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For doing International business, one important issue that should be concerned is culture. There are many different cultural existed on the world. Culture, by Geert Hofstede, can be defined as "software of the mind" or how people think and reason which differentiate them from other groups. Jean Monet described that "culture is the context in which things happen; out of context even legal matter lack significance". Culture can be in Tangible aspects and Intangible aspect.
Cross-Cultural is one of four major risks in International Business. Most of people might not aware of culture roles in business. Normally, people in different countries have different culture. Cultural impacts language, lifestyles, attitudes, customs, and religion of that society. Cross-cultural risk is a situation or event where a cultural miscommunication puts some human value at stake. Doing international business with lack concerning in cultural might lead to fail business. The example of lack of cultural concerning is using symbol or product or service naming that has negative meaning in that culture or selling alcohol in Muslim country which will lead to fail of business.
Knowledge about culture is very important for business. For the company, as the culture is different in different country, the etiquette and common sense in doing business are not always the same. Different values and attitudes also affect the requirement of products and services. Preparation for cross culture leads to more successful in dealing with business partner and launching product. Moreover, culture also affects both employees and customer in that country. Culture affects employees for their working behavior, preference, style also the way they think and act. However, not only national culture, professional culture and corporate culture can also impact employees. For effect on consumers, culture influences their consumption, product preference buying decision and attitude toward products or services.
One thing that should be done before starting international business is managerial tasks. According to culture's difference, things are done differently. There are a lot of things to be reconsidered as they affect business success.
One of the tasks is developing products and service. Company should learn how culture will affect its product and service. Some products are not suitable for some countries. For example, German people would like to have functional product while Japan look for product's appearance. For life insurance case, in Japan, customer is the god, they looking for best service; the salesperson should be available whenever they want to claim or made contract. So they tend to buy insurance with better service than better offer of money return. In some countries, they think of insurance as an investment. They do not care about service, but the profit return from life insurance. The products and services should be developed to fit each culture and customer requirement.
For communication and interacting with foreign business partners, person in each culture has different communication style.
In screening and selecting foreign distributors and partners, knowing their culture helps in understanding their business values and their action. For life insurance business, this is also important as working style and seriously view point for business and their concern about customer of the distributors and partners are things that impact sales. Knowing culture will help in selecting best candidate for partners.
Negotiation and structuring international business ventures also vary in each culture.
Interacting with current and potential customers from aboard; how can salesperson reach customer, what should be the strategies in approaching to customers? Some culture, people do not like to be badger by salesperson.
Last task that should be considered is preparing advertising and Promotional materials. How to advertise? As different cultures adopt different culture values, it impacts on advertising activities and sale promotion. Advertising something that can relate the products or services with culture values can persuade the customer.
Human resource management for unfamiliar culture is also important. Human resource varies among cultures such as team working, employment, communication, organization structure, business relationships, etc. Culture understanding is an important quality of person who works aboard. When managers or employees are sent to work aboard and face unfamiliar culture, they should learn and be prepared for culture of that country. Unfamiliar culture affects their effectiveness. Foreign manager and employees should know how to deal with local culture, behavior such as greeting, ceremony, social status, their values, etc. The more culture understanding, the more effective and ability to reach goal they are. Human resource management should give high concern on this in finding the best candidate for the position.
Normally, there are three ways of cultural orientation; Ethnocentric orientation, Polycentric orientation and Geocentric orientation. For ethnocentric orientation, person use one's own culture as the standard and do not understand why people from other culture act different. Person who develop this orientation will never success in international business. Persons who are polycentric orientation, they develop their liking for the country. They will have more understanding of that culture but not for complicate matter. And for geocentric orientation, the person truly understands the culture. They understand local behavior, preference, value. Geocentric orientation and Polycentric orientation is more prefer. Unfortunately, most of foreign managers have ethnocentric orientation. For life Insurance company, if the managers and sale person develops Ethnocentric orientation, they will not understand customer behavior which might lead to unable to sell the insurance. Understanding the culture helps in choosing sales strategies, advertising methods, type or package of products, and conversation with customers. For example, in East Asia culture, talking about possibility of death or accident might lead to misunderstanding as cursing. Culture and valued should be truly understand in order to know how to convince customer to by life insurance. Moreover, it also helps in communicate with local employees knowing how to encourage local sale person for higher sales. This is one of the problems that company should concern for Human Resource when sending employees aboard. The person should be trained for cross-cultural understanding, and should be either geocentric orientation or polycentric orientation.
To deal with cross-cultural, first thing is to know what the keys things of the country are. There are three approaches to interpreting culture in each country; Metaphors, Stereotypes and Idiom.
Metaphors is the distinctive traditional that people in the society shares together; normally are attitudes, values and behaviors. Knowing about metaphors of locals helps in getting along with them.
Stereotypes are a popular belief or action about specific about the group of people. Stereotypes can help to make a picture of other countries. However, employing stereotypes without consciousness is not a good thing as it is not always true. There are real difference among groups and societies if we look deeper and understand behavior.
Idiom is a different way of saying or meaning something. It exists in every culture. Idioms can symbolize cultural values. This is something that is hard to understand except the person has very well understanding in background of culture.
Knowing about these approaches will lead to better understanding the local people. In life insurance case, metaphors help salesperson know better conversation to build relationship and get along with customer. Stereotypes help them to have roughly picture of the customer behavior so they can easier judge the situation. Knowing these three approaches will help salesperson in dealing with customer.
Cultures context is the way of communication of people in that culture which is defined as Low-context culture and High-context culture. In low-context culture, people communicate in direct and explicit and express the whole message out clearly. For High-context, people use nonverbal message and body language. Understand culture's context is very important. It helps salesperson know the real meaning of conversation that customer want to deliver to them know. It also help in knowing how to speak and convince customer.
Greet Hofstede's culture dimensions is another way to help understand culture. It defines national cultures using five dimensions; Individualism (IDV), Power Distance (PDI), Uncertainty Avoidance (UAI), Masculinity (MAS), and Long Term Orientation (LTO). Hofstede's dimensions let us know more about culture and social system. It also tells about values of that culture. From these, employees who work aboard will have better knowledge to dealing with local employees and customers. This also helps in analyzing the effect of culture to life insurance sales.
First dimension is Individualism versus collectivism. This dimension shows the degree to which individual are integrated into groups. Individualism societies are focus more on one's own self-interest and do not have strong tie with other people while collectivism give important to group. This dimension has effect on life insurance sales. In case of collectivism societies, people are stick in a group and care each other. They normally believed and have confidence on their friends or relative opinion. They tend to buy insurance from people they know than stranger. Using sale strategies, promotion and advertising that play on person relationship will affect sales in these societies. For example, advertise on buying parents life insurance is a security for child, Launching group discount package, or focus customer is salesperson close people. However, these methods might give different result for individualism. Using right strategies for individual dimension will impact insurance sales.
Power distance shows the gap or distance of equality between of people society. High power distance societies have large gap for equality between people in high position and people in lower position. While in Low power distance, the gap is less. This also means gap between the social classes. Knowing about this dimension help in launching suitable life insurance package for selling in that society. For example, In Japan that almost everyone are belonged to middle class, launching life insurance package or price that is more suitable for middle class will have impact on sales. In India the upper stratum controls buying power, package and price should be suitable to upper class.
For uncertainty avoidance, it shows society's tolerance for uncertainty event. High uncertainty avoidance societies try to minimize risk and uncertain situations. In low uncertainty avoidance societies, people can tolerate more risk. People in high uncertainly avoidance societies tend to buy more life insurance to as security for their family in case of unexpected situation occurs. In conversely, people in low uncertainly avoidance will buy less insurance as they have better tolerate for risk.
Masculine versus feminine cultures show the society's orientation based on traditional male and female values. Masculine cultures value competitiveness, assertiveness, ambition, career, and my care little for others. In contrast, feminine cultures values nurturing roles, interdependence among people and caring of other people. Life insurance sales is affected by this dimension as selling insurance in masculine culture will have small sales because they care for their assertiveness and career, and do not have much concern about other. They will not buy lot of life insurance. In the other hand, selling in feminine culture will have higher sales. As they care for other people around them, they will buy life insurance as a security for their family and relative.
For the last dimension, long-term versus short-term orientation, shows the importance attached to the future. Long-term orientation will look for long-term success. They take the long view to planning and living. While short-term is mostly looking only on present. This dimension also has great effect on life insurance sales. In long-term orientation, as they concern and plan for the future, they tend to buy more insurance.
As you can see, Culture is a complicate issue. There are many things to be concern about cultural before starting international business. Lacking of cross-cultural rick awareness might lead to fail of business. Culture influences people in that society. It not only affects their life style but also their thinking, values and behavior. Understanding and adapting knowledge about culture is an important thing to success in international business.
Expanding product sales in international business means expanding business to foreign market. However, accessing to new market is not easy. How can we know which country our company should enter is. Screening country base on only traditional per capita income is not a good analyzing. The economy of the market can't be fully analyzed by use only Per-Capita. Analyzing without regard to purchasing power parity Per capita didn't tell that people in that country will purchase the product. There are also other factors that impact the product demand and should be concern in screening enter country. Other indexes of demands should also be included in analysis.
After company makes a decision to enter new market in international business, first thing we have to do is analyze product suitability. Not every country that can be sold because the customer need is not the same. For example, in Japan, they prefer car that is completely covered. They want to have privacy when they are sitting in the car. Convertible will not be able to sell a lot of amount in Japan. We should clearly know about suitability of product so we can know the direction of the market of products. There are some following questions that should be asked about product.
Who initiates purchasing? For our products, they are accessory for luxury automobiles therefore the target customers are people who have high income or manufacturer who produce luxury automobiles.
Who use the product or service? Car owner who own luxury automobiles.
Why do people buy the product or the service? People buy product only if it meet their needs or requirement. Our customers buy products for replacement, or their specific need.
What economic, cultural, geographic, and other factors in the target market can limit sales? There are many factors that impact the sales. Manager should analyze these factors for the product und use them to compare for each target country or culture.
Answering this information will help in evaluating if product can be fit with the market country. Analyzing product suitability also shows the factors that may hider product or service market potential in each target market.
In selecting country as a candidate for entering market, first we should roughly do country screening. Country screening will help reducing the number of the countries that should be deep investigated as potential target market. Countries shouldn't be randomly selected for analyzing. it is an ineffective working. Normally, there are many ways in selected group of countries for country screening as in following.
Select countries with similar culture to our home country in terms of language, culture, and other factors. These countries will have similar interest and product need and requirement. It will be easier in expanding products to these countries than others. >>>
Emphasize countries with large target customer population. Country that has large target customer population gives more opportunities to sell product more. >>>>
Targeting by a Region first; targeting a group of country at the same time. Countries in same region tend to share similar factors. This method is more cost effective. >>>
Target on Gateway countries. These countries are entry points to nearby markets. Enter this countries will help in entering others in that zone. >>>>
In finding the potential countries market, list of countries from country screening should be narrowed choices by examining specific information. There are many market potential indicators to be used in analysis. Market potential analysis shows the potential of selected countries as new markets. . It let us know opportunities where we can have best return market. There normally are three practical approaches used for analyze market potential of listed countries, which are per-capita, middle class size and a mix of market potential indicators.
First approach is per-capita or GDP. Per capita income shows income per person of the country in average. For company products, accessory of luxury car, the target group is people who have high income. Per-capita can be used for analyzing potential country however, using only traditional per-capita without regarding to other economic indicators might lead to mistake in decision making as per-capita income has several weaknesses. First, it is resulted in average of country. Another weakness is it is inaccurate results. Normally, in emerging country, most majority of population have low end income. Wealthy class in the country affects as increasing average income. The average distribution does not accurately represent the income of majority group. In contrast, in the developed countries, the majority are middle class the result inaccuracy might be less. Moreover, per-capita income only shows how much money people in country have. It doesn't tell the true purchasing power of the country.
In order to have better analysis for picking up countries, more efficient and reliable indicators such as purchasing power parity or PPP should be accounted in analyzing. Purchasing power parity is the adjusted indicator for equivalent currency exchange rate with taking account on different price level between countries based on same currency unit. Another way for purchasing power parity theory is Big Mac Index. Big Mac exist in most countries around the world and its price is already adjust according to the purchasing power parity concept. The product price is different among different countries due to countries economy. The price will affect purchasing of customer. This might impact the business when look over the real purchasing power. However, this approach has some limitation. First, there are some informal economies that are not officially recorded and are not included in calculating Nation's GDP. Second. Also, for developed countries, majority population is in the low end of income scale. Another limitation is the information is normally recorded and reported by the local government therefore; sometimes the reported information is not as high as it should be in order to get low-interest and aid form international organization. However, relying on per-capita even with regard to purchasing power parity alone is still not enough to have a good analysis for demand. There are many other factors in country that impact product demand. We should include demand indicators in analysis.
For second approach, middle class size shows the proportion of people in between the wealthy and the poor. Middle class is an important indicators for economic. They consume large amount of products. However, this approach in not appropriate with our product criteria as our product target on high income class.
For the last method is using other indicators for determining attractive market. These are indicators of demand which are realistic measured of market potential index.
Market size is the population of country, especially urban population. This indicator is one of the important for measuring market potential. It helps to identify if the market is big enough. The bigger market size, the more demand can be expected.
Market Growth rate is the country's real GDP growth rate. It shows increasing or decreasing in theÂ demandÂ for a particular product over time. With this index, we can know the market trend for accessories for luxury care in future.
Market intensity is a private consumption and GNI represent spending and buying power of citizens.
Consumption capacity is the percentage share of income held by the country's middle class. However, our product should focus on high-income class population's market intensity. It will give company more information for possibility and amount of product sales.
Country's receptivity to imports is the characteristics such as number of mobile phone subscribers, density of telephone lines, number of PCs, density of paved roads, and population per retail outlet. It gives idea for ability to access to market.
Economic freedom is the degree of government intervention in business activities. Higher intervention means business have less smoothly flowing in their operation.
Market receptivity is the particular country's inclination to trade with the exporter's country as estimated by the volume of imports.
Country risk is the degree of political risk. It includes regulatory, financial, political, and culture barriers and the legal environment for intellectual property protection.
These indexes should be included in analysis for company's product market potential. Using these indicators will help company in comparing each target countries in several dimensions. However, the indexes should be modified and weighted to fit product target group which are upper class of population. Moreover, additional specific dimensions for product can be added to index such as number of imported luxury car, sales of luxury cars, sales of accessories for car of competitor, etc. This will improve methodology for picking country and give better analysis.
In conclusion, picking countries for potential market is one of the firstly steps for international business. Company should be carefully pay interest in picking countries as potential market. Methodology in picking resulted in quality of analysis. There are many factors to be considered and analyzed. It is wise to consider all reasonable indicators for markets in order to have more precise analysis.
Every country has its own characteristic of political and legal systems. These systems impact the performance of business and are concern as country risk. Country risk is one of four risk in international business. In entering foreign country, first, company should concern about country risk. Company operations and profitability are affected by the country's political and legal environments. Country risk is can be measured by various indicators. Each factor is relevant to the operation and performance. Company should have deep detail and knowledge about the political systems, and law and regulation of business for particular countries. For the manufacturing case, laws and regulation impact on manufacturing operation, taxes.
First thing to know is political system of the country. There are three major types of political systems; totalitarianism, socialism, and democracy. Country's political system affects its government roles. For instant, in country with totalitarianism political, the government controls all economic matter and also regulations. In capitalism countries, government controls business operation and commercial activities. Or in Democracy, government functions are limited mainly for legal system, public matters and facilities. China is socialism. Mexico and Europe adopt mixed political system. Government's function impacts on country its regulation, economic, market and also legal system. Political systems might cause country risk such as government takeover the corporate assets, using sanctions and embargoes to respond to conflict with foreign countries, boycotts, war and revolution, and terrorism. These country risks will have indirect effect to Aoki Company.
Legal systems are different among countries and are influenced by its political system. The legal systems provide rules, limitation on personal relationships and organizations. There are five ways of laws systems; common law, civil law, religious law, socialist law, and mixed systems. Different law systems give different rules and regulation. China has socialist law and Mexico and Middle Europe has civil law. For risk from legal system, there are directly effects to company strategies, operation and business activities due to business laws and regulation.
First is foreign investment laws; restrictions about foreign direct investment or FDI. Each country has its own restriction on inward foreign direct investment. These laws affect company strategy, firms chose in doing business and also business operations and performance. Aoki should first research and study in detail on China, Mexico and Eastern Europe's investment laws. Examples for Foreign investment Laws are
In China, it requires foreign investor to pay taxes with money source from within China. This means that foreign company has to move some of their money for business to china.
In Mexico, there are some business activities that are reserved for state only. Some activities, foreign company can't invest alone without Mexican. There also are percentage restrictions for foreign investment on business activities.
Next country risk is from Controls on operating forms and practices. Government establishes laws and regulations on how firm should conduct production, marketing, and distribution activities within their borders. This also affects on business operation and performance and its potential. For example, in china, in some industries, Foreigners are not allowed to own the company without local partner. Company has to change and adapt their way of operation to fit with foreign country laws and regulations. This might lead to company performance is not efficient as it should be. It also reduces effective of company operation.
Laws regarding repatriation of income are also the cause of country risk. Repatriation laws bring about restrictions on transferring money or profit back to investors' country. As investors try to transfer their profit in foreign countries back to their home country, Government also establishes laws to control investors in transferring money out of its country. With this restriction, company will face problem as they cannot transfer all profit back to their headquarters. Example for this laws is China's law. It requires foreign investor to have account bank in china and use money source from within china to do financial activities. However, company cannot withdraw or transfer their money out of China easily.
Another cause of country risk is Environmental Laws. These laws are regulations on use of nature resource, and emit of pollution, and the abuse of air, earth and water resources. Government establishes environmental laws to ensure their citizen's health and safety. Another purpose of these laws is to preserve their nature resources. Environmental laws vary among different countries. For example, the environmental laws of Mexico is not require high standard and is not a well or enforced environmental laws because government do not want foreign business reduce their investment. In the other hand, In Eastern Europe, they give an importance to environmental issues. Business firm should strictly follow the environmental laws and regulations. As Aoki wants to set up manufacturing process in these countries, it is important to know about their environmental laws. Moreover, company should look at its current production site and observes its environmental efficiency. So, company can check its environment standard with countries laws. If the manufacturing environmental does not meet the laws, company should find the way to improve it.
Laws about contracts also can be the cause of country risk. There are five types of business contracts; contract on sales of goods or services, distribution of the firm's products through foreign distributors, contract for licensing and franchising, contract on foreign direct investment, and joint-venture contract. Contract laws indicate term and regulations for making contracts. Contract laws are normally different in each country. Also, term, regulation and legal activities, for each type of contracts are different. Foreign investors should study about contract laws to know how should they planed and do business activities in that country.
Country risk comes from country political and law system. It normally reduces company effectiveness and its business operation efficiency. Foreign company should research on these laws and find the way to have less country risk. However, there are also others laws and political issues that are country risk such as tax laws, distribution laws, marketing laws, etc. As Akoi want to manufacturing and export to Latin America and Europe, import and export regulation, and import and export taxes between China, Mexico, Eastern Europe with importing country also should be concern. Company should use local legal specialist when invest in foreign country in order to have better preparation for its political and laws to reduce country risk.