Complexities Faced By Organizations In Their International Business

Discuss about the Complexities faced by the Organizations in their International Business.

The aim of this report is to determine the complexities faced by the organizations in their international business (Cavusgil et al. 2014). International business is the new age concept being made popular in the recent years due to the increased risk in operating in a particular market. Thus, more and more organizations are opting for international business. It is helping them in dividing their business risks in various regions and along with increasing the market share. Moreover, international business helps in gaining more identity and exposure for their products. However, there are various challenges being faced by the organizations in the international business. This is due to the reason that in the international business, various countries are having different trade policies and legislations which should be followed by the organizations. Accordingly, this report will discuss about the various aspects of the international business. Moreover, the entry mode being available to the organizations to enter in to a new international market will also be discussed. The forms of export and the type of intermediaries being available to the business organizations will also be analyzed in this report. Based on the findings from the operations of xxx, recommended measures will be given according to the challenges faced by them. Xxx is a prominent and leading organization catering in the fast moving consumer goods category (Thain and Bradley 2014). They are mainly originated from Malaysia and now initiating strategies to enter in other south Asian countries for expanding their market.

There are several issues being identified with the international business of xxx.It includes management of the human resources and selection of the effective entry modes. Theories for the international business such as theory of absolute advantage, theories of comparative advantage and product life cycle theory will be used to determine the effectiveness of the international business policies of xxx (Huxham and Vangen 2013). However, there are several assumptions being made in the report in order to identify the issues. It is being assumed that the home and the host country for xxx are having equal level of economy and per capita income. It is also being assumed that same and similar products will be marketed by xxx in all regions. It is also being assumed that the countries that are being used in the theories will be considered as the organizations here in this report.

Findings

According to (Sitkin and Bowen 2013), international business poses various challenges for the organizations. This is due to the reason that in the international business, organizations are going to operate in different countries. This causes problem in their management due to the reason that they have to adhere with various legislations and regulations of different countries. Legislations in different countries are variable and not similar to one another. Thus, it becomes difficult for the organizations to adhere with all the varied legislations. According to (Hill, Cronk and Wickramasekera 2013), the key issue for the business organizations in the international business is the management of the human resources. This is due to the reason that, the organizational culture in the home and host countries will be different and effective management between these two is quite difficult for the organizations. The organizational culture and practices being followed in the home country may not be acceptable in the host country. Thus, organizations have to adhere with the cultures and social aspects of the respective countries

According to (Uner et al. 2013),import and export barriers are also being present for the organizations in the international business. He stated that, the tariffs rate varies between the countries and in few cases, the tariff are much higher which cause increase in the cost of production or the cost of the products. It negatively affects the organizations being in the international trade. The effective practices for the international business by the organizations depend on the situation of the countries for entry. Countries having higher political and economical risk should have the strategy of having the merchandise in the host countries. It will help the organizations in minimizing the associated risk by having less amount of investment incurred in the host countries. Joint venture is applicable in the countries where the political and economical factors are stable and the relations between the home and host countries are favorable. Having subsidiaries by acquiring the local organizations will also help to penetrate the host market more effectively and with lessamount of investment.

Organizations opting for the international business should implement a particular entry mode strategy. Entry mode strategy refers to the various options for choosing to enter in to the global market. It varies from direct exporting the goods in the foreign market or setting up manufacturing facilities in the host countries. According to the situation of the targeted market and the objectives of the organizations, it is being determined that which strategies should be effective and selected. Selecting an entry mode is based on the two factors, internal and external. Internal factors refer to the business objectives and financial condition of the organizations. On the other hand, external factors refer to the condition of the market to be entered.

Process of choosing entry mode

There are two main factors which are being considered in determining the effective entry mode. These two factors are internal and external. Internal factors includethe goals and objectives of the organization (Costinot, Vogel and Wang 2012). In the case of the xxx, the main objective of them is to expand their market in the south Asian regions. Moreover, the products of the organization are also key determinants to determine the entry mode. The fast moving consumer goods is very much price sensitive sector. Thus, direct import from other countries will increase the price of the products. In terms of this aspect, the most effective mode will be having the subsidiary in the host country. It will help to gain and penetrate the newly entered market more effectively. Moreover, the localization in the manufacturing of the items will further help to reduce and regulate the price in the market.

Financial strength of the organizations is also an important factor to determine the entry mode in the new market. If the organization is small and not having enough capital to build up another manufacturing facility in other countries, then the direct export or export through merchants will be beneficial (Brouthers 2013). It will help to reach out to the new customers without having incurred much investment. In the case of xxx, they are one of the most leading organizations in Malaysia. They have the capital in having their own manufacturing facility in the new market. However, the cost of distribution and retailing is much more which may become difficult to maintain for them in the initial stage.

Experience in the international business is also an important factor for choosing the effective entry mode in the international market. If the organization is having favorable experience in the in the international business, then it will be easy for them to invest more money in the mew market. On the other hand, it will be a risk being taken by the organization if they lack experience in the international business and implementing huge business investment in the host countries (Kaplan and Mikes 2012). In the case of xxx, they lack experience in the international business and it is their first venture in entering in global market. Thus, it will be a risk for them to have another manufacturing facility in the host country.

External factors such as, market size of the host country is a determinant to choose the effective entry mode. If the market size in the host country is huge, then it will be viable to have a manufacturing facility there. However, if the market is having less potential and smaller size, then investing bigger amount in creating the manufacturing facility there willadversely affect the business in the long term. In the case of xxx, they are targeting the south Asian countries which are one of the most populous regions in the world. Thus, the market will be huge and it will be a profitable venture if they set up manufacturing facility there. It will help them in offering the products in market oriented price.

Internal factors

The growth rate of the market to be entered is also an important criterion for choosing the effective market entry mode. If the market of the host country is increasing at a rapid rate and has the potential to grow in the future also, then it is viable to have the manufacturing facilities in the new market. On the other hand, if the market growth is negative or the market is already matured to grow in future, then it is not advised that a manufacturing unit be set up in the host market. In the case of xxx, the chosen market is the south Asian market which constitute of developing economies with having huge market growth potential. With having huge population in these countries, the potential for the future market growth is also positive. Thus, having a manufacturing unit in the host country will be the profitable venture for them.

Regulations and legislations of the government in the respective countries is also one of the key determinants of selecting an effective market entry mode. If the regulations in the host country are favorable for setting up manufacturing unit, then it will be profitable to have the facility in the host country (Brouthers 2013). It will further help to gain the incentives being provided by the governments in order to promote foreign investments. In the case of xxx, the government of the south Asian countries is providing various incentives to set up the manufacturing units there. Thus, it will be profitable for them to have their manufacturing unit there.

Cost of production is also an important criterion for selecting the effective entry mode. If the cost of production is low in the host country than in the host country, then it is advisable that the manufacturing unit should be set up in the host country (Grunig and Morschett 2012). It will help the organization in reducing their cost of production. In the case of xxx, the labor and other operational cost in the south Asian countries is much lower compared to other countries. Thus, it will be profitable for them if they can set up their manufacturing unit in the host country. In the later stage, the manufacturing unit in the host country can act as the export hub for them.

Infrastructure of the host country plays also an important role for the selection of the entry mode. If the infrastructure of the host country is favorable enough for having the manufacturing unit there, then it will be profitable for the organization to have the manufacturing unit there. It will help in enhancing the productivity of the organization if the infrastructure such as, roadways, railways, waterways and electricity is favorable. In the case of xxx, the infrastructure is developing and still they are not enough to offer optimal facility. Thus, it should be taken in to consideration by them before selecting the market entry mode.

External factors

Exporting is the simplest way of entering in the international business. Exporting refers to the selling and transporting the products from the manufacturing facilities in the home country to the foreign countries. It does not involve any investment in the host countries. Exporting is being divided in to two types. Direct exporting refers to the concept where the manufacturers maintain a separate department for export. All the associated activities regarding the export are being managed by the manufactures itself. No third parties are being involved in the process of exporting. On the other hand, indirect exporting involves third party vendors such as various export intermediaries and management firms. They possess expertise in the international business. On the behalf of the manufacturers, they look after the export process. The process of export is being outsourced by implementing this concept.

• Export organization: Various organizations maintains separate department for exporting their products in the international market. In this case, organizations maintain separate department with having separate personnel to look after the export operation.An export manager is being appointed to look after the whole operation.
• Representatives: Representatives mainly works on the commission basis. They represent the organizations in the foreign countries. They advertise the products to the potential buyers and accordingly the products are being exported.
• Distributors: Distributors have the responsibility of purchasing the products by importing and then sells it to the domestic customers (Sousa and Novello 2014). The main advantage of distributor over agents is the support of the customer service. Distributors also provide customer support for the products being sold.
• Retailers: In a few cases, organizations export and sell their products to the retailers in the host country. Afterwards it is the responsibility of the retailers to sell that product to the domestic customers.
• Direct buyers: In some cases, organizations export their products directly to the consumers in the foreign countries. Majority of these cases are being associated with the governmental transactions and hospitals. In these cases, the consumers directly come in to the contract with the exporting organizations regarding the purchase of the products. Accordingly, the products are being exported to the respective customers.

• Trading companies: Various trading organizations are operating in the international market which is responsible for the trading of the exported goods to the foreign countries. They purchase products from various organizations around the world and sell it to the domestic retailers in different countries.
• Re-marketers: Various organizations are there which are outsourcing their manufacturing process to any third party vendors in different countries. In this case, the third country vendors manufacturers the products and export it to the remarketers. Afterwards, the items are being sold in the domestic market as branded products of the re-marketers.

• Government trading organizations: These organizations are being owned by the governments and in few countries they are the only ones who are entitled to sell the imported items in the domestic market. Thus, the exporting organizations have to go through these organizations in order to sell their products in the foreign countries.
• Export broker: Export brokers helps in engaging the buyers and sellers for the particular product in the international market. They are being contacted by the potential importers and exporters for the transactions which are being further initiated by them.
• Management firm: Management firm look after the export process of the organizations. They work on the contract basis. It is their responsibility to effectively manage the export process of the organizations (Madsen, Moen and Hammervold 2012).

Xxx is operating in the sector of fast moving consumer goods. Majority of the products are having close substitutes in the host market. Thus, the existing product portfolio of xxx may not be as effective as it is in the home market. According to the theory of absolute advantage, it should be first considered that whether xxx is having absolute advantage over its competitorsor not. According to this theory, xxx should have less cost of production than the competitors in order to market and sell their products in the host country. Another key issue being identified is the selection of the entry mode in the new markets. From the above discussed forms of entry modes, it is been seen that the south Asian countries is having huge potential and moderate infrastructure which will be positive aspects for having the manufacturing facility. However, xxx is not having much financial force to set the distribution network in the new markets.

Xxx is also facing issue in managing the human resource in the home and host countries. This is due to the reason that the organizational culture that is being followed in xxx is being designed keeping in mind of the Malaysian culture (Alvesson and Sveningsson 2015). Thus, it may not be accepted in the south Asian countries where it is making entry. This issue is related to the cross cultural conflict. Forceful implementation of the existing organizational culture in the host country will create gap in the human resource management in the organization (Brewster et al. 2016). Another issue being identified with xxx is the lack of experience in the international business. This is their first attempt in making way in the international business. Thus, it will be a challenge for them to gain the market share in the host country with having several experienced and established competitors. They will face the risk regarding the probability of success of their products in the host market. The choice of products may not get matched with the taste and preference pattern of the customers in the host country.

One of the key challenges that they are going to face in the international business is the political and diplomatic relation between the host and home countries. Xxx is a Malaysian organization and they are going to enter the market in the south Asian countries. Thus, it is important for them to have identified the relation between its home and host country. If the relation gets adversely affected between the two countries, then the business will have negative implications.

• According to the theory of Adam Smith, one organization will have the absolute advantage over the other, if only it have the more effectiveness and efficiency in producing the similar products than the other. Thus, before making entry in the international business, xxx has to determine the their effectiveness in producing the fast moving consumer goods compared to the competitors present in the host country. It will help them to create their policies regarding the international business accordingly.
• According to the comparative advantage theory given by David Ricardo, organizations should determine the opportunity cost being associated with the production of the particular product in the country or by importing it. They should implement the policy which will create more comparative advantage. In the case of xxx, they should determine whether it will be more profitable for them to have the manufacturing unit in the host country or exporting it from the home country. As earlier discussed, the cost of manufacturing in the south Asian countries is comparatively lower than other countries. Hence, it can be assumed that the opportunity cost of producing the products in the host country will be more than importing it from the home country.
• According to the product life cycle theory given by Raymond Vernon, particular product which is being at the end of its life cycle in the home country can be introduced in the host country as a new one. However, in this case it is to be seen that the host country is not having the access of the product from before. In the case of xxx, the products that they are selling in their home country can be introduced in the host country. It will help them to extend the life cycle of the products. Moreover, the cost involved in the development of the new products can also be avoided.
• In managing the human resources in the international business, xxx should follow the geocentric approach in recruiting and selecting people. According to the geocentric approach, employees are being selected on the basis of the requirement of the skill sets and qualification rather than on the basis of nationality. Thus, the probability of the clash in the cultural aspects between the host and home country employees can be avoided.

Conclusion

Having analyzed the various aspects of the international business, it can be concluded that there are several options available for the organizations in making the entry in the foreign market. Moreover, the market entry strategies and the choice of the export forms and intermediaries is being dependant on the external and internal environmental factors of the organization. It can be said that the process of selecting the strategies regarding the international business is based on the particular situation being faced by the organizations. Thus, various organizations will have the choice of implementing different strategies to have most optimal way of increasing the productivity from their international business. In this case, the target market being selected by xxx is one of the most rapidly developing regions in the world. In addition, these regions are having huge population which helps the organization in having a large market to tap. Xxx is planning to enter in the market of south Asian regions which are one of the most developing regions in the world. Thus, they are having huge opportunities in the international business. Based on the issues being found from the analysis of the internal and external factors, it can be said that implementing the strategies of joint ventures will be more effective for them. It will not involve huge investment like in setting up manufacturing facilities. On the other hand, it will also helps to avoid the tariff barriers being associated with export and import. Accordingly various recommendations are being given in this report. These recommendations will help the organization in selecting their strategies for entering in the international business more effectively. Following the recommended steps will further help them to enhance the output from the international trade

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