Cultural Diversity and Global Business
The national economies currently considered “emerging” account for over 60 percent of the world’s population. These growing economies in Asia, Eastern Europe, and Latin America will drive the global economy for decades to come. It is critical for businesses in the developed countries of North America, Western Europe, and the Pacific Rim to position themselves to participate in these economies’ growth, if they are to continue to thrive.
Firms in developed economies were once able to send a large percentage of their exports of goods and services to developing countries that had to take what was offered with very little expectation of variations being offered to suit their needs. Today, the size of developing economies, in terms of both population and buying power, has forced firms around the world to pay more attention to local needs. Consumers in developing countries have increased incomes, and they are using that buying power to exercise their choices in the market. Most often, the choices they make are in favor of the familiar. Thus, presenting products or services tailored to local needs and tastes becomes critical to foreign firms if they don’t want to lose out to local competitors. The result is that managers have to make choices about their strategies.
For example, consider: what is the most effective way to enter and succeed in a growing country like China, India, or Brazil? These types of choices involve two questions. First, to what extent does the product or service have to be changed in order to be competitive in the market containing increasingly sophisticated local rivals? Second, how should the product or service be delivered to the customers?
Corporate Posture – Strategies
How a firm positions its product in a country other than its home country has many important implications. A good place to start is to think of a product that does not need any modifications to be consumed in a developing nation. A chemical like polyvinyl chloride (PVC) is a good example. PVC is a flexible substance that may be transformed into different things in different countries, but it is the same chemical raw material everywhere. Without any product modifications, a firm can follow a global international corporate strategy when selling raw PVC.
However, if it is a food product, the environment is very different. Customers all over the world have a wide range of taste preferences that are driven by several factors. International food companies need to adapt most of their products to these local tastes. In addition to altering the food product itself, they may have to adapt their distribution and marketing, which may also vary from county to county. In these situations, the firm’s corporate strategy has to have a lot of local responsiveness. In such a case, the firm follows a multi-domestic international corporate strategy.
Global international corporate strategies tend to have lower costs due to the absence of local modification and marketing needs. Multi-domestic strategies tend to enable more powerful pricing, as customers pay more for products that better fit their local tastes. Firms that try to pursue this type of strategy follow what is called a transnational international corporate strategy. In a transnational strategy, a firm starts with Porter’s value chain arrow and focuses on the capabilities that are held in the firm. Managers then identify the activities that do not need local customization and try to conduct those with an eye on global efficiency.
Entry Method – Two Options
Once a firm decides how to position its products or services in a new international market, it has to decide how those products or services will be delivered to customers. In general, this is a question of whether the firm should retain control or whether it should bring in a partner.
Looking broadly at a firm’s entry choice, we can place exporting at one end of the continuum and a firm-owned international business unit at the other end. Exporting is actually easy these days. Even the smallest of firms can fill international orders using the Internet, a simple global payments system, and international delivery services. In this situation, the exporting firm is actually outsourcing some of the more difficult parts of doing international business to firms like Visa and the United Parcel Service (UPS). On the negative side, the extent to which customer service can be provided is quite limited. Still the cost and risk of expanding sales internationally are very low.
At the other end of the scale is the establishment of a local business unit in the foreign market. Last week, we discussed the way in which Wal-Mart stores entered the UK market with the acquisition of the ASDA chain of supermarkets. Wal-Mart used a slightly different strategy when entering Mexico. There it built stores from the ground up with the assistance of a local joint-venture partner.
In Mexico, the threat of retaliation toward Wal-Mart from established firms was low because the market is emerging and the number of established firms is limited. Further, all firms, local and foreign, have many new customers entering the market with the growing affluence of the country. Thus, Wal-Mart had the time to build stores the way it wants from the ground up, a luxury it did not have in the UK.