Keillor, B. (2013).

The international business environment: and overview and new perspectives

( complexities and choices ) . En Understanding the global market:navigating the international
business environment (pp.1-23)(192p.). Praeger. (C51129)

CHAPTER ON E

The lnternational Business

Environment: An Overview
and New Perspectives
(Complexities and Choices)

lntroduction
Because of the ever-increasing interdependence of ma rkets around the
globe, there is a real need for businesses of ali sizes- and in ali countries-
to consider the opportunities expanding into this global marketplace
might represent. Although large multinaúonals may get the most attention
in the media, the truth is that for virtually any size firm, developing and
implemencing a sustained growth strategy requires serious consideration
be given to moving beyond domestic market boundaries. For a number
of reasons, not the least being the inten1ationalization of the marketplace,
reliance on a single domestic market is no longer a sustainable long-term
business model for the majority of firms. The limited growth oppo rtunities
afTorded in a single market, cou pled wi th the fact that firms from outside
that domestic market are now acti vely compeúng for this li mited market
share, means that small, medium, and large fitms must acknowledge the
expansion of their operacional scope.
Unfortunately, successful internacional operations demand more than
simply expandi ng a firm 's current domestic business model- no mat-
ter how successful that model may be, or may have been in the past.
The primary key to inte rnalional success is hav ing a clear understanding
of the complex nature of the international business environment. Too
2 Understanding the Global Market

often, firms will overlook the knowledge they possess when it comes to
operations in their own ho me market. Having a clear perspective when
it comes to elements such as consumer tastes, preferences, and over-
all behavior as well as product pricing, distribution, and competitive
dynamics is crucial for sustaining any business but these pieces of the
bus iness environmem are freq uently second nature when it comes to the
firm's domestic market. This is hardly surprising- an established firm
must have a clear handle on ali o f these elements of the environment
(and more) to be "established."
However, when these same firms move. into new (i.e., imernational)
markets, ir is not unusual for them to overlook the need to gain the same
leve! of understanding of ali aspects of che environment in this new mar-
ket. This means carefully considering not only the components of the busi-
ness environment, but also the various ways in which these could possibly
imeract, how those imeractions may differ from the domeslic market, and
che impact this will have on current business models and their viability.
Too often any discussion of the internati onal business environment
becomes overly focused on cultural d ifferences. Clearly, cultural d iffer-
ences can ha ve a profound effect on the types of products that might appeal
to consumers in another market, how those products are used, where they
will look for those products, and how to best connect wi th those consum-
ers. But concentrating too heavily on just cultural differences can result in
an incomplete view of an imernational market fo r two basic reasons.
First, the business environment comprises many more fundamentally
im portant elements, but this is often overlooked simp ly because these are
considered implicit in strategy development in a domestic market. Put
another way, businesses don't ignore the relevant components of their
environmem when ir comes to domestic operations; these components
are so interwoven in the strategic process and che development of busi-
ness models. Further, these components are so familiar that the domestic
operacional environment is not an unknown quan tity. Thus, when a firm
moves to an internalional environmem, it is easy to overlook the need to
establish a clear picture of che unique environment of this new market.
Second, although many firms do not recognize this, it may be that cultural
differences are only a small-perhaps even insignificam-characteristic of
the imernational market(s) being considered. Many firms discover that,
alt hough cultural differences exist in a market, those differences have little
orno impact on their firm or its products.
The overall objective of th is book is to provide a clear, practica! under-
stand ing of the complex nature of the international business environmem
and its various relevant components. The goal is not to provide a guide
The lntemalional Business Environment 3

to creating and implementing an international strategy. Rather, by care-

fully considering the complex nature of the intemational business envi-
ronment and how ics various components may, or may noc, aliecc firm
operacions, a manager will have a foundation for creacing that long-term
successful international strategy. To begin, this chapter addresses the com-
plexities of the intemational business environment but not before discuss-
ing cwo critica! elements: why internacional operations are so imponant
for che 2 lsc-century firm and what firms can expect to achieve by "going
international."

The lntemational Business Environment: An lssue of Complexities

So if truly understanding the intemational business environment means
going beyond focusingjust on cultural differences, where is the best place
w start? The answer is in what makes international business different from
domestic operations. Given ali the attention directed coward internacional
business as a distinctly unique operational exercise, it is safe to assume
that there must be unique aspects associated with intenrntional business
compared with domestic business. These can be most sucdnctly described
in cerms of chree issues: 1) che unique aspects of the market environment,
2) the available strategy options, and 3) the di fferent market entry options.
Each of these issues represents a real departure from those most com-
monly associated with domeslic operalions.
In the case of the first, the unique aspects of the market environment,
the crucial point is recognizing the problems of operating in two, or more,
markets. The differences encountered in the various marketplaces can be
substantial and significant. This is not to say that a domestic market envi-
ronment is not a complex venue for conducting business. A qu ick look at
the impact of economic changes, or shifting demographic pattems, in the
U.S. market shows that just these pieces of the overall environment can
have a profound impact on firrns operating in the United States. Nor <loes
this suggest that there are additional components added to the interna-
cional business environment. All the same ingredients- culture, politics,
economics, for example-are present in any ma rket. vVhere the complex-
ity enters the equation is in which of the various market environment
componems are significant and relevam to a given firm and how these
may change from market to market. The reality is simple: market differ-
ences exis t across m arkets. The ch allen ge faced by firms is twofold . First,
they must have a dear idea of which aspects of the market differ from the
market(s) in which they currently operate. Second , they need to ascer-
tain whether these differences have any impact on their panicular firm. A
4 Understanding the Global Market

theme that 'Nill occur over and over as we look at the various facets of the
inte1national business environment is that di!Terences do not necessarily
require actions- they may have no impact on a given firm at ali.
The second issue that makes the intemational business environment
unique involves how the finn will choose to operate in their international
markets relative to their domestic ma rket. This is a question of strategy
options. Although it is not impossible for a firm to "export" its domestic
business model, what is successful in one market can be a complete disas-
ter in another. A truly unique aspect of international business involves
being able to manage different business models. Put another way, this sec-
ond issue is ali about coordinating differem strategies for different mar-
kets. Sometimes this will mean developing a totally different approach for
one market compared \vith another. Other times, it migh t mean that the
best option is for the fim1 to develop a universal strategy that is "plug-and-
play" across multiple markets. Or it is possible, under the right conditions,
for a firm co be able co use che same business model chat works in their
domestic market in other markets internationally. Regardless, the need to
consider multiple strategy options rather than automatically relying on
what has worked well in the past in the domeslic market makes inter-
nacional business, and effectively operating in the international business
envi ronment, unique.
The third, and last, issue that makes the international business environ-
ment and international business operations uniq ue involves the various
market entry options. ln a domestic market, the question of how a firm,
and its product, will not only physically enter the market but also present
itself (i.e., imponed, domestic, etc.) is a moot point. The firm is there; the
product is there. Entering an international market presents a whole new
set of problems in terms of market entry options. The firm musc decide
how it wi ll move the product into, and through, the market as well as cake
into account how that strategic choice will affect their overall operational
strategy For example, will the market entry strategy position the finn
and its product asan outsider? Sometimes this approach is appropriace-
imponed products are often perceived as being of higher quality and can
therefore demand a highe r price. At the same time, the ability to sustain
revenues as a high-priced imponed good may be problematic if economic
instability exists in that market or if there is a high leve! of negative atti-
tudes toward "foreign" companies and their products.
These issues need to be full y dealt with befare any discussion of the
actual intenrntíonal business environment can begin . However, that dis-
cussion begs two impo rtant questions. Firsl, if the imernational business
environmem, and operating within it, is so complicated then why bother'
The lntemalional Business Environment 5

Second, if the fim1 chooses to operate in this complicated environment

what is it trying to achieve? Let'.s delve deeper into these questions before
retuming to the issues of what makes the international business environ-
ment unique and how best to prepare for dealing wi th it.

IsBeing "lntemational" an Option?

Taking into account the complex nature of the international business
environment-and the potential operational problems that a fi m1 might
encounter when moving into the global marketplace-the obvious ques-
lion becomes are internalional operations really necessary? Put another
way: is being "international" an option or a requirement? Although many
managers might argue that the U.S. domestic market continues to repre-
sent a single market of opportunity, thereby suggesting that international
operations are not a requirement in today'.s business world, the reality is
that no firm regardless of size can avoid, whether directly or indirectly,
being "international."
In their book The Quest for Global Dominance, Gupta, Govindarajan,
and 'vVang (2008) provide a compelling argument that no firm can avoid
the international marketplace- that being "international" is not an option.
They build their case around "impe ratives" and "globalization" characteris-
tics that show that not only are international operations not to be avoided
but that by embracing the idea of going internalional firms large, small,
and in-between can better position themselves for long-term success in the
ever-challenging modem market. The imperatives are growth, efficiency,
and knowledge, and the globalization characteristics involve customers
and competitors. To have a true sense of the stage on which the interna-
tional environment and international operations are based, ü is useful to
consider each of these carefully.

The Growth lmperative

The so-called Growth lmperative in and of itself may be the single best
argument for fim1s to look outside their domestic marketplace. For finns
to continue to succeed over time the ability to grow is paramount. Few
companies, no matter how succ.essful, wou ld say that their strategy for
the future is to stand pat on their current market share and performance.
Long-term , even sh o rt-term , success requires increased sales, revenues,
market share, and customers. Unfortunately, for those firms committed to
only domestic operatio~ven in a market as substamial as the United
States-the opponunity for growth in these areas is increasingly limited .
6 Understanding the Global Market

First, there are the problems and challenges associated with operating
in a mature market. The product life cycle can give many clues as to the
nature of a market, and how businesses in that market muse operate to
remain relevant. This product life cycle comprises four basic stages: intro-
ductory, growth, matuti ty, and decline. The in troductory stage is when a
prod uct is first introd uced and profits are generally negative. The goal is to
get the market to accept the product. In the growth stage, sales and prof-
its cake off, signali ng competitors that they should enter the market with
similar products . This is the most profitable but also the shortest stage in
terms of time. The mature stage-the longest of the four-is when sales
and profüs begin to leve! off and the firm is focused on maintaining mar-
ket share and profüs in the face of high levels of competition. The decline
stage represents products that the market has determined are no longer
relevant with a resulting drop in sales. Firms with products in the mature
stage are centered on kee ping their products relevant and profitable.
The United States is the classic example of a mature market. For firms
in this market, whether they are targeting individual consumers or other
businesses, their product and its functions are well established. Further,
when new products emer the market they quickly move (assuming they
do not foil altogether) from the introductory and growth stages to the
maturity stage. This stage is characterized by a wide variety of prod uce
choices (read: competitors) and customers who are familiar with their
prod uct options.
There are three basic approaches to growing in this rype of market envi-
ronment. The first is to find new customers within the current market
environ ment. This means finding new market segments that, for whatever
reason, the firm chose not to target previously. These segments may have
been avoicled because they were not consiclered profüable enough in the
past or because the product was determined to not be as relevan t to that
segment(s) as it was to those customer segments already targeted . Either
way, the "quality" of these new customers may be questionable. A sec-
ond oplion is to find new uses for the procluct. This too has its potencial
drawbacks because it may require the product to be adapted , and produce
adaptations can be expensive. Altematively, it may mean that the produce
is now being presented to the market to be used in a way that it was not
originally in tended. In either case, the costs- whether direct, indirect, or
oppon unity-based- cou ld be significant. The third option would be to
seek out similar customers, usi ng the product in similar ways, in new
markets. lntenlational markets.
So sustaining growth, based on the characteristics of a mature market,
is an issue most U.S. firms must address. There are also the challenges
The lntemational Business Environment 7

associated with the economy and current economic conditions in the

United States. lt is beyond the scope of this book to go into the details of the
most recent, and ongoing, economic situation in the United States- stag-
nan t growth, high unemplo)'ll1ent, government deficits, consumer debt,
the list goes on. Any firm planning for growth over the next decade would
view the U.S. market with real trepidation. The prospects for U.S.-based
corporate growch is not necessarily a positive one for most firms-particu-
larly for those used to the relatively un fettered growth opportunities this
market presented in the l 990s on through the early part of the 2 l st cen-
tury. Any real sustainable growth will have to come from other markets.
This is not to suggest that other markets ha ve not been similarly affected
or that the U.S. economy is an isolated case. European markets are also
faced with se1ious economic challenges-even crises in sorne countries.
lt has been said that when the U.S. coughs, Europe catches a cold. The
interrelalionship of the U.S. economy, che European Union, and individ-
ual European countries means that, from the perspective of the economic
environment, rnany of the same problerns that plague the United States
exist in these other markets- perhaps even more seriously. Howeve r, this
is not to say there is no opportunity in these markets. Like the United
States, which remains a global economic power, che opportunities exist;
they rnay just take differen t fo1ms. This rnay mean for sorne firrns that
growth can be achieved through continued attention being placed on the
United States with additional focus on the European Union. Although less
attractive than in years pase, che European Union still represents a large,
essentia lly single rnarket in te1ms of rnarket entry issues and therefore a
means th rough which growth can be rnaintained at the individual firm
leve!. Furthermore, this movement into Europe would mean both a pres-
ence once the economic downturn subsides and also a means of diversify-
ing markets. Finatl y, many other markets outside of Europe (e.g., China,
India) rnay not have the sarne economic issues as the United States and
Europe, rnaking thern another attractive choice for long-term growth.

The Efficiency lmperative

If the Growth lrnperative <loes not provide a cornpelling enough case
for intemational operations, consider the Efficiency lmperative. Virtually
every firm seeks to grow over time. This means increasing sales and rev-
enues through the acquisition of new custorners and the expansion into
new markets and market segments. However, simply placing the company
into such a market setting is not necessarily sufficient. The firm must then
be able to succeed in the foce of other competitors. This is where che
8 Understanding the Global Market

Efficiency lmperative enters the picture. Businesses that operate across dif-
ferent markets become more efficient as they leverage the unique charac-
teristics of these market environments.
Markets that have opportuni ties generally have unique strengths and
advantages that can create synergies and increase competitive advantage.
A common advantage would be lower labor costs, which reduce overall
procluction costs, resulting in higher margins. That is, perhaps, the most
commonly recognized advantage associated with international operations.
Unfortunately, if this were the only significant efficiency advantage to oper-
ating outsicle of the domestic market then it woulcl be exclusive to manu-
faclUring firrns, or those with substamial labor-imensive costs. Although
the ability to lower labor costs through offshore manufacturing is a distinct
operational advantage, the increased efficiencies that go along wi th interna-
cional operations can extend far beyond the cost of production-associated
labor.
As the service component of firms' product offerings has increased,
rnany of these fitms find increased efficiencies in other markets not sim-
ply through inexpensive labor but also in more affordable, highly skilled
labor. This means increasecl efficiencies can be obtained not just thro ugh
increasecl labor quantity, based on a finite cost, but also increased quality.
Traditionally, the U.S. market was associated with highly educated and
highly skilled ernployees. Although that has not changed , many other
markets have raisecl the standard of their skilled labor force to a leve! that
meets, and sometimes exceeds, that of U.S. employees- and at a much
lower cost. For example, a large segment of the population of India are
not only highly versed in technology. and technology-related fi elds, they
are also fluent English speakers. Furthermore, what is considered to be a
clecent micldle-class income in India would be a fraclion of what a com-
parable engineer, programmer, or information systems professional would
require in the United States. Thus, if a firm that provides technical support
to its customers can pay qualifiecl support staff, say, 25 percent of what
sim ilar domeslic-basecl employees would be paid, serious efficiencies can
be realized, making che firm more competitive.
These efficiencies are not limited just to labor advantages, whether quan-
tity or quality. They also extend to other operational advantages. Aclvan-
tages associated with location (e.g., proximity to inputs or new customer
segments), production synergies (e.g., product design expertise), market
knowledge, and operational efficiencies can be realized when a firm has
multiple market environments in which to conduct business. The Growth
lmperative recognizes the need for companies to grow, and the means
through which chis can be accomplished via internacional operations. The
The lntemational Business Environment 9

Efficiency Imperative recognizes that international operations do not rep-

resent just additional operational costs; the distinct characteristics of each
market may mean that by leveraging chese characcetistics, the firm may be
able to become more efficient.

The Knowledge lmperative

The third irn perative- Knowledge- recognizes that the Efficiency
Imperative can be used to take the firn1 yet another step furthe r. V/hereas
the Efficiency Imperative is ali abo ut leveraging market and location
advamages to increase operational efficiency, the Knowledge lmperative
is about applying lessons learned in one market to gain, or regain, com-
petitive advantages in other markets. Put another way, the unique require-
ments of one local market may be "exportable" to other markets to create
competitive advamage in multiple markets.
Regardless of the global nature of the markecplace, differences across
markets persist. Consumers have different tastes and preferences, use prod-
ucts for different purposes, use varying amounts, and may place emphasis
on differem aspects of value that the product represents. Similarly, the
business customer may apply dilierent critetia in purchasing and using
a product. However, fi nns operating across d ifferen t markets often dis-
cover that product charactetistics sought by customers in one rnarket may,
for related but not necessarily identical reasons, seek out similar product
characteristics and respond to che same "reasons to buy" a produce.
A good illustration of the Knowledge lmperative in acti on would be the
example of the changes made to disposable diapers for Asian markets and
how those changes were then "exponed" back to the U.S. manufacturers
of disposable diapers, which originally had che best-performing produces
available. Unfortunately, for ali but one of these manufacturers, the U.S.
domestic market was dominated by a single brand . That left the second
place firm in a competicive bind. Under the existing market conditions, it
was unlikely that the companys brand would be able to make substantial
inroads in terms of additional market share. Thus, the Growth Irnpera-
tive drove the firm to seek out other nondomestic markets. Asían markets
were determined to be particularly attractive given the cultural irnportance
placed on children- and the resulting money spem-along with the fact
that the disposable diapers in those markets were generally inferior com-
pared with the U .S. product. However, living space and storage constraints
rneant that for the U.S. product to serve the needs of the rnarket, the prod-
uct had to be adapted so that it performed (dryness, absorbency, etc.) at
the same high leve! but was made so that each diaper was significantly
10 Understanding the Global Market

smaller (i.e., easier to store). Developing a batting material that met these
requirements was accomplished, ancl the firm was able to grow revenues
through its Asian ma rkets rather chan relying on the U.S. domestic market.
The Knowledge Tmperative then enters the equation. Changes in the
U .5. rnarket made the appeal of easier-to-store diapers a product charac-
teristic that American consumers now began to seek out. The issue was
not limited co scorage ac home. The clemancl for these new diapers were
relaced to demographic changes in the Uniced Staces-most specifically,
the increase in two-income families and the subsequent rise in day care
ancl young children being frequently transponed oucsicle of the home. In
short, U.S. families dicl not necessarily have che same storage challenges
in cheir home as the Asian families, but young children on che move need
diaper bags not cupboards. All else being equal, the more diapers that
could be stored in the diaper bag the more that particular brand would
appeal to U .5. parenrs. Recognition of this subtle, but imponanr, shift in
consumer needs meant chat che firm that had "leamed" how to meet this
need in the Asian countries was able to apply that knowledge back in their
clomestic market with the end result being an increase in market share in
the United Sta tes.
Like che Efficiency lmperative, the Knowledge lmperative is all about
recognizing that international operations are more than just costs and rev-
enues to be balanced out over each rnarket in which the finn operates. The
truly international firm understands that by operating in other markets,
there may be efficiencies and knowledge that can be leveraged in other
markets which, in turn , create competitive advamages. Each of the three
irnperatives discussed represent compelling reasons for finns of any size
not only to consider the opportunities that international operations pre-
sem but also the aclvanrages that competing firms may have over firms
that choose not to engage in operations outside of their domestic market.
The two "globalization" aspects of the intemational business environment
show how the new face of customers and competitors make it impossible
for any business to view itself solely as a domeslic firm .

The Globalization of Customers

In sorne sense, it could be argued that the three imperatives just dis-
cussed form the basis for the dynamic nature of the international business
envi ron ment. That is, the Growt.h, Efficiency, and Knowledge Tmperatives
create the stage for the distinguishing characteristics of the 2 l st-century
global marketplace. The globalization of cusromers, and competitors,
looks at che two other primary participants in the international business
The lntemational Business Environment 11

environment. The first, understanding the global nature of customers

arouncl the worlcl-both in clomestic ancl international markets-is cru-
cial for corporate sustainabilit:y ancl growth. The seconcl, unclerstancling
the globalizati on of competitors, infl uences the firm's ability to operate at
rnaximum efficiency in ali rnarketplaces.
The globalization of custorners refers to the fact that, as more firms rnove
into more markets arouncl the worlcl, customers will be exposecl to a larger
number of product choices. This changes the consumer environment in
a number of ways---enough mate rial for a book covering just global con-
sumer behavior. However, for this cliscussion, which is designecl to clevelop
an unclerstancling of the issues faced by firms anempting to navigale the
internacional business envirorunent, understanding cwo issues related to
these global customers becomes paramount. First, having an ever-increas-
ing number of product choices has helpecl to undermine the whole concept
of brand loyalty. Seconcl, this increasecl procluct seleclion- couplecl with
other changes such as che increase in information available to consumers-
means that corn panies must be prepared for customers who are informed.
The challenge presented by consumers who are more and more com-
fortable with a wicle range of product choices is a clouble-edged sword. On
one hand, consumers with more product choices from a large number of
both domestic and international companies means that they are more eas-
ily lured from one product or brand to another. This rneans that it is easier
than it has been previously for firms new to a market to successfully entice
consumers to purchase a new ancl different product. Consumer behavior
in the 2 lst century in ternational business environment has shown that
firms can rnake tremend ous headway in rnarkets wherein it would have
previously been clifficult to achieve even moclest success.
A e.ase in point is the Korean car manufacturer Hyunclai. The statecl goal
of the firm a few years back was to have a greater percentage of market
share in the United States than Toyota had . Conve ntional wisdorn said
such a goal was unattainable, especially considering the long and estab -
lished presence enjoyecl by Toyota in the United States. However, after
only a few years, the results speak for themselves. Although Hyu ndai has
not supplanted any of theJapanese automakers in the American rnarket, it
has made significant strides in that clirection. Much of this has to do with
the level of comfort U.S. consumers have with a large number of procluct
choices from firms around the globe when it comes to buying a car. Unfor-
tunately, this cuts both ways because those same consumers would have
little reluctante to move to another brand if the buying proposition was
appealing-those customers who are now b uying Korean cars were obvi-
ously buying something else at sorne point in time.
12 Understanding the Global Market

The second potential problem that these globalized customers represent

is a natural result of having more products from which to choose. In mak-
ing product choices, consumers naturally seek out information to facili-
tate that decision-making process. As the number of che potential choices
increases, so does the amount of infonnation that must be gathered. This
means that the consumer of the 2lst century is comfo rtable dealing with
produce informacion. The knowledge serves to make it easier to selecc
the best product when many are faced with reduced economic resources.
For firms, an infonned consumer is desirable. At the same time, having
info1med consumers also means they are more demanding given that they
not only know what other alternative produc.ts have to offer, chey establish
higher expeccations of any individual produc.t given thac they know whac
the best products actually can offer. ln short, the global consumer is open
to new firms and their products, but having these individuals purchase
the produc.1 does not mean the firm has captured and held market share.

The Globalization of Competitors

The final piece in this "to be, or not to be" internalionalization discus-
sion is the globalized nature of a firms competition. Because ali firms seek
to increase sales and revenues, any given cornpany, regardless of size, can
anticípate being placed in a situation in which , regardless of their own
operational scope, they are international. Even the smallest local firm can
find itself competing with nondomestic fi.rms. For example, a small local
specialcy-grocery store could easily be threatened by the availability of sim-
ilar products through online ordering. Firrns that build a premium-pticing
strategy around customer service may find their market share eroded due
to competitors lower prices achieved through che economies of scale that
can accompany increasing the number of markets in which they operate.
The possibility of similar situations is endless.
lrrespective of the scenario, the bottom line is this: ali firms face the
same pressures and opportunities when it comes to international opera-
tions and, alchough an individual firm may opt out of direct international
operations, at least sorne portian of their competing firms will be from
other markets. So if in ternational business, at some leve!, is unavoidable,
whac can firms expec.t to achieve when they enter chis complex market
environment? The key to success is for the firm to have a clear idea going
into international operations exactly what it is uying to achieve. There are
severa! reasonable overall objectives that fitms can attempt to achieve, but
trying to do too much can result in a confused strategy and , potentially,
failure in the firms international efforts.
The lntemalional Business Environment 13

lntemational Business Objectives

There are four categories of objectives typically associated •.vith interna-
tional operations: increased sales/revenue, the acquisition of resources, the
diversification of sales and/or suppliers, and minimizing competitive risk.
Each set represents reasonable goals for any firm to seek to achieve. How-
ever, each requires substantial resources and because of these costs may
not necessarily be mutually supponive. The best way for a firm to succeed
in finding the way through the complex imernational business environ-
ment is to first have a clear and defined notion of exactly what its goals are
in operating outside of the fam iliar confi nes of the dornestic market.

lncreased Sales and Revenues: Environment Differences lncrease Opportunity

The rnost obvious goal for international operations is to di rectly increase
the firm's profits. Howeve r, simply selling a product in a new market <loes
not guarantee success-even if there appear to be no clear competing
produces in that market. Typically, che firm that seeks to quickly increase
sales and revenue by moving into a nondornestic market, or markets, will
likely be most successful when it looks for one of three types of markets:
those with pent-up latent demand, those wi th cultural characteristics that
will facilitate relatively high levels of procluct usage, ancl those with favor-
able product life cycle differences compared with the clomestic market.
vVhen a country begins to move through the phases of economic and
market developmem, latem consumer demancl begins to become eviclent.
This latent demand is caused by a lack of products in that market ancl
fueled, through the globalization of consumer information, so that as che
economy is better able to suppon the sales of a wide range of consumer
goods and service.s the lack of these over time means that demand can
easily outstrip supply. Further, given that these countries are newly clevel-
oping, there is a lack of domestic market producers for consumer prod-
ucts. In the past two decades, China is a prime exam ple of an economy in
which , regardless of domestic development, demand has far outstripped
the abilit y of the market to supply the products sought by the countrys
newly empowered consumers. Such a situation, even in a highly regulated
economy such as China, means that for non-Chinese firms-especially
those providing consumer products- there have been , and continue to be,
substantial opportunities to generate increased levels of sales and revenues.
Cultural d ifferences across domestic and nondomestic markets can also
create opportunities to quickly increase profits. These cultural differences
can mean that a culturally based sales cycle can be mitigated. For example,
14 Understanding the Global Market

generally the peak times for U.5. retailers--and the products they sell-
are the run-up to Christmas and the August back-to-school timeframe.
For many of these stores, and the producers of their products, the time
in between (particularly the first three months of the year) can represen t
slow sales. So1ne of these firms have discovered that other cultures-Asían
cultu res in particular- have gift-giving seasons that offset the retail sales
valleys experiencecl in the Unitecl States. Thus, these cultural differences
can not only increase sales but also help to provide a more steady revenue
stream. Another potentially favorable cultural diffe rence that can increase
sales is a cultu ral p ropensity to consume more of the procluct than the
domestic market. Here a good example would be U.S. rice growers who
recognize that although their product may be consumed irregularly by
American consumers, it is consumed severa] ti mes a <lay in Asia.
Lastly, product life cycle differences can create an environment favor-
able for increasing sales and revenues. This situation occurs when a prod-
uct, or sorne variation of the product, moves "back" in the product life
cycle when it enters a new market. The problem of products in the mature
stage of the product life cycle has been discussed previously 'vVhen a fin11
can take its existing product to a market where it is not as well known,
or as >videly used, it can in e!Tect become a "new" product- with ali the
attending sales and revenue advantages associated wi th the growth stage of
the product life cycle. Apple's ability to adapt the iPod technology to meet
the demands of this type of market, such as the iPod Shufíle, den1onstrates
how a product can continue to generate new sales long after it has reached
the mature stage in its clomestic market.

Acquire Resources- Environment Differences lncrease Competitiveness

A second, equally reasonable but perhaps less obvious, objective of a
firms international operations would be to acquire resources from nondo-
mestic markets that, in turn, would enable the firm to be more efficient-
and by extension more profitable- in ali markets. This approach could
easily be viewed strictly from the perspective of gaining access to raw
materials or other physical production inputs, but to view international
resource acquisition only fron1 that perspective would be unnecessarily
restrictive. Certainly, acquiring physical resources may be an imponant
motivating factor for moving outside of the comfort of a domestic market ,
but a firm could be just as equally motivated by the prospect of acquiring
intellectual or financia! resources.
History has shown that obtaining physical inp uts has been viewed as
a political justification for entering other 1narkets--sometimes through
The lntemational Business Environment 15

the use of military fo rce such as the expansion of the Japanese empire,
which precipitated the war in China and the Pacifíc during the l 930s and
l 940s. Fortunately, firm-level initiat.ives to gain these physical resources
from nondomestic sources are generally less dramatic. At the individual
corporate leve!, the two basic types of physical resources sought for are
labor and production inputs (e.g., raw materials, component parts).
Labor can come in many forms ranging from inexpensive manual or
semimanual, manufacturing workers up through educated employees with
higher-level technical skills and knowledge. The latter is better placed in
a discussion of intellectual and knowledge resources, but the notion that
other markets can be a good source of inexpensive production-oriented
labor is reasonable. Goodyear Tire & Rubber Company, which accounts
for upward of 40 percent of ali tire production in the world, has found that
tapping into the Asían labor rnarket enables the firm to n1aintain a higher
leve! of global competitiveness through less expensive production labor
costs . The facc chat the tires manufaccured in Asian planes can be exponed
throughout the world more cheaply than if the same tires were produced
in the target country where labor costs (e.g., local labor unions and the
associated costs) are prohibitively high provides ample evidence fo r the
value of international resource acquisition. Sim.ilarly, the concentrated
abundance of production inputs suc.h as raw materials or components in
a particular location can create econ on1ies of scale that can be leveraged
across multiple operational locations.
'vVhere physical resources are more commonly associated with manu-
facturing fi rms, the acquisition of intellectual or knowledge resources can
be an ad vantage for firms of ali types. As was discussed previously in this
chapter (see the "Knowledge lmperative" section), the nature of the global
marketplace is such that operating Ln multiple ma rkets can result in the
abili ty to use what the firm might learn in one market in others as well.
Although related, the acquisition of intellectual or knowledge resources is
somewhat d ifferent. Companies that seek to acquire intellectual resources
desire to use the special knowledge in a particular market to improve
overall operational e!Tectiveness. For example, the Ford Motor Companys
long-term close relationship \vith Mazda was built around the recogni-
tion, on the part of Ford, that Mazda had special knowledge in the area of
engine building, which enhanced Fords overall operations.
A third category of resource acquisition would be financia! resources.
Similar to the goal of increasing sales or revenues, fi rms that seek to
acqu ire financia[ resources through international operations often do so
with the intent of using those additional funds to maintain, or increase,
competitiveness in another market(s). McDonalds Corporation effectively
16 Understanding the Global Market

employed this strategy in the early part of this centu ty. The high leve! of
profitability in other markets-especially Asia ancl Europe-meant that
the company hacl financia! resources to invest in rebuilding the firms
product offering in the United States. This u lti ma tely resulted in the finn
exp eriencing healthy growth at the same time its largest domestic com-
peti tor (i.e., Burge r King) was experiencing almost exactly the same leve!
of sales decline.

Diversify Sales and Suppliers-More Mari<ets Spread Risks

A third objective fo r firms involved in internacional business would be
diversification wi thin the supply and value chain. The goal finns seek to
accomplish using th is app roach involves risk reduction through market
diversification. This risk reduction can be targeted at any, or ali, of the
three pieces of the microeconomic, or industry, environment- namely,
customers, competitors, or suppliers.
Moving into other market can enable firms to offset sales íluctuations
(e.g., seasonal or cyclical) by spreading out the company's customer base. A
U.S. firm that has a seasonal product, such as apparel, could offset seasonal
sales fluctuations by entering markets in che Southern Hemisphere where
the climate seasons are the opposite of the home market. At the same time,
a firm could also reduce the impact of its prime competitors by seeking
out markets where that compelitor may not have as strong a brand name
or as much market share- which is exactly the motivation behind Pepsis
decision to enter the Eastern European markets as part of their worldvvi de
battle against Coca-Cola. A finn could also use multiple-market opera-
tions to reduce supplier dependency while increasing efficiencies because
local suppliers not only can be a key factor in international supply chain
effectiveness, but having multiple suppliers places the finn in a position in
which it is not bound to the fortunes of another company.

Minimize Competitive Risk-Knowing the "Enemy"

The fourth, and final, intenwtional business objective set by finns could
be the goal of minimizing con1petitive risk. The discussion of the Efficiency
and Knowledge lmpe.ratives shows that firms can realize significant gains
through the information and skills obtained when operating in nondomes-
tic markets. These gains can easily resul t in gathering knowledge that con-
verts d irectly into competitive advantage. These international operations
can also be used to gain competitive advantage through the leveraging
of potential corporate synergies- such as brand equity that may extend
The Jntemalional Business Environment 17

across n1arket boundaries-providing additional resources that can be

used to reduce competitive threats. International operations can also be
employed as a means of mitigating che impact of the market power, or
market share, of strong local and regional competitors.
Regardless of the set of objectives selected by a firm for its involve1nent
in the global marketplace, it is essential for that firrn to have a clear, well-
definecl set of objectives that do not interfere or contradice one another.
The most effective firms are those that do not try to accomplish too much,
especially when they are new to international business. The drive rs, or
imperatives, for intemational operations are clear, but so are the cornplex-
ities of the internalional business environment. Assuming chal interna-
cional business is "che same thing, only different" compared with domestic
operations can be a recipe for failure. Before tackling the complexities of
the intenrntional business environn1ent-assuming the firm accepts that
sorne leve! of internaúonal activity or exposure is unavoidable-a corpo-
rate direction that establishes an understanding of what is desired from
inten·national operations is the key first step to understand ing the global
rnarketplace. Frorn rhere, rhe firrn can face the complexities and choices
that are the hallmarks of the international business environmenl.

What Makes thelntemational BusinessEnvironment Unique ... Revisited

Challenges inthe Business Environment

As we look forwa rd to our discussion of the global marketplace and its
environment, it is important to establish one clear fact: the components
that comprise this imernalional business environment are not clifferent
from those that form che domestic market. The pieces- social/cu lcural,
physical/geographic, political/legal, economic, competitive, technologi-
cal, and so on- re1nain unchanged. 'vVhat <loes change, however, is the
irnpact each rnay have on international business and how, frorn market to
market, that impact can vary across che various components of the given
business envir onment. Under these circumstances, the problem faced by
businesses is this: the right approach to dealing with one market-and
its corresponcling environrnent-will not necessarily transfer to any other
market. Put another way, although the variables remain the same across
markets, the equation for success will likely change. As noted at the begin-
ning of this chapter, th is is the first thing that makes operating in the
international business environment unique.
The impact each of the key areas of the international business environ-
ment has on firm operations varíes. At sorne leve!, it is correct to assume
18 Understanding the Global Market

that this impact universally leads to increased tisks, but the nature of this
heightened risk, and indeed whether it applies to any given firm, can
cause any business to see the environment differently from others oper-
ating in that same market. For example, a fi rm li ke FedEx may see the
p timary tisk factors in the physical/geographic con1ponent of the envi-
rronment (e.g., effects on response time, damages to shipped goods) and
the political/legal environment (e.g., laws and regulations that address
•vhat can be shipped and how). Alternatively, a firm such as Subway
would potentiall y view the primary risk factors to be cultural/social (e.g.,
food tastes and preferences), economic (e.g., stability of demand, ability
to pay), and local compelitive forces.
Regardless of the composition of the international business environ-
ment in which a firm operates, the most effective and effi cient firms do
not in1mediately adopt an operational attitude that centers on alteting its
business model to fit the threats, real and perceived , that might exist in
that environment. A key theme throughout this book is that, for long-term
success, finns recognize the need to participate in actively, and attempt to
manage, their international business operational environme nt. The firms
that are truly successful over time tend to be those that have an approach
to the global marketplace identified as "directive" rather than "adaptive."
A firm wi th a di rective perspecti ve on the inte111ational business envi-
rronment views the environment in which it operates being, to sorne degree,
controllable. Classic business theory is built around the notion that the
business environment, whether domestic or intemational, is essentially
uncontrollable. By extension, any firm faced with a threat would need to
adapt its operations and business model to accommodate that threat. The
adaptive firm concludes that the business environment is uncontrollable,
•vhich means the environmenl represents restrictions around which the
firm must conform if it is to operate at sorne level of success. The direc-
tive firm <loes not acce pt this approach- at least not initially. The directive
firm approaches the international business environment with the attitude
that any risks or threats in that market should be managed rather than
simply conformed to. These firms take an initial approach that assumes
that threatening aspects of the international environment can be somehow
rreduced, removed, or transposed by efforts on the pan of the firm.
That is not to imply that ali risks and threats associated with the inter-
nacional business environment can be controlled at the firm leve!. How-
ever, by proacti vely considering how these challenges can be managed,
rrather than adapted to, the directive firm adopts a strategic mind-set that
is proactive- and by extension more likely to place the firm in a superior
competitive position. One of the most importan! underlying themes of this
The lntemalional Business Environment 19

book is that the successful fitm not only understands the global market-
place and all the attending market environments, but it also actively par-
ticipares in íts markets of operations in arder to achieve maximum results.
Jf sorne firrns operate as "adaptives'" and others are "directives," the ques-
tion then becornes: what leads a finn to be directive 7 The answer is rnulti-
faceted. First, firms inclined toward being directive are those that, first and
fo remost, consider the issue ar hand to representa substantial threat. This
seems intuitive, but a tru ly directive firm devores substantial resources
to rnoni toring its operational enviromnent so that it can son out the real
threats from the perceived threats. One of the most comn1011 errors firrns
make when operating internalionally is to assume that environmental dif-
ferences represent su bstantial operacional threats. Cultural differences, for
exarnple, rnay exist-and they rnay Tepresent sorne leve] of threat. How-
ever, that threat rnay not be substantial enough to have an impact on the
firms potential for success. McDonald\; is generally not viewed positively
from che perspective of French consumers, yet che attractiveness of che res-
taurants and the rnenu offering rneans that, irrespective of what the French
might think of McDonald$ in general ten11s, the firm has achieved se1ious
growth in France over the past severa! years. A directive firm has a firm
grasp of its in ternational business environment and knows when proactive
actions are appropriate.
Directive firnis also recognize the need to gain competitive advantage
from these "directive" effo rts. Because of the resources involved in proac-
tive participation in any business environment, the best firms will only
engage in these activi ti es if the end result is to gain advan tage over other
firms in the market. A company may move to have its products reclassi-
fied to avoid a tarilT but will only do so if the result is likely to lead either
to an increase in market share or the abilit y to reposition the produce in
such a way as to avoid its present set of cornpetitors. Along the same li nes,
the directive firm will see a favorable cost-benefit comi ng from its efforts.
There is no need to engage the threatening component of the environment
if it will require more resources than can be gained.
The last driver that should lead a firm to consider whether being direc-
tive is an appropriate course of actiorn would be the ethical rarn ifications of
its choice. Managing, or somehow altering, the environment in which the
firm operares is not a process performed in a vacuum. These aclions have
che potential to have an impact on customers, other firms, even the markec
in general. The history of international business over the years is littered
wi th examples of fi rms whose acti ons- ranging from damage to the natu-
ral environmem all the way to sponsoring assassinations-were motivated
by a drive for success that led to what are clearly unethical decisions.
20 Understanding the Global Market

The tn1ly successful intenrntional firm recognizes that its actions in its
market(s) of operations will have consequences which may not be positive
and that m ust be controlled. The long-term successful international busi-
ness is one with high ethical standards.

Strategy Options
One of the most difficult operacional issues a firm moving into the
global marketplace faces is the need to r-econcile its domestic and interna-
tional operations. Taking into account the d istinct íeatures oí the market
environment in which the firm has chosen to operate, it has three basic
strategy options: a domestic extension strateg)', a multidomestic strategy,
and a global strategy. Depending on the goals of the firm and the market(s)
selected, each of these strategy options can be viable and appropriate.
However, the complexity of the firm's overall international business envi-
ronment will help to dictate which would bese fit its proposed business
model. Having a clear and accurate understanding of the business envi-
ronment within each and every market the fitm operates, or proposes to
operare in, will help to select the best possible strategy option.
A domestic extension strategy is one in which the firm chooses to adopt
the same business model, based on the domestic marketing mix (Le.,
price, product, place, and promotion) across ali international markets.
This means the firm will present those n1arkets with a product essentially
unchanged, to the same target market(s), at the same price, connecting
with custorners using the sarne promotion activities. This is a quick and
relatively inexpensive means of engaging in international operations, but
to be effective, one particular assmnption must hold. The success oí a
don1estic extension strategy is predicated on the fact that no significant
differences exist in the selected intemational business environment(s)
when compared with t.he firm's domestic market-at least in terms of the
fitm's own individual product offering. To be successful , this characteristic
oí the firm's internacional business environment musL be in place.
On the other end of the spectrum is the multidomestic strategy.
Whe reas the domestic extension strategy assumes little or no d ifferences
exist between the domestic market environment and the targeted inter-
national markets, the multidomestic strategy assumes that any identified
differences in the business environmen t are substancial enough to war-
rant the development of an individual business plan for each individ ual
market. The creation of a distinct strategy and marketing mix for each
market in which the finn operates is typically only used when the firm
can identify one market, or a lirnited number of rnarkets, that represent
The lntemational Business Environment 21

huge opportunities, due to the large amount of reso urces required to cre-
ate market-specific business models. In a multidomestic scenario, the
end result will be independent strategies for each markec in which che
firm operates based on the market's unique business environment. For
example, in the domestic market, the firms product 1nay be the accep ted
low-price, low-quality choice, but in an intemational market virtually the
same produce can be positioned as a premium-priced impon. The most
importanc driver associated wüh choosing a multidomestic strategy is the
business environment of the given inte111ational market.
Last, is the global strategy option. The firm that adopts a global strat-
egy essentially lumps ali business models LOgether-domestic and inter-
national- and seeks to standardize wherever and whenever possible, only
making alte rati ons in this universal operational approach when the spe-
cific characteristics of a 1narket enviromnent demands. This global strat-
egy option is best characterized by the phrase "think global, act local."
For example, McDonalds has conscructed its global scrategy around what
the company says ali consumers around the world want from McDon-
alds: value, service, and quality. Using these basic strategy building blocks,
McDonalds then "interprets" them in each individual market in which the
firm operaces. Provided a company can correccly identify che basic scrategy
components on which to build th is global approach, the advantages are
clear: cost savings th rough econon1ies of scale, a consistent product offer-
ing, and synergistic 1narket segmentation strategies. These generally offset
che potencial of opporcunicy costs associated with a "compromise" scrateg)'
and the problem of knowing exactly when and where standardization is
possible and "acting local" necessary.

Market Entry Options

The last piece that sets intenrntional business- and operating in an
intemational environment-apart fro m domestic operations is the var-
ious market entry options. Although this book deals wich the various
aspects of the in ternational business environmen t, the impact of the envi-
ronment on a firm is, to sorne extent, determined by the fi1111's choice of
market entry. There are three basic n1eans through which a fi1111 can enter
a nondomestic market: exporling, sorne form of partnership, or foreign
direcc invescment (FOJ). These can be used lO miti gate risk factors in a
market environment because they enable the firm to control the amoun t
of exp osure to market risk.
Exporting, oflen characterized as "build it here, sel! it there," involves
keeping as many assets and propriecary resources in the füms home
22 Understanding the Global Market

market as possible, thereby reducing many oí the threats associated with

operating internationally. However, this approach to a new market can also
limit opportunities because che firm will fi.nd itself somewhat removed
from that market which , in turn, reduces its knowledge of the market.
Partnerships with local firms can provide essential tnarket knowledge and
access to customers through established distribution channels, but they
can increase firm exposu re to che risks of "sharing" assets and proprietary
resources with that local firm . Foreign dir ect investment overcomes both
the problem oí being removed from the market and sharing with a partne r,
but the biggest risk factor here would be the commitment of high levels of
resources to the new nondomestic market.
By p lacing the challenges of international operations- the complex
business environment, strategy choices, and market entry options-into
the larger context oí globalization and the objectives sought by interna-
lional firms , we are now in a position to delve more deeply into the various
aspects of che international business environment and understand exactly
how each has the potential to influence the success, or failure, of a com-
panys inten1ational initiatives.

The Firm and the lnternational Business Environment

As we move forward and begin to consider the various components of the
international business environment in greater depth, sorne basic assump-
tions are implicit in all of our discussion. The first may seem obvious
but bears consideration: all finns wan t to succeed in their internati onal
operations. The theme of this book is that the successful fitm 'Nill actively
assess, analyze, and where appro priate manage, its internacional business
environment rather than simply attempting to "expon" its domestic busi-
ness model and hope for the best. Another assumption we will make is
that ali firms seek to gain competitive advantage. lt is simply not enough
to maintain a steady leve! of revenue and ma rket share; the truly successful
firm will want w win, not just exist in its incemational nrnrket(s).
Third, we will assume that, depending on the nature of any given
inte rnational market and its business environment, that d ifferent types of
resou rces may be required in order to be effectively proactive and all firms
have limited resources. Further, we will assume that resources will only
be deployed by the firm to manage the environment when there is sorne
cost benefit. Taken together, these two assumptions recognize the need to
consider carefully ali aspects of the market environment and only act on
issues that represent real threats and that can also be effectively dealt with.
Finally, we will assume that managers can perceive any given business
The lntemational Business Environment 23

environment differently resulting in different responses. This means that

rather than seeking a definitive, "correct" response to challenges in the
international business environment, the best managers will not be afraid
to make a ti mely, but informed, decision .

Summary
In this chapter, we have discussed what makes operating in the in ternational
business environment unique-the challenges of dealing with the various
components of that environment and their complex interrelationships as
well as the strategy options and market entry choices which also face the
firm. We have also put the whole notion of international operations in to
the larger context of globalization arnd the objectives fin11s seek to realize
in their intenrntional activities. Operating successfully in an international
markel requires more than coming to terms with cultural d ifferences. The
complexities of the various components of the market environment muse
be fully explored, operational objectives clearly de fined, strategy options
closely considered, and me appropriate market entry strategy determined.
Underlying all of this are the "d rivers" of globalization, which make inter-
national business, at sorne leve!, a reality for ali firms. Understanding che
pieces of the international business environment means first understand-
ing its operational context.