Business Explain: September 2020

Archive for September 2020

What are the implications for managers of developments in the world trading system? Why should a manager of an international firm care about the political economy of free trade or about the relative merits of arguments for free trade and protectionism?

Trade barriers & firm strategy

Trade barriers constrain a firm's ability to disperse its production activities in multiple locations (which according to trade theories can be highly profitable).

Tariffs raise the cost of exporting → disadvantages to domestic firms.

Quotas limit the ability to serve a country from outside → disadvantage to domestic firms.

Local content regulations could force a firm to locate more production activities in a given market than it otherwise would have → decreasing efficiency and increasing costs since the optimal location for production is not being used.

Threat of anti-dumping action limits the ability to use aggressive pricing to gain market share → disadvantages to domestic firms.

Policy implications

Government policies can have a direct impact on business and arise from the need for protectionism against the large influence business firms have on international trade. But as explained earlier, engaging in protectionism might end up with a firm denying themselves the opportunity to build a competitive advantage by constructing a globally dispersed production system. Encouraging protectionism can jeopardize a firm's own activities and sales overseas if other governments decide to retaliate as a response.

What is the development of the world trading system like and the current trade issue?

Free trade began in England in 1846, but disappeared with the Great Depression. In 1947, GATT was established to liberalize trade → followed by WTO and more organizations that included enforcement mechanisms and other things to control and regulate trade.

What are the arguments against strategic trade policy? What would happen then if we let government intervene to support domestic firms in order to help them gain first-mover advantages?

Retaliation and trade war

Establishing domestic firms in a dominant position in a global industry with the help from the government will boost national income at the expense of other countries leading to retaliation(=revenge) and finally a trade war.

Domestic policies

Some governments might not act upon the common good of the country, but rather support specific groups with great political influence.

Why do governments sometimes intervene in international trade?

The reasons for governments to intervene in international trade are mostly for political and economic reasons.

- Political reasons.

Protecting jobs and industries
Protecting national security
Protecting consumers
If a product seems to have the ability of endangering its consumers in any way.
Furthering foreign policy objectives
Building good relationships with countries favored by the government.
Protecting human rights

- Economic reasons.

The Infant Industry Argument
Subsidies from the government to give initial support to domestic firms that are trying to establish themselves in an already competitive market. Once they have gained market shares and is functioning well, the subsidies will be removed.
Strategic Trade Policy
Government intervention can be appropriate in order to either help a domestic firm gain first-mover advantage in a global market, or to help domestic firms overcome barriers of late-mover disadvantages.

Which policy instruments are used by governments to influence international trade flows?

The government has seven specific policy instruments they can use to influence international trade flows.

- Tariffs

A tax or duty that is paid on certain exports and imports.

- Subsidies

Government payment to support domestic producer.

- Import quotas

A direct restriction on the quantity that is allowed to import of a certain product.

- Tariff rate quota

Hybrid of tariff and import quota, meaning they are restricted in quantity and also pay a tariff.

- Voluntary export restraints VER

Usually set up by the exporting country upon request from importing country, which limits the amount allowed to export to the importing country.

- Local content requirements LCR

The decision to require that a certain proportion of a production of a product is done domestically, and the rest can be imported.

- Administrative policies

Rules that make it difficult to enter with import into a country.

- Antidumping policies

Rules on how to handle dumping strategies.

What are cultural exclusives?

Cultural exclusives are those customs or behaviour patterns reserved exclusively for the local people, from which the foreigner is excluded.

What is cultural adiaphora?

Cultural adiaphora refers to areas of behaviour or customs that cultural aliens may wish to conform to or participate in.

What is meant by cultural imperative?

Cultural imperatives are business customs and expectations that must be met and conformed to if relationships are to be successful.

What are the requisites for cultural adaptation?

The requirement for adaptation is mainly to have an awareness of the local customs and be willing to accommodate those differences that can cause misunderstanding. Cultural imperative, communication emphasis and the meaning of time is included here.

As well as high-and low-context culture (low-context means getting down to business quickly, whereas high-context requires more time for conducting business).

How can resistance to cultural change influence product introduction? Similarities to domestic marketing?

Ethnocentrism refers to when we behave in an ethnocentric way, meaning there is an exaggerated tendency to believe our own values/norms/culture are superior to those of others. It is a concept which complicates the process of cultural assimilation.

With the resistance in mind, there are two ways for marketers to introduce an innovation. Either one waits for the right moment, or one enters and causes an immediate change in culture. Cultural change can occur if a innovation has advantages, but requires a culture to learn new ways to benefit from these advantages.

How are cultures dynamic? Is it good or bad?

Culture is dynamic in nature, since it changes over time due to new innovation, changes in life quality and such. However, any change in the currently accepted way of life meets with more initial resistance than acceptance. Many solutions have arisen from accidents, and some from innovation. Many are the result of cultural borrowing, which is common to all cultures.

What is especially troublesome about problems caused by language in foreign marketing?

Written and spoken language is often quite different, and unless a marketer fully masters a language there should be help provided by a national or native speaker.

What is material culture and what are the implications on marketing?

Material culture consist of technology and economics. Technology refers to the technological know-how possessed by a society. Economics refers to the way people employ their capabilities and the resulting benefits, including production of goods and its distribution. Material culture affects demand, quality and what kinds of products are demanded as well as their functional features.

What is the similar-but-different aspect of culture?

Even if cultures borrow from each other, and in fact become more and more alike, It is the unique combination of cultural traits that ultimately makes cultures similar but different at the same time. Important to remember is that although some countries may seem alike, they remain different in many ways. For example, in the USA they speak English, just like in the UK. But the two are very different.

Societies often borrow from other cultures to solve problems, why is this of significance to marketing?

Borrowing from other cultures can have the effect on a culture that if adapted to local needs and if it becomes commonplace, it will be passed on as cultural heritage, thus becoming part of the new culture.

How do the definitions of culture vary between the popular and the one by cultural anthropologists?

By popular definition, culture includes every part of life. It refers to values and beliefs shared by a group of people, something which is learned and shapes the perception of the world and our lives. The scope of the term "culture" to the anthropologist however, includes more, and is illustrated by the elements included within the meaning of the term.

Material culture (technology, economics)

Technology refers to the technological know-how possessed by a society. Economics refers to the way people employ their capabilities and the resulting benefits, including production of goods and its distribution. Material culture affects demand, quality and what kinds of products are demanded as well as their functional features. Disposable income → that proportion of your income that is not already accounted for. Marketing implications are that some products will simply be unwanted and a waste in terms of a population's amount of disposable income.

Social institutions (social organisation, political structures)

These concern how people relate to one another, how they organize their activities to live in harmony and govern themselves. Including here is gender segregation, division between partners as well as families, siblings and friends. Even personal space falls into this category.

Education (literacy rate, role and levels)

Education is an important part of culture for marketers to understand as it influences the marketing strategy and techniques used. Advertising and communication will differ a lot depending on for example the literacy rate in a society.

Belief systems (religion, superstitions, power structure)

Religion has an impact upon people's habits, their outlook on life, the products they buy, the way they buy them, even the newspapers they read. Acceptance can be highly influenced by the religion of the society. Value systems → values that are followed unconsciously.

Aesthetics (graphic and arts, folklore, music, drama, and dance)

These play a great role in interpreting the symbolic meanings of various methods of artistic expression, colour and standards of beauty in each culture. Thus, products must be produced in accordance with the style, symbols and colours that are appealing to the culture in that particular market.

Language (usage of foreign languages, spoken versus written language)

These elements constitute the environment in which marketing efforts interact and so are critical to understanding the character of the marketing system of any society.

Why should a foreign marketer be concerned with the study of culture?

In order to truly understand what it takes to introduce a new product into a market, or a complete business, a marketer must understand the market, which is the people. The people are who they are and want what they want because of their culture.

There is the factual knowledge which is something that is usually obvious but that must be learnt, ie different meaning of colours, tastes and other traits indigenous to a culture. These can be anticipated, studied and absorbed by marketers.

The interpretive knowledge refers to the ability to understand and appreciate fully the nuances of different cultural traits and patterns. Such as the meaning of time, attitudes towards other people, one's role in society and so on.

Ideally, a marketer possesses both these knowledges about the countries she works in. Facts are rather easily accessible these days through internet, but to truly understand a culture most people have to live amongst it for some time. Since this can be hard to achieve, the best solution is often to consult and cooperate with bilingual nationals that have a marketing background.

Is culture pervasive in all marketing activities?

Yes it is, because culture deals with a group's design for living. The scope of the marketing concept is to achieve the satisfaction of consumer needs and wants at a profit, which requires the marketer to understand the culture of its consumers.

One must carefully consider the cultural aspect when a promotional message is written, or using certain symbols as well as in the production of a new product. Thus, culture is pervasive in all marketing activities; pricing, promotion, distribution channels, product, packaging and styling.

What three cultural change strategies can a foreign marketer pursue?

1. Culturally congruent strategy

Involves marketing products similar to ones already on the market in a manner as congruent as possible with existing cultural norms, thereby minimizing resistance.

2. Strategy of unplanned change

The strategy of unplanned change consists of introducing an innovation and then waiting for an eventful cultural change that will permit the culture to accept the innovation. The essence of unplanned change lies in the fact that the marketer does nothing to accelerate help to bring about the necessary change where the marketer deliberately sets about to overcome resistance and to cause change that will accelerate the rate of adoption of his product or innovation.

3.Strategy of planned change

Means deliberately setting out to change those aspects of a culture most likely to offer resistance to predetermined marketing goals.

Which role does the marketer play as a change agent?

A marketer constantly deals with the culture of the people, meaning the market. A marketer's efforts are judged in this cultural context and either accepted, resisted or rejected. Cultural change refers to when the use of something new, e.g a innovative product, is the beginning of change in cultural conditions, e.g Americanisation. If a marketer has the right knowledge and skills, he or she might be able to actually introduce a product that changes a piece of the culture in that country.

What is the establishment chain model?

A model that shows how a firm's resource commitment when going abroad depends on psychic distance, need for control, and knowledge of the market.

What are the market entry objectives?

1. Psychic distance
Market is considered distant due to psychological barriers

2. Market seeking
Companies that venture into new countries become international because they are looking for new markets, actively seeking customers worldwide

3. Efficiency seeking
Firms want to enter countries/markets where they can achieve efficiency in different ways

4. Resource seeking
Firms try to enter countries to get access to raw materials or other inputs for cost reduction

What is a wholly-owned subsidiary and what are the benefits of it?

A wholly owned subsidiary is a company whose common stock is 100% owned by another company, the parent company.

Whereas a company can become a wholly owned subsidiary through an acquisition by the parent company or having been spun off from the parent company, a regular subsidiary is 51 to 99% owned by the parent company.

When lower costs and risks are desirable or when it is not possible to obtain complete or majority control, the parent company might introduce an affiliate, associate or associate company in which it would own a minority stake.

1. To capitalise on low-cost labour

2. To avoid high import taxes

3. To reduce the high costs of transportation to market

4. To gain access to raw materials

5. Means of gaining market entry

What are the factors that influence the strength of a company in a particular market?

1. Its achievable market share

2. Marketing ability and capacity

3. Product and positioning fit

4. Quality of distribution services

A firm's competitive strength, meaning the strength of a product or company as compared to competitors. By assessing this, managers can determine whether the firm has the resources and potential to achieve goals in the particular market or not. Depending on the outcome, there are several different ways of entering a new market that firms can choose from, depending on their objectives.

A business designs its competitive strategy to deliver advantages in the marketplace, but the market situation may evolve. Knowing which factors affect the strategy lets you monitor key variables and adjust your actions to take advantage of changes and opportunities. As markets shift under the influence of the actions of your competitors, you have to modify your strategy to continue delivering the competitive advantages you need to remain profitable

Why are strategic alliances popular and why do companies enter into these agreements?

These are cooperative agreements between potential or actual competitors, often between firms from different countries.They can be anything from joint ventures to short-term contractual agreements. The perks are that they facilitate entry into a foreign market, as a local business partner can provide the necessary experience to do so successfully.

They also allow firms to share the fixed costs and possible risks of developing new products or processes, and are way to bring together complementary skills and assets that the firms could not develop on their own.

Ultimately, it makes sense to form an alliance that will help the firm establish technological standards for the industry that will benefit the firm. What speaks against it is that it gives competitors a low-cost route to new technology. Unless a firm is careful, it can give away more than it receives in the end.

What are the factors that influence the attractiveness of a country as a market? How can you do the analysis to select a market to enter?

1. Market size (total and segments)

2. Market growth (total and segments)

3. Competitive conditions

4. Markets uncontrollables (political, economic, and cultural factors)

It is pretty clear that businesses prefer a country that is less costly, more profitable, and has fewer risks. Cost considerations are related with investment. Profitability is dependent on resources. Risks are associated with the environment and hence it is of prime concern.

Why are joint ventures popular?

Joint ventures have become popular for a number of reasons.

Gain access to markets

One important marketing reason is to gain access to markets. Nearly all of the developing countries, and many developed countries, require some degree of local participation for operating in their country. Mergers with distributor companies or companies which already have well-established local distribution may provide rapid market access and distribution to foreign companies entering a country.

Broaden the line of merchandise

Sometimes companies join forces in order to broaden the line of merchandise that they have available, thereby gaining marketing efficiency and better public image.

Gain valuable local knowledge

Another market reason for joining ventures is that local firms possess market information and the marketing know-how, which would take years for a foreign company to acquire. Such participation minimizes the risk of market failure and speeds the marketing effort.

Financial reasons

Joint ventures may also arise for financial and manpower reasons. Financially it is sometimes desirable to merge with foreign companies because the merger provides access to local capital markets and combines the resources and fund raising capabilities the companies have. It may also give access to a higher quality and more capable managerial manpower.

How will entry into a developed foreign market differ from entry into a relatively untapped market?

The differences between entering a fully developed market and an untapped foreign market are many and extremely varied. Some of these differences are channels of distribution that may or may not be developed. Governmental attitudes toward business, foreigners, and industry may be very liberal in a growing economy, while an established market may be very restrictive.

Communication and transportation may be highly limited in untapped markets and highly developed in successful countries. The amount of capital, banks, and exchange-rate systems will vary according to the market's development. Finally, the degree and amount of competition will vary accordingly. To this list, endless factors could be added such as cost of entering the market, social customs, laws, etc.

What is required for an international business to change its organization so that it better matches its strategy?

Within most organizations is a strong organizational inertia(=tendency of an established organization to continue with old habits). These origin from a range of different factors such as the distribution of power and influence, the existing culture of the firm, manager's preconceptions of the right way to conduct business and institutional constraints, either by government or firm itself.

So how can a business overcome the inertia in order to change its organization?

Unfreezing the organization by shock therapy and clearly articulate the means of change.
Transfer process means redesigning the whole system and involving employees in the process.
Refreezing the process, which takes longer as it means allowing the new culture to establish itself while slowly forcing the old one out.

How can organization be matched with a strategy to improve the performance of an international business?

Localization strategy

For the localization strategy, the decision-making processes should be decentralized in order to achieve best possible local responsiveness. It should also be divided into an area division structure, again to focus on local responsiveness over cost reductions. Given how all subunits work independently, producing the full product group in each separate entity, the need for coordination and integrating mechanisms are low, which also results in low performance ambiguity thus all entities are responsible for their own production and no need for cultural controls.

International strategy

For an international strategy, decision-making should be partially centralized and decentralized, with important functions such as R&D centralized to head quarter and production functions decentralized to a few major facilities in favorable locations. Worldwide product divisional structure is prefered to this strategy as it does not need to focus on local responsiveness, but rather keeping cost low in order to achieve high profitability. The strategy requires some coordination in order to transfer core competencies and skills between subsidiaries, which indicates a certain need for integrating mechanisms as well as cultural controls. Performance ambiguity exists in a moderate scale.

Global standardization strategy

Given how global standardization focuses on standardized products, it requires some centralization in decision-making in order to achieve consistency in its R&D, production and marketing. Furthermore, this strategy is most likely to function the best with a worldwide product divisional structure since it focuses on realizing economies of scale, learning effects and location economies to reduce costs. Given how this strategy requires a firm to disperse its value creation activities across the globe, high coordination is necessary and that means many integrating mechanisms, high performance ambiguity and need for cultural controls.

Transnational strategy

Finally, the transnational strategy, focusing on both low cost and differentiation, needs both centralized and decentralized decision-making. It should apply a global matrix structure to facilitate both goals, but this increases the need for coordination greatly which furthermore increases performance ambiguity and the need to integrating mechanisms and cultural controls.

What different organizational choices can be made in an international business? (Integrating mechanisms)

Integrating mechanisms

These mechanisms are applied when managers find it hard to coordinate on their own, and is therefore a tool which can through formal and informal ways help achieve coordination.
When is coordination necessary? The need is the lowest in firms pursuing a localization strategy and increases from international to global standardization to finally the transnational strategy which requires the most. The reason is that transfer of core competencies requires coordination, as well as dispersing value creation activities to achieve location and experience curve economies → least important in localization strategy and increasingly important until transnational strategy. Impediments to coordination arise from managers and employees not "speaking the same language", literally and practically. It can also be if goals of the firm are pursued differently.

- Formal integrating mechanisms

Direct contact → managers contact each other directly when there is an issue.

Liaison roles → subunits coordinated by two persons with responsibilities.

Teams → when further coordination is necessary, teams are put together to coordinate.

Matrix structures → maximum coordination, geographical areas and product divisions.

- Informal integrating mechanisms

Knowledge network → transmission of information through an informal network based on relationships between managers and employees and includes a lot of trust.

What different organizational choices can be made in an international business? (Vertical Differentiation)

Vertical differentiation

- Centralized decision-making

Facilitates greater coordination and integration of operations, helps ensure that all decisions made are consistent with organizational objectives, makes it easier to avoid duplication of activities and therefore keeps costs low, and finally helps managers maintain enough power to enforce radical decisions such as strategic aggressive pricing or organizational changes.

- Decentralized decision-making

By decentralizing decision-making, a firm is able to relief top managers of certain decisions which allows them to focus on more important issues. Decisions made by managers of the local production might be able to make greater decisions based on familiarity and previous knowledge, as well as responding quicker to urging issues. Finally, greater freedom is a motivational force which can encourage employees to work more efficiently.

What different organizational choices can be made in an international business? (Horizontal Differentiation)

The Horizontal differentiation

Begins when a company decides to start assigning specific job functions to different employees rather than having all employees performing all necessary tasks. The firm can organize itself according to process, product, functions, service, location, and client.

- Domestic structure

Functional structure

Organization is split into functions, which reflect the value creation activities of the firm(R&D, production, marketing, and sales) when demand of management increases.

Product divisional structure

When the firm not only needs to split into functions, but into different divisions in order to coordinate a large product offering(producing many different products). Each product is split into its own division with separate functions that focus on the specific product.

- International division structure

Once a firm decides to go international, companies add a new international division which groups all international activities. This division is normally organized according to geography where each division is in charge of a country or an area with one or several products. In time and if demand increases, it might serve for a firm to introduce the domestic structure worldwide rather than divide according to geographical areas. Problems? Dual structure → conflict and coordination problems between domestic and international operations. Domestic managers might not be the best suited to make foreign decisions, but due to hierarchy do which relegates foreign managers to second tier and is inconsistent with a strategy that tries to expand internationally. Also, transfer of core competencies and innovational thinking can be inhibited by the lack of coordination between domestic and foreign operations.

- Worldwide area structure

Favored by firms who produce products with low diversification and has a domestic structure based on functions → divides itself internationally into geographical areas where each area is responsible for all parts of R&D, production, marketing, sales, HR and finance functions.
The worldwide area structure is favored by firms who aim for a strategy that focuses on local responsiveness over cost reductions, e.g localization strategy. The power of decision-making is decentralized to each geographical area and division. It is not as suitable for a global standardization strategy since the high fragmentation and difficulties in transferring core competencies makes it harder to achieve location and experience curve economies and therefore cost reductions.

- Worldwide product divisional structure

Often adopted by firms that have a larger diversification between its products, and originally had a domestic structure based on product division. Each product or product group is divided into its own division and then located in optimal locations for the value creation activities.
This structure helps overcome the coordination problems related to the area structure, as this one helps firms realize location and experience curve economies as well as facilitating transfer of core competencies within subsidiaries. The worldwide product divisional structure is favored by firms pursuing an international strategy but mainly global standardization strategy. It does not consider local responsiveness, but rather favors cost reductions in all possible ways.

- Global matrix structure

For firms pursuing a transnational strategy, none of the above structures will support both of the goals of the firm - low cost and local responsiveness. The global matrix structure is designed to combine the two, area and product division, in order to create a structure that facilitates both low cost and local responsiveness. The idea is that operating decisions for a product will be shared by the product division and the various areas of the firm.

Although good in theory, this structure becomes slow and bulky in practice, since all decisions take longer with more people involved. This makes the organization unable to respond quickly to shifts in demand and react to innovative ideas.

What is meant by organizational architecture?

Refers to the totality of the firm's organization and consists of the following;

→ Organizational structure

Horizontal differentiation
The formal division of a firm into subunits like product divisions, national operations, and functions.
Vertical differentiation
The location of decision-making.
Integrating mechanisms

The establishment of integrating mechanisms to coordinate the activities of subunits.

→ Incentives & control systems

Incentives are tools used to encourage and reward employees for good behaviour, such as bonuses and pay raises.
Control systems helps a firm achieve consistency in the overall strategic and financial objectives. Personal control → personal contact with subordinates and common in small firms.
Bureaucratic controls → control through a system of rules that direct actions of subordinates.
Output controls → control is measured by the performance of reaching goals.
Cultural controls → the belief is that each employee controls their own behaviour and performance.
Performance ambiguity = when the cause of a subunit bad performance is unknown → often occurs when subunits are highly dependent upon each other.

→ Processes

They way that decisions are executed within the firm and that valuable processes can be found on all levels of the firm, across country and cultural borders.

→ Organizational Culture

Depends much upon the social culture of the firm, the history of the firm, the perceptions about good management by the current managers as well as founders and decisions that have proofed successful.

→ People

The employees, but also the strategy for recruitment and retaining valuable individuals.

What are typical characteristics for B2C markets?

1. Buyer is usually passive.

2. Relationship between buyer and seller is indirect.

3. Goods are often bought for end use.

4. Numbers of buyers and sellers are many.

What are typical characteristics for B2B markets?

1. Buyer is usually active.

2. Relationship between buyer and seller is direct.

3. Goods are often bought for production, not by end users.

4. Numbers of buyers and sellers are few.

How does the characteristics that define the uniqueness of industrial products lead naturally to relationship marketing?

Relationship marketing → based on mutual cooperation, trust and joint beliefs. The purpose of this marketing type is considered to enhance marketing productivity by achieving efficiency and effectiveness; great interdependence and partnering leading to a lower cost and achieving competitive advantages. Both within business-to-consumer and business-to-business markets, relationship marketing functions. However, relationships between businesses, B2B, normally emphasises long-term and thus demands a higher level of relationship and commitment.

It seems natural for companies producing industrial products to go for a relationship marketing strategy. To fulfill the needs of industrial customers, a marketer must understand those needs as well as how they will change when they buyer strives to compete in global markets that call for long-term relationships.

Why might a multinational company seek ISO 9000 certification?

ISO 9000 is a set of international standards on quality management and quality assurance developed to help companies effectively document the quality system elements to be implemented to maintain an efficient quality system. They are not specific to any one industry and can be applied to organizations of any size. ISO 9000 can help a company satisfy its customers, meet regulatory requirements, and achieve continual improvement. However, it should be considered to be a first step, the base level of a quality system, not a complete guarantee of quality.

What part does industrial fairs play in international marketing of industrial goods?

A trade fair is an exhibition where participants are able to show and sell their products and services. It is also used to establish and maintain contacts. At these fairs, companies can sell their products, reach prospective customers, contact and evaluate potential agents and distributors, and get their marketing out to foreign countries.