Category: Internationalization

There are four main modes to approach the internationalization process and to work on international trade and development activities: Import, Export, Licensing and Franchising.

If we focus our attention on the less common modes of internationalization, Franchising and Licensing, we can notice a lot of features which are common to both modes and that can be analyses for a better understanding of the internationalization process.

Normally we refer to Franchising considering all those Brands that expand their presence in a territory through a network of stores. If you have more than one shop... you are a franchise. This statement is wrong because it is not always the case. In fact, some Brands prefer to retain ownership of every single point, regardless of their location, thus centralizing the internationalisation processes and closing the doors to potential affiliates. This is the case, for example, of brands such as Kiko or GameSpot. Even Starbucks has grown internationally by opening its own branches (by contrast, McDonald’s is considered as one of the best examples of a business that has grown through a franchising model).

When a company, on the other hand, decides to expand its business and open its doors to other entrepreneurs decentralizing the management (and capital) of the various points, there are two methods that can be used: Franchising or Licensing.

We have a franchising agreement when a mother company tries to transfer to its affiliates a specific know-how. This know-how is also linked to the concept of licensing, indeed, it can include confidential information, trademarks, logos and designs, copyright materials and potentially patents. The essence of franchising is therefore the passage of a real "know-how" that must be collected in a special operating manual becomes vitally important as well as legally indispensable. In this case the freedom of the franchisee is really minimal to the advantage of standardizing processes and product quality.

The essence of licensing is the owner retaining ownership of its Intellectual Property while offering others the right to use it. Thus, a company is allowing third parties to use a technology or a new process idea to develop their businesses. This license is usually given in return for royalties. There is also a so-called brand-licensing which represents an agreement of a mother company providing to its licensees its brand, directives and a basic set of business together with constraints and indications related to the use of the brand. The emphasis in brand-licensing is shifted to communication and to the brand itself, leaving to licensees more possibilities for movement in the management of the activity. Luxury brands are highly sought after for licenses, as their brand brings a touch of prestige to the product to which they lend their name. But luxury brands should be careful not to stray too far from their market or offer too generous licenses. This due to a risk of devaluating its brand and lost much of its cachet (i.e. Pierre Cardin).

The international trade and development activities have various approaches on how to conduct the process. Among these approaches we can underline the four most significant ones:

1. INDIRECT CHANNELS

They are represented by companies which based their international trade and development activities with operators that buy the product and resell it in their own market, both to final customers and to other local companies. These operators are for instance importers (who also take care of border and customs management) or distributors (which instead often require the customs management and practices by an importer company).

Indirect channels involve less investment and less commercial risk in the short term, and also represent the ideal solution for a first export phase. However, these channels also have significant disadvantages, largely due to the limited presence of the companies in the foreign market, which makes their exports dependent on the commercial relationship with the foreign importer / distributor.

2. INTERMEDIARY CHANNELS

The international trade and development activities can be focused on international partnership. Thus, in this case companies are selling their products and services abroad thanks to the commercial activities of local partners, intermediary companies, or agents. The trade is usually direct with the final customer, while the local agent gains a fee for the support it gives to the foreign company to enter in the new market and for developing the local network. The international partnership can have various forms, in particular they can have the exclusivity or not. When a local agent has exclusivity means that it is the only company who has the right to sell those products for a certain limited period. In counterpart, the foreign manufacturing company is usually asking to the local agent to reach a minimum number of sales within its exclusive territory.

3. DIRECT CHANNELS

These are the companies that establish their business in a foreign country. Thus, their international trade and development activities are direct and independent. Some of these companies are for instance retail or e-commerce chains which allows the company to manage business relationships directly.

The direct channels, and therefore the decision to directly manage its own customers or even to address the final consumers, has the strategic advantage of consolidating its commercial position receiving direct feedback able to constantly improve its action on the new market and to obtain higher margins. However, even this path is not without its weak points: greater investments, greater rigidity of the structure (disinvesting from a market is more complex and generally much more expensive), post-sales management by the same company.

4. COUNTER TRADE

It is a barter form, used in modern international trade and development activities, whereby the buyer pays for the goods by selling other goods.

It represents a set of specific contractual formulas, modern form of barter, used in international trade, united by the presence of binding agreements between sovereign states (more or less explicit legal framework), which link export transactions to other import transactions. The counter trade consists of a single contract through which supplies of goods, products or raw materials are compensated by the acquisition of other goods. This specific international trade approach is widespread especially in countries that are poor in currency resources and rich in raw materials. In the past it was used in particular in the interchange with Eastern and Third World countries, in order to improve nominal trade deficits and alleviate transfer and convertibility problems related to the different monetary and credit systems.

Why is Culture Important in Understanding Strategic Management and Business Development?

Any of us who is travelling is constantly living different situations that can be considered strange, anomalous or weird to us. Culture impacts in our daily life as in our business. Indeed, every culture has its own values, habits, attitudes, believes. We usually simplified(y) and link a culture to one single nation, but we should always consider that this is not really correct because in any nation there are also differences such as various territorial origins with different histories and socio-economic situations (i.e. Western and Eastern Germany; Northern and Southern Italy, etc.), different ethnicities, religions, minorities, languages, etc.

Culture is relevant in Management and Business Development because it embraces a large number of spheres which can influence our perceptions and decision-making approach. In particular there is a variety of business-areas where culture can strongly influence and impact on the strategic approach and the expected results of a company:

- Marketing

- Management of international teams

- Business negotiations

- Leadership

- Language and communication skills

- Establish business trust and long term relations.

Analysing the Marketing and looking at these two videos, for instance,  (https://www.youtube.com/watch?v=smusX8AirYY & https://www.youtube.com/watch?v=PIojNGI9KGE) we can easily understand how two companies, both working in the bakery and pasticcerie sector, are focusing their television-advertisement on different cultural-values. Indeed, the Finish Company Oululainen (https://www.oululainen.fi/) which has developed the first video focuses its attention on the tenacity and independence of the child from his father concluding the video with the written sentence “Kova kuin elämä” - Hard as life. The video of the Italian Company Mulino Bianco (https://www.mulinobianco.it/home) is instead focused on the value of the family and its unity. Mulino Bianco video, indeed, at the end of the images says “Flauti, fatti per stare insieme” – Flauti, made to be together. This example notices the relevance of culture in any marketing strategy.

What is culture?

Culture is a complex concept which defines the individual and collective, intellectual and social, material and spiritual evolution of people. The concept of Culture had a relevant historical progression, in particular from the second half of XVIII Century, thank to various scholars such as J.G. Von Herder, E.B. Tylor and later on to F. Boas.

According to Richard D. Lewis, one of the main scholars who has studied the role and impact of Culture in Business, the concept of Culture is composed by different levels and each level correspond to specific individual and collective characteristics. Lewis Model defines as most relevant characteristic of our Culture the National level, while the personal level as the least influencing one (see the picture below).

Levels of Culture (Lewis Model view)

Lewis explains also that Culture is linked to a single nation due to the specific collective way we perceive and create it. Thus, analysing the pictures below, we can compare the perception of culture of Germans and Japanese. In the first case - considering the German cultural perspective - each individual entering in the society undergoes a “process of acculturation” which later is transferred to other younger individuals. In the second case - considering the Japanese cultural perspective – Culture is evaluated as collective and united concept which all people are carrying on day by day, year by year. In Japan, the culture itself includes different collective concepts such as art, language, science, law, philosophy, etc. Thus, comparing the two perspectives we can underline that German culture is founded on the concept of individuals, while Japanese culture is based on the community and its harmony.

Evolution of Culture – German perspective (Lewis Model view)

Evolution of Culture – Japanese perspective (Lewis Model view)

According to the Lewis Model, there are four specific main spheres where people can easily have a cross-culture misunderstanding: 1) VALUES - Core beliefs; Attitudes and world view; 2) COMMUNICATION PATTERNS - Speech styles; Listening habits; 3) Concept of TIME; 4) Concept of SPACE. Looking at the pictures below, indeed, we can see how people perceive differently the meaning of space.

Meaning of Space – People waiting a bus in Finland

Meaning of Space – People waiting to enter in a Temple in India

Meaning of Space – People waiting to enter in a Bank in Bulgaria

The Lewis Model of Cross-Cultural Communication

Richard D. Lewis has distinguished the different cultures in three main groups: Linear-Active; Multi-Active; Reactive. Focusing mainly on the national level, Lewis Model defines the Anglo-Saxon cultures as Linear-active (i.e. Germans, English, American, etc.), so people who are frank, direct, job-oriented and capable to follow their activities in a well-organized and linear way. Multi-Active are all the people belonging to Latin cultures (i.e. Spanish, Italians, Brazilians, etc.) who are mainly people-oriented, very communicative, creative and capable to follow various activities at ones. The third category is called Reactive and includes mainly Asian cultures (i.e. Japanese, Chinese, etc.) which are polite, indirect, patient and react to partner’s actions. The three categories represent a model which simplified the reality, but each individual - despite his/her nationality - according to a detailed test which Lewis has created can belong more or less to one of these categories. Here below there is the picture of the triangle of Lewis Model and the list of the main features which define the classification of the three categories of Lewis.

Lewis Model – Linear-Active; Multi-Active; Reactive.

Main features of the three categories of Lewis Model

 

 

 

Partners in international business development can be distinguished in three main type of profiles: Importers; Distributors; Resellers.

Each of these profiles has a different relevance in the potential strategy we could implement to establish our business in a new country. Thus, it would be important to understand properly their different roles and activities in order to understand how their profile could match our business.

It is also relevant to underline that not always all these three profiles can be useful to our commercial strategy; potentially we could work with one, two or all of these three profiles.

The specific chain of any sector does not depends only on the will of a company or a producer, but it is influenced by various factors such as the geographic position, the transport costs, the knowledge we have about a specific country, the new legal framework, etc. All these factors influence the strategy of a producer or a company willing to develop its business abroad which cannot always control independently its internationalisation process.

IMPORTERS

Importers are all the companies characterized by these factors:

1. They buy large quantity of products to import them;
2. They work constantly with customs and therefore they are expert on legal practices and customs procedures;
3. They transport, import and stock large quantity of products with low prices;
4. They resell the products to local distributors.

This kind of company profile is very well known in particular in country with customs and border and which are not belonging to large economic community. In these countries the customs clearance and the need to reduce logistic costs are two key factors for containing costs and for the arrival of the goods at destination without problems.

DISTRIBUTORS / WHOLESALERS

Distributors are all the companies characterized by these factors:

1. They buy products from importers or directly from producers;
2. They sell their stock to resellers or to specific category of the commercial chain (i.e. in industrial sector to installers);
3. They have large stock to guarantee a fast delivery around all their territory of competence;
4. They have a well-structured and widespread sale-network;
5. They have various promotional and marketing activities such as sectorial fairs or events;
6. They can have post-selling activities – i.e. technical assistance for industrial machineries;
7. They are able to support financially (i.e. leasing, payment extension, etc.) their partners and resellers;
8. They are usually located in industrial/commercial zones out of large cities.

Distributors often represent key partners to a successful export-strategy or any internationalisation business process.

In some cases distributors can work also as importers, but generally speaking the two profiles are distinguished.

RETAILERS

Retailers are all the companies characterized by these factors:

1. They buy from distributors medium or small quantity of products;
2. They sell to final customers;
3. They usually commercial structures in residential areas or peripheral area easily reachable by consumers.

Retailers are for instance supermarkets, department stores, and various kind of shops.

This brief overview of these professional figures gives us a clearer understanding of different types of partners, of what they do and which of them are useful in our internationalization process. Identifying the necessary partner is a primary step for developing a correct and successful strategy to do business in a new country.

1. Demographic Analysis and Dimensioning of our Market in the new Target Country

This preliminary analysis gives us a general overview about the numbers of our potential clients in the country and shows how we could reach them.

This first analysis can be distinguished between B2C and B2B approach depending on the business core that we follow. Thus, if we focus on a B2C business, a demographic analysis allows us to evaluate the numbers of inhabitants of a specific territory, its density, the workforce, and the incomes groups. If we focus on a B2B business, a demographic analysis shows us our potential clients their location and density according to our corresponding sector of interest.

After the demographic analysis, the dimensioning of our market is represented by the evaluation of the niche of our clients which we would like to reach. Thus, the dimensioning represents a second filter to identify our commercial strategy in the selected target country.

2. Analysis of the Needs of our Market

As soon as we identify the particular segments of our potential clients, we would need to discover and evaluate all their needs. This study will allow us then to understand the motivations behind the choices of our clients. The awareness of these needs and motivations will help us to diversify our proposal and to define new drivers for the demand of our clients.

3. Analysis of the Competitors present in our Target Country

The object is to assess all the competitors which are already working in the target country to define our added values. Thus, we would need to gather a lot of information to compare their activities analysing advantages and disadvantages they have in the market where we would like to develop a new business. This comparison should include all the main and relevant factors which are driving our sector - i.e. prices, quality, ancillary services, selling approaches, purchase/financing arrangements, etc.

4. Analysis of the barriers to start developing a new business in our Target Country

Before to start a new business abroad we should carefully evaluate all the barriers and obstacles we could face working there. This will allow us to avoid unpleasant surprises and problems unplanned being more effective towards our goals. So we should try to answer to these following questions: Why should we think that we will have success starting a new business in this target country? What would be the main obstacles we would face in this target country? Among the various potential obstacles we should consider: the value of our brand in the target country, the legal frame and any specific regulation related to our sector, taxes, custom duties, inflation, the culture and the mindset of the local people, access to the distribution channels, structural costs, transport, access to funds or loans and the banking system, etc.

5. Legal Frame of the Target Country

It would be relevant to know the legal frame of our target country because it can represent opportunities or difficulties for our new business. Indeed, in case the local regulations constitute an obstacle to our sector we should carefully evaluate the real chance we have to develop a new business in this country. Contrary, in case the local regulations constitute an opportunity for us we would be able to exploit them.

Internationalization has become increasingly relevant for the competitiveness of companies of all sizes. Nowadays, particularly SMEs operating always more in a global market can move quickly to take advantage of international activities, seizing opportunities for not only revenue growth but also the exchange of knowledge and the enhancement of skills.

Internationalization of business is one of the ways a company responds to the impact of globalisation, yet a successful internationalization process respects and emphasizes the distinctiveness of an organisation.

Why should I internationalize my business?

Here are the main reasons why internationalization is a good choice today:

• MORE SECURITY – Internationalization grants a true independency from the local market

Your business will be less vulnerable to periodic fluctuations and downturns in the local market. During economic crises, thanks to their capacity to reach foreign markets, many companies keep and also improve their production capacity, employment and financial structure;

• MORE PROFITS – Internationalization allows to improve performances

Your business will increase sales and profits. By expanding your activities globally you will likely improve your overall revenue. Nowadays, customers are global and if your company is able to look beyond the borders of your domestic market, you have some real upside potential. Sales in foreign marketplaces can also be performed at a higher price than the one applied for the local economy. Many imported products are paid, indeed, as premium products and foreign brands.

• MORE SKILLS – Internationalization enhances productive capacity and management learning

Extending your actions and customer base internationally can help you create new product, learning from other markets and competitors, and get used to work with very demanding and different customers. A company can benefit so much from participating in a diverse and competitive market that its own product design and marketing strategy would improve and benefit from the interaction with other markets needs.

• MORE BRAND – internationalization helps to improve a company brand-reputation

Enlarging the activities abroad and working with various partners and new clients can help a company improve its brand reputation. Brand reputation represents all the ideas and emotions that a customer associates with the brand and the customer service experienced during the acquisition of goods or services, whilst using them, and after-sales services provided by the company. Thus, a favourable brand reputation signifies that customers trust a brand and they are more likely to buy its products.

• MORE COMPETITIVENESS – Internationalization reduces costs by virtue of enhancing productive efficiency

In many industries internationalization can support companies achieving greater scales of economy, in particular for companies from smaller domestic marketplaces. In other cases, a firm may seek to exploit a unique and differentiating advantage, such as its service model, its brand, or a patented-product.

Challenges

Despite the common understanding of the relevance of internationalization, there are still many internal and external barriers that obstruct the internationalization of many companies, especially SMEs. Among the various issues that any organisation should solve in order to succeed in its international business development process, these are some of the main problems: The business strategy to implement; The potential business-partner to choose; The specific activities to develop (import/export/production/etc.); The country or the region where to focus; The knowledge and skills of the employees; The cross-cultural awareness of the people interacting with the company.