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Economics Essays | International Economy

• Questions:1 & 2
• Questions:3 & 4

Question 3

The H&R Johnson Company would have to analyse its international options and evaluate why the company wants to go international. There are 4 reasons for a firm to go international:

# To gain access to new customers for current products/services. Other companies will capitalise in other markets on the innovation of companies that remain wedded to their domestic markets.
# To retain present customers. National customers require national suppliers and by extension, global customers require global suppliers this is the main aim of H&R Johnson to compete in the UK market.
# To augment current competencies. Porter argues that firms ought to seek out the most demanding markets so that they are forced to keep their competencies up with the best in the world. Being global also allows firms to tap into a great deal of intellectual capital – a significant driver of future success.
# To gain access to low-cost factors of production this too is the aim of the company

However there are certain barriers that H&R Johnson should be aware of and incorporate these issues in its long-term international strategy.

Barriers to International Operations

# Tariffs and quotas – some governments place barriers on the range or quantity of imports.
# Foreign ownership rules – companies wishing to set up in another country, often a developing country are forced to accept major shareholdings being held by locals.
# Foreign languages
# Local regulations – these may mean that different forms of packaging need to be used that sales quantities need to be changed and perhaps the characteristics of the product need to be altered.
# Local tastes
# Transport costs
# Different currencies
# Tax and other financial regimes

One of the main options available for H&R Johnson is to set up their manufacturing units abroad in a country where they would be able to minimize the cost and be able to use cheaper easily available raw materials. The company has two options it can either set up its production facilities in third world countries, which are developing fast like India, or in the EU. There are many economies in the EU that would serve as ideal places to start production for tiles at lower rates.

The nature of international business involves penetration of international markets through adoption of the host country's economics, norms, trends, consumers and culture. The global environment can be hard to understand; this requires a good understanding of the global environment and its implications on the business. The challenge for managers today is to formulate a strategy that would enable the company to be effective in the international world. To formulate that effective strategy H&R Johnson must first weigh its strategic goals if it is to expand into new markets like the Far East and US it must have production facilities in those regions. Similarly the company can also outsource within the EU countries like Spain and Italy, which already have tile-manufacturing facilities.

Despite the fact that the Tile industry is very saturated the company could expand into new markets to sell its tiles. H&R Johnson has a very distinct British appeal with its tiles being used in Westminster Palaces. To exploit the luxury market H&R Johnson could enter new foreign markets with its distinct appeal. By segmenting each market the company would be able to utilise the wide variety of products that it makes.

Market Penetration

The level of commitment to international marketing is a major variable in deciding what kind of involvement is appropriate. H&R Johnson’s options range from occasional exporting to expanding overall operations (production and marketing) into other countries. We are going to look at the following approaches to international involvement.[1]
# Exporting
# Licensing
# Joint ventures
# Trading companies
# Direct ownership

The management could use these options to penetrate various markets owing to the market conditions and the level of commitment the management would be interested in this report recommends three following options to H&R Johnson:

Exporting
Exporting is the lowest level of commitment to international marketing and the most flexible approach. H&R Johnson Tiles Ltd may find an exporting intermediary that can perform most marketing functions associated with selling to other countries. This approach entails minimum effort and cost. Modifications in packaging, labelling, style or colour maybe the major expenses in adapting a product. There is limited risk in using export agents and merchants because there is no direct investment in the foreign country.
Export agents bring together buyers and sellers from different countries; they collect a commission for arranging sales. Export houses and export merchants purchase products from different companies and then sell them to foreign countries. They specialise in understanding customers’ needs in foreign countries. Foreign buyers from companies and governments provide a direct method of international exchange by contacting domestic firms about their needs and the opportunities available in exporting. Domestic firms that want to export with a minimum of effort and investment seek out foreign importers and buyers.

Licensing
When potential markets are found across national boundaries and when production, technical assistance and market know how is required licensing is an alternative to direct investment. The licensee, the owner of the foreign operation pays commission or royalties on sales or supplies used in manufacturing. An initial down payment or fee may be charged when the licensing agreement is signed. Exchanges of management techniques or technical assistance are primary reason for licensing agreements.
Licensing is an attractive alternative to direct investment when the political stability of a foreign country is in doubt or when resources are unavailable for direct investment. Licensing especially advantages for small manufacturers wanting to launch a well-known brand internationally, e.g., Questor Corporation own the Spalding name that produces no goods itself; Pierre Cardin has issued 500 licences and Yves St Laurent 200 to make their product.
This however would not be a very suitable option for H&R Johnson Tiles Ltd as the Tile industry is very competitive and the main factors that would affect demand would be price and quality unlike the brand power in most consumer goods.

Franchising
Another alternative to direct investment in non-domestic markets is franchising. This form of licensing, which grants a right to use certain intellectual property such as trade names, brand names, designs, patents and copyrights is becoming increasingly popular in Europe. Under this arrangement the franchiser grants a licence to the franchisee, which pays to be allowed to carry out business under the name owned by the franchiser. The franchiser retains control over the manner in which the business is conducted and assists the franchisee in running the business. The franchiser retains ownership of his or her business, which remains separate from that of the franchiser.
Franchising has recently experienced a period of rapid growth. Companies such as Benetton, Body Shop, Holiday Inn and IKEA are particularly well known for the commitment to growing global business in this way. There are various reasons why the popularity of franchising has increased so rapidly. First, the general world decline in manufacturing and shift to service industries has increased the relevance of franchising. This is significant, because franchising is a very common internationalisation process for service organisations. Second, franchising has been relatively free of restrictions from legislation, especially in the EU. Third, an increase in self employment has provided a pool of individuals willing to become involved in franchising, and this activity has generally been supported by the major clearing banks. This would also allow H&R Johnson Tiles Ltd to sell its tiles through major stores and place their product more strategically in international markets.

Expansion Method Matrix
This model looks at both internal and external options within the company, which can be considered and evaluated to expand the business.

Internal Development:
H&R Johnson Tiles Ltd must carry an internal audit of their capabilities before they embark on any growth venture. The company needs to establish a capable management team that can reorganise and streamline the operations at H&R Johnson Tiles Ltd so the company can have the capability to operate on a global level. H&R Johnson Tiles Ltd will have to re organise themselves to smoothly enter into a growth phase successfully. The management will have to train and develop new staff members and managers that would be able to overlook the international operations. These activities would include implementing various HR strategies to manage the workforce.

# There are a number of factors that the management of H&R Johnson Tiles Ltd will have to consider more specifically, their plan can be:
# A reality check: when the management first examines the feasibility of their expansion, it will lead them to consider all relevant factors
# .
# Implement HR policies that will motivate the staff and train them in a better way so they can deliver world-class product
# The company will have to lower costs to increase its market share in the UK and abroad.
# A timetable for operations; helping the management to coordinate all the diverse activities that go into running the business
# Modelling tool that helps the management evaluate the variable factors that affect H&R Johnson Tiles Ltd, so the management can better prepare to deal with situations that may arise as conditions change
# A vehicle for tracking performance of the business: Financial Indicators

Question 4

A competitive advantage derives from the particular distinctive capacity of a company like H&R Johnson to capture, develop, and defend over time, with major intensity and aggressiveness than its competitors, one or more of the critical factors of success existing in one sector .[2] This company then acquires competitive advantage when it performs activities of strategic relevance (those included in the value chain) in a more economic or efficient way compared to competition. Acquiring or maintaining competitive advantage depends on the capacity of understanding not only its own value chain but also the way in which the company fits into the value system as a whole. The relationship between the value chain limits and the competitive limits provides the base to define the significant boundaries of the business units and the value chain is therefore used as a tool to diagnose the competitive advantage as well as creating it and maintaining it.

The comparative advantages
The logic of comparative advantage does not only regard productive activities but also all the activities included in the value chain such as research and development, distribution, promotion and so on, allowing to distribute its activities in such a way to reflect the different local opportunities. Competitive advantages are independent from comparative advantages. There is an interaction, which directs the company in its co ordination and configuration choices regarding its own activities. While competitive advantage is obtained through interventions on the value chain, the company seeks for comparative advantage by positioning the activities generating value according to the financial convenience offered by one market in respect to the other one. Further, it could be advantageous to disperse some activities of the chain in those countries that can provide a significant comparative advantage through the availability of its own product elements at more limited cost .[3] With a view to improving the geographical configuration of the company's activities, comparative advantages arising from the excess availability of markets in which productive elements are less expensive are to be picked up, keeping in mind the intensive utilisation of these in the different phases of the added value chain. The most appropriate strategy to follow is the one aiming to simultaneously benefit from competitive advantages and comparative advantages.

The interaction of comparative advantage-competitive advantage
A precise definition of global strategy requires the necessity of referring to the spatial distribution of the company as well as to the single business activities operated by the company. H&R Johnson should also aim to consider the interaction of advantages between different countries to maximise its sales than solely to rely on the cost benefit of producing aboard.

Strategic options

The first kind of behaviour arises from the presence of comparative advantage between countries and from a simultaneous absence of competitive advantage among the competitors. In such a case, the latter export standardised products coming from conveniently located facilities and from international trade: the company moves towards a vertical integration. The second strategy, encountered in the absence of comparative advantages but in the presence of competitive advantages, induces companies to differentiate their offer and to penetrate foreign markets through direct investments. Such behaviour is placed in inter-sectorial exchange context and pushes the company towards a horizontal integration. The third type of competitive confrontation occurs when the company exploits in the same way competitive advantages and comparative advantages with an internationalisation and integration policy, vertical and horizontal, through the co-ordination and spatial dispersion of the activities. In such way, the international company exploits the relative superiority derived from the configuration and the co ordination of the geographically dispersed activities, as well as from the competitive advantages obtained from the products development and the markets penetration selection: this behaviour is characteristic of the global company. This is the strategy, which the management at H&R Johnson should focus on.
The three types described above can be represented in a graph by evaluating the combinations of the countries' comparative advantages and the competitive advantages in the companies' products regarding the single strategic behaviours at an international level.

Patterns of interaction of competitive advantages comparative advantages

COMPARATIVE COUNTRY ADVANTAGE

The different strategic alternatives

The cost leadership
This strategy represents one of the most efficient ways to build a leading position in the market on a global scale. In fact, when H& R Johnson adopt a price level more or less similar for one of its competitors, their being able to attain more limited costs permits to obtain a major income margin, which can be employed in many profitable ways: for example, by improving the quality of products. A primary analysis of its own cost structure will be needed.

The acquisition of cost advantages can be possible through different methods:
# Impoverishment of products
# Engineer redesign of products
# Control over raw material resources
# Limited costs of workforce
# Governmental aid
# Geographical localisation
# Technological innovations and automation of productive processes
# Acquisition of productive capacity at advantageous costs
# Cut in general costs

As shown, there are many types of action and situation to consider in order to reduce costs and to occupy a key position in the search for competitive advantages. By implementing these actions, H&R Johnson can make its benefits outweigh the costs of moving to new markets.

The global differentiation

There is a distinction between strategy diversification and product diversification .[4]

Strategy diversification: consists of identifying and selecting specific market segments, and developing for each of them an adequate marketing programme.

Product diversification: consists of introducing a different product than that of their competitors. H&R Johnson Tiles could introduce new types of tiles and designs in the market.

Among the other ways of ensuring a maximum competition level, let's remember:
# Provision of products, which are perceived by consumers as being of higher value than those of competitors.
# Supply of support services.
# Creation of a strong brand image to guarantee consumer loyalty.
# Offer of products characterised by new technologies.
# Improving quality.
# Increase in distribution network.

1. Chee H. & Harris R. (1998 1st ed) Global Marketing Strategy (FT Pitman)[Return]
2. Porter. M, “Il Vantaggio Competitivo”, Edizione di comunita, 1987[Return]
3. Valdani. E., “Marketing globale: la gestione strategica nei mercati internazionali”, Egea, Milano, 1998.[Return]
4. Dicken. P., “Create & Survive”, The Economist, London, 1.12.98.[Return]