International Business Operations

This article focuses on how corporations make the decision to operate on an international level and the types of systems and processes that they put in place so that the business operations of the international entity run smoothly. The world has changed significantly since World War II. Organizations have been challenged to duplicate their success in other countries. In order to accomplish this task, the management team must devise a plan that will bring them the same level of success that they experienced in their home country. After a company has decided on what strategy would benefit the organization, it will move to the next step, which is the development of an approach to manage its global business operations. One approach that has been explored is the international trade theory. Once an organization has defined its international strategy, the next step would be to develop a process for implementing the strategy.

Keywords Absolute Advantage; Classical Economics; Comparative Advantage; Factor Endowments; International Business Operations; International Strategy; International Trade; International Trade Theory; Mercantilist Theory

International Business > International Business Operations

Overview

The world has changed significantly since World War II. "Countries that were previously separated by thousands of miles, and historical enmities are now closer together, thanks mainly to the impact of globalization and the lifting of trade barriers" (McLean, 2006, p. 1). Organizations have been challenged to duplicate their success in other countries. In order to accomplish this task, the management team must devise a plan that will bring them the same level of success that they experienced in their home country.

International business strategy provides corporations the opportunity to expand and manage business operations in many locations across the world. Many organizations are weighing the pros and cons of starting operations overseas. However, it is imperative that the decision makers identify opportunities, explore resources, and assess core competencies before implementing a plan to move forward. These three factors may provide a foundation for many corporations as they implement an international strategy. According to Hoskisson, Hitt, and Ireland (2003), each factor should be evaluated when determining whether or not to move forward.

Areas for Consideration

Identify International Opportunities

a. Increase market size- If a domestic market’s size is unable to support needed manufacturing facilities, it may make more business sense to start an operation abroad.

b. Return on investment — There are two issues that decision makers may consider when determining the effect on the organization's finances. First of all, global markets may be necessary to support and enable the large capital requirements of substantial investment projects. Secondly, some countries have weak patent laws. Therefore, an organization may have to expand overseas in order to stay ahead of competitors who may attempt to market similar products.

c. Economies of scale or learning -Economies of scale can increase profit per unit and spread costs over a larger sales' base. In addition, moving into the international market allows the organization to expand the size of their market, which leads to economies of scale for departments such as marketing, manufacturing, distribution or research and devolvement.

d. Advantage in Location — Organizations can develop a competitive advantage by moving into markets that have low costs. These types of markets would provide the organization with better access to raw materials, lower labor costs, energy and key customer base.

Explore Resources and Capabilities (International Strategies)

e. International business-level strategy — If an organization wanted to develop an international strategy at the business level, the management team should evaluate the four determinants of national advantage. These determinants include:

i. demand conditions (the nature and size of buyer's needs in the home market for the industry's goods or services),

ii. related and supporting industries (the supporting services, facilities, and suppliers),

iii. firm strategy, structure and rivalry (the pattern of strategy, structure, and rivalry among firms),

iv. factors of production(the inputs needed to compete in any industry).

f. International corporate-level strategy — In certain international business situations, corporate strategies allow for the individual overseas operation centers to control their own procedures. In other situations, the strategy is to homogenise procedures across the entire organization, regardless of location. Whatever method the organization decides upon, the way that business level strategies are selected and implemented will be impacted. There are three types of corporate level strategies that an organization can choose from.

i. Multidomestic strategy — The products are tailored to meet the needs of local preferences, and the organization is isolated from global competition by competing in industry segments that are most affected by differences among local countries.

ii. Global strategy — The products are standardized across the national market. Business-level strategy decisions are made by the headquarter office. This type of strategy is prominent among Japanese firms.

iii. Transnational strategy — The combination structure has characteristics that emphasize both geographic and product structures. Global efficiency and responsiveness are the goals of this type of strategy.

Assess Core Competencies (Modes of Entry)

g. Exporting — high cost, low control

h. Licensing — low cost, low risk, little control, low returns

i. Strategic alliances — shared costs, shared resources, shared risks, problems of integration

j. Acquisitions — quick access to new market, high cost, complex negotiations, problem of merging with domestic operations.

k. Establishment of a new subsidiary -complex, often costly, time consuming, high risk, maximum control, potential above-average returns

After a company has decided on what strategy would benefit the organization, it will move to the next step, which is the development of an approach to manage its global business operations. One approach that has been explored is the international trade theory.

International Trade Theory

Classical economics was created as a response to the economists who supported the mercantilism school of thought. The concept was introduced in the late 18th century, and focused on economic growth and freedom, laissez-faire ideas and free competition.

Three Key Principles of Mercantilist Thought

There were three key principles to the mercantilist thought, and they were:

• Exporting is good, but importing should be avoided
• When a merchant exports, he will receive payment
• It is best to export as much as possible in order to maximize the amount of money one can receive.

The downside to this theory is that it does not recognize the positive effects of importing. Therefore, if the country does not import, it will have to sacrifice the consumption of certain items.

Economists Adam Smith & David Ricardo

Adam Smith wrote a book entitled, "The Wealth of Nations," which highlighted the significance of specialization. His work was in response to the mercantilist thought that was popular in Britain since the 16th century. This book established a foundation for the concepts and principles of classical economics. Smith believed that free competition and free trade was the best way to promote a country's economic growth. According to his theory, international trade was considered a type of specialization. Specialization advocates that each country should specialize in the production of goods that it is equipped to produce (i.e. absolute advantage). The countries should export part of their production and use the other part to barter for products that they cannot produce. Smith believed that communities would grow if the members were allowed to pursue their own interests, and these members would make a profit by producing goods that other people were willing to buy. The members would use the profits to purchase the products that they needed. Unfortunately, the concept of absolute advantage is not realistic. It tends to only work in those markets where geographic and economic environments are simple.

David Ricardo expanded on this concept by introducing the principle of comparative advantage. Ricardo's theory was based on the labor theory of value, which makes labor the only factor of production. He proposed that the value of goods produced and sold under competitive conditions were proportionate to the labor costs incurred in producing them. However, he acknowledged that there would be periods where the price would be dependent on supply and demand. He argued that if one country had the ability to produce everything more efficiently than another country, it was not a hindrance for international trade. Rather, the theory of comparative advantage provides a strong argument in favor of free trade and specialization among countries.

Political & Economic Risks of International Trade

Although both of these economists support the concept of international trade, there are some risks and they can be broken down into two categories — political and economic risks.

Political risks include:

• Instability in national governments
• War, both civil and international
• Potential nationalization of an organization's resources
• Cancellation or non-renewal of export or import licenses
• Confiscation of the importer's company
• Imposition of an import ban after the shipment of the goods
• Imposition of exchange controls by the importer's country or foreign currency shortages
• Surrendering political sovereignty

Economic risks are interdependent with political risks and include:

• Differences and fluctuations in the value of different currencies
• Differences in prevailing wage rates
• Difficulties in enforcing property rights
• Unemployment
• Insolvency of the buyer
• Failure to pay the amount due within six months after the due date
• Non-acceptance
• Surrendering economic sovereignty

Application

Operations

Once an organization has defined its international strategy, the next step would be to develop a process for implementing the strategy. According to Ball, McCulloch, Frantz, Geringer, and Minor (2005), the process of strategic planning provides a formal structure for managers to

• “Analyze the company's external environments;
• Analyze the company's internal environment;
• Define the company's business and mission;
• Set corporate objectives;
• Quantify goals;
• Formulate strategies;
• Make tactical plans.”

Situational Analysis & Forecasting

Companies should analyze the variables that they can control, and this analysis should include a situational analysis and a forecast. After the analysis has been completed, the management team is ready to proceed with the examination of the business, vision and mission statements. Once the statements have been defined, the company may proceed to setting corporate objectives. After everyone agrees on the objectives, the organization is ready to formulate the corporate strategies. These corporate strategies will assist the company in determining what types of goals it wants to accomplish in the global market. Contingency and tactical plans are developed in order to complete this process. Contingency plans are developed to address best and worst case scenarios that could have an impact on the company. The tactical plans, also called operational plans, are designed to be specific and spell out the objectives that need to be reached. Tactical planning is specific and short term.

Factors Affecting Strategic Planning

Some of the factors affecting a strategic plan are time horizon, plan implementation facilitators, and sales forecasts and budgets. The time horizon addresses the timeline for the process. Strategic plans can be short, medium or long-term. The timeline is dependent upon the age of the organization and the stability of the market. Plan implementation facilitators are responsible for developing and implementing the policies and procedures that will govern the process. In most cases, the policies and procedures are:

• Broad guidelines approved by the senior management team and the board
• Designed to assist operational managers with handling daily business transactions, including potential problems
• Developed to efficiently use the operational managers' time as well as provide consistency and uniformity across operating units.

Planning Methods for Operations

Each organization has the opportunity to decide which type of planning process it should pursue. The three main planning methods are top-down planning, bottom-up planning, and iterative planning, and the features of each are:

a. Top-down planning — Planning process that starts at the top (i.e. senior management team) and flows down to the different levels of the company. In this model, “corporate headquarters develops and provides the guidelines that include the definition of the business, the mission statement, company objectives, financial assumptions, the content of the plan, and special issues” (Ball, McCulloch, Frantz, Geringer, and Minor, 2005). An advantage of this method is that the corporate headquarters should be able to develop global plans that effectively utilize the organization's resources. A disadvantage is it may restrict motivation and initiative at the lower levels of the organization and be insensitive to local conditions.

b. Bottom-up planning — Planning process that starts at the lower ranks of the organization and proceeds to the top. In this method, the workers on the floor inform the management team about what they think will work. These recommendations become the organization's goals. An advantage to this method is that all employees feel empowered and that they have made a valuable contribution to the success of the organization. A disadvantage of the method is that some employees may have too much freedom to influence the operations of the organization and there may be hidden personal agendas.

c. Iterative planning — This method is a spin off of the two methods mentioned above. Each method continues to refine its process until all of the differences have been resolved. This type of approach is becoming more popular as international corporations seek a single global plan when operating in many diverse foreign environments.

Some top level managers believe that they spend too much time on issues, strategies, and implementation. Some thought should be given to the organizational design of the company. When designing the structure of an organization, managers need to be concerned with finding the most effective way to departmentalize in order to take advantage of the efficiencies gained from specialized labor, and coordinating the activities of departments that assist the organization with meeting its overall objectives.

The international division is at the same level of the domestic division, but is responsible for all host country activities. Product divisions are responsible for global operations such as marketing and have the production of products under their control. Each division is assigned regional experts. Geographic regions are formed and are responsible for all of the activities in their designed areas. Area managers oversee the operations and report to the CEO. Few organizations are designed to function from the top level. Those reporting to the CEO tend to be senior level functional executives.

Viewpoint

Legal Framework for International Operations

As international businesses continue to grow, many organizations in the United States will shift from exporting their products to establishing a business operation abroad. In order to set up a business at a global level, organizations will need to address issues such as setting up the office, hiring employees in the host country, and acquiring property in foreign countries. When establishing a foreign presence, organizations must tackle the different legal, tax and commercial issues in both countries. According to McVey (n.d.), organizations must decide on the type of legal form in which they plan to do business overseas.

Direct Forms of Foreign Presence

Some of the direct forms of foreign presence include foreign subsidiary, branch office, representative office, and joint venture. A foreign subsidiary is formed when the corporation establishes a separate legal entity (i.e. corporation, Limited Liability Company or equivalent entity) in the host country. Another option is for the corporation to establish an office, distribution center, or manufacturing facility in the host country, without establishing a separate entity. In this type of scenario, the office is still a part of the main corporation and is responsible for conducting business in the host country. On the other hand, the corporation may establish an office in another country for special projects. There are no business transactions, but special projects such as preliminary marketing analysis and promotional campaigns are developed. A final form of direct presence is the joint venture. The corporation may form a partnership with a business in the host country.

Indirect Forms of Foreign Presence

Some of the indirect forms of foreign presence include distributor, agency, and marketing representative licensing/franchising. In the distributor model, the corporation finds an independent party in the host country and conducts business with that party or other members in the chain of distribution. Some corporations may appoint an independent party to act as its legal representative in the foreign countries and the agency has the authority to negotiate on behalf of the corporation. This is an example of the agency model. Transactions performed by the agency are legally binding for the corporation. However, some corporations may decide to appoint an independent representative, but not give them the power to enter into any legal agreements. This model has been classified as the marketing representative approach. Contracts are sent back to the corporation's legal department. Licensing/Franchising involves the assignment of an independent party to use propriety assets such as trade secrets, copyrights, trademarks, patents, software, data and business systems.

There may be a time when the organization decides that they do not want a foreign presence. In this type of situation, the organization will either export directly from the United States or transmit the information itself. Sometimes, it is advantageous for the organization to sell products directly to the customer.

Conclusion

"An increasing number of U.S.-based associations are facing an urgent need to create a successful strategy for international programs and activities" (Barkan, 2006). According to Barkan (2006), this trend is being driven by one or more of the following factors:

• “Globalization has encouraged organizations to demand more international reach from their trading opportunities as they are faced with international issues.”
• “Corporations may have been trading at the international level for a number of years, but the results have not met expectations and a new approach is needed.”
• “In the search for growth, international markets offer the best untapped or underdeveloped opportunities for programs and services.”

Many corporations will develop a specific strategy to address these factors. Although this type of approach could work in the corporation's favor, there are potential pitfalls such as:

• The organization's established core strategy does not fit the needs of international organizations and a conflict is created.
• There is potential of a silo or split being created as a result of the organization's international strategy taking on a life of its own.
• If an organization wrongly assumes that most American corporations have the same needs and those needs are different from the needs of international corporations.

It is therefore beneficial if the organizations consider the following suggestions when developing their international business strategies to successfully run their operations abroad. Barkan (2006) believes that organizations should

• Make sure that the common mission is clear to all involved, especially partners that are at the international level.
• “Adopt a global governance policy that defines the roles and responsibilities of the board, staff, and volunteers.”
• “Identify global strategic objectives/key performance indicators and balanced scorecard measurements that will assist the organization in defining success.”
• “Develop regional structures and strategies mapped to the global governance and strategy structure.”
• “Gather input and feedback on a local/regional level and at the same time, collect and validate input gathered globally.”
• “Identify those issues that are common universally versus those that are specific and of high importance to a region.”
• “Develop an implementation strategy based on the information collected.”

Terms & Concepts

Absolute Advantage: Refers to a situation in which a producer recognizes more efficiency in creating a good or service than another producer in the same industry; effectively using the same amount of resources to yield a greater output.

Classical Economics: School of economic thought begun during the late 18th century which stresses economic growth and freedom, laissez-faire policy and free competition; supported by the works of Adam Smith, David Ricardo and John Stuart Mill.

Comparative Advantage: Theory which explains the rationale behind international trade; illustrates how certain products can be produced more efficiently within specific environments, thus, it makes sense to produce what is most efficient and trade for those goods which are not as easily produced.

Factor Endowments: The total amount of resources available to a country for manufacturing; includes land, labor, capital, and entrepreneurship.

International Business Operations: Activities and guidelines involved in creating value for an international business’s stakeholders.

International Strategy: Introducing an international operations component to an organization’s strategy in order to capitalize on market need or shortcomings in a foreign market.

International Trade: The exchange of goods and services between countries; creates a world economy in which prices, or supply and demand, affect and are affected by global events.

International Trade Theory: Theory which attempts to explain the phenomenon of international trade patterns and distributions; speaks to the benefits of free trade.

Mercantilist Theory: Protectionist view which purports that a country should focus on enabling a high number of exports while discouraging imports through tariffs.

Bibliography

Ball, D., McCulloch, W., Frantz, P., Geringer, J., & Minor, M. (2005).International business (10th ed.). New York: Irwin McGraw-Hill.

Classical economics. (2007). In Encyclopedia Britannica. Retrieved May 23, 2007, from Encyclopedia Britannica Online: http://www.britannica.com/eb/article-9024233

Hoskisson, R., Hitt, M., & Ireland, R. (2003, January). International strategy. Retrieved on May 22, 2007, from http://jobfunctions.bnet.com/presentation.aspx?&docid=92164&promo=110000

International trade theories. (n.d.). Retrieved on May 22, 2007, from http://www.witiger.com/internationalbusiness/tradetheories.htm

McLean, J. (2006). Globalization is here to stay. British Journal of Administrative Management , 16. Retrieved on May 23, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21159995&site=ehost-live

McVey, T. (n.d.). Structuring international operation — A legal framework for companies operating abroad. Retrieved on May 22, 2007, from http://www.williamsmullen.com/news/articles%5fdetail/012.htm

Suggested Reading

International codes and multinational business: Setting guidelines for international business operations. (1986). Sloan Management Review, 27, 90. Retrieved May 23, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4021716&site=ehost-live

Kumar, S., & Chase, C. (2006). Barriers and success factors in the management of international operations: Mexico and China overview. International Journal of Management & Decision Making, 7, 525-537. Retrieved May 23, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=22894510&site=ehost-live

McNeil, M., & Pedigo, K. (2001). Western Australian managers tell their stories: Ethical challenges in international business operations. Journal of Business Ethics, 30, 305-317. Retrieved May 23, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=12130948&site=ehost-live

Milani, K., & Rivera, J. (2004). The rigorous business of budgeting for international operations. Management Accounting Quarterly, 5, 38-50. Retrieved May 23, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=12476030&site=ehost-live