International Business Strategy - Essay Example

?Running head:   INTERNATIONAL BUSINESS STRATEGY CASE   International Business Strategy Case Insert Insert Insert 15 April 2011 1) Discuss the factors that influence the country selection decision of multinational firms; b) Compare the relative attractiveness and riskiness of Brazil and China to multinational car manufacturers. The selection decision of multinational firms by Brazil depends on low costs of goods from countries such as China. China produces less costly materials, which Brazil sees as an advantage when it comes to assembling cars. As Marco Polo suggests, the main attraction of business in china is usually cheap labor, low interest rates and effective infrastructure. Hence, the theory of comparative advantage, which focuses on the fact that a country should produce the goods and services that are of an advantage to business compared to other countries, applies. This is the case with China, since their low cost and highly demanded machinery are of absolute advantage to the country and it is able to attract major nations like Brazil. A country should hence focus on those goods that are demanded for trade by other countries so as to improve on its economy and gain a comparative advantage (Lasserre, 2007). The diversity of a country I terms of competition can also influence whether a firm’s selection decision. The size of a country’s market is also important since it represents the quality of products being produced in that country. A favorable market, should be able to grow fast due to demand of its products and services, implying that it is the best market for business since it has a competitive advantage. The taxes and interest rates are a major concern to multinational firms who want to venture in business in other countries. These firms will always opt for the low interest rates and low taxes on their goods. Mot industrialized countries have a product differentiation, diverse competition, diverse distribution of product and mass retailing. Some governments guarantee some incentives for foreign investors, they include; protection against imports, ensuring of monopolistic positions where necessary, accommodating rates on rents, power, and telecommunications. Such governments also offer the investor with sweet loans, equal participation in the market, credit on exports and also subsidies. These incentives are offered by foreign countries so as to attract investors (Lasserre, 2007). Absolute advantage theory applies in the case of Brazil, which seems to have been keen on the selection of multinational firms; this occurs when it comes to the advantage of one country compared to another in the production of goods and services (Lasserre, 2007). Countries like china have an advantage of cheap and skilled labor and low interest rates over other countries; in this case, Brazil buys raw materials and components from china like windows, which are reassembled in other firms around the world to produce complete busses. The main aim why Brazil relies on China for its raw materials is because of their friendly price, thus enabling Brazil to make profit on the end product. However, Brazil and China are not the only car manufactures. General Motors was experiencing losses before the year 2007 but suddenly made profits as a result to major sales made in the china market in 2006, whereby, it was able to invest more than $2million, which resulted to major profits through the sale of 7.2 trucks and automobiles in China. In addition, General motors acquired the second highest market share in China in 2006. Moreover, car manufactures like the Ford, Honda, and Volkswagen produce economy cars that can compete with the china’s current vehicles. It is evident that car manufactures like the GM are a threat to the Brazilian bus maker Marco Polo. Generally, the reason why Marco Polo does not produce complete busses in China is that, there is a requirement of $100 as an investment, which is very difficult for this company to afford. Whereas, the GM car manufactures were able to part with $2 million as the investment cash that is required, hence making it easier for GM to operate and cooperate with other car manufacturers in China. The theory of opportunity cost is evident in this case, since general motors had to part with $2million so as to be able to invest in china. However, this yielded fruits later in that year when general motors profits drastically rose as a result of marketing in the Chinese market. Though Marco’s company is able to acquire cheap goods from china, if perhaps raw materials were scarce at some point in China, it is obvious that china would prefer selling these raw materials to huge car manufactures like the Ford and General Motors since they are likely to purchase the raw materials even when the price is high. Therefore, Marco Polo Company can be hardly hit if its cheap market in China would change, since this would result to high cost of production for the Brazilian company. In addition, General Motors always puts its waste product into use at the GM plants, whereby the aluminum waste is utilized to make engines and transmission materials, hence reducing the cost of purchasing raw materials. 2. a) Discuss the factors that a multinational firm considers when deciding whether to enter a country on its own or through a collaborative arrangement such as a joint venture or other strategic alliance. A multinational firm that is willing to conduct business in another country either seeks for a joint venture with another company, which could be a direct or indirect competitor in business. Generally, joint ventures are formed by firms that are willing to gain skills or perform business from another company within the country or other countries, mainly when it is difficult for each individual company to accomplish on its own. The main aim of joint ventures is to achieve economic gain. However, for these joint ventures to succeed while trading in a foreign country there has to be cooperation and openness. It is important for a firm to be aware of the regional differences in the preferred country to trade in. Therefore, firms should understand the different customs, norms, currencies, and languages of that particular country. In addition, a firm should be able to consider the market size, level and type of competition, products differences and barriers to trade in that country (Lasserre, 2007). A firm should also be able to determine the nature of country it will be penetrating in terms of, the richness of the country, the technological and infrastructure status, the competitiveness of the country in terms of the business intended. The other factor is the issue of whether the partners wish to contribute towards resources, skills and assets that are required for the joint company to be able to compete in the market. Competitive advantage is a major factor in conducting of business. Therefore, understanding and communication between joint ventures is important (Lasserre, 2007). A company should be able to assess the availability of the product it wishes to market into another country; such could be a benefit if there is minimal or indirect competition of the preferred product. The comparative advantage theory falls in place here, since these firms must choose which country is favorable for business in terms of cheap labor, low cost of goods and services, and low interest rates. The ability to compare and make a decision on these factors is important. A firm should be able to make the most favorable decision on which country to enter and whether their country of choice rhymes with their capabilities. Whether a firm decides to operate on its own or through a joint venture, the above factors should be their main focus in order to achieve economic benefits. The decision for a company to penetrate a country on its own or through a partnership with another country, depends on whether this firm can handle the issues that arise in a partnership. b) Why do you think that Marco Polo decided not to enter into a collaborative agreement to manufacture cars with china? The decision for Marco to work alone, depends on independency in terms of, making decisions, sole profits, consultations and solely acquiring of knowledge. A collaborative agreement such as a joint venture involves a partnership of two firms that pair up in order to achieve the same interest. However, joint ventures may be accompanied by several weaknesses; first, learning about the cultures of the two firms and how they operate can be difficult - rivalry must exist in joint ventures. In addition, joint ventures are prone to cultural differences since they have to deal with both national and corporate cultures. For instance, the reason why the collaboration between Forker, a Dutch company and VFW, a German company failed was due to cultural differences. Further, cross border alliances are prone to differences in their administration and organizational practices. Joint ventures are mainly affected by lack of trust and poor communication. Marco Polo’s decision not to enter into a collaborative agreement with any firm could be as a result of wanting to do business alone and acquire more ideas about the China market, of which the company does not need to share with anyone. Another factor that could have led to this decision is that Marco Polo may have realized that a joint venture could be more complicated since he needs to consult the other party on every move, thus limiting the rate of decision-making. Nevertheless, Marco seems satisfied that he is able to conduct business in China without any interference, his knowledge of the Chinese market is remarkable and at this rate, he is capable of venturing into any market, since he has the skills. In addition, Marco is able to gain all the profits by himself, and this is very motivating for an individual. Marco is also able to achieve a direct foreign investment, since he is not collaborating with anyone else. c) Describe the different types of alliances that exist, giving examples of each type An alliance is usually an agreement of two or more business parties, aiming to pursue specific goals, but remain independent organizations (Lasserre, 2007). There are different types of alliances that exist, namely; joint venture, which is an alliance formed by two or more firms, that create a company and they share some of their resources and skills so as to be competitive - an example is Novartis and Bayer Schering AG. The equity strategic alliance consists of two or more firms whereby, each of them owns a certain percentage of the formed company, and they combine and utilize their skills to achieve a competitive advantage - examples include, General Motors and Mazda Motor Cooperation. Non-equity strategic alliance consists of two or more firms, which decide to share their skills, abilities, and resources so as to be able to compete in the market, for instance, yahoo and sina. Finally, the global strategic alliance is a partnership that involves two or more firms that could be between companies and foreign governments. d) Identify the factors which determine whether an alliance succeeds or not, and indicate which factor(s) in your opinion is (are) relatively more important in each kind of alliance, giving explanations in support of your answer Alliances can only prosper and attain their goals if there is presence of risk and reward sharing, legal operations, sharing of their technology and the presence of a joint product development. Alliances are fruitful only when the partnership strategic goals converge as the goals deemed competitive diverge. Secondly, if partners are able to learn from each other but also are capable of granting limited access to their competent skills. The main factors that a joint venture should consider are the length of agreement, the pricing of their goods or services, government intervention, and technology transfer from one partner to the other and vise –versa. However, most joint ventures are faced with the problem of mistrust in the knowledge sharing part, how to share the benefits and duties, differences in culture, and when to end the partnership (Lasserre, 2007). In joint ventures, both parties usually try to share resources; however, each firm would rather develop and protect its resources. Moreover, in strategic alliances, each partner targets at maximizing the gained skills but still wants to be competitive by maximizing own potentials. Therefore, the aid to these alliances should be through negotiations and coordination. The promotion of effective communication is essential in any alliance since, it is through communication that grievances are aired and both partners look for solutions to any arising issues. This enhances peace, harmony, trust and the will for both parties to cooperate. These measures guarantee that a partnership may last longer than the agreed time, since both parties are playing their parts. Hence, the two parties should be able to produce products and services and hence benefit from the same level of access to the factors of production, which relates to the perfect competition theory. However, alliances can only prosper only if there are appropriate decision-making mechanisms, good communication is encouraged and monitored, and there is an understanding between partners. In addition, partners should be willing to share their resources, skills, and assets to attain a competitive advantage in the market (Lasserre, 2007). 3a) What do you think are the factors that influence the way in which a car manufacturer organizes its value chain? Value chain is the process of adding several activities that a product has to go through before reaching a customer. Generally, value chain is based on a sequential order of activities. First, all the inputs have to be in place before production starts, and then these inputs are converted into final products. Afterwards, these goods are either shipped or sold directly to clients. Each stage of the value chain makes the product better. Several factors affect or influence the value chain of car manufactures, one being the cost of raw material. If a manufacturer has a cheap source of raw materials, then the final product will be profitable. The accessibility to resource contributes to how fast a car can be manufactured and also its quality, since if a car manufacturer has the best expertise and also availabity of raw materials, then the manufacturing process will be effective. When the cost and quality of resources are affordable and admirable, then there is a guarantee that the process of manufacturing a car will be appropriate since only the best materials are used. Thus yielding to a quality car, that would result to high returns. The geographical distance of how far components are transported could also affect the speed at which a car is manufactured. If materials take too long to arrive to their destination, then the pace of manufacturing is low and this may also lead to many expenses being incurred. Competition could also affect the value chain of car manufactures, if they face stiff competition, they may be forced to lower their prices of the final product so as to at least acquire a market share. The presence of expertise is required in any car manufacturing process, therefore, the ability to hire and maintain these experts is based on costs of payment, if they are not well sustained, and they are easily poached by rival competitors, thus interfering with the value chain. The type of car that the manufacturer desires to make determines its value chain. Incase the car requires special skills and new model, then the production process may take a while, due to designs and the special skills needed in each stage of production. The rival competitors can determine the type of car a car manufacturer would design. In addition, the market demand for certain cars may determine the value chain of a car, especially if a desirable number is in demand. In addition, the consumer trends and lifestyle of customers are a major determinant while manufacturing a car. A car manufacturer should be able to operate on an absolute advantage theory, such that, he targets the market that he is guaranteed he will make convenient sales and end up with high returns. A car manufacturer should also be familiar with the current trends and the changing lifestyle so as to be able to gain competitive advantage. The 3 L’s of global operations that include; localization, location and linkage determine the manufacturer’s decision to set up of global operations. 1Localization determines why a firm should put up an operating facility away from the original location. Hence, the factors that determine the set up of an operation site are the competition and growth opportunities. Whereby, a firm has to determine on the main aim of setting up the operation, is it for growth purposes and if they want to have a competitive advantage. Location also determines the favorable site to set up an operational site. The preferred location must be accompanied by high quality and low costs of resources, the resources must be accessible such as, human capital and raw materials, infrastructure should be up to date, this includes transport and communication sectors. Linkage describes the role of the operation and how it links with other operations. Linkage is associated with types of plants available in a firm; offshore factory which produces items at a lower price, like China. Source factory that deals with procurement, production and the process of modification. For instance in Malaysia. Server factory produces products based on technology current trends. The contributor factory hence deals with local procurement of products and services (Lasserre, 2007). b). How does this aspect of car manufacturing influence the organization of the value chain, in particular a car manufacturer’s decision of whether to make some components itself or to buy them from a supplier? A firm can decide to outsource from another firm that manufactures the needed components at a high quality and at a lower price, which is derived from the economies of scale. Incase there is a high demand for cars, the manufacturer is forced to work around the clock so as to meet his customer’s demands. For instance, General Motors recycles some of its waste products and comes up with engines. This is an example of how a manufacturer can save on the cost of raw materials and at the same time, produces quality cars. According to Lasserre (2007) when a firm produces components on behalf of an outsourcing firm, then it is possible for it to produce high quality products at a lower price. Though most firms opt to produce components on their own, it is however wise to purchase the best quality of products at a lower price. In cases where a manufacturer is trying to imitate a new design of a car, it means that he has to purchase the raw material from a suitable cheap dealer, like China. This ensures that the cars manufactured are up to standard while less was spent on their raw materials. In order to keep up with the current trends in the car manufacturing industry, a manufacturer has to know how to acquire the best materials for assembling. In this case, Marco Polo prefers purchasing the materials all the way from China to Brazil. According to Marco Polo, china has low interest rates, cheap labor, and a favorable price on the car components. Threats of directs competitors is another factor that may influence the decision of a manufacturer. The more competitors there are, the higher the rate of rivalry in prices; hence, for a manufacturer to reduce on costs, he can opt to make the component rather than purchasing. However, one of the main factors that lead to the decision of a car manufacturer to make components on his own, is because of the quality of the component they desire. The purchased components may be of low quality, thus costing the manufacturer a lot in terms of costs and quality (Lasserre, 2007). 4) With reference to the concepts of: a) economies of scale and b) competitive advantage; did Marco Polo use any of those strategies? Explain Generally, with time, average total costs and output are conversely related, creating a benefit of economies of scale. Therefore, economies of scale are meant to increase the scale of production. In addition, a business can also maintain its prices but increase on its profit margins. In the case of Marco, his main goal was to acquire raw materials at a cheaper cost and he preferred assembling the buses in different region. Therefore, since economies of scale can occur when a unit cost is low, Marco certainly gained the economies of scale. In order for a firm to achieve a competitive advantage as compared to its competitors, then it must be able to sustain its profits. Marco was able to acquire the same components as his competitors, but at a lower price from China. Therefore, Marco’s end product will certainly be produced at a low cost, thus giving him an advantage, if he sells the buses as the same price as his competitors. Outsourcing is evident in Marco’s case since he liaises with a Chinese company to manufacture car components at a cheap and reliable price. Reference List Lasserre, P., 2007. Global strategic management. Hampshire: Plagrave MacMillan. Read More