BMGT 495 – Project 3: Internal Environment Analysis (Week 6)

Competing in International Markets
LEARNING OBJECTIVES
After reading this chapter, you should be able to understand and articulate answers to the following
questions:

1. What are the main benefits and risks of competing in international markets?
2. What is the “diamond model,” and how does it help explain why some firms compete better in
   international markets than others?
3. What are the various global strategies that firms can adopt?
4. What forms of involvement are available to firms that seek to compete in international markets?
   Kia Picks Up Speed
   Kia is enjoying accelerated growth within the global automobile industry.
   On June 2, 2011, South Korean automaker Kia announced plans for a major expansion of its American
   production facility. Capacity at Kia Motors Manufacturing Georgia Inc. (KMMG) was slated to expand 20
   percent from 300,000 to 360,000 vehicles per year. In addition to the crossover utility vehicle Sorento,
   the plant would begin making a sedan named the Optima in September 2011. The expansion of the plant
   was estimated to cost $100 million and was expected to create 1,000 new jobs. [1]
   This ambitious growth was made possible by Kia’s superb performance in the US market. KMMG had
   started building vehicles less than two years earlier after being constructed for a cost of $1 billion. In
   2010, yearly sales in the United States climbed above 350,000 vehicles. Kia’s overall share of the US
   market increased in 2010 for the sixteenth consecutive year. In May 2011, Kia sold more than 48,000 cars
   and trucks in United States, an increase of more than 53 percent from May 2010 sales levels. The Optima
   led the way with a whopping 210 percent increase in sales.
   Kia was not the only beneficiary of its success. KMMG’s location of West Point, Georgia, had been
   economically devastated when its homegrown textile company, WestPoint Home, shut down its local
   Chapter 7 from Mastering Strategic Management was adapted by The Saylor Foundation under
   a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
   by the work’s original creator or licensee. © 2014, The Saylor Foundation.
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   factories to take advantage of lower labor prices overseas. Following a fierce competition with towns in
   Mississippi, Kentucky, and other states, West Point was selected in 2006 as the site of Kia’s first US
   manufacturing facility. To win the plant, state and local authorities offered Kia more than $400 million
   worth of incentives, including tax breaks, free land, and infrastructure creation.
   Georgia’s return on this investment included two thousand new jobs at the plant as well as hundreds of
   jobs at suppliers that set up shop to support KMMG. The neighboring state of Alabama benefited from
   KMMG’s success too. As of June 2011, nearly sixty companies spread across twenty-three Alabama
   counties supplied parts or services to KMMG. [2]
   The name “Kia” means to arise or come up out of Asia. [3] This name is very appropriate; Kia rose from
   humble beginnings as a maker of bicycle parts in 1944 to become a global player in the automobile
   industry. As of 2011, Kia was producing more than 2.1 million vehicles per year in eight countries. Kias
   were sold in 172 countries. Kia employed more than 44,000 people and enjoyed annual revenues in excess
   of $20 billion. Fellow South Korean automaker Hyundai owned just over 33 percent of Kia, and the two
   firms strengthened each other through collaboration. When taking all of these facts into consideration,
   Kia’s slogan—The Power to Surprise—had to make its rivals wonder what surprises the Korean upstart
   might have in store for them next.
   Workers in Georgia build Sorentos for South Korea–based Kia.
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   Image courtesy of IFCAR,
   http://upload.wikimedia.org/wikipedia/commons/9/98/2011_Kia_Sorento_LX_2_–_02-13-
   2010.jpg.
   [1] http://www.kmmgusa.com/2011/06/kia-motors-manufacturing-georgia- begins-expansion-projects-to-supportincreased-volume-beginning -in-2012/
   [2] Kent, D. 2011, June 19. Kia production in Georgia helping companies across Alabama. al.com. Retrieved from
   http://blog.al.com/businessnews/2011/06/kia_production_in_georgia_help.html
   [3] Frequently asked questions. Kia website. Retrieved from http://www.kia.com/#/faq/
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   7.1 Advantages and Disadvantages of Competing in
   International Markets
   LEARNING OBJECTIVES
5. Understand the potential benefits of competing in international markets.
6. Understand the risks faced when competing in international markets.
   As Kia’s experience illustrates, international business is a huge segment of the world’s economic
   activity. Amazingly, current projections suggest that, within a few years, the total dollar value of
   trade across national borders will be greater than the total dollar value of trade within all of the
   world’s countries combined. One driver of the rapid growth of internal business over the past two
   decades has been the opening up of large economies such as China and Russia that had been mostly
   closed off to outside investors.
   The United States enjoys the world’s largest economy. As an illustration of the power of the
   American economy, consider that, as of early 2011, the economy of just one state—California—would
   be the eighth largest in the world if it were a country, ranking between Italy and Brazil. [1] The size of
   the US economy has led American commerce to be very much intertwined with international
   markets. In fact, it is fair to say that every business is affected by international markets to some
   degree. Tiny businesses such as individual convenience stores and clothing boutiques sell products
   that are imported from abroad. Meanwhile, corporate goliaths such as General Motors (GM), CocaCola, and Microsoft conduct a great volume of business overseas.
   Access to New Customers
   Perhaps the most obvious reason to compete in international markets is gaining access to new customers.
   Although the United States enjoys the largest economy in the world, it accounts for only about 5 percent
   of the world’s population. Selling goods and services to the other 95 percent of people on the planet can be
   very appealing, especially for companies whose industry within their home market are saturated ().
   Few companies have a stronger “All-American” identity than McDonald’s. Yet McDonald’s is increasingly
   reliant on sales outside the United States. In 2006, the United States accounted for 34 percent of
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   McDonald’s revenue, while Europe accounted for 32 percent and 14 percent was generated across Asia,
   the Middle East, and Africa. By 2011, Europe was McDonald’s biggest source of revenue (40 percent), the
   US share had fallen to 32 percent, and the collective contribution of Asia, the Middle East, and Africa had
   jumped to 23 percent. With less than one-third of its sales being generated in its home country,
   McDonald’s is truly a global powerhouse.
   Levi’s jeans are appreciated by customers worldwide, as shown by this balloon featured at the Putrajaya
   International Hot Air Balloon Fiesta.
   Image courtesy of Kevin Poh, http://www.flickr.com/photos/kevinpoh/4446228896.
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   China and India are increasingly attractive markets to US firms. The countries are the two most populous
   in the world. Both nations have growing middle classes, which means that more and more people are able
   to purchase goods and services that are not merely necessities of life. This trend has created tremendous
   opportunities for some firms. In the first half of 2010, for example, GM sold more vehicles in China than it
   sold in the United States (1.2 million vs. 1.08 million). This gap seemed likely to expand; in the first half of
   2010, GM’s sales in China increased nearly 50 percent relative to 2009 levels, while sales in the United
   States rose 15 percent. [2]
   Lowering Costs
   Many firms that compete in international markets hope to gain cost advantages. If a firm can increase it
   sales volume by entering a new country, for example, it may attain economies of scale that lower its
   production costs. Going international also has implications for dealing with suppliers. The growth that
   overseas expansion creates leads many businesses to purchase supplies in greater numbers. This can
   provide a firm with stronger leverage when negotiating prices with its suppliers.
   Offshoring has become a popular yet controversial means for trying to reduce costs. Offshoring involves
   relocating a business activity to another country. Many American companies have closed down operations
   at home in favor of creating new operations in countries such as China and India that offer cheaper labor.
   While offshoring can reduce a firm’s costs of doing business, the job losses in the firm’s home country can
   devastate local communities. For example, West Point, Georgia, lost approximately 16,000 jobs in the
   1990s and 2000s as local textile factories were shut down in favor of offshoring. [3]Fortunately for the
   town, Kia’s decision to locate its first US factory in West Point has improved the economy in the past few
   years. In another example, Fortune Brands saved $45 million a year by relocating several factories to
   Mexico, but the employee count in just one of the affected US plants dropped from 1,160 to 350.
   A growing number of US companies are finding that offshoring is not providing the benefits they had
   expected. This has led to a new phenomenon known asreshoring, whereby jobs that had been sent
   overseas are returning home. In some cases, the quality provided by workers overseas is not good enough.
   Carbonite, a seller of computer backup services, found that its call center in Boston was providing much
   strong customer satisfaction than its call center in India. The Boston operation’s higher rating was
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   attained even though it handled the more challenging customer complaints. As a result, Carbonite plans
   to shift 250 call center jobs back to the United States by the end of 2012.
   In other cases, the expected cost savings have not materialized. NCR had been making ATMs and selfservice checkout systems in China, Hungary, and Brazil. These machines can weigh more than a ton, and
   NCR found that shipping them from overseas plants back to the United States was extremely expensive.
   NCR hired 500 workers to start making the ATMs and checkout systems at a plant in Columbus, Georgia.
   NCR’s plans call for 370 more jobs to be added at the plant by 2014. Similarly, General Electric
   announced plans to hire approximately 1,300 workers in Louisville, Kentucky, starting in the fall of 2011.
   These workers will make water heaters and refrigerators that had been produced overseas. [4]
   Diversification of Business Risk
   A familiar cliché warns “don’t put all of your eggs in one basket.” Applied to business, this cliché suggests
   that it is dangerous for a firm to operate in only one country. Business risk refers to the potential that an
   operation might fail. If a firm is completely dependent on one country, negative events in that country
   could ruin the firm. Just like spreading one’s eggs into multiple baskets reduces the chances that all eggs
   will be broken, business risk is reduced when a firm is involved in multiple countries.
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   Firms can reduce business risk by competing in a variety of international markets. For example,
   the ampm convenience store chain has locations in the United States, Mexico, Brazil, and Japan.
   Image courtesy of MASA, http://upload.wikimedia.org/wikipedia/commons/d/db/Ampm.JPG.
   Consider, for example, natural disasters such as the earthquakes and tsunami that hit Japan in 2011. If
   Japanese automakers such as Toyota, Nissan, and Honda sold cars only in their home country, the
   financial consequences could have been grave. Because these firms operate in many countries, however,
   they were protected from being ruined by events in Japan. In other words, these firms diversified their
   business risk by not being overly dependent on their Japanese operations.
   American cigarette companies such as Philip Morris and R. J. Reynolds are challenged by trends within
   the United States and Europe. Tobacco use in these areas is declining as more laws are passed that ban
   smoking in public areas and in restaurants. In response, cigarette makers are attempting to increase their
   operations within countries where smoking remains popular to remain profitable over time.
   In 2006, for example, Philip Morris spent $5.2 billion to purchase a controlling interest in Indonesian
   cigarette maker Sampoerna. This was the biggest acquisition ever in Indonesia by a foreign company.
   Tapping into Indonesia’s population of approximately 230 million people was attractive to Philip Morris
   in part because nearly two-thirds of men are smokers, and smoking among women is on the rise. As of
   2007, Indonesia was the fifth-largest tobacco market in the world, trailing only China, the United States,
   Russia, and Japan. To appeal to local preferences for cigarettes flavored with cloves, Philip Morris
   introduced a variety of its signature Marlboro brand called Marlboro Mix 9 that includes cloves in its
   formulation. [5]
   Trends in the decline of cigarette use in the United
   States and Europe may snuff out profits enjoyed by
   brands such as Marlboro.
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   Image courtesy of Autodesigner, http://en.wikipedia.org/wiki/File:Marlboroultralights.JPG.
   Figure 7.2 Entering New Markets: Worth the Risk?
   Image courtesy of The Fayj, http://www.flickr.com/photos/fayjo/333325967/
   Political Risk
   Although competing in international markets offers important potential benefits, such as access to new
   customers, the opportunity to lower costs, and the diversification of business risk, going overseas also
   poses daunting challenges. Political risk refers to the potential for government upheaval or interference
   with business to harm an operation within a country (). For example, the term “Arab Spring” has been
   used to refer to a series of uprisings in 2011 within countries such as Tunisia, Egypt, Libya, Bahrain, Syria,
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   and Yemen. Unstable governments associated with such demonstrations and uprisings make it difficult
   for firms to plan for the future. Over time, a government could become increasingly hostile to foreign
   businesses by imposing new taxes and new regulations. In extreme cases, a firm’s assets in a country are
   seized by the national government. This process is callednationalization. In recent years, for example,
   Venezuela has nationalized foreign-controlled operations in the oil, cement, steel, and glass industries.
   Countries with the highest levels of political risk tend to be those such as Somalia, Sudan, and Afghanistan
   whose governments are so unstable that few foreign companies are willing to enter them. High levels of
   political risk are also present, however, in several of the world’s important emerging economies, including
   India, the Philippines, Russia, and Indonesia. This creates a dilemma for firms in that these risky settings
   also offer enormous growth opportunities. Firms can choose to concentrate their efforts in countries such
   as Canada, Australia, South Korea, and Japan that have very low levels of political risk, but opportunities
   in such settings are often more modest. [6]
   Economic Risk
   Economic risk refers to the potential for a country’s economic conditions and policies, property rights
   protections, and currency exchange rates to harm a firm’s operations within a country. Executives who
   lead companies that do business in many different countries have to take stock of these various
   dimensions and try to anticipate how the dimensions will affect their companies. Because economies are
   unpredictable, economic risk presents executives with tremendous challenges.
   Consider, for example, Kia’s operations in Europe. In May 2009, Kia reported increased sales in ten
   European countries relative to May 2008. The firm enjoyed a 62 percent year-to-year increase in Slovakia,
   58 percent in Austria, 50 percent in Gibraltar, 49 percent in Sweden, 43 percent in Poland, 24 percent in
   Germany, 21 percent in the United Kingdom, 13 percent in the Czech Republic, 6 percent in Belgium, and
   3 percent in Italy. [7] As Kia’s executives planned for the future, they needed to wonder how economic
   conditions would influence Kia’s future performance in Europe. If inflation and interest rates were to
   increase in a particular country, this would make it more difficult for consumers to purchase new Kias. If
   currency exchange rates were to change such that the euro became weaker relative to the South Korean
   won, this would make a Kia more expensive for European buyers.
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   Cultural Risk
   Cultural risk refers to the potential for a company’s operations in a country to struggle because of
   differences in language, customs, norms, and customer preferences (). The history of business is full of
   colorful examples of cultural differences undermining companies. For example, a laundry detergent
   company was surprised by its poor sales in the Middle East. Executives believed that their product was
   being skillfully promoted using print advertisements that showed dirty clothing on the left, a box of
   detergent in the middle, and clean clothing on the right.
   A simple and effective message, right? Not exactly. Unlike English and other Western languages, the
   languages used in the Middle East, such as Hebrew and Arabic, involve reading from right to left. To
   consumers, the implication of the detergent ads was that the product could be used to take clean clothes
   and make the dirty. Not surprisingly, few boxes of the detergent were sold before this cultural blunder was
   discovered.
   A refrigerator manufacturer experienced poor sales in the Middle East because of another cultural
   difference. The firm used a photo of an open refrigerator in its prints ads to demonstrate the large amount
   of storage offered by the appliance. Unfortunately, the photo prominently featured pork, a type of meat
   that is not eaten by the Jews and Muslims who make up most of the area’s population. [8] To get a sense of
   consumers’ reactions, imagine if you saw a refrigerator ad that showed meat from a horse or a dog. You
   would likely be disgusted. In some parts of world, however, horse and dog meat are accepted parts of
   diets. Firms must take cultural differences such as these into account when competing in international
   markets.
   Cultural differences can cause problems even when the cultures involved are very similar and share the
   same language. RecycleBank is an American firm that specializes in creating programs that reward people
   for recycling, similar to airlines’ frequent-flyer programs. In 2009, RecycleBank expanded its operations
   into the United Kingdom. Executives at RecycleBank became offended when the British press referred to
   RecycleBank’s rewards program as a “scheme.” Their concern was unwarranted, however. The
   word scheme implies sneakiness when used in the United States, but a scheme simply means a service in
   the United Kingdom. [9]Differences in the meaning of English words between the United States and the
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   United Kingdom are also vexing to American men named Randy, who wonder why Brits giggle at the
   mention of their name.
   KEY TAKEAWAY
   x Competing in international markets involves important opportunities and daunting threats. The
   opportunities include access to new customers, lowering costs, and diversification of business risk. The
   threats include political risk, economic risk, and cultural risk.
   EXERCISES
7. Is offshoring ethical or unethical? Why?
8. Do you expect reshoring to become more popular in the years ahead? Why or why not?
9. Have you ever seen an advertisement that was culturally offensive? Why do you think that companies are
   sometimes slow to realize that their ads will offend people?
   [1] Stateside substitutes. 2011, January 2011. The Economist. Retrieved
   fromhttp://www.economist.com/blogs/dailychart/2011/01/comparing_us_states_ countries
   [2] Isidore, C. 2010. July 2. GM’s Chinese sales top US. CNNMoney. Retrieved from
   http://money.cnn.com/2010/07/02/news/companies/gm_china/index.htm
   [3] Copeland, L. 2010, March 25. Kia breathes life into old Georgia textile mill town. USA Today. Retrieved
   from http://www.usatoday.com/news/nation/2010-03-24-boomtown_N.htm
   [4] Isidore, C. 2011, June 17. Made in USA: Overseas jobs come home. CNNMoney. Retrieved from
   http://money.cnn.com/2011/06/17/news/economy/made_in_usa/index.htm
   [5] T2M. 2007, July 3. Clove-flavored Marlboro now in Indonesia [Web blog post]. Retrieved from http://www.thetwo-malcontents.com/2007/07/clove-flavored-marlboro- now-in-indonesia
   [6] Kostigen, T. 2011, February 25. Beware: The world’s riskiest countries. Market Watch.Wall Street Journal.
   Retrieved from http://www.marketwatch.com/story/beware-the -worlds-riskiest-countries-2011-02-25
   [7] Kia sales climb strongly in 10 countries in May [Press release]. Kia website. Retrieved from http://www.kiapress.com/press/corporate/20090605-kia%20sales%20 climb%20strongly%20in%2010%20countries.aspx
   [8] Ricks, D. A. 1993. Blunders in international business. Cambridge, MA: Blackwell.
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   [9] Maltby, E. 2010, January 19. Expanding abroad? Avoid cultural gaffes. Wall Street Journal. Retrieved from
   http://online.wsj.com/article/SB100014240527487036 57604575005511903147960.html