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Economics Essays | International Economy

• Questions:1 & 2
• Questions:3 & 4

In the 21st century the world economy is common for all economies and businesses. Individual firms and their entire industries are coming to recognise that in today’s trade environment isolation is no longer possible. Most businesses today are affected directly by economic and political developments in the international market place. These developments demonstrate that it has become virtually impossible to disregard the powerful impact that international business has on all of us.[1] Participation in the world market has become truly imperative hence business now operates in a global market place and bases their operations globally rather than locally.
All the global opportunities need careful exploration if they are to realise. An awareness of global developments is necessary and understanding of their meaning and a development of the capability to adjust change. Globalisation is the watchword that describes the need for companies and their employees, if they are to prosper, to treat the world as their stage. [2]

The Capitalist world economy is constructed by integrating a geographically vast set of production processes. Other countries through trade can use the production process of one part of the world. The countries through interdependent on one another can specialise in specific areas and also attain goods and services that they cannot produce. The capitalist economy has the need to expand the geographic boundaries of the system as a whole, creating thereby new loci of production in its axial division of labour. Capitalism is a system based on the endless accumulation of capital. It is a system, which requires appropriation of surplus value. [3]
An international business strategy for firm would enable it to benefit from this global potential, there a number of strategies a business can adapt to increase sales and market share globally. Most large Japanese Multinationals and US set up their production facilities away from their own countries to benefit from the cheap yet high skilled labour.
Other aspects of an international business strategy could include penetrating new foreign markets to increase sales. The international business strategy would encompass all these actions and would look at how to manage and control the international business operations. For H&R Johnson Tiles Ltd the international business strategy could include outsourcing production abroad so they could minimise costs and compete with other tile manufacturers in the UK.
Existing global economies have converged to such an extent that it has opened new doors for companies embarking on international ventures. The phenomenon of international trade has led to an improvement in telecommunications infrastructures, specialised transport facilities, and has reduced trade barriers. This in turn has led to a global increase in the demand for goods and services. Such movement in trends has influenced the nature and behaviour of international companies, and in some instances, changing their organisational culture. This has had some direct implications on enterprises that have grown from being localised to actualising international status, such as achieving and a maintaining a global vision [4]

With the phenomenon of globalisation we are watching a dynamic transformation of all economic sectors: the polycentric typology of the multi national and multi domestic markets develops its own characteristics in order to better answer of the global sector. The distinctive element, which characterises the economic context, is the behaviour of companies. In the polycentric field, competitive confrontation among single businesses was limited to national opportunities without ever achieving a real exchange of knowledge and therefore obstructing the globalisation process. The economic characteristics of the host country imposed on the firm a considerable effort and investment in order to adapt with maximum efficiency its own capacities to the local needs and to the structural and competitive characteristics of other countries. Hence, the structure of the polycentric field was demonstrating its dedication to internationality by joining together the single local sectors but still keeping each of them individually distinctive in each national context.[5]
The opening of the global mechanism is not only expressed by the gathering of single national realities but also by their interdependence through confrontation in the respective national contexts and sectorial action at a worldwide level.[6] The widening of the competitive arena demands a change in strategies; even though the "world wide" business remains an entrepreneurial concept, it not only takes into consideration the economical aspect but also the political dynamic.
The level of competition grows, the market becomes more complex and many more variables come into play. The behaviour of global operators, outstretched towards the research of a dynamic innovation of the product, becomes the weapon for survival. The quality of the product incites the adoption of new and efficient strategic actions to reach economic and organisational efficiency with a minimum waste of energy and resources. Inexpensiveness becomes the selective criteria for those who want to survive in a highly competitive context. The development of a global strategy is focused on localised decisions; the various production facilities allow the exploitation of economies of scale and of cost and quality differentials existing on a local level. Even the type of customer’s changes: Transnational customers urge the adoption of world wide is standards as well as a strategy based on global coo ordination. The new generation of customers is able to choose between prices and productive commercial and service policies, provided by different suppliers, on the world wide field. The relationships with transnational customers oblige the supplier to achieve a global coo ordination of its own activities. In such a situation, the need for gathering the maximum information on international competitors is needed to understand their objectives, intentions and strategy in order to contrast and react to their market behaviour. [7]
Other factors that have permitted participation by conditional countries to the globalisation process are, without any doubt, the decreasing customs and institutional barriers for commercial exchanges and the integration of financial markets. Especially in the past twenty years, a lot of countries have adhered to international agreements regarding the planned reduction of custom tariffs in order to facilitate the development of the free trade of goods and services at a world wide level. Further, the drop of restrictions on the international movement of capital, has brought up the integration of financial markets and an enormous increase in the transfer of currency between different countries, foreign investments and especially, the financing available to companies to eliminating financial costs differentials in the varied national contexts. In general, the presence of financial markets bent on globalisation means lower risks and more treasury control possibilities for companies, which operate in different countries. [8]
A simple definition, which however is interesting for the numerous implications it includes, can be summed up in the following terms: the global strategy is that which consents the firm to achieve competitive advantage on international markets thanks to a strategy, concentration or co ordination of its decentralised activities or by combining them. A further analysis of such definition will highlight the most relevant characteristics of global strategy as well as the objectives, which can be achieved with it. The value chain concept is a component, which is a particularly useful tool. In fact, the logic behind the composition of the value chain is that of dismantling the company's activities into basic components in order to understand the level of coordination and concentration, which they represent at a world wide level to identify the nature of the competitive advantages available in the pursuit of the global strategy. Let's remember that the company pursues two types of competitive advantages. Low cost, in other terms the capacity to carry out the operations of its core value chain at lower costs than those of its competitors, and differentiation, in other words the capacity to achieve particular and different services compared to the competitors. [9]

Question 2

The internal drivers for H&R Johnson Tiles Ltd to go international are mainly the fact that the company does not have a competitive advantage over others. Deposit the fact that once they where market leaders in the UK, the tile industry has changed drastically with suppliers producing aboard and even in Europe at a cheaper rate and exploiting the UK market. The inability of H&R Johnson to offer low prices and use cheaper raw material is hurting their business. By manufacturing some of their tiles aboard and making only their specialised products in the UK would enable the company to offer a wide variety of tiles and at the same time be competitive in the UK market.
The economist Michael Porter has introduced the “value chain” concept. [10]The value chain analyses a company business by its strategically relevant business process with the view to understanding the trend of costs and existing sources of differentiation and is part of a bigger flow of activities defined by Porter as "value system". The value chain is a theory according to which the company business is made up of a whole lot of specific production functions but correlated with definite activities. In particular, the value chain of each company is constituted by generic categories of activities linked to one another in distinctive ways (generic value chain).[11] "Value" means the amount that buyers are disposed to pay in exchange of what the company provides. The measure of value is given by the amount that can be obtained from the price of the company's products and the number of units sold. The value chain visualises the total value and includes two elements: the generic value activities and the profit margin. Therefore the value chain represents a systematic way of examining and classifying the activities executed in each sector by a company. We can distinguish primary activities and support activities, which are represented in the graph down below. Even though each activity seems independent they are strictly related to one another in the way that the performance of one activity will influence on the cost and efficiency of the other.

The Value Chain

Regarding the optimum level of desegregation of the eight activities, we should consider Porter's observations according to which "activities that either have different economic logic or possess high impact or potential differentiation, or which represent an increasing or significant portion of cost, should be isolated and separated".

Under this model of the Value Chain H&R Johnson need to concentrate on their value chain and implement steps that would enable them to offer more value to their final product. This would include producing abroad and establishing new links with the suppliers and managing their international logistics and sales more efficiently.

The Tile Industry

The external factors that would motivate H&R Johnson Tiles to adapt an international strategy include the nature of the tile industry, which is very concentrated and very competitive. The producers in countries like China can sell tiles in the UK for lower prices. The European Tile manufactures are also highly specialised and competitive. The Tile manufacturing all has some advantage like better access to the raw material or cheaper labour. The management at HR & Johnson must be able to compete with all these companies efficiently and guard its market share. To better understand these conditions this report analyses the tile industry according to the Porter’s five forces model.

Porter’s Five Forces

According to Michael Porter (1979), “every industry has an underlying structure, or set of fundamental economic and technical characteristics that gives rise to … competitive forces. The strategies wanting… to influence that environment and the company’s favour must learn what makes the environment tick. The state of competition in an industry depends on five basic forces, the collective strength of which determines the ultimate profit potential of the industry.” [12]

The competitive forces in question are:
# Threat of new entrance to the new industry (that is, the height of barriers to entry)
# Threat of substitute products
# Bargaining power of customers
# Bargaining power of supplies
# Rivalry among current competitors in the industry

Porter (1980) argued that it is the strength of these forces in an industry which determines its potential for profitability and which strongly influences its structure.”

Threat of Substitutes
Products

Threat from new Entrants

In the case of H&R Johnson, these forces apply as follow:
# The threat of new entrance is high as there are many new tile manufacturers in third world countries that can easily export to the UK.
# Potential substitute products include plastic tiles and other glazed tiles, which are also cheaper to produce.
# The bargaining power of buyers is very high as they have a wide variety of tiles to choose from within the UK and Europe.
# The bargaining power of suppliers for H&R Johnson in UK is not so high as there are not so many suppliers in the UK.
# Rivalry among existing competitors is very high as each customer is trying to make better products at lowered costs.

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10. Stonehouse, Hamill, Campbell & Purdie, “Global and trans-national business, strategy and management” p. 54, 2000, Wiley.[Return]
11. Paul Finlay, And Strategic Management: An Introduction to Business and Corporate Strategy[Return]
12. Stonehouse and al, p.84, “Global and trans-national business, strategy and management”, 2000, Wiley.[Return]