Protectionism and its Impact on International Business Strategy (SMUnit VIII-3of 4)

Explain the concept of protectionism. Describe at least one impact to international business strategy. Your response should be at least 200 words in length. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations.

Learning Objectives

Upon completion of this unit, students should be able to:

1. Identify and be able to analyze the implications of the international environment on the strategy of the firm.

Written Lecture

The Pros and Cons of Going Global

To what extent should international markets be a part of your strategy? Should you go global, or focus on developing a competitive advantage on the home front? Going global is often tempting for business strategists. Global operations allow you to tap into potentially huge markets that can bring advantages of scale that drive revenues and product cost reductions. Global markets also provide opportunities to extend product life cycles. Many global companies introduce products locally first, then take them global in order to lengthen the revenue cycle. Finally, if you do seek to reach global markets, you may be able to find not only additional customers, you may be able to find lower cost inputs to production, such as lower material and labor costs that are found in some lower cost regional economies. There would seem to be nothing but advantages to having a global strategy, but there is a flip side of the coin to consider.

Global markets are large markets—but large markets tend to be competition magnets. If you play in a very large market, you may well find your company on the wrong side of Porter's Five Forces, and end up competing away potential profits. You may end up losing against tough competition as well. Have you ever heard anyone say, "This is a billion-dollar global market—if we get only 1% of this market, we will be rich"? Perhaps there is some truth to this comment, but on the other hand, 0% of a billion-dollar market is not only zero profit—it is less than zero because of the cost incurred in competing in the global arena. Another disadvantage of a global strategy is, therefore, the cost of global operations. The more people that you have in the company located around the globe, the more complex is the management and control. You will need information technology, business systems, travel, and local management. You will need to consider what elements of the business will be kept strictly local, and which could be distributed throughout the world. The management of the implementation of a global strategy is therefore extremely difficult and costly, and it keeps management on its toes.

Cultural Issues

Global strategies incur complexity beyond the raw numbers of the people, the locations, the costs, and the communications channels. A global strategy will naturally involve management, as well as customers from different cultural backgrounds and different native languages. This means that policies, initiatives and advertising campaigns that seem intuitive in a local setting may make little sense to someone in a different country. Further, the strategy of the parent company may make sense to local staff, but not to employees located in

different time zones and geography. Such differences lead to friction and add costs to the company due to the additional management effort required to keep everyone on the same page.

Culture runs deep and can impact how employees around the world approach working together and problem solving. As an example, most Western countries such as the US, the UK, and Scandinavia tend to have a "low context" approach to communication. Low context cultures can easily manage by reading emails or documents and seeing the details spelled out in black in white. High context cultures, by way of contrast, are present in Asia, most notably Japan, Korea and China. High context cultures need more face-to-face interaction in order to fully understand what is being communicated. This means that you can't simply attempt to govern a multinational company by use of electronic communications. You will likely need management to travel extensively in order to communicate and reinforce basic company directives.

Financial issues

A strategy that crosses borders inevitably encounters differences in costs of living, inflation rates, and currency fluctuations. Each of these categories trigger both opportunity as well as risk, but in the end, the added complexity tends toward adding cost and management difficulty to your strategic implementation. If for example, the cost of living is very high in a country targeted by your strategy, the cost of any operations established in this country will be high. As a result, profits will be impacted, or product prices will be forced to rise. The risk of higher fixed costs may be offset by the opportunity of placing operations in lower cost regions. For instance, if your strategy calls for doing business in the European Union, you may want to establish your most labor intensive operations in the nearby lower-cost Czech Republic instead of a higher-cost country, such as Germany.

As your company moves finished goods from one country to another it will likely face import duties. Some import duties required by importing countries may result in the effective doubling of the cost of the product. In the absence of a trade agreement between the two countries, duties may be overcome by establishing some local manufacturing. Local manufacturing may also take advantage of tax breaks and low labor costs. On the other hand, local operations may add cost and management complexity, so it is not necessarily an import duty panacea.

Currency values change over time and when a company expects to do business in a country with a fluctuating currency, the business plan must take this into account. For example, assume that you have agreed on a pricing strategy with retailers in the country in which you are doing business. If the currency declines in value by 10% against the currency of the home country you have effectively lost 10% of the price. You will need to increase prices, or move out of the market.

The Web and international business

It is always possible to consider a minimalist approach to doing business globally. For example, if you host a product Website, and you allow international shipment, then you are in business. This is often done by companies today, but although this technique can minimize costs, it also limits the degree to which you can support your target market. This opens the doors to competitors, and limits the opportunity for follow-up success.

In the international arena, there is no "free lunch." Opportunities abound, but so do risk so managers would do well to be cautious when stepping into the global arena.