Advantages and Disadvantages of International Business Theories - Coursework Example

International Business Environment Introduction Business environment has become multi-dimensional in nature on the international forum. The political, social, economic and technological aspects of any country are subjected to rapid changes over time. Post trade liberalism, the degree of market uncertainty has substantially increased in most world economies. As a result, profit making organizations are subjected to cut-throat competition in the market (Gionea, 2008). The managers in various organizations try to logically analyze changes of the global forces before formulating new or downsizing the existing business strategies. However, along with empirical analysis, theoretical knowledge is also a crucial component of business management. The essay tries to theoretically and empirically estimate the advantages and disadvantages of certain international business theories. Presently, the degree of market competition and consumers’ preferences are greatly volatile in nature. Under such critical situations, companies and their native countries can become successful by appropriately assessing the rationale behind different business theories (Cawsey, Deszca and Ingols, 2011). International Product Life Cycle Theory Raymond Vernon had introduced a theoretical model in 1966 in order to analyze the pattern of internationalization adopted by multinational organizations (Ayal, 2012). Vernon had applied the concepts of Ricardo’s comparative advantage theory and the conventional theory of Product Life Cycle to build the International Product Life Cycle model (Ayal, 2012). The theory claims that trading partners in the international business world changes over time. Figure 1: International Product Life Cycle Theory (Source: Provenmodels, 2014) The above figure graphically explains the three stages of International Product Life Cycle. The International Product Life Cycle theory is divided into three sections. New Product This stage is initiated when a company operating in a developed nation introduces a new technologically innovative product in its native market (Ayal, 2012). The company manufactures and sells the new product in the same nation for two primary reasons. Firstly, the company can acquire adequate investable funds for producing its new product in the developed nation. Secondly, consumers of the developed country have the purchasing power to buy such expensive innovative products (Chenet, Tynan and Money, 2000). Towards end of this stage, the company might trade its newly manufactured product in other developed economies (Ayal, 2012). Maturing Product In this stage, the company increases the volume of its sales in other developed economies and the product design and manufacturing process followed becomes stable. The labour, average and transportation cost associated starts declining as the firm experiences scale economies due to increased volume of sales (Lozano, et al., 2013). Eventually, the new product will mature in the market and will become more competitive in nature. By becoming more competitive, the product will face threats of severe market rivalry. At the end of this stage, the company will start exporting the product in the low income countries (Ayal, 2012). Standardized Product In this stage, the product faces saturated demand in its principal as well as non-principal markets. The overall manufacturing cost of the product would be high until this stage. Here, the firm desires to lower the cost of production and shall not add any additional features (Barney, 1991). Owing to such modifications the product becomes standardized in this stage. The firm experiences further economies of scale and falling labour costs while manufacturing such standardized products. Finally, the product becomes popular in both developed and developing markets (Ayal, 2012). Strengths The theoretical aspects of this model help the companies to expand business in international markets. The model assists the companies in understanding the extent to which competitive business environment gradually changes and ways in which their internal functions should be transformed with respect to the same. The companies can frame international marketing strategies with the help of this model (Ayal, 2012). The theoretical perspectives of the model enable companies to determine the most appropriate market for manufacturing the new product. The model elaborates on causes behind the fact that exports in the developed countries are more than that of the developing nations. Weaknesses The model assumed that diffusion of new technology occurs gradually in order to generate momentary differences between nations in terms of use and access to new technologies. However, over time, such an assumption becomes invalid. The income discrepancies between countries have considerably reduced. At this juncture, a multinational company can rationally launch a new product in more than one developed country. The model believes that a company will first introduce a new product in its native market, subsequently export the product abroad and finally make foreign direct manufacturing investments (Ayal, 2012). At present, there are other types of popular market entry modes in the business world. The model supposes that technology can be confined to standard operating procedures and capital equipment. The model primarily concentrates on product side of a product life cycle and provides limited explanation about the consumer analysis. Even so, owing to reserve innovation, new product innovation often cannot flow from developed to developing markets (Ayal, 2012). Empirical Analysis The model explains the reasons for which companies operating in the United States are able to transform into multinational organizations when they dominate the global trade and per person income level of the country’s individuals was highest in the world. The International Product Life Cycle Theory can be empirically proved by observing the internationalization process of companies within the teletransmission industry (Grover, 2010). Traditionally, multinational companies in the developed nations conducted international business expansion activities as per theoretical viewpoint of the model. Companies such as, Apple Inc., had initially introduced numerous new products and services in the developed market of the United States (U.S.) (Apple Inc., 2014). These companies could access adequate investable funds and technological knowledge while launching new products. The U.S. consumers had adequate discretionary spending power to purchase such innovative expensive services and products. Over time, these firms have exported and made direct investments in other countries that have lower income levels. Nonetheless, post globalization, certain developing countries such as, China, Russia, India and Brazil, have transformed into emerging economies (Grover and Malhotra, 2010). These countries are characterized by adequate productive resources, less expensive skilled workforce and growing per person income levels. Dominant companies in the developed nations such as, Procter & Gamble, often desire to make new inventions in these markets so as to experience low manufacturing costs and a growing market demand by the middle income group of individuals therein for products offered (Grover and Malhotra, 2010). For instance, Tata Group, which is a popular multinational conglomerate in India, had initially launched its economic car, Tata Nano in the domestic market. The company is now making attempts to export this car to developed economies such as, the U.S. (Tata Group, 2014). Hence, the International Product Life Cycle Theory is not always applicable in the contemporary business world. Krugman’s First Mover Advantage Theory The concept of First Mover Advantage was introduced by the popular economist, Paul Krugman. The concept was a part of his New Trade Theory (Thijssen, 2010). The theory stated that international trade of a firm considerably depends on its extent of scale economies and networking effects. The theory claims that when a firm first enters in a particular industry, it experiences certain advantages in terms of scale economies and business networks. Being the first entrant in the market, the company is able to acquire the entire market demand. Production becomes high due to increased volume of demand, which enables the company to experience scale economies in production (McCarty, 2007). The average cost of production declines due to economies of scale, which is why the products can be sold at low prices. It becomes difficult for the other entrants to set prices at such low levels. The first mover in an industry is able to establish effective business networks. With the help of such networks, the company can form good relations with its business stakeholders. Thus, as per Krugman’s First Mover Advantage Theory, a company can enjoy an advantageous situation if it enters an industry at first. Strengths The New Trade or First Mover Advantage Theory is an economically rational theory. When a company is the first to enter in an industry, it acts as a natural monopolist therein. The firm enjoys the entire market demand, thereby experiencing low average cost of production due to economies of scale. Figure 2: Economies of Scale (Source: Zhao, et al., 2012) If a company faces economies of scale, then rise in its output is more than that of inputs. The above figure shows that average costs of a firm is the least while experiencing scale of economies. Moreover, when a company becomes a first mover in a market, it gradually gains adequate experience and makes new technological innovations that facilitate profit enhancement or lower operational cost (Pettinger, 2013). Through such technological inventions, the company becomes a dominant business power in the industry. The theory states that the first mover enjoys a wide network of business connections. The firm can procure raw materials at low costs and easily formulate marketing strategies if superior relationships are maintained with stakeholders. The brand value of a first moving firm in an industry is highest among the employees and consumers (Kim and Lee, 2011). In addition, the first mover experiences the longest learning curve and proficiently forecasts the upcoming market uncertainties within the industry. Weaknesses Although it is always beneficial to become a first mover in a particular industry, there are numerous problems associated. The first mover often faces Free Riding problem in business. The secondary or late movers within the industry have an opportunity to study business techniques employed by the first mover (Pettinger, 2013). The government authorities of any country aim to enhance the level of competition within all industrial segments. The first moving firm often becomes a monopolist in the market. In order to avoid such circumstances, the government authorities provide additional incentives to the late movers. Consequently, the late movers often become free riders in the market and conducts business more conveniently than the first mover. The innovation cost of the first moving firm is more than imitation costs of the late movers (Pettinger, 2013). Also, the first moving firms face more risk and uncertainty. The first mover often incurs loss while launching new products and services in a market. The late movers can learn from the mistakes made and success stories of the first moving firm and will be able to exhibit more productivity. According to the incumbent criteria, the first moving firm in an industry can face problems relating to excess accumulation of fixed assets, cannibalization of existing produce and organizational inflexibility (Pettinger, 2013). Empirical Analysis From the above context, it can be stated that a first mover always experiences certain benefits in business. Nevertheless, there are certain problems that might nullify the benefits accrued by a first moving company. In order to avoid such issues, companies try to move first in an industry by following the corporate strategies adopted by successful first movers previously. The first moving strategy adopted by the Japanese multinational company, Sony Corporation, is quite popular in the business world (Pearson, 2014). The company had launched new products prior to its competitors in the electronics industry. These products were launched after observing taste and preference patterns of the consumers in the market. So, many companies become a first mover in the market by launching products catering to the exact preferences of consumers. Royal Dutch Shell is another popular multinational company of the United Kingdom (U.K.) that has recently become a first mover in the market by introducing a new floating LNG facility (Pearson, 2014). The company has also declared to make new investments whereby it can incorporate newer technologies within business. As a result, through first mover advantage, companies such as, Royal Dutch Shell and Sony Corporation, have been able to gain more core competencies compared to the market rivals. In the present scenario, firms across most industrial segments are exposed to monopolistic or oligopolistic market competition (Markides and Sosa, 2013). These markets are characterized by few sellers and infinite number of buyers. The numbers of sellers are few because each of them holds a dominant position in the market by becoming first or early movers in respective industries. Companies experiencing first mover advantage often create artificial entry barriers for new entrants through specialized strategies such as, limit pricing (Lieberman and Montgomery, 2002). Porters Diamond Model The Diamond Model was introduced by the popular scholar, Michael Porter. The classical international trading theorises state that comparative advantage lies in the factor endowments of a nation. Such endowments included factors such as, land, labour, capital and natural resources. Certain customized factors of the country are skilled labour force, superior technological knowledge, public support and social culture. Porter had introduced this model in order to explain various causal factors that help to establish national advantage for any economy. Figure 3: Porters Diamond Model (Source: QuickMBA, 2014) The above figure shows the different determinants included in Porter’s Diamond Model. These dimensions presented above elaborate on fields that a country should improve upon before establishing domestic industries. The model states that there are four ingredients that help to create national advantage. These factors are skills and resource availability, accessibility of firm’s operational information, defined organizational goals and organizational pressure for making new innovations and investments. The Porter’s Diamond model indicates that a company should export merchandise from those industries, which own the necessary components. Strengths Factor Conditions In order to attain greater competitive advantage, a country often tries to enhance the stock of its productive resources. Moreover, if the existing resources in a country are inadequate, then the domestic companies introduce new approaches to gain core competencies. According to the model, if a country or its native companies increase strength of the productive resources, then it would be considered as a leading nation in the international business market. Demand Conditions When demand faced by a product in a country is high, then the local companies enjoy competitive advantages in business. This is because foreign firms pay less attention in manufacturing such products compared to the domestic companies in a country. Under such circumstances, the domestic companies begin to export the product in foreign countries, post demand saturation in local markets. Considering this factor, it can be said that companies should attempt to conduct business in local markets if its product experiences high demand therein. Supporting and Related Industries If the supporting industries of a company own competitive advantage in business, then it experiences cost and innovation efficiencies in trade. Such impacts are stronger if the suppliers are international competitors themselves. Hence, if the suppliers of a company are established business firms, then the firm can procure more industrious resources in its production process. Firm Rivalry Strategy and Structure The local business affairs considerably influence the strategy of a firm. The Diamond model also indicates that a company always aims to experience more local rivalry in long run so as to face less global rivalry. This is because greater local rivalry helps to lower the pressure of innovation experienced by every firm. If a company succeeds in beating intense domestic competition, then it transforms into a competent business player in the international market (Bidgoli, 2010). Weaknesses Porter’s Diamond model focuses exclusively on the home based business expansion of a company (Aaker and Keller, 2000). The model does not adequately explain various business internationalization strategies that can be adopted by a company. A country can improve its national competitive advantage by following theoretical perspectives of the model; yet, its multinational activities cannot be improved with the same. Nowadays, the companies are found to function rationally on the basis of resourced based view. Such theories state that resources can be outsourced, in case a company or its domestic market fails to manufacture the same at low costs. By improving the stock of domestic resources, enhancing domestic demand and increasing the domestic market rivalry, a company can improve business primarily in the native market (Burns and Gomolinska, 2000). Even so, without adequate business internationalization, a firm cannot experience the desired commercial growth in long run. Empirical Analysis Porter’s Diamond Model can be empirically analyzed by examining the case of Korea. The telecommunications and information sector of Korea has developed rapidly owing to its internal demand conditions. Since 1998, the extent of internet penetration therein has increased (Poulsen, 2007). The products and services offered in the telecommunication and information sector experience increased demand due to growing popularity of online business and rise in the level of internet users (Markides and Geroski, 2005). The factor endowments in the concerned industry are adequate. The industry has a proper IT infrastructure, where nearly 90% of country’s land area is wired with internet network. The government encourages competition within this industry and support companies in introducing technological innovations. As a result, firms operating in the Korean information and technology industry meet the requisite criterion for satisfying local demand and competing in the international market. Conclusion Domestic and international trading is subjected to intense volatility and rivalry in the recent times. Prior to globalization, commercial success could be attained by an organization by beating domestic market competition. Currently, companies must excel both in local and foreign markets because nearly all countries have adopted open door policies of commerce after globalism (Head, 2007). From the above context, it would be correct to conclude that each international business model is valuable for trading success of an organization. However, companies must implement the theoretical implications of these models in a customized manner. According to the theories of International Product Life Cycle, it is often easier to launch new products in the developed countries. If the product manufacturing process requires resources that are easily available in the low income countries, then the company should follow law of reserve innovation. A firm can become first mover in a market only after appropriately assessing success of its new trading process. It is not necessary that all first movers will benefit from trade. As per Porter’s Diamond model, besides building competency in the domestic market, a company should expand business through internationalization strategies. Therefore, companies cannot apply generalized theoretical models without analyzing their intrinsic rationality. Reference List Aaker, D. and Keller, K. 2000. Consumer evaluations of brand extensions. Journal of brand insurance, 48, pp. 317-324. 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