Factors for the Success of International Businesses
With the trend of globalization, the world has become more integrated and it has also become an open place for businesses (West et al., 2014). In consequence, more and more firms enter international market, expecting to generate higher profits and larger customer base (West et al., 2014). Nevertheless, it is a crucial fact that not all international firms can succeed in foreign markets and many factors directly influence the operation of international businesses. This includes political environment, the extent to which international businesses’ products/services are attractive, and timing for internationalize and so on (Harveston et al., 2015, Rialp, 2016). Nevertheless, among different factors, culture, the selection of market, as well as internal capabilities are considered to be three most important factors that contribute to the success of international businesses. This essay will focus on these three factors and justify why they are critical for international businesses.
Kogut and Singh (2016) define culture as shared norms and values of a social system, which are the most important aspect of a society. Differently, Hofstede (1991) thinks that culture is the collective programming of mind and it distinguishes members of one society from another. From these two definitions, it can be found that culture is unique to a society and it significantly influences the way people think and behave in that society. Based on this opinion, it is considered that culture will profoundly affect international businesses. A good understanding of cultural differences and the ability to overcome cultural differences will contribute to the success of international businesses.
Many literature shows culture’s impacts to international businesses. For example, Hofsede (1991) introduces a cultural dimension framework and identifies five important components of culture, which are 1) power distance; 2) uncertainty avoidance; 3) masculinity/femininity; 4) individualism/collectivism; and 5) long term orientation. These cultural features cause some differences on international businesses’ operation. For instance, Hofstede (1991) identifies that China is a country which has a high power distance which means that the power of firms are centralized and employees are used to follow what managers require. Nevertheless, UK is a country which has a low power distance which means that people expect equity in workplace. If a Chinese firm operates in the UK and hires local people, British employees may feel that they are not respected by the company if their opinions are neglected by managers. This will cause conflicts between employees, thereby decreasing their job satisfaction and performance. As a result, the overall business performance will be negatively influenced, which may directly lead to business failure. This is idea is confirmed by Rialp (2016) who conducts a quantitative research with over 50 American firms which run businesses in China. The research finding shows that more than 82% of them have faced problems caused by cultural differences (Rialp, 2016).
In addition, Mayrhofer (2014) indicates that culture forms people’s value, thereby significantly affecting their preference. In other words, consumers from different cultures may have very different shopping preferences and behaviours. This view is agreed by Pompitakpan and Francis (2016) who state that culture is the fundamental determinant of a person’s wants and behaviour. Above view implies that when firms run business in international market, they need to clearly understand local consumers’ preferences influenced by their cultures. For instance, in the America culture, turkey is a traditional food for Thanksgiving. Understanding local traditions would allow poultry firms to better grasp business opportunity when running business in the U.S market. Another example is that in Chinese culture, red colour represents happiness so it is favoured by consumers. An international business that has good knowledge about Chinese culture would be able to improve their product design and packaging by adding red colour to attract local consumers.
From above discussion, it can be found that culture not only influences international businesses’ internal management, but also influences consumer preferences. Many real word businesses also confirm culture’s importance to business success. For example, the well-known E-commerce Ebay entered China in 2002 when Chinese consumers had little knowledge about C2C business. With a high uncertainty avoidance culture, Chinese consumers had low acceptance to Ebay to reduce risks faced by them (Speiers, 2014). As a result, Ebay experienced huge failure and had to quit from China in 2006. On the contrary, McDonalds’ is considered as a successful case in dealing with cultural differences. The company realized that consumers had different tastes in different countries so it localized products to better meet local consumers’ preferences. For example, it launches Beijing Chicken Rolls in China and it launches Cheese Tsukimi Burger in Japan (Furayi et al., 2017). As a result, McDonald’s remains its leadership in fast food industry worldwide and in the year 2017 its revenue achieved $22.82 billion (Furayi et al., 2017). From above examples, it can be found that generating a good understanding of culture enables international businesses to conduct effective strategies to respond to cultural differences, thereby leading to business success.
3.0 Selection of market
Besides culture, the selection of market is also an important factor that contributes to the success of international businesses. According to Wild et al. (2013), when expanding in international markets, firms need to take various strategic decisions, and one of them is the choice of international markets worth entering. As Wild et al. (2013) explain, the identification of promising foreign target markets can ensure the future success of the firms, and conversely inappropriate market selection would be costly and may cause business failure. Many considerations are associated with market selection and Porter’s (1990) National Diamond framework provides a good understanding towards the view. Although the model aims to identify national competitive advantages, it is effective for international businesses to select market because they can use the key elements of the model to assess the attractiveness of the target market. As Porter (1990) identifies, there are four major determinants of national competitive advantage, which are 1) demand conditions; 2) competitive rivalry; 3) factor condition; and 4) related supplier or support industries. Below sections will address these four determinants and provide more detailed discussions.
Demand conditions is concerned with local demanding in an economy. According to Hill (2011), the determinant of demand significantly influences the competitive advantages of local firms. This is because if the demand is high, local firms have to innovate their products and this process improves their competiveness. For example, Germany is a country which is famous for premier automobile companies such as BMW and Mercedes. The high demand on high-performance automobiles allows local firms to gain competitiveness on high quality cars, but the country is also weak in producing cheaper and mass-produced autos. Consequently, if an international car business wants to enter Germany market, it has to consider whether it can produce low priced cars to compete with local firms. In addition, Hollensen (2011) demonstrates that high demands mean that international businesses can have more potential customers. Therefore, selecting a country with high demand would ensure the profits of international businesses.
Then, competitive rivalry is also critical for international businesses. Garelli (2013) illustrates that competition in local market not only determines local firms’ competitiveness, but also determines the ease of doing business in that country for international businesses. For example, China is specialised in manufacturing and the country has gained competitiveness in producing low priced products by taking advantages from its cheap labour. This implies that if a British firm wants to enter China, it would face intense competition in price and it would be very difficult for it to create price competitiveness.
Condition factor is concerned with whether a country has sufficient production factors such as knowledge and infrastructure (Fendel and Frenkel, 2015). These include human resources, knowledge resources, technologies, and infrastructures and so on (Fendel and Frenkel, 2015). According to Rialp (2016), a country with sufficient production factors would allow international firms to run business more easily. For example, if Tesla is going to enter a less developed country where has low technologies and skills to build charging stations, its sales would be influenced because consumers may be concerned with the convenience of driving Tesla cars.
The last one is supplier or support industries. Schott (2014) illustrates that company’s operation requires many suppliers and support industries. For example, while a coffee shop provides drinks to customers, it needs suppliers to offer coffee beans, coffee machines, as well as other facilities such as tables and chairs. In addition, firms may need to finance in foreign markets so banks are also needed. Uchida and Cook (2015) demonstrate that when entering a country that gain sufficient supplier and support industries, firms would gain benefits on costs and efficiency.
Above discussions use Porter’s (1990) framework to demonstrate how companies can achieve success by considering national competitive advantage. Nevertheless, it is a fact that market selection is a complex issue and much more factors must be considered. For instance, the target market’s political stability and economic growth are also important. This implies that firms need to take various factors into account when examining a market’s attractiveness. Also, Fendel and Frenkel, (2015) analysed why international businesses fail in foreign markets and found that more than 62% of them fail because of the inappropriate market selection.
4.0 Internal capabilities
The last factor explored to contribute to international business’ success is internal capabilities. Rowe and Dickel (2013) illustrate that internal capabilities are concerned with firms’ resources and competences. Many international businesses fail because their expansion is inconsistent with their internal capabilities. Hagedoorn (2013) demonstrate that the resource-based view believes that resources owned by firms create capabilities, and the capabilities then develop competences.
When entering international markets, firms need to critically review their resources. For example, Fendel and Frenkel (2015) claim that the operation of international businesses requires high financial supports. This is because they may need to make investments in foreign countries, they may need to purchase new equipment and they may also need to hire more staff (Fendel and Frenkel, 2015). Strong financial resource can ensure international business’ basic investment and operation.
Furthermore, branding is also identified to be a valuable resource for international businesses. Kogut and Singh (2014) indicates that with strong branding, international companies can obtain high brand awareness and recognition in target markets. This enables them to penetrate into the market more quickly (Kogut and Singh, 2014). Apple is a successful example. Before entering China, Apple has developed high brand awareness worldwide. When it entered China in 2011, Chinese consumers had already developed high desires on Apple products and then the company gained huge success in Chinese market with a revenue of $28.27 billlion among which over 25% of revenue was contributed by Chinese market (Rialp, 2016).
Different companies may have different resources and capabilities, and above discussions only provide two examples to illustrate how international businesses can achieve success by taking advantage from their own capabilities. Many cases also show that inconsistence between expansion and internal capabilities can cause business failure. A Korean coffee brand named Café Bene launched a bankrupt announcement in China in October 2018 (Zhang, 2018). The company entered China in 2012 and quickly implemented a series of expansion plan (Zhang, 2018). Within six years’ time, Café Bene opened over 5000 stores in Chinese market (Zhang, 2018). Nevertheless, it fails to correctly understand the local demands, thereby leading to high financial burden, and directly causing the business failure. This case shows that international businesses must have a good understanding about their own capabilities and recognize whether they are able to successfully run businesses in international markets.
This essay identifies three factors that contribute to the success of international businesses. They are culture, market selection, as well as internal capabilities. From the discussions, it has been learnt that culture not only influences international businesses’ internal management, but also influences local consumers’ preferences and buying behaviour. Then, market selection is critical because right selection can allow international businesses to generate new opportunities. Finally, the essay points out that international businesses need to ensure a consistence between expansion and internal capabilities. Among these three factors, it is considered that market selection is the most important factor because market decides everything. Then, culture is the second important factor because it can be overcome with different practices such as learning the culture of target market and good communication can also ease the effects of cultural differences. Internal capability is the third important factor because international businesses can conduct the internal assessment regularly based on their development plan and capabilities can be developed over time as firms increase their abilities to access to resources.
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