Challenges in International Strategy

Risks in International Strategy. When a firm conducts business internationally, its subsidiaries operate on an equal footing with the parent company. These geographically dispersed branches behave and conduct separate business. Additionally, there is only a little parental corporate coordination (Cingoz & Akdogan 2013, pp. 572-586) A private company’s intentions and activities, not those of the government, are essentially reflected in an international business strategy; as a result, the main objective is to maximize profits. Notably, there are three different forms of these international corporate strategies: multi-domestic, global, and transnational (Akhter & Beno 2011, pp. 26-30). Using a global strategy the local responsiveness is maximized by giving decentralizing decision making authority to individual business units in the different countries so that they can create products tailored for their respective local markets. In global strategy, there is no decentralization as all the operation involving in and around decision making is controlled by the home office with the aim of ensuring global efficiency (Cingoz & Akdogan 2013, pp. 585-589). Lastly, the transnational strategy combines the best of the other two strategies that are multi-domestic and global to achieve local responsiveness and global efficiency. Nonetheless, the combination of domestic and global strategies is usually an uphill task since it requires the fulfilling of the dual goals of flexibility and coordination. Firms that effectively implement a transnational strategy often outperform competitors who rely on either the national or global corporate strategies.

International strategy is dynamic in the sense that it requires knowledge of the most current trends in its successful execution. Its complexity is drawn from all plans, efforts, and strategies involved thus the combined complexity, and dynamic nature makes an international strategy to be dominated by risks (Niepmann & Schimdt-Eisenlohr 2013, pp. 3-20). It is the dream of many companies to go global, but going global is often accompanied by a share of its challenges and limitations. The presence of these challenges is what qualifies the international expansion strategy to be a dynamic and complicated process. The understanding of this dynamic nature (characterized by constant change, activity or progress) helps the firm to employ the necessary strategies and build systems to aid in the process of expansion (Hou 2013, p. 23). The processes therein involved are intricate due to the need to prevent high-risk prevalence to deliver successfully in the expansion process of an organization. However, with the ultimate goal of maximizing profits and ensuring multinational existence, risks are always not shoved away completely or permanently (Ruigrok, Dimitrios & Greve 2013, pp. 6-15). Risks may come as a result of different factors or improper prior preparation towards risk management. Moreover, the degree of risks differs from one company to another and from one country to another depending on the degree of risk to the exposure.

International expansion among businesses is faced with numerous risks. Foreign exchange fluctuations are one of the risks that face the use of global strategy. These variations have a direct effect on cost. The International strategy which is primarily formed on the commitment of resources, adverse foreign exchange fluctuations may pull down the resources used thus leading to little or no profits (Akhter & Beno 2011, 28-32). These foreign exchange fluctuations are compared between the parent company location and the subsidiary company location of operation. The impact of interest and exchange rates make it highly risky to conduct international business. These fluctuations cause the value of the firm’s assets, liabilities, operating incomes and expenses to differ from the existing ones (Niepmann & Schimdt-Eisenlohr 2013, pp. 30-50).

Notably, the highly dynamic nature of international strategy may lead to strategic risks. A firm should have the ability to make a strategic decision in response to the forces that are a source of risk. The Porter’s model can be instrumental in the formulation of such strategies. The model highlights the need to analyse competition intensity in the market, the threat of new entrants in the market and substitute goods and services and the bargaining power of consumers and that of suppliers (Chang 1994, p. 51). For instance, the new entrants may limit an established multinational company from acquiring customers or even raising prices. Strategic decisions are therefore significant in determining if new entrants will gain a foothold (Camelo, Fernandez-Alles & Hernandez 2010, pp. 678-685).

Furthermore, an international strategy may be faced by political risks particularly if a firm intends to operate in a politically unstable country. A corporation cannot operate towards maximum profit realization in a turbulent political environment (Carpenter & Dunung 2012, p. 67). In the expansion of business, it is usually unpredictable of the future political situation making international strategy highly risky. Adverse political actions can be very detrimental to business. These political risks can be macro or micro. Macro risks may be harmful to the extent of affecting all foreign firms and lead to cases of expropriation whereas micro risks may affect an industrial sector by having stringent rules or actions on all foreign companies (Carpenter & Dunung 2012, pp. 55-94). The ultimate effect is that multinational corporations may end up losing their finances if unprepared as it was in the case of Fidel Castro takeover of Cuba in 1959. A firm is then likely to consider a nearby politically stable environment because of the market commitment and degree of risk (Twarowska & Kakol 2013, pp. 1006-1011).

Additionally, operational risks are a great threat to the international business strategies and may cause great losses. The risks are caused by the assets and financial capital that aid in the day to day business operations of an organization (Niepmann & Schimdt-Eisenlohr 2013, pp. 50-65). The breakdown of machinery, the demand, and supply of resources and products, shortfall of the goods and services, lack of efficient logistic planning and execution and inventory will lead to inefficiency in production. Cutting down production and operational costs can reduce unnecessary waste and enhance profitability both locally and globally (Hou 2013, pp. 23-24). As a result, the risks of operation are curbed along with the operation process to ensure their reduction.

Communication barriers which comprise of those arising from language, culture, and customs may affect the expansion strategy of a firm. Risks of this nature may affect the expected output of a multinational company if the company is found on the receiving end of these negative outcomes. Therefore, the expansion strategy should be adequately choreographed to address these adversities in the event of their occurrence (Carpenter & Dunung 2012, pp. 512-546). The preparation of a firm to address risks arising from this barrier makes international strategy a complex and dynamic process thus tagging along with the relative risks. In Uppsala explanation, a firm will venture into a nearby market with little market commitment which explains why a multinational company in its expansion process will readily venture into an adjacent market with a relatively similar culture, customs and language with the location of the parent company (Carpenter & Dunung 2012, p. 512). For instance, an organization based in Europe may be a little reluctant to venture into the African market due to proximity and the difference in the language and culture but better still get into the market of several European countries where their products are readily and easily acceptable.

Moreover, supervisory shortcomings may arise from physical absences and distance. Even though a firm will always seek to demonstrate some independence from the parent company, this is however not a guaranteed practice as the parent company will want to exercise its supervisory mandate. However, this mandate is limited because of risks that are tagged along with distance and the parent company’s physical absence in management (Hou 2013, p. 23). The complexity and dynamism of international strategy are experienced in establishing mitigation measures of risks arising from such situations.

Environmental risks are also some of the risks that are usually associated with the global expansion of a company. Whereas it is impossible to dictate and inform the environmental conditions of a location, it is important to note that proper assessment of the said factor is necessary during expansion (Cingoz & Akdogan 2013, pp. 584-589). The process of international expansion will always seek to employ essential skills and risk mitigation measures to limit the vast impact risks have on business. Nevertheless, following the dynamism of the international market such risks are not guaranteed not to happen. Business owners and corporate legal representatives need to understand the significant legal differences between their parent companies’ location and the country or countries that they want to set operations. The understanding of this aspect helps avert crises that may arise due to legal misunderstandings and misinterpretations. For example, the US law is different from that of the other world which is centered on European Law (Akhter & Beno 2011, pp. 27-34). Businesses should understand the international business law as it will guide the organization’s undertaking to limit the legal risks involved in the expansion process.

Conclusively, however extreme all the discussed risks may be, a globally operating company should keep a careful watch on all prevailing local conditions and internal logistics. As part of the risk mitigation process, regular auditing by an in-house audit team or external audit firm is essential in the effective control of risks which ultimately secures the financial interest and position of the parent company (Niepmann & Schimdt-Eisenlohr 2013, pp. 65-70). Best practices for international business are centred around robust risk assessment, and mitigation strategies against political, environmental, strategic, financial, corruption risks and any other risks since they can occur spontaneously (Miller 1992, pp. 320-330). Finally, the global business space is dynamic and so any effective strategy will pay off in the ultimate prevention of risks to ensure productivity and profitability of the business.

References

Akhter, S. H. & Beno, C. (2011). “An Empirical Note on Regionalization and Globalization. Multinational Business Review, vol. 19, Issue 1, pp. 26-35.

Camelo, C., Fernández-Alles, M. & Hernández, A. B. (2010). Strategic Consensus, Top Management Teams, and Innovation Performance. International Journal of Manpower, vol. 31 Issue 6, pp. 678-695.

Carpenter, M. A. & Dunung, S.P. (2012). Challenges and Opportunities in International Business.

Chang, M. H. (1994), The Dynamics of Porter’s Three Generics in International Business Strategy, in (ed.) Research in Global Strategic Management. Research in Global Strategic Management, vol. 4, p. 51. Emerald Group Publishing Limited.

Cingoz, A. & Akdogan, A. (2013). Strategic Flexibility, Environmental Dynamism, and Innovation Performance: An Empirical Study. Procedia - Social and Behavioural Sciences, vol. 99, pp. 582-589.

Hou, A. X. (2013). Risk Management in International Business. Risk Management, issue 27, pp. 23-24. Society of Actuaries.

Miller, K. D (1992). A Framework for Integrated Risk Management in International Business. Journal of International Business Studies, vol. 23, no. 2, pp. 311-331

Niepmann, F. & Schimdt-Eisenlohr, T. (2013). International Trade, Risk and the Role of Banks. Federal Reserve Bank of New York Staff Reports, no. 633. Pp. 1-71.

Ruigrok, W., Georgakakis, D. & Greve, P. (2013). Regionalization Strategy and Performance. Multinational Business Review, vol. 21, Issue 1, pp. 6 – 24

Twarowska, K. & Kakol, M. (2013). International Business Strategy Reasons and Forms of Expansion into Foreign Markets. Zadar, Croatia. Pp. 1006-1011.