvantages - Material availability

- Flexibility- Products are

differentiated => earn more money

- Low costs- Easy to control- Cheap product, meet

general consumes’ demands

Disadvantages - High costs in marketing, management and operation

- Difficult to control

- Undifferentiated products

Case related: 7-Eleven in Taiwan: Adaptation of convenience stores to new market environments, Henkel Detergent, Levendary Café, Samsung, Amore

V. How to get new products into International Markets (Foreign market entry modes)

Exporting (Direct, Indirect)

Licensing Joint Venture

Direct Investment

Strategic Alliances

Financial Capital Requirement

Low Zero Med High High

Profit Potential to Investor

Med Low Med High High

Financial risk Low Low Med High High

Managerial Management Requirement

Low Low Med High Med

Operational Decisiveness

Med High Low High Med

Speed of Market Entry

Low High High Med High

Technological Access to Customer Feedback

Low Low Med High Med

Technological Risk

Med High Med Low Med

Other Ability to cope with high tariffs

Low High High High Low

Ability to exploit high economies of scale

High Low Med Med Med

6

Obviously a company wants to want foreign direct investment in order to control and own everything. This means the company will have no choice but learning and building everything from a baby level in a new market. This is somewhat risky and unstable. However, there are several restraints if going international.

Exporting is the first option to consider. However, its restraints are government regulations and lack of consumer information.

The second one is licensing. An example could be in the case Cameron Auto Parts, McTaggart was willing to help the company to get a step in joining European market by licensing. Although this could save some money for Cameron, but it also means that Cameron would have no access to the European market in the future; and its own core competency was sold to another company. Licensing company can turn into future competitors or may ruin the company’s names and reputation.

The third one is full acquisition or joint venture. This solution can help the foreign business simplify managerial decision making and make everything easier to earn money. These alliance options allow firms to pursue a strategic goal as well as create value from combining widely different sets of capabilities including selective access to the target firms’ capabilities and management with separate firms. However, there may exists conflict over asymmetric new investments, mistrust over each other, lack of support from the mother company, and performance ambiguity.

The fourth one is strategic alliance. This method will allow technology exchange, increase global competition, industry coverage, and fasten economies of scale and reduction of risk. Its disadvantages are difficult to find a good and suitable partner, loss of control and unstable relationship management across border.

Case related: Neilson International in Mexico

VI. Trade Finance Instruments

Following are some of main trade finance instruments:

Instruments Pros ConsPrepayment - Reduce nonpayment

for goods (exporters)

- Least attractive payment option for importers

- Uncompetitive for exporters

Letter of credit: a commitment by an importer’s bank that payment will be made to the exporter once the L/C’s terms and conditions have been met

- Reduce nonpayment for goods (exporters)

- Guarantee shipped goods (importers)

- Increase transparency

- Reduce risks for both sides

- High cost associated with the use of L/Cs

7

Documentary collections: entrusting their own banks the collection of an importer’s payment

- Allow exporters retain control of the goods until payment is received

- Low bank associated fees

- Goods shipped are not specification (importers)

Open account: exporters ship and delivery goods before payment (typically 30-90 days)

- Attractive to importers since they can resell foods before having to pay

- Generate working capital needs for exporters

- The highest-risk option for exporters

On-time payment is always a concern of the international buyers. One of the reasons causing the problem is that the sellers do not trust the buyer; therefore, they choose to pay later if there exist any unqualified products. For example, Belco is a global leading marketer of poultry, meat and other food products. The company’s credit team was facing a problem of collecting account receivables, particularly from Kooritsa Kiev. Having been collaborated with Belco for four years, Kooritsa had committed on placing large order and made quick payments in early 2008. It was 40 days since Kooritsa received the order, but the company hadn’t pay back Belco, which was about $84,000; and the company was going to have an outstanding balance for an additional $78,000 that would come to due in 15 days.

Case related: Exporting to Ghana, Belco Global Foods

8

Case briefs

1. Global Wine War 1009: New World versus Old (p.10)

2. Wipro Technologies Europe (A) (p.12)

3. Henkel KGaA: Detergents Division (p.13)

4. Scotts Miracle-Gro: The Spreader Sourcing Decision (p.15)

5. Polaris Industries Inc. (case analysis, p.15)

6. Offshoring at Global Information Systems, Inc (p.17)7. Baker Adhesives (p.18)

8. Belco Global Foods (p.19)

9. Cisco Systems, Inc.: Collaborating on New Product Introduction GS-66 (p.20)10. Foreign Investment in Russia: Challenging the bear (p.21)

11. Cameron Auto Parts (p.22)

12. Chabros International Group: a world of wood (case analysis, p.23)

13. Exporting to Ghana (case analysis, p.24)

14. Danone and Wahaha: A bitter-sweet partnership (p.27)

15. Grosch: Growing Globally (p.28)

16. Neilson International in Mexico (case analysis, p.29)

17. Levenday Café: A global challenge (p.31)

18. Samsung (p.31)

19. Google and the Government of China on Tuesday (p.32)

20. AmorePacific (p.33)

9