International Business Environment

A Sample on Role of International Business Environment

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Introduction to International Business

International business has been playing a significant role for centuries to increase the revenues for countries. In other words, foreign trade has made significant impact on the both micro economics and macro economics. International business refers to the process of buying and selling of goods and services across borders. There are several countries indulged in trading internationally such as India, China, UK and Brazil etc. In the present study, research will focus on analyzing strength and weaknesses of international businesses trade. Furthermore, study will highlight several theories regarding product life cycle, competitive advantage theory etc. furthermore, study will be focusing on analyzing the theories and implementing on to the different companies in order to achieve both international and national competitive advantage.

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International Product Life Cycle Theory

It is an economic theory that was introduced by Raymond Vernon. This theory suggests that at the initial stage of a product life cycle all the resources and labor associated with its production comes from the area of its invention (Yu and Ramanathan, 2012). Afterwards, when product becomes adopted by the consumer and along with that established in foreign market, gradually production is switched over from the origin. Furthermore, this model assists in demonstrating dynamic comparative advantage. Product Life Cycle consists of five different stages such as: introduction, growth, maturity, saturation and decline.

First stage: Introduction

In this stage several companies make valiant efforts to introduce products and services to meet local needs and wants. However, it can be stated that on the basis of growth of all the countries, products and services are produced in the most advanced nations. In context to that, IBM produced PCs and introduced in the US market and in addition to that, PCs were distributed quickly all the way through the industrialized countries (Gómez, Zornoza and Alcamí, 2003).

Second stage: Growth

Along with better quality, companies need to have an effective marketed product that can efficiently meet the needs of target market. During this stage IBM gradually setup their market through surveys and estimates about market size and composition. Furthermore, in this stage IBM moves its production to different country to attain cost reduction by producing copy products and along with that to capture growth in home market. As it can be justified by this that replicas of early IBM PCs were not produced in US.

Third stage: Maturity

In this stage, companies often concentrates on producing goods and services at the lowest cost. In other words, companies like IBM, Tesco, Audi and Apple etc focus on implementing strategies and techniques that allows them to attain low cost of production. In context to that, IBM management focuses on producing its clones or replicas in those countries that assist them to reduce their operational expenses (Petty and Guthrie, 2000).

Fourth stage: Saturation

According to this stage, Sales and profits of the product reach the peak level and there is no possibility of further enhancement. According to the theory, Apple products reach their saturation period very quickly due to technological advancement. In spite of that, company is leading the chart because of their latest technological indulgence in phones, PCs etc. and attaining competitive edge in the global market.

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Fifth stage: Decline

Declining stage of every product constitute the poor market demand. In context to that, developing countries produce such products and services. However, company like HP is generating high revenue from this stage of their products as they did not sell 80% of the products five years ago.

Strength and Weaknesses of IPLC

Product life cycle consist of several strengths and weaknesses for the companies. All products are subject to a life cycle, as they are introduced new and innovate and ultimately become obsolete (Sudarsanam, Sorwar and Marr, 2006).

There are a number of advantages and disadvantages for both businesses and consumers with this theory.

Strengths

Innovation, safety and security

In context to the international level, companies indulging PLC has made positive implications on consumers by driving innovation which leads to products that are more effective and safer. According to this point, companies operating in automobile sector always kept on focusing at innovation in order to sustain in the market. Audi enhancing their technological aspect by including various small tools and techniques in their cars such as air bags, auto pilot mode etc that provides their customer better technical and safer product to operate with. However, this could be challenged on the basis that, in food and beverage industry companies constantly do not innovate their products.

Understanding marketing and development

In retailing sector competition level is very high, that leads companies to regularly understand the needs and wants of market and according to that manufacture products. However, it might be argued in other sector but in retail sector companies like Tesco, ASDA and Sainsbury have to analyze market requirements. Furthermore, this method appears to have been successful largely in retail sector because they are offering wide range of products and on that basis understanding market needs and wants becomes very much crucial for Tesco and other retailing companies (Zhang and London, 2013). In argument to this theory, if a product of Tesco is reaching to its late growth stage of life cycle then company has to recognize that with increasing competition it will be very difficult for product to generate high revenues and profits.

Weaknesses

Low application in certain markets

The main disadvantage of this model is that it is not applicable in all product categories. In context to that, established food and beverages brands like Coca Cola, PepsiCo etc sustain their revenues from the products that have been at the maturity level of their life cycle from past many years. But if company tries to experiment with core products like beverages then it may provoke consumer decrease the consumption rather than increasing it (Mann and Byun, 2011). On that basis, food and beverages companies are avoiding such theory in order to sustain in the market for longer period of time. Furthermore, this method places too much emphasis on changing the products and services with new trends and that could be a major decision for the management of such highly established companies.

Planned obsolescence

Perhaps the most serious disadvantage of this theory is that it effectively demands that products need to be replaced by new once. For instance, in recent Microsoft divest XP with Windows 7, as it highly impacted on the consumer that were in constantly using the services of XP (Lagrosen, 2007). It is a planned obsolescence by the company and it could impact on their customer base. Along with that, this has been highly criticized by the future fluctuation because Microsoft is stating that in the year 2016 they will be launching Windows 8 and that will take over windows 7. Along with that, this theory has also ensured huge disadvantage for another company like Apple Inc. Top level management always focus on bringing innovation in their products which is good for growth, but considering the previous models of products revenues has been decreased.

Krugman’s First Mover Advantage Theory

This theory of first mover advantage can be define as the first to enter in a new market, the business enterprise gains an advantage over its actual and potential rivals. According to this theory, if any company being a first one to enter to a new market then automatically thinking goes that it can establish what the other people would call ‘’defensible ground’’ (Dögl, Holtbrügge and Schuster, 2012). Along with that, firstly it can capture market share much more easily without any major hindrance regarding competitors trying to capture same customer base. Secondly, at the time when competitors enter into the market then firm’s management team will undoubtedly have the advantage in the coming competition such as familiar products, brand loyalty, appropriate retail outlets and up and running distribution system etc. Thirdly, beating rivals into the market, the first mover firm can consolidate its position in the existing market and compete effectively in future. According to the theory, John Pemberton the inventor of Coca Cola introduced a carbonated soft drink for the consumer in the category of beverages. Before coca cola there was no company that made an attempt to produce such product and enter into beverage sector. Coca Cola was the first mover in the category and created drinks that were never served before. Majorly the tables for Coca Cola had turned after the entrant of businessmen Asa Griggs Candler, whose marketing skills and tactics led Coke to dominate the world of soft drinks market throughout the 20th century.

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Strengths and weaknesses of First mover theory

According to the theory of first movers, sometimes companies that make effort to enter first in the market is rewarded with huge profits and a monopoly like status. On the other hand, sometimes first mover is not able to capitalize on its advantage and leaves the opportunity for later entrants to compete proficiently against the earlier entrants.
Strengths:

Technological leadership

According to this Theory it is considered to be the most essential strength within the organisation. If a firm is able to gain first mover advantage then it had some sort of unique breakthrough in its research and development department. Procter & Gamble Company operates in personal care, food and beverages sector, is the best suitable example showing the strength of this theory. According to that case, company’s technological leadership helped force their products in the US market. On the basis of this theory, Firm’s management used learning based preemption to assist invest in low prices European synthetic fibber which helped them to create diapers at a cheaper and profitable prices. Apart from this, physical aspects of first mover advantage theory are not the only ways some of the companies acquire advantage (Brooks, Weatherston and Wilkinson, 2010). Along with that, managerial system and organisational behaviour are some essential elements that can prove to be beneficial for the emerging companies.

Switching costs and buyer choices under uncertainty

According to the theory, this is the benefit that first Mover Company gets from other companies. Switching cost is the extra cost that late entrant must invest to divert or attract customers into their favour. PepsiCo is the most suitable example of this advantage as they invested high amount of money in the advertising and marketing their products which can be termed as switching costs for the customers in order to attract them. A study by Ries and Trout (1986) showed that new comers that emerged into the market as far as beverage industry is concerned it was very difficult for them to overcome Coca Cola or capture their customer base (Arora and Mclntyre, 2014).

Weaknesses

Free rider effects

Perhaps the most serious limitations of this theory is that, second mover or late mover to an industry have the ability to identify and evaluate all the strategies and techniques of the first mover which gives a advantage to the new comer and is a weakness for the existing company. According to this theory, PepsiCo making second entrant into the beverage industry after Coca Cola gets the advantage of understanding and evaluating the techniques and strategies used by them. Furthermore, manufacturing product with different taste and most probably according to the needs and wants of the market in order to gain competitive edge (Daniels, 2001).

Shifts in customer needs or technology

According to Krugman’s theory, new entrants generally exploit technological aspects in order to displace existing incumbents. Late entrants always critically analyse the market needs and wants and according to that offer products to generate high revenues (Frenken, 2006). Basically, an apparent inconsistency happens when first mover is unable to identify the current needs of market and displease its customer base.

Incumbent inertia

Sometimes companies enjoy being a first entrant into a market, moreover they can also get satisfied with their performance and on that basis do not utilize or capitalize on their opportunities can be a hazardous situation for the firm. Operating in beverage industry once the fixed assets setup is done it is hard to change according to the alteration in trends. According to this method, it becomes an disadvantage for Coca Cola that their large setup cannot be shuffled according to the needs and wants and it more tougher for them when PepsiCo entered into the market with latest technological machineries and tools and techniques to capture the market of Coca Cola (Paul, 2011).

Porter’s diamond model

This model of competitive advantage of nations was developed by American scientist Michael Porter (NHS, 2012). According to him, for attaining competitive advantage it is most important for a firm to have the ability of constantly innovating according to the needs and wants. This model consist of five interlined factors such as: factor conditions, home demand condition, related and supporting industry, firm strategy, structure and rivalry and government. Firstly, factor conditions this factor describes about the situation in country regarding production factors, like skilled labour and infrastructure etc. Basically, these factors are upgraded or deployed over the period of time to meet the demand (Nijkamp and Lulia, 2010). Furthermore, this factor can be grouped into human resources, material resources, knowledge resources and capital resources. Secondly, home demand conditions assists in identifying state of home demand for products and services produced in a country. Thirdly, according to the theory it assists in evaluating the existence or non existence of internationally competitive supplying industries and supporting industries. Fourthly, the positive outcome of this theory was that it helps a company to understand the conditions in a country that determines how companies are established, organized and managed and along with that, characteristics of domestic competition industries.

Strength and weaknesses of Porter’s Diamond Model

According to this theory a firm can establish its business in domestic market and gain competitive advantage in the market. The main aim of this theory is to provide national advantage to a firm. Whereas, its five factors give clear indication that a newly start firm can gain better position in the market through this theory in a short span to duration. J Sainsbury is a public limited company and deals in the retailing sector of UK. According to this theory’s five factors can be explained as advantage with the help of Sainsbury structure. Firstly, factor conditions assists in identifying the factors regarding UK’s like skilled labor, infrastructure etc. J Sainsbury being a local company utilizes the most suitable resources for them. Company has created its own important factor such as skilled resources and technological base for expanding their business operations. Moreover, they are upgrading or deploying resources to meet the market demand (Nagel, 2012). Constant innovation and adopting new methods of fulfilling the needs and wants of UK market has given them local comparative advantage. Secondly, a more demanding local and global market has set Sainsbury the national advantage. Firm produces products and services according to the needs and wants of UK people that automatically enhance their demand of products in the existing market. Thirdly, positive outcomes of related and supporting industries are that it has created innovation and cost effectiveness for the Sainsbury wide range of products and services. Along with that, bargaining power of the company has been increased. Fourthly, firm, strategy, structure and rivalry have appears to be successful largely because local conditions have affected several firms strategy and along with that force them to move beyond basic advantages. According to this corporation has developed and adopted most appropriate marketing and branding strategies that has helped them to attain competitive advantage in the local market.

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On the other hand, limitation of this theory is that indulging such strategy into the functioning of firm will not help them to expand their business at international level. Sainsbury making valiant efforts to sustain in the local UK market but in context to foreign market company might have to change their whole structure in order to enter into the foreign market. According to the theory firm has two sided limitation: first is that, if firm tries to enter into new market then they have change their whole strategy, structure and functioning. On the other hand, retailing foreign firm like Wal-Mart has made very difficult for the firm to sustain in the local market also because they are also providing products and services with quality and with local taste that attracts customers the most (Wal-Mart, 2013). On the basis of Krugman’s theory Wal-Mart be the second mover in the market which gives them an advantage of understanding the strategies and structure of Sainsbury in retail sector. According to that, Wal-Mart has planned its overall functioning in UK and which is totally different from US (Ervik, Kildal and Nilssen, 2007). In general terms, this model was developed only by looking at ten developed countries which means if Sainsbury wants to enter into developing market like India and China they have focus on different strategy and procedure. Furthermore, this model does not address adequately to the roles of multinational companies. Along with that, if Sainsbury needs to attain success the through this model they have to focus on making careful choices regarding functioning ().

Conclusion

From the above study of international business environment it can be concluded that every firm need effective and efficient strategies and policies in terms of attaining competitive advantage. During the study it was analyzed that in order to understand the modern international businesses trade three models are essential to undertake. Firstly, international product life cycle theory was discussed in that five stages were focused on and along with that strengths and weaknesses of this model in beverage industry. In addition to that, krugman’s first mover advantage theory was discussed that assists in understanding the factors that are important for a organization to undertake while entering first and in a new market segment. At last, research focused on porter’s diamond model limitations and advantages towards achieving competitive advantage in local as well as international market.

Refrences

  • Arora, A. and Mclntyre, R. J., 2014. Global Business Transcendence: International Perspectives Across Developed and Emerging Economies. Palgrave Macmillan.
  • Brooks, I., Weatherston, J. and Wilkinson, G., 2010. The International Business Environment: Challenges and Changes. Financial Times/Prentice Hall.
  • Daniels, D., 2001. International business: environments and operations. Pearson Education India.
  • Dögl, C., Holtbrügge, D. and Schuster, T., 2012. "Competitive advantage of German renewable energy firms in India and China: An empirical study based on Porter's diamond". International Journal of Emerging Markets.
  • Ervik, R., Kildal, N. and Nilssen, E., 2007. The Role of International Organizations in Social Policy: Idea, Actors and Impact. Edward Elgar Publishing.
  • Frenken, K., 2006. Innovation, Evolution and Complexity Theory. Edward Elgar Publishing.
  • Gómez, C. R., Zornoza, C. C. and Alcamí, L. R., 2003. "Organizational learning and product design management: towards a theoretical model". Learning Organization,
  • Hamilton, L. and Webster, P., 2012. The international business environment. Oxford University Press.
  • Lagrosen, S., 2007. "Quality management and environment: exploring the connections". International Journal of Quality & Reliability Management.
  • Mann, M. and Byun, E. S., 2011. "Accessing opportunities in apparel retail sectors in India: Porter's diamond approach". Journal of Fashion Marketing and Management.
  • Nagel, C., 2012. Global Market Entry. Xlibris Corporation.
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