International

Business
Environment

Student Name: Nishant Goyal

Student Id: 179189724

Module Code: PGBM04

Module Name: International Business Environment

Module Tutor: Muhammad Azam,

Table of Contents
Introduction of International business ........................................ 2
Theories of International Business ............................................. 4
International Business: Mode of entry ........................................ 9
The Case study of IKEA entered into INDIA market ............... 11
Recommendations: ................................................................... 13
Conclusion:............................................................................... 14
References ................................................................................ 14

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Introduction of International business
The exchange of products or service or resources between two or more nations called
as International business. This exchange can be anything like physical goods to other
resources like people, patents, copyright and assets, liabilities. Globalization creates
a greater opportunity for business. Such type of globalization can take place where
buyer preference is changing. In terms of production where sourcing of products and
services are from another countries. (Saylord 2012)

India is emerging market with more then 1B population and a gross domestic
product of 1B USD. India is land of opportunities for domestic and international
marketers in different industry sectors. World class brands from fashion industry to
telecommunications to pharmaceuticals have a significance presence in India. Now
more than 500 IT companies have operations in Bangalore a tech city in India.
(Nakra 2010)

Advantages of International Business:

 High living standard: Countries which are rich in raw materials, human
resources, land and capital have benefits to produce a low cost product which
enhance the local consumer purchasing power and which leads to living a high
standard quality life by consuming high quality products.
 Increase socio-economic welfare: Due to increase of international trade,
consumers can enjoy the wider range of products which enhance economic
development of that country.
 Wider market: International business increase the market size. Big MNCs
can not rely on single country they can do trade in any country and focus on
other foreign markets too.
 Reduce risks: Both commercial and political risk is reduced by international
trade.
 Provides the opportunity to domestic market: Foreign companies gives
opportunity to domestic company in technology, market intelligence etc.
 Economic growth: Specialization of country resources, labor, productivity,
innovations leads to economic growth of nations.

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  Cultural engagement: International business benefits not only on
commercial and economical factors but also on culture and social
development.

Disadvantages of International business:

 Political Factors: Government instability cause a discouragement for

international business. Its effects on their long term goals and objectives.
 High invest in foreign: Developing nations which have less purchasing
power can led to failure to get that money where they are doing their
operations in that countries. So, there is risk is of losing the investment.
 Exchange instability: Due to fluctuation of currency exchange rate there is
less chance of return as per target.
 Entry requirements: local government impose rules and regulations for
foreign country in their mode of entry.
 Corruption: Corruption and bribe discourage the foreign investors to expand
their business on those countries.
 High cost: While entering into new foreign market there are pre-expenses
before starting the operations into that countries like market survey, quality
check, legal activities. These activities demand high cost by which foreign
investors refrain themselves from internationalizing their business.

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Theories of International Business
International business consists of many aspects differ from different countries. There
are many theories related to international business-like Mercantilism, absolute
advantages, comparative advantages, factor proportions theory, international
product life cycle, new trade theory and national competitive theory.

Theory of Mercantilism

International
business Classical Absolute advanatges

country
based
Comaprtive advanatges

theories Heckscher ohlin

Country similiarty

Modern Product Life cycle

firm based
theories
Global strategic Rivalry

Porters Diamond theory

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Theory of Mercantilism
Mercantilism is an economic and political practice in Europe in late 16th to 18th
century. The main aim of this theory is to maximize the nation economy by limiting
exports tariffs and maximizing exports or less import. Other simplest form is as
‘Bullionism’: the new idea of measuring the country wealth by a gold they have.
Such ideas are very attractive to some governments. Accumulating gold is necessary
to be a powerful state in world.

Theory of Absolute Advantages and Comparative

Advantages
It defined as ability of company, people, country to produce a good or service in low
cost in more efficient way then other entities who is producing same good or
services. For example, if A is producing a 1000 shirts in 2 hours and B is producing
same 1000 shirts in 1 hour then B have absolute advantages then A. (Fontinelle,
2011)

Almost all countries have an absolute advantage in various sectors like Canada have
in agriculture because largest area and other Asian countries are known to have an
absolute advantage in manufacturing products because of low labor cost.

If one country/organization is specialize in producing that product or services more

efficiently and cost efficient then they have comparative advantages to the other
country/organization (economic online 2012) there is benefit to both countries by
trading with each other if one of them is more efficient then another.

For example, if one worker in a A Country generate both pant and shirt at 10 per
hour and if worker in a B country with low equipment capacity is producing either
4 pant or 6 shirts per hour, each nation can earn profit from doing business because
their business of pant and shirts are different. The less efficient country have a
comparative advantage in shirts and can trade for pants with more efficient country.
It is called as gain from trade.

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Theory of Heckscher Ohlin
The Heckscher Ohlin model is calculations-based model. It demonstrates that the
nations will export the goods that use their plenty and cheap factor of production of
that goods and import the countries that use the countries scarce factors.

Countries have the comparative advantage in those goods which are abundant locally
in production. This is because the profitability of products is calculated by producing
costs. Products that require inputs that are locally plenty are cheaper to produce than
those products which require inputs which are locally less.

For example, a nation where economy and land are abundant but labor is scarce,
have comparative advantages in those goods which require less labor but huge
capital and land for instance – production of grains. If the capital and land is massive
then the product price will be less. This is the main factor required to produce the
grains that the price will be low so that it is attractive to both locally consumption
and while exporting.

On the other hand, goods which require high labor are expensive to produce where
labor is scarce and its price is high. Therefore, its better for country to import that
product from another country.

Country similarity theory

Country similarity theory states that the countries having most similarities ( per
capita income, economic development, GDP, transportation, industrialization,
communications, language etc. ) are most likely to trade with each other. The
business between two countries of goods produced by the same industry like japan
export Honda to india and India export hero to Japan.

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Product life cycle theory
This theory based on trade between developed countries according to product life
cycle concept. According to this theory there are three company’s
internationalization which are a New product, a maturing product and standardized
product. this concept is applied on multinational companies. The main aim of this
theory is how to increase the profit.

New product level

In this theory, new product is created in small scale and marketed in domestic
market. After reaching to popularity it is exported in a smaller scale to developed
nations. For example, if A country produce an environment friendly car and then
sells to another advanced economic and developed nations.

Maturity product level

When the new products begin expansions in market in existence of competition then
company decide to go foreign market by transferring production in another develop
country to reach maximum consumers. Normally, there is another branch opening
in part of world where company wants to expand their business. Company open the
branch in that country where cost of production and labor is lower so that they can
increase their profit. Another advantage is that transportation cost is less so that they
can fulfill the customer demand as quickly as they can. It will not take that much
time as they are doing before by exporting the product from their home country to
another nation.

Standardized product level

This is product mature and declining level. Production of the products in developing
countries where production cost, transaction cost and labor cost is less then home
country and these products then exported to their home country and another
developed country.

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Porters theory
It states that the country has a competitive advantage in an industry if they have
capacity to upgrade and innovate.

Firm
strategy, Demand
Structure conditions
and Rivalry

Related
Factor and
conditions Supporting
industries

Figure: Porter Diamond Diagram

‘Factor conditions’ are the nation factor of production which comprises of

production cost, labor, capital and land. It is competitive advantage for national
enterprises in global market.

‘Demand conditions’ is the nature of local customers which can become the source
of competitive advantage.

‘Related and supporting industries’ it describes as the mutually supporting of

different industries to each other for the benefits of each other. For example,
pharmaceuticals industry, chemical industry, marketing firm and packaging
industries work together in same region for each other mutual benefits.

‘firm strategy, industry structure and rivalry’ describes the strategic characteristics
of industry and rivalry in different countries in can also be advantage. For example

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Germany company spending on technical excellence can helps the engineering
industries.

Global Strategic rivalry

It describes is several ways in which big multinational companies can develop
competitive advantages over its competitors by expanding their business in global
market, investing money into research and development, acquisition and merging
etc. the main aim of this maximization of the company profit for their financial
shareholders not depends upon social and environmental factors.

International Business: Mode of entry

The decision of how to enter into foreign market have a significant impact on
business growth results. There are four different mechanism for expansion of
business on global level

1. Exporting
2. Licensing
3. Joint venture
4. Direct investment

Exporting:
Exporting is traditional method to enter into foreign market. In this no investment
required or no need of open a production facility.

Exporting consist of coordination of four players:

 Exporter
 Importer
 Transport provider
 Government

There are three different types of exporting:

 Indirect exporting: Export broker, export trading company etc.

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  Direct exporting: foreign agent and distributor, own distribution network etc.
 Cooperate exporting: export grouping, piggybacking. ( stone 2014)

Licensing:
Licensing is essential for a multinational enterprise to do business in their target
company and use the property. Such type of property is intangible like Rights,
trademarks, patents etc. The company who wants this license have to pay a fee to
get those rights on intangible property. It is legal agreement between a local licensor
and foreign licensor.

franchising is similar to licensing in which big companies give franchise to another

investor with their own terms and conditions. For example, Subway, KFC all this
food industry expands their business in different countries through the franchising
mechanism. ( quickmba )

Joint Venture:
There are five main basic objectives in a joint venture which are market entry, Risk
sharing, Technology sharing, join product development and confirming to
government regulations. (Kotler and Armstrong 2012). Joint venture will survive if
there is following conditions are present between the partners like: converging goals,
small market share and are able to learn from each other without surrendering their
comptetive advantages or intellectual property rights. (Ching, chand and moon 2012)

Under the right circumstances, a joint venture can allow an organization to gain
access into new market where they can’t do it. The main restrictions are from the
local government because of threat of local industry, environment and long-term
industry prospect etc. The real-life example of Singapore airline industry, they want
to enter into Indian domestic airline industry but government of industry restrict their
entry because of threat of local player in that market. However, they enter into India
with the joint venture of Tata group by owning a 49% of share. Enter into Indian
market through wholly owned subsidiary is not possible because of government
rules and regulations but they enter through tata which maximize their exposure,
profit, flexibility etc. (the Indian express 2014)

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Direct investment/wholly owned subsidiary:
This is processing whereby a multinational enterprise enter into the foreign market
by 100% ownership. They do direct investment into the foreign land (Yiu and
Makino 2002)

There are two ways of wholly owned subsidiaries which are acquisitions and
greenfield operations. Acquisitions is the purchase of foreign organizations to enter
the market and greenfield operations is creation of new organization into the foreign
market by direct investment. Organization who wants to limit their risk, and
maximize the exposure they will choose the acquisition method because existing
company in targeted country have reputation and customer base. Greenfield
operations and acquisition are not superior to each other. In fact, it depends upon the
company goals, objectives and circumstances.

Wholly owned subsidiaries or direct investment is the risky entry mode then other
discussed entry modes. If implemented wrongly it can cause a high loss to the
company, brand image and profit. But if it implemented correctly and in the right
circumstances it generally gives high rewards back. An organization which enter
into the foreign market by direct investment have high control, high commitment,
high presence and high risk. It allows to organization to reach diverse geographic
region. (Yiu and Makino 2002)

The Case study of IKEA entered into INDIA market

About IKEA:

IKEA is multinational home furniture retailer. It was rapidly growing from its since
starting 1943. Today it is largest furniture retailer known for its Scandinavian style.
It was founded by Sweden national Ingvar Kamprad. They are also known for ‘ready
to assemble by customer’ furniture company. Most of their furniture’s are assembled
by customer only. This allows the reduction of cost of product and packaging. As of
November 2017, IKEA owns and operates 423 stores in 52 countries.
(Franchisor.ikea.com, 2017)

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 Customer can buy IKEA product by walk in store or buy online. Around 12B people
visited IKEA website in year 2105-16. Most of the IKEA stores are owned by
INGKA, a holding company controlled by stitching INGKA foundation, one of the
40 wealthiest foundation in the world.

International expansion:

Ikea started expanding in 1963 to Norway for its first foreign market. There are
different factors that need to be considered while entry into the new market, presence
of the market, warehouse, operations and suppliers. It is very easy for IKEA to that
market where they have already doing operations otherwise they have to setup
everything from starting. IKEA is sourcing from India since last 28 years, so it is
easy to enter in India as they know their bureaucracy and corruption level.

IKEA enters into India

IKEA use franchises system to expand their business in developing countries. IKEA
group is franchisee of IKEA which owns 90% of the IKEA store. IKEA India is the
investment of IKEA group.

Target customers: IKEA’s target market is family with children. There business area
is to reach maximum people. The middleclass of 350 million people can afford
IKEA.

Marketing: IKEA team launch a brand campaign for Indian market with the
partnership of Dentsu impact a creative ad company.

Competition: Ikea have competition with local markets, foreign retailers but major
competition is with unorganized local markets where a customer can reach possible
and order as per their specifications and price.

Pricing: Price of IKEA products is less than competitors because their aim is to reach
each and every customer. IKEA have attractive offers and affordable price products.

Risk and challenges: They have some challenges in their supply chain. Another thing
is Culture and IKEA value which is similar to Swedish values. So, the staff must be
trained properly and understand the IKEA aim, goals, objectives and values

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PESTLE analysis:

Political Legal Economical Social technological Environmnetal

•Instability •30% sourcing •High inflation •No 'DIY' •Poor •Climate

•Bureaucracy from local •Weak culture infrastructure change
and corruption SMEs currency •Small sizes and logistical •Environmental
•Central and •Rulling and •Price sensitive homes support friendly
state govt. opposition consumers •Style and •Electricity products
conflicts partiies have •Tax laws status disruptions
different conscious •limited
oppinion on consumers intelluctual
FDI •low availibility property
of skilled enforcement
workers •Rapid internet
penetration

Recommendations:
In aspect to achieve its expected results from the Indian market, IKEA will need to
apply these following strategies:

Segmentation:

 focusing on 25-35 aged people whose income is more then average. These
types of customers are more attracted to westernized lifestyles and looking for
uniqueness and imported design products. So, IKEA can serve these type of
customers as per their living standards.
 In order to manage the high-income customers, there must be special staff to
give attention and premium service to them.
 IKEA must offer local home delivery and long-distance delivery to Indian
cities.
 Due to shortage of wood and government environmental regulations, IKEA
must find an alternative way to find new materials which is lighter and
environmentally friendly.

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Positioning:

 Government forces foreign companies to source from local market. Therefore,

IKEA have benefits to sourcing from small manufactures and provides low
prices to Indian market.
 IKEA have to maintain the quality with low prices.

Branding and Awareness:

 IKEA must be active on social media and quick response to their customers.
 The layout of store reflects the design of many Indian flats and can join with
builders or constructer to furnish the flats and give offers to customers.

Conclusion:
The purpose of this study to critical evaluate the method of internationalization. How
retail organization enters into emerging market by using different business strategy
and mode of entry. I choose IKEA as retail organization which enters in Indian
market recently. IKEA group is major franchisee of IKEA and IKEA India is the
investment of IKEA group. IKEA is already sourcing from last 28 years from India
so it is easy to enter in Indian market as they know the circumstances of market.
IKEA did partnership with DENTSU impact to launch their brand companion. IKEA
targets Indian family for their marketing and giving affordable prices and offers.
They have their own first store in Hyderabad where they getting good response.
Also, they are doing e-commerce. They have upcoming project which is to reach
maximum consumers by providing local store in big cities like Delhi, Mumbai and
Bangalore.

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