BU5003 International Business operation

Tutor Dr Neil Moore
Assessment number G35691 Number of words 2015 Date 14/11/2012

Essay topic: “The decision to develop and grow business operations can be a daunting prospect for any galvanization. In particular, the decision to expand into overseas markets generates a broad range of challenges and issues. Using contemporary examples and concepts considered in this module discuss the challenges and issues faced by business organizations as they decide whether or not to internationalize their operations.”

As a company expands, it begins to get itself involved in marketing programs that may not have been part of the original business plan. Businesses evolve, and plan change and a company may begin to realize that it needs to get involved in international markets. Obviously, it has a lot of benefits when a company enters into a foreign market. Expanding sales, acquiring resources and minimizing risk are the three principal operating objectives that why companies engage in international business. Normally, these three objectives guide all decisions about whether, where and how to engage to be international business. So in order to seek high sales and profits, gain global market share and reduce dependence on existing markets, it is inevitable for any companies to go abroad. However, it also generates enormous number of challenges and issues when organizations decide entry overseas markets. “The international Companies operate in an environment shaped by cultural, legal, economy, trade governmental and institutional forces.”(Daniels, 2010) So this article will use some examples to discuss the key challenges and issues faced by business organizations when they decide expand into overseas market, also compare the difference between the management of international business operations and management of nationally based operations.
First of all, take McDonald’s and KFC as the example. Both McDonald’s and KFC are the leading restaurant in the world, and in western countries McDonald’s preforming is far more superior than KFC, while, in Chinese market, McDonald’s cannot compete with KFC. Until 2012, KFC have over 3000 chains in China while McDonald’s only have around 1000 chains, and no matter the total revenue, the number of the chains and the speed of spread, KFC is far ahead McDonald’s. According to those two companies development background we could found several reasons about why McDonald’s relative failed in China. And those reasons are also the basic issues for any organizations should be considered.
As early as 1985, KFC has been interesting in Chinese market, so the KFC president taken decisive action, which choose a Chinese called Dongda Wang as vice-manager in Southeast Asia because he born in China, has clear knowledge about Chinese culture and consumer behavior. After he did over a year research, the first KFC restaurant opened in Beijing. The first operation KFC did in Chinese market is that the main products are based on Chicken instead of beef. Because KFC found Chinese people like eat chicken more than beef. Secondly, KFC supported the cleanest restaurant that Chinese customer had never seen because in the last century, the most unpleasant place in traditional China’s family was the kitchen and bathroom. So at that time KFC made a huge influence among Chinese people, and a significant number of Chinese people want to tasted this western restaurant, even though at that time the hamburger was sold 1 pound for each and Chinese people the average income just 10 pounds per month. Because of that, KFC made huge succeed in the first step. On the other hand, McDonald’s opened the first series in China was 3 years fell behind KFC, and they insist on used beef as the main material. So why KFC succeed in China because they require customer demand, quite know what Chinese customer need, and understand the culture difference, even though it is a slight change. While McDonald’s didn’t realize what Chinese customer need. So cultural difference is the key issue should be considered by any organizations who decide go to external market, no matter the country’s culture is comparable with host-country or totally different. “A company usually needs to make fewer adjustments when entering a culture that’s similar to its own, but it must quite careful to heed subtleties both in host-country behaviors and in host-country perceptions of foreigner’s behaviors” (Daniels, 2010, p 127).
Secondly, choose appropriate modes of operations when an organization pursuing international business is also quite important. The KFC chooses the direct chain and the licensing and franchising as their developing strategy since 1999 and this approach had brought massive success after implemented while McDonald’s implemented the same way with KFC was in 2004, but at this time KFC already had over 1200 chains in China, which was almost double than McDonald’s at that period. In the following years, McDonald’s begins to realized that their developing strategy was not appropriate, so at first they decided use the same operation modes with KFC from 2004, also reduce the franchising from 0.8 million pounds to 0.2 million pounds in 2010; also they design more products for Chinese customer, which range from breakfast to dinner, and most of the products made by chicken. Those approaches made McDonald’s performance much better than before. So choose an appropriate approach when enter into a new market is also an important issues for the manager to considered.
Thirdly, I want to discuss how political environments have an impact on global business, and what I discuss is not about a country’s political system, but how business operations be impacted by political issues between two countries. Take the South seas issue between China and The Philippines as the example. Both of them said The Huang Yan island in South Seas is belongs to them, and both sides insist not to let some. In this case, Chinese authorities have imposed some policies to limited Philippines economy, one of the policies is produced an “unbelievably stringent” agricultural quarantine rules since March this year. The reason of publish this public is that China is one of the biggest importing country for Philippines’s banana, and banana exporting has an overriding influence on Philippines’s economic. After this policy published, the banana agency had suffered lost. In the previous years, half of the banana sold to China while in this year, most of the bananas have to decay in Philippines. So the political issues between China and The Philippines have considerable impact on those two countries exporting and importing, especially for The Philippines. Moreover, I think forecasting and managing political instability is also should be considered by managers, because the issue between China and Philippines has existed several decades, so the agency manager should be aware those issues in advanced. “MNEs use a number of strategies in managing political risk. A typical approach is first forecast the specific risks and then determine how to reduce or eliminate those risks that are considerable unacceptable” (RUGMAN, A, 2000, p 365). While, the Filipinos did not realize it, even though China is a large market and will bring considerable profit for them, they should develop other markets as well, such as the Middle East and Europe market. So, as a manager they not only should learn to think about how macro political environment has influence on their business, but also need to predict political issues.
Burberry chief executive Angela Arendt’s (2012) said: “As we stated in July, the external environment is becoming more challenging.” Also, according to Retail analyst (2012) Bethany Hocking of Investec Securities “ Burberry’s trading statement implied “a significant slowdown and Burberry is not immune from wider macro-economic turbulence”. Despite Burberry influenced by economy recession, it reported half-year pre-tax of 173m pounds, up 6%. So, in this part, I want to use Burberry as an example to illustrate how company implement operations when they faced by rigorous external environment. There are three different types of expansion strategies for this company, which is retail, wholesale and licensing respectively. And those three expansion strategies implement in different territories. Retail mainline stores are mainly opened in developed areas, such as European countries and the cities like Hong Kong in Asia. That’s because the people who live in those areas have strong purchasing power; also it has well-developed tourist industry. According to Burberry annual report between 2011 and 2012, retail accounted for approximately two-thirds of revenue in Europe and in Asia pacific retail account for approximately 85% of revenue. And wholesale is mainly in Emerging Markets, approximately two thirds of licensees income come from Japan and the balance from global products and the European wholesale children swear licensee. So Burberry through, carried out three types of expansion strategies in different areas to adapt different external country’s economy environment, thus can improve their sales and profits. In order to handle serious external environment, Burberry implement a series of operations. First is intensify non-apparel, and the most successful operation was launched the new Burberry Body women’s fragrance, and this portfolio to move from 19th to 9th in the United States. Secondly operation is to invest in under-penetrated markets, that approach is mainly focus on developing markets, especially in India and Brazil, in 2012, two new stores will opening in India and the formation of a new subsidiary with a local partner in Saudi Arabia. So Burberry through combination the expansion strategy, launch new production and enter a new market to avoid the influence of the external environment.
So, from the previous part we can see that the physical factors (such as a country’s geography) and social factors (such as its politics, law, culture, and economy) are the main reasons why international business differs from domestic business. The first McDonald’s and KFC example illustrate the culture difference is the main reason about that. Because the main productions of those two fast food restaurant in European markets is beef hamburger and chips, while when they came into China, in order to require customer need, they design wide range of products unique for Chinese market, which even include rice and noodles. Next, according to Daniels said “it should no surprise that a nation’s political policies influence the ways in which international business take place within its borders (indeed, whether it will take place)”. So, political policies also create the trade gap between foreign markets and local markets. For instance, the ownership of the fishing island issue between China and Japan has been influenced on those two countries trade, as a result of that issue, considerable numbers of Chinese people rejects Japanese products; the sales volume of Toyota, Honda and Honda Motor has decreased by 50% in the first two months in this year. This sales condition was totally different with Japanese market. Furthermore, I think economic forces can make international business differs from domestic business. Because economics explain why international companies exchange goods and services globally. And why a country’s currency relative valuable than another’s. That’s mainly reflected on labor cost in the global market. If an organization wants to increase their profits and reduce their cost, labor cost must be considered by the manager, so most of the international companies set up their industry in developing countries, normally, the labor cost in developed countries is over two times higher than emerging countries, in this case, those companies willing to operation abroad in order to seek higher profits.
As above, we can see that the culture differential; political; choose the right expansion strategy and economic forces are the main issues that the companies will be faced when they internationalize their operations, those four sectors also illustrate why international business differs from domestic business. So, when some organizations decided expand their business into a foreign market, they should carefully think about the gap between host-country and target country, does customer will adapt our products? Should we design new products for customers? Which kind of modes should we choose in overseas market? Or is this country’s political issues will affect company’s operations... All of those questions should be considered by managers. So it is not an easy task for any companies who want gain foreign market share, only realize the challenges and really to deal with it, that they can set the first step.

References

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