Discussion Questions:
1. In a world of zero transportation costs, no
trade barriers, and nontrivial differences between nations with regard to
factor conditions, firms must expand internationally if they are to survive.
Discuss.
It
is true that different countries have different factor conditions. According to
the theory of comparative advantage, different activities should occur in the
counties that perform them most efficiently, given that different countries are
endowed with different factors of production. In a world of zero transportation
costs, no trade barriers, it seems that many giant companies are likely to
suffer from the pressure to expand for international businesses that offer the
best set of factor endowments if they are to survive. I agree that small firms
will have a little pressure but giant companies must expand their global web of
value-creation activities in order to take the benefits of differing factor
endowments in different locations.
However, the situations in which the firms
are operating in the counties with the most favorable factor endowment, it is
not necessary for the firms to expand internationally at that moment. Most
firms want to expand their business activities in order to take the comparative
advantages because by so doing, they can easily achieve economies of scale,
lower cost advantage, and product differentiation opportunities etc. Those
firms which want to expand internationally have to adopt one of different entry
modes such licensing, exporting, franchising, merger & acquisition, green
field investment, joint venture, and turnkey projects. Having said this,
therefore, both theory and practice suggest that many small firms are able to
survive quite well but giant companies have a much pressure to survive locally
so that they must go internationally if there are no transportation costs, no
trade barrier, and nontrivial differences between different countries with
regard to factor conditions.
References
Hill, C. W.
(2011). International Business: Competing In the Global Marketplace.
New York: McGraw- Hill .
2.
“The choice of strategy for a multinational firm
must depend on a comparison of the benefits of that strategy (in terms of value
creation) with the costs of implementing it (as defined by organizational
architecture necessary for implementation). On this basis, it may be logical
for some firms to pursue a localization strategy, others a global or
international strategy, and still others a transnational strategy.” Is this
statement correct?
It is certainly true that the choice of
strategy for a multinational firm must depend on a comparison of the benefits
and costs of implementing that strategy. I totally agree that this statement is
correct because the benefits and cost structures of any one of these strategies
differ widely for multinational firms operating globally. There should be a
cost-benefit trade-off with strategic choices for international firms to pursue
a better strategy. Moreover, these strategic choices must fit to their purposes
logically so that a multinational firm can achieve a competitive advantage in
the global marketplace.
To achieve a competitive advantage, a
multinational firm must perform one or more value creating activities in a way
that creates more overall value than do competitors. Superior value can be
created through lower costs or superior benefits to the ultimate customers. For
achieving this benefit, it would be more logical for some firms to pursue
international strategies- localization, global, international and
transnational.
However, every strategy will bring some
benefits and costs that undertaken by a multinational firm. The appropriateness
of each and every strategy depends on the pressures for cost reduction and
local responsiveness in the global marketplace. So it is logical to think each
of these four major strategies from different perspectives-cost and benefits.
Localization strategy could be useful for a firm to achieve a competitive edge
but it has to reduce its cost structure to compete with aggressive competitors
so it would require moving toward a transnational strategy.
On the other
hand, international strategy is only viable for short term period and to
survive in the long term it has to shift towards a global standardization or a
transnational strategy before their potential competitors.
References
Hill, C. W.
(2011). International Business: Competing In the Global Marketplace.
New York: McGraw- Hill .
3.
Discuss how the need for control over
foreign operations varies with firms’ strategies and core competencies. What
are the implications for the choice of entry mode?
In this globalized world, different firms have different
ways of operating its strategic activities and core competencies for control
over foreign operations. It is necessary for these firms to match their
strategies and competencies with their operational controls so that they can
achieve a competitive advantage. For this, strategies the firms may choose for
operating on a global market have to analyze first as follows:
Global
Standardization: This strategy focuses on increasing
profitability by reaping the cost reductions that come from economies of scale
and location economies. These companies standardize their product or service in
order to pursue a low-cost strategy on a global scale. Companies that face high
pressure for cost reductions and low pressure for local responsiveness should
pursue this strategy.
Localization:
Companies that pursue this strategy focus on differentiating their product or
service to uniquely match the tastes and preferences in their different
national markets. Companies that face low pressure for cost reductions and high
pressure for local responsiveness should pursue this strategy.
Transnational:
This strategy looks to achieve the best of both Global Standardization and
Localization simultaneously. That is both low costs and differentiation. Since
these are competing goals, such a strategy is very difficult. Companies that
face both high pressure for cost reductions and high pressure for local
responsiveness should pursue this strategy.
International:
Global companies that don't face competition and sell a product that serves a
universal need or needs don't need to differentiate their product to local
tastes and preferences or cut costs. Companies that face both low pressure for
cost reductions and low pressure for local responsiveness should pursue this
strategy.
Generally speaking, there are basically 5 main choices
for entry mode over foreign operations.
1.
Exporting:
Exporting refers to the process of producing goods and services in the home
country and delivering these to host countries for making some profit. It is
good when producing these products is cheaper domestically rather than
producing in the foreign countries. However, transport costs and tariff
barriers hinder exporting.
2.
Licensing:
This is when a foreign licensee buys the rights to produce a company's product
in the licensee's country for a negotiated fees and the licensee puts up most
of the capital necessary to get the overseas operation underway.
3.
Franchising:
Franchising is quite similar to the features of licensing, but it involves
longer-term commitments and insists that the franchisee agree to abide by
strict rules about how it does business.
4.
Joint
Ventures: Joint ventures occur when a global company partners with
a company that is established in the host country, allowing the global company
to benefit from the local partner's knowledge of the host country's competitive
conditions, culture, language, political systems and business systems.
5.
Wholly
Owned Subsidiaries: This is when a parent company owns 100% of
the stock of a company in a host country. This gives the global company tight
control over production.
From the above analysis, it is known that when we go from
1 to 5, we get more expensive, but also get more control over its operations in
foreign countries. For instance, no other foreign companies have control over
its exporting entry mode, but wholly owned subsidiaries have 100% control over
its foreign companies. On the other hand, the distinctive competencies will
have effect on which strategies to opt for. For example, if a company's distinctive
competency is based on proprietary technology, entering into a joint venture
could be risky due to losing control over that technology. This type of firm
should seek expanding into foreign countries through wholly owned subsidiary to
maintain control over that technology. In the same way, companies with
distinctive management competencies shouldn’t face a risk of losing their
management skills to franchisees or joint-venture partners. However, it is
better for the firms to go for global strategy at that situation.
References
Hill, C. W.
(2011). International Business: Competing In the Global Marketplace.
New York: McGraw- Hill .
Case Study on
Downey’s Soup:
Downey’s
Soup
Downey’s is one of the best soup restaurants
created over 20 years ago by Jack Downey in Philadelphia. When the Philadelphia
office of the Japanese External Trade organization (Jetro) asked Downey to
serve his lobster bisque at a minitrade show in 1991, he thought that it could
be possible to produce his soup in a mass volume in order to sell in Japanese
market. Before a well entry into Japanese market, Downey had to face lots of
challenges and plight related to products taste and quality standard. The purpose
of this case study is to analyze the different actions taken by Downey’s Soup
in order to expand its market into Japan. In this paper, I would like to
emphasize on major problems and opportunities faced by Downey’s Soup, and
strive to come up with a reasonable conclusion.
Downey Foods’
Export Opportunity
Downey's Foods export opportunity occurred
mainly as a result of strategy reactive rather than proactive actions. For
example, when they presented the dish to Jetro it was given to them with the
regular recipe that was used in Downey's tavern. They reduced salt level in the
soup in order to comply with the local Japanese taste after it was requested by
the buyer. In the same way, they also had not made sure the soup did not have polysorbate
which was not permitted in Japanese food industry. Looking these activities, it seems that
opportunity was the result of strategy reactive because initially they made a
minor mistake and then they were rectified by the company in order to comply
with Japanese food standard or Japanese customers. Therefore, I suggest it was
a result of strategy reactive rather than proactive actions.
Downey’s experience
of frustrations when trying to export to Japan and improving its prospects of
succeeding in the Japanese market
Downey frustrated many times in order to
export to Japan. To meet the Japanese market demands, the company attempted to
change the contents in the soup to comply with the Japanese health and food
regulations. It was so tedious task for the company because it passed the lab
in the United States but when it reached the lab in Japan it did not pass the
requirements needed by Japan.
Downey improved its prospects of succeeding
in the Japanese markets by working with other Japanese traders, i.e. local
broker-Santucci Associates and national distributor-Liberty Richter Inc.-in
order to increase sales. Doing this just was not enough so it had to redirect
its research and development efforts to build its domestic products line. Not
only that much, it had to maintain its products quality standard to comply with
Japanese food regulations and customize the taste and ingredients as per the
need of Japanese customers. Therefore, doing these activities surely would be
helpful for improving its prospects of succeeding in the Japanese markets.
The exporting
strategy and steps should be taken to increase the volume of its exports
The exporting strategy refers to the way goods and services are being
delivered to final customers from the place of production to the place of
consumption, especially from one country to another. To do this task
successfully, joint venture or working with foreign trading partner could be a
good strategy for Downey to increase the sales volume. On the other hand,
marketing research should be conducted to understand the needs and wants of a
country’s market. It does not matter whether it is Japan or other countries,
but understanding the markets needs in the particular country is essential to
increase the volume of its exports. It is also important for Downey to maintain
quality standard so that which countries it enters it does not hamper in regard
to quality assurance and regulation from that particular countries. In addition
to that, it can increase the volume of the export by offering large volume of
the products and services at a cheaper price so that other competitors cannot
compete with Downey’s soup.
Summary & Conclusions
In a nutshell, through this case analysis, it
has helped to understand the real challenges and opportunities that Downey’s
Soup had faced a few years ago. Furthermore, it is the lobster bisque of
Downey’s Soup which had made Japanese delegation on Japanese External Trade
Organization (JETRO) impressed and offered the company an opportunity to export
Lobster Bisque Soup to Japan. However, Downey’s Soup learned that exporting
agricultural product to Japan was not as easy as it seems. JETRO did not
provide detail information regarding to exporting an agriculture product to
Japan and this has resulted in frustration and losing money for the cost of
research and development effort, changing contents and delivery regulation etc.
Nevertheless, Downey’s Soup learned a valuable lesson from this action. Thus,
the research and development effort had been done in order to solve these
challenges and convert these challenges into opportunities by expanding the
domestic market and luring the attention of one of the nation largest
distributor, Liberty Richter Inc. in Japan.
References
Hill, C. W.
(2011). International Business: Competing In the Global Marketplace.
New York: McGraw- Hill .
(n.d.) Retrieved September 26, 2015
from http://www.quickmba.com/strategy/global/
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