International Operations Essay

Question:

Write a report on international operations.

Answer:

Introduction

The present day business world is very complex. With the introduction of globalization, the business organisations were able to expand their business operations overseas and increase the overall competition exponentially. As a result, even national companies these days are facing tough competition from local as well as multinational corporations. Where the national companies usually aim for expanding its business operations to international levels, they are also aware about the complexities of it and how it can spoil the market share or the success that they have been able to achieve in the local market. Further, no matter how small or large a multinational company might be, it still has to undergo a lot of complexities and difficulties if it has to enter a new market. The basic reason behind the complexity of entering new markets is that the external and internal environment factors of business increase exponentially and the companies have to look for many more things rather than just their local laws, culture, society, human resource, technology, resources, etc. (Nikotina, 2014). Therefore, in this report, we will discuss a number of factors that can hinder the efforts of a company in entering into a new or a foreign market.

International Trade

International trade is the exchange of goods and services between companies and customers on a global scale. International trade is when a customer is able to buy an iPhone in Australia, which was designed in California and was manufactured in China. International trade has been evolved due to globalization and it expands the potential markets of a company. International trade provides new opportunities to the companies and as a result, each and every company has a dream of expanding its business on an international level and the companies which are able to do so are known as multinational companies.

Factors Influencing Entry into New Markets

When a company works locally or on a national level, it only has to deal with the laws, regulations, policies, government, cultures and society of that particular nation. On the other hand, while entering into a new or a foreign market, the company might not have much awareness about the laws, regulations, government, cultures or society of the new country. Thus, it becomes very difficult to cope up with the changes in internal and external environment which ultimately makes it difficult for business organisations to enter new markets. First of all, it is important to study the conditions that facilitate a multinational company to enter a new market. Let us discuss some factors that might motivate a multinational company to enter a new market:

  • When the multinational companies feel that the existing markets are saturated and have no prospects left that could offer further growth to the business
  • When the domestic markets are small and lack opportunities
  • When the growth in the already entered markets has slowed down
  • To increase the market share at a global level
  • To set up industries in new markets that could possibly help the multinational companies in lowering down the operating costs or by providing tax benefits
  • If a foreign market has high growth rate or is still untapped
  • If a multinational company feels that it has the required resources and surplus that would be required to expand the business into a new market ("8 Reasons Why Most Companies Prefer to Go Global – Explained!", 2013).

Let us discuss some of the factors that can hinder a company’s efforts of entering into a new market:

Overview of Environmental Factors

In general, the environmental factors of a multinational company are divided into two categories, which are internal environment factors and external environment factors. Internal environment factors are those factors which are in direct control of the company whereas the external environment factors are those factors which are not in the direct control of the company. The internal environment factors are basically the factors related to finances, social and cultural values, research and development, human resources, management and organisation structure of a company ("Strategic Planning: Environmental factors in strategic planning", 2016). On the other hand, the external environment factors are related to the economy, technology, political, legal, competition and social and cultural conditions ("External environment factors | PESTEL analysis", n.d.).

Economic Factors

It is an obvious fact that not all countries in the world would prove to be an opportunity for multinational companies. Companies can differ according to the type and price of the product or service that they offer and a country might not be developed enough to afford or accept the products or services of a high end or luxurious company. As a result, companies should definitely refrain from entering into such markets that can hinder their business prospects. Further, the economic development of a country also plays a major role in the decision to enter the market. A highly developed country would be able to accept higher end or luxurious products whereas a developing country might not be able to accept such high end products as they are already striving for growth ("5 Factors You Must Consider While Your Company is Entering to a New Market", 2013). However, there might be a number of customers in each and every country that would be able to purchase the products irrespective of their prices, but countries that do not promise high business activities are not good for business ventures. For countries that cannot afford high end products, companies have to develop les sophisticated versions of the same product that they can sell at lesser prices but then it might harm the company’s reputation due to lack of quality in foreign products. Further, the rates of economic growth in a country can also have an impact on the demand of goods and services. It is also important for companies to have a deeper look into the lifestyle and purchasing powers of the customers so that it can ensure that its new business venture would not go in vain and the market would offer them with fruitful opportunities in terms of high demand for product and services.

Economic factors play a huge role in the success of an expansion strategy. This can be proved by giving an example of nestle company. Nestle is one such company which has been considered to be multinational of multinational companies. The company has its work operations going on in 60 countries with around 400 plants and with a workforce of one quarter of a million employees. The company is the largest food processor in the world and is amongst the top 100 companies in the world. Some of its market leaders are coffee, mineral water, condensed milk, confections, etc. ("Global Expansion of Nestle", 2016). The company has been facing a significant challenge to its expansion strategies due to economic factors. Nestle has a strategy of sourcing milk from domestic farmers, which has increased the problems for the company. Recently, in Pakistan, Nestle experienced a hike of 12.9% in the prices of the milk that it used to source from the domestic farmers of Pakistan. Such economic factors can have great impacts on the operations of a company as they end up increasing the operational costs and the final product of the price. Therefore, a fluctuating economy poses a threat to the business organisation that plans to enter its market (Jeffrey, 2016).

Social and Cultural Factors

Culture of a country is defined as the set of values, beliefs, customers, religions, cuisines, fashion, etc. that the people follow. Countries can differ from each other on the basis of culture and social factors. These differences between countries are the ones which sets each country apart from the other. Social and cultural differences are very important in international business and can hinder the efforts of a company to enter a new market to a great extent.

One of the best examples of how social and cultural factors can hinder the efforts of a company is when a product or a service is not accepted by a certain group of people at all. As a result, the companies have to make drastic changes in their products or services in order to achieve success in the new market else they face high criticism and risk of failure of the venture altogether. In fact, some companies even have to change their advertising and marketing efforts according to the social and cultural values of the new place. Therefore, it has been found that many companies send their sociologists and anthropologists in foreign markets before they start up a business in it. Another major factor that halts the expansion efforts of a company are cultural factors. It is pretty obvious that the business organisations have to undergo a great deal of meetings and negotiations with the people and the governmental organisations of a foreign country before they can actually start up a business venture in it. In the process of meeting and negotiating with them, culture can play a huge role in deciding the outcomes of the communication process. If the representatives are not able to understand the culture of the foreign country, they might end up offending the governmental organisations or the people and the deal might not become successful in the very first place. Then there can be issues when a particular product or a service might not be accepted at all by the people of a foreign market due to its constituents or any other reasons. Further, even while dealing with customers or stakeholders, the employees have to be very careful as they might end up offending them due to cultural differences unintentionally. For example, food items which contain animal meet have to be very carefully launched in foreign countries as the social or cultural values of that place might be totally against animal meet. Sometimes the name of the product might be an offensive word in the foreign market where the product is being introduced. In such a scenario, the product might now be able to sell at all in the new market ("Factors That Affect a Multinational Corporation", 2016).

One of the greatest companies that have experienced social and cultural issues in its expansion is McDonalds. The Chinese government was very eager to develop a fast food market in the country during the 90s and it was looking upon McDonalds to pave the way. McDonalds faced high risk as expanding into Chinese market could bring in problems due to very large differences amongst the Chinese cultures and other parts of the world. In Chinese restaurants, the sitting arrangements were based on a hierarchical setup depending upon the age of the person whereas McDonalds took the risk and eliminated the hierarchical setup. Further, McDonalds was also able to ensure that its Chinese restaurants did not serve any alcoholic beverages which increased the chances of women or females walk in. Thus, McDonalds had to make great adjustments in its menu and restaurants while it was expanding into China while the Chinese consumers also played a great role in accepting a certain things that were not according to their traditional customs ("Possible problems faced by McDonalds when opening a new business", 2015).

Political and Legal Factors

Political factors and legal factors are those factors that are concerned with the policies of the government, laws and administrative orientations of different countries. When planning to enter a new market it is very important for business organisations to get a thorough insight into the governmental and legal policies of that place. Multinational companies should carefully examine the records from the past so that they can get to know more about the attitude that the government of the foreign market has towards foreign investors.

Some countries, which have previously been ruled by foreign countries, are not in favour of foreign direct investments whereas some countries are highly favouring foreign direct investment. In some countries, the government has also banned the usage of foreign products which can make it impossible for the companies to enter such a market. The status of government and government organisations can also have a great impact on the entry of foreign companies into the market. Presence of bureaucracy or high rates of corruption can make it very difficult for the companies to enter such a market. Multinational companies should also consider the government changes that are most likely to occur in the future because with a change in the government, there are consequent changes in the rules, regulations and policies related to business activities. In some countries, the government provides a lot of interference in the business activities of the organisations and despite liberalization of trade, the government organisations of some countries provide greater protectionism to domestic companies rather than foreign investors ("What Issues Arise When Doing Business Globally?", 2016).

Another major factor that can hinder a company’s attempts in expanding business in new foreign markets is the employment or labour laws that a government formulates. Some countries have very strict laws related to the employment of workers in a subsidiary being opened up by a foreign country. Some government organisations have made it a strict policy that the majority of employees working in a subsidiary of a foreign company would be the people from the host country or have fixed a percentage of host country employees that have to be hired under any circumstances by a foreign company that is expanding its business in that country. Furthermore, some governments favour foreign investments and provide tax benefits to the companies who invest in their markets while there are countries that have strict laws against foreign investment and do not allow any foreign company to carry out business activities in their markets ("Factors That Affect a Multinational Corporation", 2016).

Nestle is one company which has also faced heavy criticism and hindrance due to governmental and legal issues in Pakistan, which was directly related to the human resource policies of the country. Pakistan government has a Right to association law and the failure of the company to abide by it invited heavy criticism from the localities. The term “Nespressure” was used in the revolts as Nestle tried to squeeze workers and violate the rights that they had at the workplace. To counter the accusations, Nestle agreed to establish a prominent relationship with trade union in Pakistan and it had to give 200 permanent positions to the localites as reconciliation. The matter became so worse that the country started to boycott the products of the company. In the end, the company tried its best to ensure that its promises were fulfilled but still received heavy criticism due to its failure. This example shows the impact that economic factors of a market can have on the expansion strategy of a multinational company ("Nestl? Pakistan continues to flout the law - human resources boss in high court for serial violations of reinstatement orders! | IUF UITA IUL", 2016).

Technological Factors

Technological factors are the last factors that can hinder the efforts of a company that tries to enter a new market. One of the most dramatic effects on business organisations is because of the technological factors because the technology is changing at such a pace which could never be imagined by the mankind. When entering a foreign market, a company would have to ensure that there is presence of quality infrastructure and technological resources that would be required to run the basic work operations of the company. Presence of internet connectivity, engineers, levels of technological developments, etc. can be crucial factors in determining the success of a foreign business venture.

Multinational companies have to invest heavily when they plan to enter a new foreign market as they have to set up new plant and machinery that would be required for the manufacturing of products and services. If the foreign market is not technical feasible to withstand such machinery and technology, it would be a great wastage on the behalf of the company and it would have to export the product to the new market, which would ultimately add up to the cost and would increase the risk of failure. On the other hand, if the new foreign market is technologically developed, multinational companies can easily set up their new manufacturing plants in the market and can provide the local population with cheaper products due to local manufacturing units. It would ultimately increase the chances of success as the customers would not have to pay for the export prices that the company would have to bear in case the manufacturing process is carried out in some other country.

One of the greatest companies that have lost their competitive edge in international market due to technological factors is Microsoft. The company started building its reputation on the basis of its exceptional softwares that were developed to run information systems and perform tasks. It is said that Microsoft, a company that has expanded its business into each and every country, failed as it could not cope up with the technological changes even though it had designs for developing latest smartphones, PCs, tablets, etc. The example clearly shows the impact that technological factors can have on the operations of a multinational company (Newman, 2010).

Conclusion

The present day business world is very complex and the addition of external and internal environment factors in international business makes the operations of multinational companies even more complex. The environmental factors are changing at such a rapid pace that it has become difficult for even domestic firms to carry out their business activities properly whereas multinational firms have to take care of environmental factors pertaining to multiple countries. In such a scenario, political/governmental/legal factors, technological factors, economic factors and social & cultural factors have a major impact on the efforts of a multinational company to enter a new foreign market.

References

5 Factors You Must Consider While Your Company is Entering to a New Market. (2013). YourArticleLibrary.com: The Next Generation Library. Retrieved 31 May 2016,

8 Reasons Why Most Companies Prefer to Go Global – Explained!. (2013). YourArticleLibrary.com: The Next Generation Library.

CULTURE. Retrieved 31 May 2016.

External environment factors | PESTEL analysis. Dineshbakshi.com. Retrieved 1 June 2016,

Factors That Affect a Multinational Corporation. (2016). Smallbusiness.chron.com. Retrieved 31 May 2016,

Factors to Consider For International Marketing. (2015). Cleverism. Retrieved 31 May 2016,

Global Expansion of Nestle. (2016). Lotsofessays.com. Retrieved 1 June 2016,

Jeffrey, L. (2016). Challenges associated with managing organizations that operate in different geographical and cultural contexts: Nestle.

Jethani, A. INFLUENTIAL FACTORS OF INTERNATIONAL BUSINESSAND INTERNATIONAL BUSINESS ENVIRONMENT (1st ed.). 2016,

Newman, R. (2010). 10 Great Companies That Lost Their Edge. US News & World Report. Retrieved 1 June 2016,

Nikotina, A. (2014). Five challenges you’ll need to overcome to succeed in international business - Trade Ready.

Overview of the International Business Environment. (2016). Boundless.

How to cite this essay: