Managing Global Expansion
Managing Global Expansion
Global trade expansion has been the goal of societies since the beginning of the concept of trade. Over the years, trade around the world has been restricted by political barriers, inadequate industrial technology, transportation expenses and long intervals. There have been communication deficiencies and the deficiency of global management awareness.
As the world enters the 21st century, these boundaries have rapidly begun to dissolve. Trade agreements between countries are actively being written to reduce political constraints to commerce. Technology enables manufactures to produce masses of durable products that can be transported around the world. Products can now be delivered around the world in hours or days instead of months or years. Communication is now virtually instantaneous as a business can be in constant touch with its affiliates. Finally, companies throughout the world are gaining knowledge on how to be successful in the new global market. Managers must be equipped to compete in the global economy or risk domestic market presence against global companies out of the country. A fundamental symposium on the fundamentals of global management will be presented.
The Global Concept
The term “Global Marketing” was first created in 1983 with the publication of “The Globalization of Markets” in the Harvard Business Review written by Ted Levitt. Previous to this time, the terms international or multinational marketing were used to illustrate trade between nations. Global marketing is often misunderstood to be completely indistinguishable with international marketing. However, global marketing is used to depict a new phenomenon. The global marketing concept can be distinguished from other similar terms by studying the history of international trade terminology. In order to tell between the definitions of global marketing from other terms, a global strategic manager must recognize these differences (Jeannet and Hennessey, 2002).
Domestic marketing gives attention to a company’s efforts exclusively at its own national market. Although the company decides to market a specified product domestically, they may also choose to expand across many fragments within their individual market. Management using domestic marketing strategies may be selecting to market domestically for the reason that of a local advantage or because they have a limited merchandise line that would not be viably marketed outside of their home country (Jeannet and Hennessey, 2002).
Export marketing is when a firm makes a decision to embark on to ship, or export their products outside their domestic borders. The company’s particular product may be in demand by distributors in another country that will result in a call for exportation. A company may also come to a decision to penetrate another country’s market by exporting by-products that can not be manufactured without problems in the intended country. The exporting manufacturer has to meticulously price their products to remain profitable but yet persist to be competitive. Shipping expenditures and import charges at the destination country are a few of the expenses coupled with exporting. Government policies in both countries have got to be taken into concern as well as strategic financial requisites with the importers (Jeannet and Hennessey, 2002).
International marketing is when a company moves beyond the extent of exporting and becomes more concerned with the local marketing environment in the importing country. International marketers are to be expected to have their own sales subsidiaries that will concentrate on marketing tactics in the importing country. International marketing will bring about the need to develop exclusively distinct marketing strategies for each market. Companies would have to include local cultural and environmental in consideration in order to successfully develop their products (Jeannet and Hennessey, 2002).
Multinational marketing is where a company to a large extent expands subsidiary assets in a quantity of foreign countries as if the developed establishments were local companies. The company produces a multi-domestic strategy where each subsidiary contends with the specific marketing tactics in their individual local markets. This has the advantage of making the local companies to materialize as a local company instead of a foreign operated company (Jeannet and Hennessey, 2002).
Horizontal integration involves the subsidiary companies not only to market the product locally, but to also locally construct the product or service. This approach removes the requirement to have the product imported from outside the subsidiaries nation. This circumvents the expenditures of transporting the product from country to country and any associated tariffs and boundaries that may apply. Subsidiaries may perhaps be directed by the parent country but may be operated independently (Jeannet and Hennessey, 2002).
Pan-regional marketing is where a group of nations structure a trade agreement that gets rid of tariffs and other trade barriers inside the group (Jeannet and Hennessey, 2002). Launched in 1994, the North American Free Trade Agreement (NAFTA) is an illustration of a pan-regional marketing region. The NAFTA agreement consists of the United States of America, Mexico and Canada (Spurge, 1997). Many companies in the United States have been forced to modify their multi-domestic strategies to take advantage of the benefits involved in NAFTA (Jeannet and Hennessey, 2002). Regionalism has become a trend that has become more common in the global market. This allows a company to compete in a regional market rather than to jump right into the global arena (Hitt, Ireland, & Hoskisson, 2003).
A global marketing strategy entails the formation of a single strategy for a product, service, or company for the global market. This differs with the multi-international marketing models that generate separate strategies for every country. A Strategic Manager will must possess a far-reaching awareness of multi-national marketing to develop a successful single global marketing plan. Although a single strategy is created, global marketing may necessitate some local customizing (Jeannet and Hennessey, 2002).
Before a company seeks out a country to establish operations in, they must understand crucial international economic specifics. Certain nations are more economically feasible to the company depending on its necessities. When nations share mutually beneficial assets, they are referred to as virtual nations. If the quickly up-and-coming global economic world were depicted as a human body, the intermediary virtual nations form the head of the body; the body virtual nations shape the torso, while the full virtualization countries shape the hands, arms, legs, and feet (Williams, 2003).
Partially virtualized nations that shape the head of the global economic body are the economically superior nations such as Britain, the United States, Germany, and France which put emphasis on service exports but hang on to some manufacturing endeavors that is innovation oriented. The virtual feature of these nations comes by way of mergers, foreign direct investment and joint venture alliances. These are the countries that set off and develop virtual companies and develop virtual nations by means of free trade agreements (Williams, 2003).
Full virtualized nations are the external parts such as the arms, hands, legs and feet of the global economic body. These consist of manufacturing-focused nations such as Singapore that carry out approximately all of their manufacturing in adjacent nations with a lower standard of living in places like Indonesia, China and Malaysia. These nations have the greatest nationalistic reliance on trade (Williams, 2003).
Body virtual nations, the torso of the global economic body are nations that use their large labor supply and low wages to manufacture most of the world’s low technology products. These are China, India, Cambodia, Latin America, Burma, and so forth. These nations must swiftly inflate their capital infrastructure and maintain currencies at a low level to make their exports inexpensive to consumers in foreign markets. These are the nations that rely most on virtual companies (Williams, 2003).
Nations must perform their part in the global economy body. If each country performs their respective functions, the body will operate at a healthy pace. The responsibilities of each country or industry are as follows (Williams, 2003).
- High technology nations: Such as The United States, Japan, Germany, the majority of Western Europe. These nations must stand out at invention, innovation and marketing.
- Low technology, labor intensive nations: For example Mexico, Indonesia, India, and Malaysia. These nations offer a hefty, inexpensive labor supply, a determined work ethic, and rising consumerism.
- Innovative, entrepreneurial, specialized companies with high growth/risk-taking potential: The United States. The U.S. has had to globally farm out its production.
- Economies of scale manufacturing: Countries like Japan, Korea, and Germany. These companies supply the world in large size corporations.
- Outsourced manufacturing: The United States, and Western Europe. These nations lead the world in foreign direct investment.
- National industrial planning: Japan, Hong Kong, Singapore, Taiwan, South Korea, and India. These nations stand out in strong nationalism, one-party politics, and undetectable protectionism.
- Laissez faire government policy: The United States, Britain and Canada. These nations do extremely well in having strong institutions and currencies.
- Nations with a core of small, private companies: Italy, China. These social structures of these nations are put together around the extended family.
- Nations with a dominance of large, public corporations: Japan, Korea, and Scandinavia. These nations toil in the sphere of innovation and private entrepreneurship.
- Diversified or integrated conglomerates: Korea, China. These nations will endure future problems of privatizing these incompetent, noncompetitive conglomerates.
Entering the Global Industry
After a company has selected an attractive country in which to carry out business activities in, the company must develop an entry strategy that is tailored for that country. A successful entry strategy can produce a successful financial return. In contrast, results could be devastating if the incorrect entry is employed or if it is executed improperly (Jeannet and Hennessey, 2002).
There is various global entry strategies that a company can make use of. Each strategy holds its own set of advantages and disadvantages. A global manager must recognize the various global entry opportunities on hand along with their pros and cons and consequently select the proper strategy with unmistakable precision (Jeannet and Hennessey, 2002).
The favorable entry strategy for most globally minded companies is to export. Exporting is where a company manufactures a product outside the intended destination country and then transports it there for sale. This strategy may be selected if the company does not wish to invest in manufacturing operations in the host country. The company may also elect to initially export to use it to learn the characteristics and nature of the market and economy before making any major investments (Peter and Donnelly, 2001). A company may also have concluded that the country does not have a considerable enough market to justify local production strategies. A company that desires to export may export indirectly or directly (Jeannet and Hennessey, 2002).
A business that is new or inefficient to exporting may choose to indirectly export their products. Indirect exporting uses a domestic intermediary such as a broker, combination export manager, or a manufacturer’s export agent. These intermediaries readily provide the company with the expertise they need to be successful in that country (Jeannet and Hennessey, 2002).
Company’s that may have had previously been successfully with exporting strategies and do not require the services of an intermediary may decide to directly export to the country. This requires the exporter to have a vast knowledge of the local economy and be able to communicate with a large number of foreign contacts. The company will need to establish a relationship with local distributors and merchants in order to open a distribution channel within the country. Local distributors will sell their products and may be in the form of independent distributors or sales subsidiaries such as car dealerships (Jeannet and Hennessey, 2002).
There are disadvantages of using exporting as an entry strategy. The process of exporting may be more costly and timely than expected. The cost of import duties and other trade barriers to the target country may fluctuate unexpectedly. Foreign agents may not be dependable and dedicated to the exporter (Peter and Donnelly, 2001).
Licensing is a contractual agreement where the licensor’s patents, trademarks, service marks, copyrights, trade secrets, or other intellectual assets may be purchased or made accessible to a licensee for a certain fee that is agreed upon in advance among the parties. These fees are sometimes called royalties may be a lump sum royalty, a running royalty that is rated on volume of production, or a mixture of both. Companies from the United States commonly license their technology to foreign companies that then use it to produce and market products in a country or collection of countries spelled out in the licensing agreement (Peter and Donnelly, 2001). Licensees are in effect for explicit time periods. These time periods are dependant on the investment made by the licensee (Jeannet and Hennessey, 2002).
A licensing contract generally allows a firm to enter a foreign market swiftly, and causes fewer financial and legal consequences than owning and operating a foreign production plant or partaking in a foreign joint venture. Licensing also allows companies from the United States to avoid many of the tariff and non-tariff barriers that recurrently get in the way of the exporting of manufactured products. Licensing can be an exceptionally appealing method of exporting for small firms or firms with modest global trade understanding. Licensing can also be exercised to purchase foreign technology for example, cross-licensing agreements or grant back clauses giving privileges to improved technology developed by a licensee (Hitt, Ireland, & Hoskisson, 2003).
Licensing has undeniable possible downsides. One negative characteristic of licensing is that control over the technology is undermined because it has been passed on to an unaffiliated company. Also, licensing usually yields less profit than exporting actual products or services. In a number of developing countries, there also may be troubles in effectively protecting the licensed technology from unlawful use by third parties (Hitt, Ireland, & Hoskisson, 2003). Quality issues may become a concern that would damage the company’s reputation. Another disadvantage is that a licensee may become a feasible competitor upon the termination of the license. The likelihood can be increased if the licensee grows to be efficient with the technology and techniques that was licensed to them (Peter and Donnelly, 2001).
Another choice comparable to licensing is acknowledged as franchising. In franchising, is what happens when an original company, the franchisor, permits rights to a third party, the franchisee, to run its business using the same brand, products, services, promotions and management systems. Franchising can involve an assortment of businesses from fast food restaurants to hotel accommodations (Hitt, Ireland, & Hoskisson, 2003). In global franchising, the franchiser is the international company that provides a complete marketing system to the franchisee, or the foreign firm. The franchiser supplies to the franchisee the necessary benefits such as use of logo, brand name, products, and processes as prescribed by the global company (Jeannet and Hennessey, 2002).
The franchisor is the owner of the business system and any brands and trademarks. Franchisors allow their franchisees to use these under license in a designated area. They provide support for them in starting their business, and in running, promoting and developing it (Hitt, Ireland, & Hoskisson, 2003). The franchiser supplies the necessary tools such as use of logo, brand name, products, and processes as arranged by the global company (Jeannet and Hennessey, 2002).
Franchisees own and operate each outlet within a franchise system. They purchase the rights to run the business using its recognized brands and trading schemes. Franchisees remain self-employed and own the distinct outlet but must operate the business according to procedures arranged in the franchise agreement. They pay for the owner’s help in the means of national promotion, training, organizational services and constant product and system development. Payments can be a set fee, or connected to turnover, or a mixture of both (Hitt, Ireland, & Hoskisson, 2003).
Another principal manner of global entry is expanding by acquisitions of resources in a foreign country. This can be identified as local manufacturing. Local manufacturing is where a company chooses to produce the product locally under its own ownership and control. There are three established levels of local manufacturing that management must recognize. There are contract manufacturing, assembly production and full scale integrated production (Jeannet and Hennessey, 2002).
Contract manufacturing is illustrated as a company that positions itself to have their products manufactured by a local company by contractual agreements. The global company leases manufacturing capacity from the target company. The local company manufactures the product as the global company issues production orders (Jeannet and Hennessey, 2002).
Assembly production is where a worldwide company manufacturers a segment of the product in the target country. This is characteristically during the final stages of production where labor is usually intense. Excessive labor costs can be evaded if the sourced country is in a labor intensive country (Jeannet and Hennessey, 2002).
Not only does this approach steer clear of an extensive capital investment in the target nation, it also circumvents any trade barriers as well. The shortcomings of assembly production are that supply disruptions can transpire from imported components. The company would have to have a precise inventory process to keep away from delays in production (Jeannet and Hennessey, 2002).
Full scale integrated production is an entirely set up local production entity. This represents the greatest obligation a company can put together for a foreign investment. Full scale integrated production may be selected to take advantage of lower production expenses in the foreign nation in order to be viable in the local market (Jeannet and Hennessey, 2002).
Acquisitions provide quick access to new markets. However, these purchases are often more complex than acquiring resources domestically. Political and cultural factors may produce problems of merging with domestic operation. Additionally, this strategy is high cost solution to expanding to foreign markets (Hitt, Ireland, & Hoskisson, 2003).
A greenfield venture is a step beyond purchasing acquisitions in foreign country. This process requires building a new, wholly-owned subsidiary in foreign country. This is especially complex and often very costly. Greenfield ventures are time consuming and are subject to high risks. However, maximum control of business operations is obtains and carries a potential for above-average returns.
A joint venture is a contractual arrangement joining together two or more organizations for the intention of accomplishing a certain business activity. All organizations agree to share in the profits and losses of the enterprise. In the global aspect, joint ventures are where a company decides to share management with one or more foreign firms (Peter and Donnelly, 2001). Joint ventures can only be prosperous if all partners have the same goals (Jeannet and Hennessey, 2002).
Joint ventures and partnerships share many characteristics. In a partnership, each respective partner has equivalent capacity to legally coerce the entire partnership. A partner can embody the entire organization in the normal course of business, and their legal proceedings on behalf of the partnership to create legal obligations (Peter and Donnelly, 2001).
Although it is legal to restrict the strength of individual partners through a partnership or joint venture contract, those agreements do not bind the balance of the world. Given that businesspeople outside of the partnership have no understanding of the restrictions, they are at liberty to rely on the perceptible authority of an individual partner as established by the natural course of dealing or customs in the industry. Individual members of a partnership or joint venture may deal with liability for the dealings of the partnership or the joint venture. However, new limited liability partnership laws and corporate structure choices for joint ventures may trim down this possibility (Peter and Donnelly, 2001).
Strategic alliances are comparable to joint ventures but differ in that in strategic alliances, the firms combine their resources together that goes further than the confines of joint ventures. Characteristically they may share a mixture of distribution access, product knowledge or technology transfers (Jeannet and Hennessey, 2002).
In order for a strategic alliance to be successful, the company must understand the competitive conditions, legal and social standards of the nation. The global company must be aware of the core competencies of the company as well as their weakness. Good partners with a common vision will be mutually beneficial to each other. All parties must be sensitive to cultural differences. They must be able to deliver their promises and be flexible in the case that the alliance agreement needs to be adjusted over time to fit new conditions (Hitt, Ireland, & Hoskisson, 2003).
Keys to Success
Managers should look at the world as being a single market. They must make global-minded decisions on strategic questions about technology, products, and capital. Global sourcing involves optimizing resources on a global scale, sales synergy, and the mastery of virtual joint ventures. However, make local-minded market decisions in packaging, marketing, advertising, and management. Managers must grant local management additional freedom for marketing and human resources. They should try to avoid in micromanaging global operations from headquarters. Companies ought to develop multicultural dexterity within the establishment to react to new or shifting workforces and consumers. This includes the following (VanAuken, 2001):
- Culturally-mixed work teams
- Significant local ownership
- Catering to cultural lifestyles
- Non-ethnocentric managers
Additionally, managers must establish a relationship between local managers, employees, venders, distributors, and customers. This includes adversarial in opposition to cooperative business connections with supply chain partners including suppliers, distributors, wholesalers, retailers, and so forth. This entails outsourced manufacturing, global sourcing, global distribution, and technology pooling. The company should develop a virtual business made up of mutually supporting supply chain partners (VanAuken, 2001).
Measuring Performance in a Global Organization
Some corporations become global in structure and operate with intensification over time. Some are naturally global from the beginning. This bestows some fascinating challenges for managers and executives who find it essential to evaluate performance and formulate decisions on those evaluations. Methods and tools can be used to provide tremendous guidance to assist managers in evaluating performance (Williams, 2003).
Performance evaluation is the periodic appraisal of operations to make certain that the objectives of the company are achieved. A corporation’s performance assessment practice is part of its financial control structure. In other words, the Global Organization must control and utilize accounting information to appraise domestic and foreign operations. Measuring performance of a Global Organization consequently must be achieved through the use of corporate information systems. Because of the potential impact of mistakes in performance evaluation, corporations should be flexible in their methodology when instituting the regulations and practices. Utilizing corporate information systems to appraise foreign and domestic operations is a limited procedure, but, because of foreign exchange rate fluctuations, appraising foreign operations is yet much further inferior. A manager must recognize the companies’ consolidation procedures and how they render the financial statements of their foreign operations. If management is to use the parent company’s currency for financial measures, then the manager must also be aware of the environment fine distinctions that each subsidiary functions within (Williams, 2003).
The primary tool for evaluating performance and management control ought to be the corporate information system. These systems are not just used solely used by controllers, but are used increasingly more by managers throughout the organization. These systems make accessible the information needed to plan, control, evaluate and synchronize all business activities. The development of accounting information systems is exceptionally vital to the success of any company, particularly a transnational or global company. There are several design features for information systems, but at a high priority and most important among them, they must be easily shared, transferred and updated between the parent and its subsidiaries (Williams, 2003).
Given that accounting information requirements differ among countries, cultures, senior management and individual country management, the only feasible methodology to existing consolidated information is through these information systems. Foreign subsidiaries should not be required to use the identical system as the parent company. Since these systems present the means to compare or model an assortment of financial statements and reports using distinctive accounting tactics to account for economic, political environments, legal constraints, and also sociological distinctions in the country of operation. Consequently, they must be designed or modified to accommodate to each other. The organizational form needs to be fully understood in order to get a clearer representation of the information flows. Although flow may vary, the information itself does not. Whatever the case may be, information about foreign operations is assembled, processed, integrated and reported to the parent companies systems (Williams, 2003).
Foreign subsidiaries have got to be appraised on their performance as a supplier, as well as how much after tax revenue in dollars they have produced. Foreign subsidiaries may not necessarily be or possibly shouldn’t be appraised on after tax dollars as their principal objective. This assessment can be accomplished by means of information flow and reporting through the parent and subsidiary information systems (Williams, 2003).
Foreign subsidiary financial reporting in their domestic currency may offer a more meaningful representation of their activities. Global Corporations should instruct their managers and directors to become familiar with the foreign currencies operating results in addition to their own currency information. This would decrease the burden on the information systems in anticipation of such time as they can be incorporated, adapted or replaced. Integrating systems on this scale, although technologically viable, is not quick and trouble-free. However, the education for management could be a refreshing revelation (Williams, 2003).
In addition to financial performance measurement in a Global Corporation, the mind-set of senior management toward the various business subsidiaries is very significant. Their attitude should be to narrow in on worldwide objectives and regard their foreign subsidiaries as part of the whole. This means that senior management must set up standards for evaluation and control that are not only universal, but local as well. The structure needs to assist global decision synchronization, while responding to host governments and consumers. Finally, assessing the performance across the corporation becomes more multifaceted, but much more vital in a global organization (Williams, 2003).
Using Information Technology to Assist in a Global Organization
Information technology (IT) can convey a company en route for globalization in a variety of means. By the means of computer and communications technologies, companies can obtain the information components from tangible products, or substitute knowledge for data, and then instantaneously transfer the electronic information or data all over the planet. Substance can be added or an information-based product can be used at the most economically beneficial location. The time delays, high overheads, and lack of customer responsiveness associated with transportation, reproduction, and inventory can be reduced or even eradicate. This instantaneous world reach generates major transformations in order management, manufacturing, and marketing cycles (Williams, 2003).
In the new global economy, domestic companies may be negatively affected because they ignored the concepts of global management. As barriers are removed, the world markets will become progressively more globalized. Not only is it important to learn the concepts of global management for protect a business from foreign companies, in the modern economy, a company will never reach its phoenix without expanding its services into the global market. Strategic managers that fall short of being educated in global management concepts will discover themselves defenseless to those corporations that have mastered this expertise.
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©2018 Michael A. Hartmann
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