Creating the Global Profit Center

CREATING THE GLOBAL PROFIT CENTER

Executive Summary

As organizations are growing increasingly competitive, the need to extend into other entry modes varies considerably in terms of not only cost incurred by firms but also benefits and disadvantages.

This essay will discuss the relevance of environmental scanning and its fundamental importance in deciding what the firm’s strengths and weaknesses are as well as external environmental factors.

The second part will then look into exports as to why it is the best choice to enter a host market for the very first time. Its alternatives, franchising and joint venturing, will also be looked at briefly.

The third section will touch upon the conclusion. It has been concluded that exporting is an important process and paves way for other forms of internalization.

The Global Marketplace

Over the past decade, the global phenomenon of expanding businesses internationally has grown to an astounding rate. Whether or not a company wants to participate directly in international business, it cannot escape the effects of the ever increasing number of firms involved in exporting, importing and manufacturing abroad. Today, it can be said that most business activities are global in scope.

In reaction to conform to global trends, the implementation and development of a comprehensive market strategy would usually involve selecting a foreign mode of entry. By definition, foreign mode of entry is an institutional arrangement that allows firms to exchange products or services (Rasheed, 2005, p. 41). Firms are presented with a variety of different forms of entry ranging from exporting to foreign direct investment (FDI). Evidence has proven that, regardless of mode of foreign market entry, significant increases in returns on sales and assets are expected (Rasheed, 2005, p. 41).

Environmental Scan of Foreign Markets And Conditions

In order to make well-informed strategic decisions a wide array of data about the external environment is needed. Information derived from within the company has limited strategic value when it comes to the analysis of the task or general environments. In situations such as these, the collection of external data is necessary. Environmental scanning, the process of acquiring data and involvement of exposure and perception of information, is one of the inherent formulations when developing firm strategies (Hough & White, 2000, p. 781). Scanning of these aspects would allow Multi-National Corporations (MNCs) to recognize existing opportunities and threats; so as to gain a sustainable competitive advantage over others. This view is consistent with the views of Belich and Dubinsky (1998) who argue that acquiring such market information is vital for business planning. Subsequently, most successful firms are those who are sensitive to changes in international events and forces are likely to anticipate and respond quickly. The elements most commonly identified include political-legal, economic, social-cultural and technology (PEST analysis) aspects which will be further discussed in the later parts of the essay.

Similarly, an exploration on the expansion of Trans-National Companies (TNHCs) into lucrative markets, notably, China and Eastern Europe, pointed out that 53% of the luxury hotel chains operate only one hotel in each country, which reflects the careful expansion into these markets (Wu, Costa & Teare, 1998, p. 257). Evidence shows that two-thirds of TNHCs instruct their managers at unit level to scan the environment for strategic planning, mostly on source quality, since managers are an important quality source for market knowledge and judgment on the countries realities (Wu, Costa & Teare, 1998, p. 257). In respect to the frequency of their scanning activities, a majority reported the scanning of the task environment continuously as compared to the general environment. This is so owing to the fact that most general managers lean towards a more performance-related role than strategic role. A primary example of concise environmental scanning and expansion worldwide is Ritz-Carlton. With 59 hotels spanning across 20 countries, Ritz-Carlton is the first and only hotel company honored with the Malcolm Baldrige National Quality Award from the United States Department of Commerce for outstanding performance (Ritz-Carlton, 2006).

Factors Influencing Entry Mode Choice

Macro and Micro Environmental Variables

As mentioned earlier, a firm’s entry mode of choice largely depends on four external elements namely, political-legal, economic, social-cultural and technology. Similar