{"id":205,"date":"2014-05-13T17:44:57","date_gmt":"2014-05-13T17:44:57","guid":{"rendered":"http:\/\/opentextbc.ca\/strategicmanagement\/?post_type=chapter&p=205"},"modified":"2019-07-02T22:59:51","modified_gmt":"2019-07-02T22:59:51","slug":"advantages-and-disadvantages-of-competing-in-international-markets","status":"publish","type":"chapter","link":"https:\/\/opentextbc.ca\/strategicmanagement\/chapter\/advantages-and-disadvantages-of-competing-in-international-markets\/","title":{"raw":"Advantages and Disadvantages of Competing in International Markets","rendered":"Advantages and Disadvantages of Competing in International Markets"},"content":{"raw":"
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Learning Objectives<\/p>\r\n\r\n<\/header>\r\n

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  1. Understand the potential benefits of competing in international markets.<\/li>\r\n \t
  2. Understand the risks faced when competing in international markets.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<\/div>\r\nAs Kia\u2019s experience illustrates, fueled by globalization, international business has become a huge segment of the world\u2019s overall economic activity. Amazingly, current projections suggest that, within a few years, the total dollar value of trade across national borders will be greater than the total dollar value of trade within all of the world\u2019s countries combined. One driver of the rapid growth of international business over the past two decades has been the opening up of large economies such as China and Russia, which had been mostly closed off to outside investors and producers.<\/a>\r\n\r\n[caption id=\"attachment_1487\" align=\"aligncenter\" width=\"400\"]\"Figure<\/a> Figure 7.3: Why Compete in New Markets? [Image description]<\/a>[\/caption]The United States, as a single country,\u00a0has the world\u2019s largest economy. Collectively, the European Union (EU) has a higher GDP than the United States, but of course it is composed\u00a0of a group of nations. As an illustration of the power of the American economy, consider that, as of early 2011, the economy of just one state\u2014California\u2014if it were a country, would be ranked eighth largest in the world, between the UK and\u00a0Russia. The U.S. capacity for production of manufactured and agricultural goods\u00a0is far greater than can be consumed in America alone or NAFTA (North American Free Trade Agreement; includes Canada, Mexico, and the United States). As a result, the overall size of the U.S. economy has led American commerce to be very much intertwined with international markets.\r\n\r\nAs primarily a trading nation, Canada has also benefited from the rapid growth in international trade and globalization. Given our immense shared border with the United States, it is not surprising that Canada and the U.S. are each others' largest trading partner, and the world's largest trading partnership. In fact, it is fair to say that every Canadian business is affected by international markets to some degree, although services are typically affected to a lesser extent. Tiny businesses such as individual convenience stores and clothing boutiques sell products that are largely imported from abroad. Many Canadian manufacturing firms would be hard pressed to produce for only\u00a0the Canadian market, as the volumes of potential sales would not allow them to achieve economies of scale. Many large corporations, on both sides of the border (e.g., General Motors (Canada), Coca-Cola, Blackberry, and Microsoft) conduct much of their business internationally (Wikipedia, 2014).\r\n\r\nThe Economist<\/em>, a well-respected international magazine, has predicted that the economy of China, just\u00a020 years ago a closed economic backwater, will be larger than that of the United States\u00a0by 2019, based on real GDP growth, inflation, and the appreciation of the value of the yuan, China's currency (S.C. & D.H., 2014). Economics suggests that the core reason for this remarkable growth has been the gradual opening of China's border to trade. Their initially low salary scale, unlimited labor force, and few manufacturing restrictions have made China a major manufacturing and trade nation. More recently an emerging middle class has begun to fuel national consumption, further increasing the economic wealth of the nation (Wikipedia, 2014).\r\n

    Access to New Customers<\/h1>\r\nPerhaps the most obvious reason to compete in international markets is gaining access to new customers. Although the United States\u00a0currently has\u00a0the largest economy in the world, it accounts for less than 5 percent of the world\u2019s population. Canada ranks at 0.5\u00a0percent\u00a0of the world's population. Selling goods and services to the other 95 percent of people on the planet can be very appealing, especially for companies whose home market is\u00a0saturated (Figure 7.3 \"Why Compete in New Markets?\"<\/a>).\r\n\r\nFew companies have a stronger \"American\u201d identity than McDonald\u2019s. Yet McDonald\u2019s is increasingly reliant on sales outside the United States. In 2006, the United States accounted for 34 percent of McDonald\u2019s revenue, while Europe accounted for 32 percent, and Asia, the Middle East, and Africa accounted for 14 percent. By\u00a02012 Europe was McDonald\u2019s biggest source of revenue (39 percent), the U.S. share had fallen to 32 percent, and the collective contribution of Asia, the Middle East, and Africa had jumped to 23 percent. With less than one-third of its sales being generated in its home country, McDonald\u2019s is truly a global powerhouse (University of Oregon Investment Group, 2013).\r\n\r\n[caption id=\"attachment_1488\" align=\"aligncenter\" width=\"400\"]\"Levi's<\/a> Figure 7.4: Levi\u2019s jeans are appreciated by customers worldwide, as shown by this balloon featured at the Putrajaya International Hot Air Balloon Fiesta. (Putrajaya is a planned city south of Kuala Lumpur)[\/caption]\r\n\r\nChina and India are increasingly attractive markets to U.S. firms. The two most populous nations in the world, both have growing middle classes, defined loosely as people financially able to purchase goods and services that are not merely necessities of life. With their immense population numbers, if only 1\u00a0percent\u00a0of Chinese became middle class over the next three\u00a0years, that would be 16 million potential new consumers! This trend has created tremendous opportunities for some firms. In 2013, for example, GM sold more vehicles in China than it sold in the United States (3.2 million vs. 2.8 million) (Szczesny, 2014).\r\n\r\nGM is not alone in moving into China. Ford Motor Company sold a total of 935,813 vehicles in China in\u00a02013, setting another annual record. Toyota and its two joint-venture partners recorded sales of 917,500 units, a 9.2\u00a0percent\u00a0increase, while Honda\u2019s China volume jumped 26\u00a0percent\u00a0to 756,882. Meanwhile, sales for Japanese brands in China continued to suffer early last year amid boycotts and violent protests that occurred after Japan renewed its claims on the disputed Senkakus\u00a0islands in the East China Sea, noted for their\u00a0potential offshore oil and gas reserves (Miller, 2014).\r\n

    Lowering Costs<\/h1>\r\n[pb_glossary id=\"3021\"]Offshoring[\/pb_glossary]<\/strong>\u00a0<\/strong>has become a popular yet controversial means of\u00a0trying to reduce costs. Offshoring involves relocating a business activity to another country. Many Canadian and U.S. companies have closed down operations at home in favor of creating new operations in countries such as China and India that offer cheaper labor. While offshoring can reduce a firm\u2019s costs of doing business, the job losses in the firm\u2019s home country can devastate local communities, leading to negative publicity.\r\n
    \r\n\r\nMany firms that compete in international markets hope to gain cost advantages. When a firm increases sales volume by entering a new country, for example, it may generate economies of scale that lower its overall and average production costs. Economics of scale may be linked to greater production from existing facilities (sharing fixed costs across larger sales) and other shared costs such as research and development (R&D) and marketing. It also has the potential to diversify risks. As well, going international has implications for dealing with suppliers. The growth that overseas expansion creates leads many businesses to purchase supplies in greater amounts\u00a0and from suppliers in multiple countries, reducing risk. This can provide a firm with stronger leverage when negotiating prices with its existing suppliers.\r\n\r\nFor example, major companies continue to outsource much of their IT work to specialists, a move that in many cases makes good business sense. The majority of employers (six out of ten) said cost savings was the main benefit of outsourcing, which they estimated at 35 percent on average, according to an IDC survey called Outsourcing Monitor<\/em>\u00a0in June 2012. Competitive advantage and access to specialized skills also ranked high on the list of benefits, the\u00a0survey found. Most IT work is still performed in Canada, IDC says, but a growing share of the market is going to companies outside the country. Offshore firms account for $3 billion of the Canadian outsourced IT market. And their share is rising 20 percent a year. They\u2019re handling everything from check processing to large databases, IDC says.\r\n\r\n<\/div>\r\nHowever, a growing number of U.S. companies are finding that offshoring is not providing the benefits they had expected. This has led to a new phenomenon known as [pb_glossary id=\"3022\"]reshoring[\/pb_glossary],<\/strong>\u00a0whereby jobs that had been sent overseas are returning home. In some cases, the quality provided by workers overseas is not good enough. Carbonite, a seller of computer backup services, found that its call centre in Boston was providing much stronger customer satisfaction than its call centre in India. The Boston operation\u2019s higher rating was attained even though it handled the more challenging customer complaints. As a result, Carbonite returned 250 call centre jobs to the United States in 2012.\r\n\r\n[caption id=\"attachment_1494\" align=\"aligncenter\" width=\"400\"]\"State<\/a> Figure 7.5: Concerns about customer service are leading some American firms to shift their call centers back to the United States.[\/caption]\r\n\r\nAfter spending a couple of decades advising Western clients on how to \"offshore\" their production facilities to low-cost jurisdictions in Asia, business consultancies say it might be time to bring some of that work home. The combination of rising wages in China, elevated shipping costs, and a rethinking of supply chains is making North America the hot \u201cnew\u201d global manufacturing hub. Boston Consulting Group predicts the combination of production returning from China and increased exports will create between 600,000 and one million jobs in the United States over the next decade (Flavelle, 2013).\r\n\r\nThis wave of reshoring has yet to touch Canada\u2019s shores, reflecting the country\u2019s status as a relatively expensive place to assemble gadgets, parts, and machinery. That raises a policy question for officials in Ottawa and the provincial capitals that they haven\u2019t had to consider for a long time: How far are they willing to go to win factory work? (Carmichael, 2012;\u00a0Ovsey, 2013)\r\n\r\nEarlier this year, research company\u00a0Alix <\/a>Partners released a report<\/a>\u00a0that showed the United States had reached cost parity with Mexico as a preferred \"nearshoring\" location, and that it would reach similar parity with China by 2015. In lay terms, that means it costs American companies no more to keep their production on home turf than it does to offshore it to traditionally low-cost locales in Asia.\r\n\r\nIn other cases, the expected cost savings of offshore production\u00a0have not materialized. In the United States, NCR had been making ATMs and self-service checkout systems in China, Hungary, and Brazil. These machines can weigh more than a ton, and NCR found that shipping them from overseas plants back to the United States was extremely expensive. NCR hired 500 workers to start making the ATMs and checkout systems at a plant in Columbus, Georgia. NCR\u2019s plans call for 370 more jobs to be added at the plant by 2014. Similarly, General Electric announced plans to hire approximately 1,300 workers in Louisville, Kentucky, starting in the fall of 2011. These workers make water heaters and refrigerators that had been produced overseas (Isidore, 2011). Snapper, a high-quality lawn mower manufacturer located in Milwaukee, Wisconsin,\u00a0concluded that the long transportation times from China did not allow them to respond quickly enough to emerging opportunities, often weather related, and so they kept production facilities in the United States.\r\n

    Diversification of Business Risk<\/h1>\r\nA familiar clich\u00e9 warns \u201cdon\u2019t put all of your eggs in one basket.\u201d Applied to business, this clich\u00e9 suggests that there is a certain risk for firms operating in only one country. [pb_glossary id=\"3024\"]Business risk[\/pb_glossary]<\/strong>\u00a0refers to the potential that an operation might fail. If a firm is completely dependent on one country, from either a supply or market perspective, negative economic, political, or natural disasters in that country can create significant difficulty, as the Japanese earthquake of 2011 proved. Just like spreading one\u2019s eggs into multiple baskets reduces the chances that all eggs will be broken, business risk is reduced when a firm diversifies across multiple countries.\r\n\r\n[caption id=\"attachment_1495\" align=\"aligncenter\" width=\"400\"]\"ampm<\/a> Figure 7.6: Firms can reduce business risk by competing in a variety of international markets. For example, the ampm convenience store chain has locations in the United States, Mexico, Brazil, and Japan.[\/caption]\r\n\r\nConsider, for example, natural disasters such as the earthquakes and tsunami that hit Japan in 2011. If Japanese automakers such as Toyota, Nissan, and Honda sold cars only in their home country, the financial consequences could have been grave. Because these firms operate in many countries, however, they were protected from being ruined by events in Japan. In other words, these firms diversified their business risk by not being overly dependent on their Japanese operations.\r\n\r\nAmerican cigarette companies such as Philip Morris and R. J. Reynolds are challenged by trends within Canada, the United States, and Europe. Tobacco use in these areas is declining as laws are passed restricting smoking in public areas and restaurants, high taxation on smoking continues, and society's views of smoking change. In response, cigarette makers are attempting to increase their operations within countries where smoking remains popular so they can\u00a0remain profitable over time. They have also introduced e-cigerettes as a separate business line to retain customers and profits.\r\n\r\nIn 2006, for example, Philip Morris spent $5.2 billion to purchase a controlling interest in Indonesian cigarette maker Sampoerna. This was the biggest acquisition ever in Indonesia by a foreign company. Tapping into Indonesia\u2019s population of approximately 230 million people was attractive to Philip Morris in part because nearly two-thirds of men are smokers, and smoking among women is on the rise. As of 2007, Indonesia was the fifth-largest tobacco market in the world, trailing only China, the United States, Russia, and Japan. To appeal to local preferences for cigarettes flavored with cloves, Philip Morris introduced a variety of its signature Marlboro brand called Marlboro Mix 9 that includes cloves in its formulation (T2M, 2007). Although unit sales of Philip Morris products overseas dropped 5\u00a0percent from 2012 to 2013, profits rose by concentrating on its profitable, high-profile Marlboro brand.\r\n\r\nSince 2009, Philip Morris International and Swedish Match AB have operated a joint venture company that has commercialized smokeless tobacco products outside of Scandinavia and the United States. Through this joint venture company, PMI sells smokeless tobacco products, including Swedish snus (Philip Morris International, 2014).\r\n\r\n[caption id=\"attachment_1496\" align=\"aligncenter\" width=\"400\"]\"Marlboro<\/a> Figure 7.7: Trends in the decline of cigarette use in the United States and Europe may snuff out profits enjoyed by brands such as Marlboro.[\/caption]\r\n\r\n[caption id=\"attachment_1497\" align=\"aligncenter\" width=\"400\"]\"Figure<\/a> Figure 7.8: Entering New Markets: Worth the Risk? [Image description]<\/a>[\/caption]\r\n

    Political Risk<\/h1>\r\nAlthough competing in international markets offers important potential benefits, such as access to new customers, the opportunity to lower costs, and the diversification of business risk, going overseas also poses daunting challenges. [pb_glossary id=\"3025\"]Political risk[\/pb_glossary]<\/strong>\u00a0<\/strong>refers to the potential for government upheaval or interference with business to harm an operation within a country (Figure 7.8 \"Entering New Markets: Worth the Risk?\"<\/a>).\r\n\r\nThe relative stability of Canadian, U.S.,\u00a0and European governments leaves citizens unfamiliar with the significant political disruption that can occur with a military takeover (Thailand), military or terrorist insurrection (Egypt), or outright war (Iraq). One example of larger political change is the \u201cArab Spring,\u201d a term\u00a0used to refer to a series of uprisings in 2011 in countries such as Tunisia, Egypt, Libya, Bahrain, Syria, and Yemen, as their populations sought to overthrow corrupt governments.\r\n\r\nSimilarly, in 2013 and 2014, military conflict between Russia and Ukraine sent\u00a0international oil prices upward on fears of further instability in oil-rich countries.\u00a0Unstable governments associated with such demonstrations and uprisings make it difficult for firms to plan for the future. Over time, a government could become increasingly hostile to foreign businesses by imposing new taxes and new regulations. In extreme cases, a firm\u2019s assets in a country may be\u00a0seized by the national government. This process is called [pb_glossary id=\"3028\"]nationalization[\/pb_glossary].<\/strong>\u00a0In recent years, for example, Venezuela has nationalized foreign-controlled operations in the oil, cement, steel, and glass industries.\r\n\r\nCountries with the highest levels of political risk tend to be those such as Somalia, Sudan, and Afghanistan whose governments are so unstable that few foreign companies are willing to go there. High levels of political risk are also present, however, in several of the world\u2019s important emerging economies, including India, the Philippines, Russia, and Indonesia. This creates a dilemma for firms in that these risky settings also offer enormous growth opportunities. Firms can choose to concentrate their efforts in countries such as Canada, Australia, South Korea, and Japan that have very low levels of political risk, but opportunities in such settings are often more modest (Kostigen, 2011).\r\n\r\n[caption id=\"attachment_1498\" align=\"aligncenter\" width=\"400\"]\"Fidel<\/a> Figure 7.9: Cuban leader Fidel Castro nationalized the assets of thousands of U.S. companies after overthrowing the previous government.[\/caption]\r\n

    Economic Risk<\/h1>\r\n[pb_glossary id=\"3026\"]Economic risk<\/strong>\u00a0[\/pb_glossary] refers to the potential for a country\u2019s economic conditions and policies, property rights protections, and currency exchange rates to adversely affect a firm\u2019s operations within a country. Executives who lead companies that do business in many different countries have to take stock of these various dimensions and try to anticipate how the dimensions will affect their companies. Because economies are unpredictable, economic risk presents executives with tremendous challenges.\r\n\r\nHyundai and Kia are flagship companies of Hyundai Motor Group, the world's fifth-largest automotive conglomerate. Car sales by Hyundai Motor Co. backtracked in Europe in 2013 amid weak overall market conditions, while its smaller sibling Kia Motors Corp. managed to increase its presence on the continent (The Korean Herald<\/em>, 2014).\r\n\r\nConsider, for example, Kia\u2019s operations in Europe. Kia has achieved sales volume growth in Europe every year since 2008, increasing market share from 1.7\u00a0percent\u00a0to 2.7\u00a0percent\u00a0in 2013. This success, often going against the overall market downturn, is a tribute to Kia\u2019s design, product range,\u00a0quality,\u00a0and warranty.\u00a0As Kia\u2019s executives planned for the future, they needed to wonder how economic conditions would influence Kia\u2019s future performance in Europe. If inflation and interest rates were to increase in a particular country, this would make it more difficult for consumers to purchase new Kias. If currency exchange rates were to change such that the euro became weaker relative to the South Korean won, this would make a Kia more expensive for European buyers (Kia.com, 2014).\r\n\r\n[caption id=\"attachment_1500\" align=\"aligncenter\" width=\"400\"]\"Economic<\/a> Figure 7.10: Economic risk involves many complex and daunting elements.[\/caption]\r\n

    Cultural Risk<\/a><\/h1>\r\n[caption id=\"attachment_1502\" align=\"aligncenter\" width=\"400\"]\"Figure<\/a> Figure 7.11: Cultural Risk: When in Rome [Image description]<\/a>[\/caption][pb_glossary id=\"3027\"]Cultural risk[\/pb_glossary]<\/strong>\u00a0<\/strong>refers to the potential for a company\u2019s operations in a country to struggle because of differences in language, customs, norms, and customer preferences (Figure 7.11 \"Cultural Risk: When in Rome\"<\/a>). The history of business is full of colorful examples of cultural differences undermining companies. For example, a laundry detergent company was surprised by its poor sales in the Middle East. Executives believed that their product was being skillfully promoted using print advertisements that showed dirty clothing on the left, a box of detergent in the middle, and clean clothing on the right. A simple and effective message, right? Not exactly. Unlike English and other Western languages, the languages used in the Middle East, such as Hebrew and Arabic, involve reading from right to left. To consumers, the implication of the detergent ads was that the product could be used to take clean clothes and make them dirty. Not surprisingly, few boxes of the detergent were sold before this cultural blunder was discovered.\r\n\r\nA refrigerator manufacturer experienced poor sales in the Middle East because of another cultural difference. The firm used a photo of an open refrigerator in its prints ads to demonstrate the large amount of storage offered by the appliance. Unfortunately, the photo prominently featured pork, a type of meat that is not eaten by the Jews and Muslims who make up most of the area\u2019s population (Ricks, 1993).\u00a0To get a sense of consumers\u2019 reactions, imagine if you saw a refrigerator ad that showed meat from a horse or a dog. You would likely be disgusted. In some parts of world, however, horse and dog meat are accepted parts of diets. Firms must take cultural differences such as these into account when competing in international markets.\r\n\r\n[caption id=\"attachment_1505\" align=\"aligncenter\" width=\"400\"]\"Pig<\/a> Figure 7.12: This photo would not help sell refrigerators in the Middle East because it includes pork, a meat that is taboo in that part of the world.[\/caption]\r\n\r\nCultural differences can cause problems even when the cultures involved are very similar and share the same language. During the 2000 Summer Olympics held in Sydney, Australia,\u00a0clothing manufacturer\u00a0Roots was the official outfitter for members of the Canadian Olympic and Paralympic teams. The Roots brand was emblazoned on the Olympians'\u00a0distinctive uniforms, and the Roots clothing was also sold on-site at the games. The fact that \u201croot\u201d is an Aussie slang for \u201csexual intercourse\u201d and often replaces the F-bomb in sentences may have somewhat helped its popularity Down Under. Who doesn\u2019t want a bag that says \u201cRoots\u201d on it?\r\n\r\nRecycleBank is an American firm that specializes in creating programs that reward people for recycling, similar to airlines\u2019 frequent-flyer programs. In 2009, RecycleBank expanded its operations into the UK. Executives at RecycleBank became offended when the British press referred to RecycleBank\u2019s rewards program as a \u201cscheme.\u201d Their concern was unwarranted, however. The word scheme<\/em> implies sneakiness when used in the United States, but a scheme simply means a service in the UK\u00a0(Maltby, 2010).\u00a0Differences in the meaning of English words between the United States and the UK are also vexing to American men named Randy, who wonder why Brits giggle at the mention of their name (Figure 7.13 \"Watch Your Language\"<\/a>).<\/a>\r\n\r\n[caption id=\"attachment_1506\" align=\"aligncenter\" width=\"400\"]\"Figure<\/a> Figure 7.13: Watch Your Language [Image description]<\/a>[\/caption]\r\n
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    Key Takeaways<\/p>\r\n\r\n<\/header>\r\n

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