International Business Operations
This article focuses on how corporations make the decision to operate on an international level and the types of systems and processes that they put in place so that the business operations of the international entity run smoothly. The world has changed significantly since World War II. Organizations have been challenged to duplicate their success in other countries. In order to accomplish this task, the management team must devise a plan that will bring them the same level of success that they experienced in their home country. After a company has decided on what strategy would benefit the organization, it will move to the next step, which is the development of an approach to manage its global business operations. One approach that has been explored is the international trade theory. Once an organization has defined its international strategy, the next step would be to develop a process for implementing the strategy.
Keywords Absolute Advantage; Classical Economics; Comparative Advantage; Factor Endowments; International Business Operations; International Strategy; International Trade; International Trade Theory; Mercantilist Theory
International Business: International Business Operations
The world has changed significantly since World War II. "Countries that were previously separated by thousands of miles, and historical enmities are now closer together, thanks mainly to the impact of globalization and the lifting of trade barriers" (McLean, 2006, p. 1). Organizations have been challenged to duplicate their success in other countries. In order to accomplish this task, the management team must devise a plan that will bring them the same level of success that they experienced in their home country.
International business strategy provides corporations the opportunity to expand and manage business operations in many locations across the world. Many organizations are weighing the pros and cons of starting operations overseas. However, it is imperative that the decision makers identify opportunities, explore resources, and assess core competencies before implementing a plan to move forward. These three factors may provide a foundation for many corporations as they implement an international strategy. According to Hoskisson, Hitt, and Ireland (2003), each factor should be evaluated when determining whether or not to move forward.
Areas for Consideration
Identify International Opportunities
a. Increase market size- If a domestic market’s size is unable to support needed manufacturing facilities, it may make more business sense to start an operation abroad.
b. Return on investment — There are two issues that decision makers may consider when determining the effect on the organization's finances. First of all, global markets may be necessary to support and enable the large capital requirements of substantial investment projects. Secondly, some countries have weak patent laws. Therefore, an organization may have to expand overseas in order to stay ahead of competitors who may attempt to market similar products.
c. Economies of scale or learning -Economies of scale can increase profit per unit and spread costs over a larger sales' base. In addition, moving into the international market allows the organization to expand the size of their market, which leads to economies of scale for departments such as marketing, manufacturing, distribution or research and devolvement.
d. Advantage in Location — Organizations can develop a competitive advantage by moving into markets that have low costs. These types of markets would provide the organization with better access to raw materials, lower labor costs, energy and key customer base.
Explore Resources and Capabilities (International Strategies)
e. International business-level strategy — If an organization wanted to develop an international strategy at the business level, the management team should evaluate the four determinants of national advantage. These determinants include:
i. demand conditions (the nature and size of buyer's needs in the home market for the industry's goods or services),
ii. related and supporting industries (the supporting services, facilities, and suppliers),
iii. firm strategy, structure and rivalry (the pattern of strategy, structure, and rivalry among firms),
iv. factors of production(the inputs needed to compete in any industry).
f. International corporate-level strategy — In certain international business situations, corporate strategies allow for the individual overseas operation centers to control their own procedures. In other situations, the strategy is to homogenise procedures across the entire organization, regardless of location. Whatever method the organization decides upon, the way that business level strategies are selected and implemented will be impacted. There are three types of corporate level strategies that an organization can choose from.
i. Multidomestic strategy — The products are tailored to meet the needs of local preferences, and the organization is isolated from global competition by competing in industry segments that are most affected by differences among local countries.
ii. Global strategy — The products are standardized across the national market. Business-level strategy decisions are made by the headquarter office. This type of strategy is prominent among Japanese firms.
iii. Transnational strategy — The combination structure has characteristics that emphasize both geographic and product structures. Global efficiency and responsiveness are the goals of this type of strategy.
Assess Core Competencies (Modes of Entry)
g. Exporting — high cost, low control
h. Licensing — low cost, low risk, little control, low returns
i. Strategic alliances — shared costs, shared resources, shared risks, problems of integration
j. Acquisitions — quick access to new market, high cost, complex negotiations, problem of merging with domestic operations.
k. Establishment of a new subsidiary -complex, often costly, time consuming, high risk, maximum control, potential above-average returns
After a company has decided on what strategy would benefit the organization, it will move to the next step, which is the development of an approach to manage its global business operations. One approach that has been explored is the international trade theory.
International Trade Theory
Classical economics was created as a response to the economists who supported the mercantilism school of thought. The concept was introduced in the late 18th century, and focused on economic growth and freedom, laissez-faire ideas and free competition.
Three Key Principles of Mercantilist Thought
There were three key principles to the mercantilist thought, and they were:
- Exporting is good, but importing should be avoided
- When a merchant exports, he will receive payment
- It is best to export as much as possible in order to maximize the amount of money one can receive.
The downside to this theory is that it does not recognize the positive effects of importing. Therefore, if the country does not import, it will have to sacrifice the consumption of certain items.
Economists Adam Smith
Adam Smith wrote a book entitled, "The Wealth of Nations," which highlighted the significance of specialization. His work was in response to the mercantilist thought that was popular in Britain since the 16th century. This book established a foundation for the concepts and principles of classical economics. Smith believed that free competition and free trade was the best way to promote a country's economic growth. According to his theory, international trade was considered a type of specialization. Specialization advocates that each country should specialize in the production of goods that it is equipped to produce (i.e. absolute advantage). The countries should export part of their production and use the other part to barter for products that they cannot produce. Smith believed that communities would grow if the members were allowed to pursue their own interests, and these members would make a profit by...
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