The Challenges Faced by International Business
This article examines how the environment affects and creates conditions for either the success or failure of business organizations and how it operates to demand effective strategic thinking on the part of decision-makers if businesses are to survive and thrive.
Take the classic example of Mark & Spencer PLC, which began in 1894 as a single high street store owned by two men, selling all items said to be costing no more than a penny to the customer. Over the years it conquered the retail sector with branches in prime locations all over the UK, and in overseas territories, totalling more than 885 stores. Not only did Marks & Spencer evolve into the giant corporation which it is today by reading the changes in the environment well, and meeting the growing needs of more and more affluent consumers, it also influenced the shopping habits of its clients. The business firm is not a faceless entity; at best, it can be an icon of social and economic progress, and at worst become vanquished by its inability to read the environment, Woolworths and MFI being two recent examples of such failure.
How the environment impacts on the fortunes of the business firm is nowhere more evident than in the collapse of many business enterprises including financial institutions (e.g.banks) in the current worldwide economic downturn. Even starker is the effect of continuing bad weather either in the form of floods or snow on the viability of a whole range of firms in the UK. Had the environment represented by the UK government not provided a lifeline to some of the major banks in the form of taxpayer subsidies, or buy-outs, they would not have survived. Different political ideologies at different times affect the business enterprise in different ways. The collapse of communism and the breaking down of the Berlin wall in 1989, coupled with the Internet phenomenon resulted in the abolition of legislation preventing global communication and industrialisation. Since then there has been a plethora of international mergers, acquisitions and alliances which saw transnational corporations (TNCs) grow in size and economic power as never seen before. Denning (1993) has identified the interaction between ownership advantage (OA) brought by the TNC and the location advantage (LA) of the countries where TNCs seek to invest. Researchera identified synergies sought by TNCs in foreign direct investment (FDI) as being motivated by strategies for market seeking (MA), efficiency seeking (ES), and knowledge seeking (KS) respectively, depending on their reading of the business environment.
Before going any deeper, it is necessary to take stock of what is meant by the business firm, and what its objectives are, and proceed to analyse the process and effects of this rapid globalisation. A business firm is a legal entity. Unlike a sole trader, or partnership, it is required to be incorporated with rules and objectives that are documented. It may be capitalised with borrowings or by shareholder contributions. While the shareholders own the enterprise and have claims to sharing the profits, it may be managed day-to-day by paid employees. The objective of the firm is ‘to maximise its value to its shareholders’ (Van Horne, 1974). Historically, ‘maximisation of profits is regarded as the proper objective of the firm, but it is not as inclusive a goal as that of maximising shareholder wealth’ (op. cit.). There are difficulties even in this conceptualization where ‘maximising market price per share’ is preferred by some to ‘maximisation of earnings per share’ (op. cit.).
A business firm currently in the news is Blacks Leisure, which was on the verge of bankruptcy, when the current adverse weather conditions improved its fortunes by providing a market for its thermal wear products. Now it is planning to expand further. Meanwhile the adverse economic environment has encouraged Poundland offering cheap goods to fill the gap left by Woolworth’s demise. The British salt manufacturing firm Ineos Enterprises chose to cancel a 12, 000 ton shipment of industrial salt promised to Germany, diverting the stock to local authorities in the UK in dire need of supplies to grit roads covered by snow. It is a good example of the environment influencing decision makers of private firms to act in a socially responsible manner. This upholds Van Horne’s (1974) assertion that even at the risk of not maximising shareholder wealth in the short term, management of business firms ought not to ignore the need for ‘social responsibility’ which brings long term benefits although perhaps not immediately apparent.
As related to business firms, social responsibility concerns such things as protecting the consumer, paying fair wages to employees, maintaining fair hiring practices, supporting education, and becoming actively involved in environmental issues like clean air and water… However, the criteria for social responsibility are not clearly defined, making formulation of a consistent objective function difficult’ (op. cit.).
It is now generally understood that a business does not, and cannot function in a vacuum. It has to react to events occurring outside its factory and office walls. The very first concern should be a close awareness of competitors’ strengths and weaknesses vis-a-vis its products and services. Additionally, most analysts require awareness of the environment in terms of political, social, economic and technological factors which impinge on the business firm.
Other analysts have expanded these to: Political – how changes in government policy could affect decision making in the firm. For example, the UK government’s concern over clean energy has resulted in a decision to invite foreign firms to bid for the supply of offshore windmills over the next several years. Not only do the windmill suppliers but also a host of firms required to supply ancillary products and services could take advantage of this decision. Social – how consumers beliefs and interests change over time. An example is the changing demography of many more senior citizens being present in the population and concerns over their health. Economic – how taxation, (e.g. tax holidays), interest rates, exchange rates, and the ‘credit crunch’ affect individual firms. Technological – how product innovations, and new technology like the proliferation of mobile phones, (iPads), change consumer preferences. Legal – how changes in law, enforcing of minimum wages, and regulating working hours, affect business. Last, but not least are the Ethical concerns that underpin social responsibility issues. An example is the refusal to trade with regimes known to contravene human rights legislation. All these factors influence to change markets which businesses need to take into account and respond to, if they are not to lose market share and jeopardise their long term viability.
A business firm, although incorporated by law as an entity is by no means monolithic. More than its shareholders, it has other stakeholders with different, if not competing objectives and interests within its ambit. Starting with the managers, there are other employees who may, or may not be trades union members, along with the community where it is situated, and which it serves, having to take into account local authority strictures on waste disposal and other similar regulations.
Discussing foreign direct investment (FDI) of transnational corporations, Robert Pearce defines the global business environment as ‘the environment in different sovereign countries, with factors exogenous to the home environment of the organization, influencing decision making in resource use and capabilities. This includes social, political, economic, regulatory, tax, cultural, legal and technological environments’. Pearce accepts that business firms do not have any direct control over this environment, but that their success depends on how well they adapt to this environment. As seen earlier in the case of Blacks Leisure and Poundland, a firm’s ‘ability to design and adjust its internal variables to take advantage of opportunities offered by the external environment, and its ability to control threats posed by the same environment determine its success’ (op. cit.).
Firms also take advantage of savings offered by outsourcing. Careful consideration of the variables of communication networks, cultural compatibility and reliability, needs to be addressed. There are offshore development centres which offer call centre provision and other web related customised professional services with appropriate infrastructure support.
How an American firm adapted to cultural diversity in France is discussed by Daniel Workman (2008). He says that the Euro Disneyland, a ‘transplanted American theme park’ near Paris had lost $34 million over the first six months since it opened in April 1992. Even before it opened there was strong local opposition that it threatened French cultural sensitivities. A strict employee dress code and the outlawing of wine in the park, among other things, angered the Parisians. Eisner, the CEO of the parent company in Florida commented: “What we have created in France is the biggest private investment in a foreign country by an American company ever. And it’s going to pay off”. Workman avers that ‘Eisner has since learned to recognize French cultural traditions and quality of life, rather than focus exclusively on American business interests, revenues and earnings at the expense of the underlying French culture'(op. cit.).
Disney found that the first American CEO of Euro Disneyland even with the capacity to speak fluent French, with a French wife, and a recipient of awards from the French government was still unable to make it a going concern. It was only after Disney replaced him and 23 American-born senior managers with local staff, that Euro Disneyland began to make profits.
Banning wine in a country which believes that ‘a meal without wine is like a day without sunshine’, made Euro Disneyland an unwelcome proposition even before it started. American-style hot dog carts were not attractive to a populace famed for its culinary and gastronomic sophistication. Later deciding to use French language rather than English, was also a more than reasonable accommodation made by Disney. It was one of the essential components of its later success.
Cultural encoding also requires that the Americans respect the more feminine French culture’s dominant need for a friendly atmosphere, cooperation, low stress levels and group decision-making instead of focusing exclusively on money and materialistic success (Workman, 2008).
Another aspect of business life is the support (or its absence) from the state as an unavoidable component of the business environment. Like most developed countries, Canada provides government funding to business firms seeking to expand into international markets. The government body responsible is the Small Business Finance Centre (SBFC). The funding is in the form of grants and loans which could be between $1500 and $10 million. Success stories abound. A $34,500 grant enabled a Winnipeg firm, K9 Storm Limited to export body armour for police dogs to 12 countries, in North America and Europe. Another Winnipeg company, Airport Technologies received $12, 500 to develop a snow plough called ‘Snow Mauler’ now being exported to the USA. The most successful has been the Garrison Guitar Works of St. John’s, Newfoundland, which received a grant of $250,000 to develop five guitar prototypes, and now, as a multi-million dollar company exports 20,000 guitars a year to 29 countries. They also own 350 retail stores in North America.
An interest free loan of $8700 enabled Keith Longmire (Nova Scotia) to develop his hand-painted birdhouses enterprise to establish itself in the US marketplace, while Domaine Pinnacle (Quebec) received a $300,000 loan to fund equipment to ferment high-quality apple cider and achieve sales of over $1 million a year. Meanwhile, Agribiotics of Cambridge, Ontario, was awarded a $44,570 loan to develop a vaccine to protect corn from pests and win a contract from the University of Wisconsin. The Canadian government also helps individual firms with their business plans as a precursor to obtaining a grant or loan (Workman, 2008).
In an earlier paragraph this essay introduced the idea of foreign direct investment (FDI). This stood at $14 billion in 1970 ‘but increased over 140 times to almost $2,000 billion by 2007. A large part of the upsurge in global FDI has been due to mergers and acquisitions (M&As). It is these cross-border mergers and acquisitions which have deepened the economic integration of developing Asia with the global economy. Researchers investigating the increasing M&A activity in this region decided that financial variables in terms of liquidity in the source country and the perception of risk (environment) influenced the level of cross-border transactions. They also conclude that the ongoing global financial crisis is likely to sharply curtail the extent of cross-border M&A transactions although this is not entirely proven.
Analysts hypothesised five ‘waves’ of M&A activity in the past. These waves occurred during periods of economic downturn. Currently, a ‘sixth wave’ is recognised with China, India and Brazil emerging as global players in trade and industry. One of the main reasons for M&A activity to be at its height in a recession could be the rapid drop in the stock value of target companies. A major factor in the increase in global outward foreign direct investment (FDI) stock increasing from $150 million in the early 1990s to $1200 million in 2000 may have been due to the above factor. However, it is not possible to generalise when one saw the attempts at a hostile takeover of the UK firm Cadburys by the US firm Krafts and its final, more amicable outcome. Cadburys was far from being a struggling firm. Its share price was holding up and its asset value had not in any way decreased before the takeover attempt.
A recent United Nations Conference on Trade and Industry (UNCTAD) report stated that 29 of the world’s largest economic giants are transnational corporations (TNCs). The annual value-added business performance of the 100 biggest TNCs exceeded that of some nation states. How the rise of TNCs transformed world trade over the last 30 years can be seen from the following statistics. In 1970 there were about 7000 non-financial TNCs investing directly in other developed or developing countries. By 1992 there were 37,000 with 170,000 foreign affiliates. The latter accounted for $11 trillion worth of output. Against this, the total world trade amounted to only $7 trillion.
An important variable in the success of transnational corporations, mergers and acquisitions is the facility with which managers, employees and customers with differing linguistic backgrounds communicate with each other. The total number of languages spoken around the world has been estimated at 6913. This is the reality of the language environment. However, there are two ways by which the language problem has been addressed. One can establish a common language for business, the most widely spoken international language being English. Although numerically more people in the world speak Chinese (Mandarin), it is confined to the People’s Republic of China whereas English is used in countries as far apart as New Zealand, Australia, South Africa, USA, Canada, UK and almost all Commonwealth countries.
Increasingly however, there are language intermediaries who could be engaged to conduct business in the local language. The volume of the global language service industry is estimated to be somewhere around $12 billion and handling around 500 million pages of translation and localization every year. An example of a language services provider of this type is Lionbridge with ’50 offices, $375 million revenue and about 4000 people on its payroll’. Specialised software products such as ‘recycling the translators’ knowledge-base (called translation memory)’ are among many new developments in the language translation industry (op. cit.).
Another reason for keeping up to date with changes in the environment is that a business firm’s operational effectiveness can be jeopardised by not paying heed to such changes. ‘Due to the rapid diffusion of best practice, a productivity barrier is soon reached… Japanese car firms… dominated in the 1970s and 1980s… Lack of a strategic perspective has since held them back while other Japanese businesses like Sony and Cannon flourish (because they) did not sit back with a ready formulated strategy that worked in the past, but revised their strategic thinking taking into account the changing realities of world trade. Obviously, their resource base and mix would have had to alter, and continue to change in the light of changing circumstances.
Writing about mergers and acquisitions Robert Heller contends that buying another business is the easiest task for management in most businesses. However, more things can go wrong in hasty acquisitions as has been proved in the literature. Here too, it is strategy and continuous scanning of the environment and competition which can ensure success. Heller talks of the need to achieve ‘superior organic growth’ once the merger has been accomplished. His answer to how this is to be achieved is to have a ‘visionary’ at the helm. Neither the conservative who wants to retain the status quo, nor the pragmatist who wants change but relies only on those tried and tested somewhere else, can succeed. Only the visionary, often battling against the odds, (could) drive the company into the future.
Heller explains why the Silicon Valley companies have enjoyed acquisition success far beyond the norm.The buys, have been slotted into a receptive culture, in which new ideas are the currency and visionaries dominate -led by a visionary chief executive who has delegated all operating duties to others.
The permeability of the firm to the increasingly global business environment has been demonstrated with examples, throughout this essay. Vision and strategic choice determine the ever changing nature of viable and successful enterprises. A final example below should convince even the most sceptical of the truth of the above conclusion.
United Technologies Corporation is America’s 20th largest manufacturer and the 43rd largest US Corporation according to Fortune 500 list (2006) with 215,000 employees. UTC makes Otis lifts, Carrier heating and air conditioning, Hamilton Sunstrand aerospace and industrial systems, Sikorsky helicopters, Pratt and Whitney jet engines, and Chubb security systems. UTC has thousands of branch offices throughout the world. Internet and IT is the key to UTC’s success. It is obvious that the UTC chief executive’s command over the organization’s resources around the world accounts for its superior productivity and competitive advantage. But it is equally clear that his control over resources is the result of well-thought out strategic decision-making of someone in close touch with the realities of business in the 21st century.
Denning, J. (1993) Multinational Enterprises and the Global Economy. Wokingham, Addison-Wesley.
Van Horne J.C. (1974) Financial Management and Policy. Prentice-Hall.
Workman, D. (2008) Disneyland Resort Paris Lessons; American Management Adapts to Cultural Diversity in France.quoted in ‘Boss is the King of Cool’ (The Sunday Times, 18th March 2009).