international business final Flashcards
What are the 3 strategies for going abroad? Describe them.
- deployment: a firm replicates its competitive advantage (replicates what works at home) into new markets + value is created by aggregating demand (selling more of the same thing to more people) + uses standardized products/services + targets similar customer needs + gains economies of scale
- development: building new capabilities by tapping into the strengths of different locations + create an integrated competitive advantage + focus on knowledge arbitrage + pick locations that are different enough to offer something new, but not so different that integration becomes hard
- deepening: widen competitive advantage without changing primary business strategy + adapting to local tastes to increase willingness to pay + decreasing costs by aggregating demand + being internationally present increases value for stakeholders
What are the 3 strategies that companies use to approach international business?
ADAPTATION
- allows firms to customize their products to meet local needs
- often a starting point for entering new countries
- can convert non-buyers by changing features
- risk is that there can be too much variety and complexity
AGGREGATION
- achieving scale economies by standardizing offerings
- sell same product globally
- focus on efficiency and cost savings
- risk is that customer differences may be ignored
ARBITRAGE
- exploiting differences across countries
- buy low in one market and sell high in another
- risk is that these spreads can get narrow
What are the 2 challenges of new markets?
- liability of being a foreigner: foreign companies face higher prices in the host country due to lack of local knowledge (they know you are new) + foreign firms may struggle to navigate the local legal system, cultural norms, and consumer preferences + locals may view foreign products as inferior
- paradox of being consistent: changing elements of your strategy, but this becomes inconsistent with the rest of your company
How do you adapt to the liability of being a foreigner challenge? What are the consequences?
- see what locals like and adapt
- may lose competitive advantage
What makes a good partner?
you love them because they add to you, and they love you because you add to them (subjective, partner does not have to be the best in the world)
What are some advantages and disadvantages of strategic alliances?
- advantages: spread risk, spread capital investment, bring resources together, facilitates entry to foreign market
- disadvantages: may give competitors a low-cost route to new technology and markets
What is economies of scale?
a company increases its production volume to reduce per-unit costs and increase efficiency
What is economies of scope?
a company diversifies its product offerings to reduce per-unit costs and increase efficiency
What are the 2 differences between economies of scale and economies of scope?
- 1 business (economies of scale) vs. multiple businesses (economies of scope)
- always about costs (economies of scale) vs. could be about costs or revenues (economies of scope)
What are the 2 types of economies of scope (2 types of synergies)? When do both of these happen?
- subadditivity of costs: a situation where the total cost of producing a good or service is lower when produced by a single firm than when produced by multiple firms
- subadditivity of revenue: when two parties join forces, the value they create together is greater than if they operated in isolation
- happen in the long-term
What are the 3 things that create value?
- opportunity cost of resources
- external option of resource providers
- willingness to sell
Which markets should you enter?
- look at spending power, size of the market, stability (political and economical)
- start in home country (competitive advantage) and then go abroad (buyers abroad may have higher willingness to pay)
- look at countries who like your product
What are some advantages of letting others enter the market before you? What are some disadvantages?
ADVANTAGES
- you can buy and sell their failed products to get wealth
- less uncertainty
DISADVANTAGES
- competitors may already have strong brand recognition, customer loyalty and market share
What are some advantages of being the first to enter a market? What are some disadvantages?
ADVANTAGES
- strong brand name
- capture demand
- no competition
- seen as more innovative than other companies
DISADVANTAGES
- devote time and effort to learn the rules of the game
- market may not exist so may be required to educate customers
Why would a firm want to start big? Why would it want to start small?
- BIG: by collaborating with a big company, risk of failure is low, penalty of failure is low, more commitment means more costly but better potential for success
- SMALL: safer but less rewarding, kills the chance to get higher reward, able to understand if the market will be fruitful in the future, chance of success decreases
- depends on risks and rewards, there is no right decision
What are the 6 modes of entry? Describe them.
- exporting: no necessary investments, sunk costs are low, able to familiarize yourself with the market (increased understanding of the market and therefore less chances for bad decisions), lowest commitment, high transportation costs, tariff barriers, easiest way to enter new markets
- turnkey projects: 24/7 industries, building up a plant and then selling it (give the keys to someone else), a little more commitment than exporting, disadvantage is you may sell competitive advantage to a potential/actual competitor, no long-term interest in foreign country
- licensing: one company grants another company the right to use its intellectual property in a foreign market, no development costs, no control over marketing and strategy
- franchising: selling in home country and want to geographically diversify, only bring brand to the new geography and the other things are supplied by the local suppliers, not much capital is needed for growth, you are not the boss/owner
- joint ventures: a new entity is born, aggregate resources together, shares costs and risks, not sole decision maker, battles for control
- wholly owned subsidiaries: highest commitment because you are the owner, all of the profit (or loss) is yours
Which modes of entry have low commitment (low risk)? Medium commitment (medium risk)? High commitment (high risk)?
- low commitment: exporting
- medium commitment: turnkey projects, licensing, franchising, joint ventures
- high commitment: wholly owned subsidiaries
What are some challenges of exporting?
- product becomes more expensive elsewhere (due to tariffs)
- product may not be as competitive elsewhere
- requires further investments (advertising, distribution centers)
- inexperienced exports suffer (need to learn the processes, lack of knowledge about the markets, same work becomes more expensive)
What is a letter of credit? Why do companies trust letters of credit? Who pays the fee for a letter of credit?
- a bank-issued document at the importer’s request guaranteeing payment to the exporter
- because they’re backed by reputable banks (solves trust issues)
- the importer
What is a draft (bill of exchange)?
- payment instrument used in international trade to settle transactions (these transactions are either domestic or international)
- buyer can obtain possession of merchandise without signing a formal document acknowledging obligation to pay (domestic) vs. payment or a formal promise to pay is required before buyer can obtain merchandise (international)
What are the 2 types of drafts?
- sight draft: requires immediate payment upon presentation
- time draft: payment is made at a later and specified date, time drafts can be either banker’s acceptance (accepted by a bank) or trade acceptance (accepted by a business firm)
Are drafts negotiable?
yes
What is a bill of lading?
- document that serves as a receipt of goods, a contract between owner and carrier, and document of title (proof of ownership or control of the goods)
- it can be used as collateral (something provided to a lender as a guarantee of repayment)
What is countertrade? What are some of its pros and cons?
- goods and services are exchanged for other goods and services, rather than cash or credit
- pro: useful when lack of cash in buying country or when non-convertible currency
- con: firms would normally prefer to be paid in hard currency, may involve the exchange of unusable/poor-quality goods
