The Role Of Management
The Role Of Management
The type and quality of its management are the keys to whether or not a firm will enter the international marketplace. Researchers have found that management commit-mint is crucial in the first steps towards international operations.2 The management of firms that have been successful internationally is usually described as active rather than passive3,4 or as aggressive rather than nonaggressive.5 Conversely, the managers of firms that are unsuccessful or inactive globally usually exhibit a lack of determination or devotion to global business. The issue of managerial commitment is a crucial one because foreign market penetration requires a vast amount of market development activity, sensitivity toward foreign environments, research and innovation.
Initiating global business activities takes the firm in an entirely new direction, quite different from adding a product line or hiring a few more people. Going global means that a fundamental strategic change is taking place. Research has shown that the decision to export, for example usually comes from the highest levels of management. Typically the president, chairman, or vice president of marketing is the chief decision maker.6 A survey of the fastest growing mid sized companies in the United States showed that for all global operations the personal commitment and vision of the chief execute tie officer played a forceful role.7
The carrying out of the decision--that is the initiation of global business transacts tins and their implementation is then the primary responsibility of marketing personnel. However in the final decision stage of evaluating global activities, the responsibility again rests with senior management. It therefore appears that in order to influence a firm to g global the president first needs to be convinced. Once the decision to globalize is made the marketing department becomes active in global business.
The first step in acquiring global commitment is to become aware of global business opportunities. Management may then decide to enter the global marketplace on a limited basis and evaluate the result of the initial activities. Global business orientation develops over time.
Management in the majority of firms is much too preoccupied with short term immediate problems to engage in sophisticated long run planning. As a result most firms are simply not interested in global business. Yet certain situations may lead a manger to discover and understand the value of going global and to decide to pursue global business activities. Trigger factors frequently are foreign travel, during which new business opportunities. Trigger factors frequently are foreign travel during which new business opportunities are discovered or the receipt of information that leads management to believe that such opportunities exist. Managers who have lived abroad and have learned dotting languages or are particularly interested in foreign cultures are more likely to investigate whether global business opportunities would be appropriate for their firms.
New management or new employees can also bring about a global orientation. For example managers entering a firm may already have had some international business experience and may try to use this experience to further the business activities of the firm where they are currently employed.
Reasons To Go Abroad
Normally management will consider global activities only when stimulated to do so. A variety of motivations can push and pull individuals and firms along the international path8. An overview of the major reasons that have been found to make firms go global is provided in table. some of the reasons come from within the firm (internal) while other reasons are the result of events outside the firm (external).
(1) Proactive Reasons
.Economies of scale
.Declining domestic sales
.Saturated domestic markets
.Proximity to customers and ports
Profits are the major proactive motivation for seeking global business. Management may see global sales as a potential source of higher profit margins or more added-on proof its. Of course the profitability anticipated when planning to go global is often quite different from the profitability actually obtained. Recent research has indicated that particularly in global start up operations initial profitability may be quite low9.
Unique products or a technologic advantage can be another major reason. A firm may produce goods or services that are not widely available from global competitors. Again real and perceived advantages must be differentiated. Many firms believes that theirs are unique products or services even thought this may not be the case globally. If products or technologies are unique however they certainly can provide a competitive edge. What needs to be considered is show long such an advantage will last. The length of time is a function of the product its technology, and the creativity of COM length of time is a function of the product, its technology and the creativity of competitors. In the past a firm with a competitive edge could often count on being the sole supplier to foreign markets for years to come. This type of advantage has shrunk dramatically because of competing technologies and the frequent lack of global patent protection.
Special knowledge about foreign customers or market situations may be another reason. Such knowledge may result from particular insights by a firm, special contacts an individual may have, in depth research or simply from being in the right place at the right time (for example, recognizing a good business situation during a vacation trip). Although such exclusivity can serve well as an initial stimulus for global business, it will rarely provide prolonged motivation because competitors-at least in the medium run can be expected to catch up with the information advantage. Only if firms build up global information advantage as an ongoing process through for example broad market scanning or assured informational exclusivity can prolonged corporate strategy be based on this motivation.
Another reason reflects the desire drive and enthusiasm of management toward global business activities. This managerial commitment can simply because man agars like to be part of a firm that engages in global business. Often however the man agerial commitment to globalize is simply the reflection of a general entrepreneurial motivation- that is a desire for continuous growth and market expansion10.
Tax benefits can also play a major motivating role. In the United States for example a tax mechanism called a foreign sales corporation (FSC) provides firms with certain tax deferrals and makes global business activates more profitable. As a result of the tax benefits firms either can offer their product at a lower cost in foreign markets or can accumulate a higher profit.
A final major proactive reason involves economies of scale. Global activities may enable the firm to increase its output and therefore lower its average cost for each unit produced. The Boston Consulting Group has shown that the doubling of output can reduce production costs up to 30 percent. Increased production for global markets can therefore help to reduce the cost of production for domestic sales and make the firm more captivities domestically as well11.
A second set of reasons primarily characterized as reactive influences firms to respond to environmental changes and pressures rather than to attempt to blaze trails. Competitive pressures are one example. A company may fear losing domestic market share to competing firms that have benefited from the economies of scale gained through global business activities. Further it may fear losing foreign markets permanently to competitors that have decided to focus on these markets. Because market share usually is most easily retained by firms that obtained it initially, companies frequently enter the global market head over heels. Quick entry, however may result in similarly quick withdrawal once the firm recognizes that its preparation has been inadequate.
Similarly, overproduction can result in a major reactive force to globalize. During downturns in the domestic business cycle, foreign markets have historically provided an ideal outlet for excess inventories. Global business expansion motivated by overproduction outlet for excess inventories. Global business expansion motivated by overproduction usually does not represent full commitment by management, but rather a safety valve activity12. As soon as domestic demand returns to previous levels global business activities are curtailed or even terminated. Firms that have used such a strategy once may encounter difficulties when trying to use it again because many foreign customers are not interested in temporary or sporadic business relationships.
Declining domestic sales, whether measured in sales volume or market share have a similar motivating effect. Products marketed domestically may be at the declining stage of their product life cycle. Instead of attempting to push back the life cycle process domestically or in addition to such an effort firms may opt to prolong the product life cycle by expanding the market. In the past such efforts by firms in industrialized countries often met with success because customers in less developed countries only gradually reached the level of need and sophistication already obtained by customers in the developed countries. Increasingly however because of the more rapid diffusion of technology these lags are shrinking.
Excess capacity can also be a powerful motivator. If equipment for production is not fully utilized, firms may see expansion abroad as an ideal way to achieve broader distribution of fixed costs.
A. Fixed costs (overhead)-
100% allocated to domestic operations
B. Selling price (per unit)
C. Variable costs (per unit)
Total variable costs
D. Contribution margin (per unit)
Alternatively if all fixed costs are allocated to or borne by domestic operations, the firm can penetrate foreign markets with a pricing scheme that focuses mainly on variable costs. The resultant contribution margin can be used to increase profits (or help pay for domestic fixed costs overhead). Table 11.2 illustrates this concept.
The amounts shown in will help to illustrate the cost and profit implications of doing business internationally. If we assume that 100 percent of the company's fixed costs (overhead), amounting to $100,000 is allocated to domestic operations then any selling price for product units sold internationally that is greater than the out of pocket cost of manufacturing and shipping (variable costs) will increase the company's profit.
The table also shows that if the company can sell the product overseas without in currying any additional fixed costs it stands to improve profits (or, alternatively, help pay for domestic fixed costs) by an additional $7 for each unit sold. It can lower its in transactional selling price to any price that is more than the variable costs ($ 13) for example a selling price of $14 and still increase profits by $1 per unit.
Variable cost pricing is a short term solution because as production increases to meet global demands, the related manufacturing equipment will wear out faster. It will have to be replaced sooner, thus increasing the company's variable costs.
A saturated domestic market has similar results to those of secluding domestic sales. Again firms in this situation can use the global market to prolong the life cycle of their product and even of their organization.
A final major reactive reason is that of proximity to customers and ports. Physical and psychological closeness to the global market can often play a major role in the global business activities of the firm. A firm established near a border may not even perceive itself as going abroad if it does business in the neighboring country. Except for some firms close to the Canadian or Mexican border however this factor is much less prevalent in the United States than in many other nations. Most European firms automatically go abroad simply because their neighbors are so close. Global Learning Experience 11.2 is a sobering reminder that the relative proximity of a market does not guarantee that it is without varying degrees of risk.
In general firms that are most successful in global business are usually motivated by proactive that is internal firm factors. Proactive firms are also frequently more service oriented than reactive firms. Further proactive firms are more marketing and strategy oriented than reactive firms, which have s their major concern operational is sues. The clearest differentiation between the two types of firms can probably be made ex post facto by determining how they initially entered global markets. Proactive firms are more likely to have solicited their first international order, whereas reactive firms frequently begin international activities after receiving an unsolicited order from abroad.
EXPORT MANAGEMENT COMPANIES
Domestic firms that specialize in performing global business services as commission representatives as distributors are known as export management companies (EMCs)
- INTERNATIONAL FINANCIAL MANAGEMENT
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