Three Different Factors Which Contribute To The Failure Of International Business

Introduction

International business consists of transactions that are formulated and carried out across national borders to achieve the objectives of individuals, companies, and industries. Primary types of international business are export-import trade and direct foreign investment. The latter is carried out in varied forms, including wholly-owned subsidiaries and joint ventures. Additional types of international business are licensing franchising, and management contracts. The fact that the transactions are across national borders, highlights a key difference between domestic and international business. The basic principles of business are still relevant, but their application, complexity, and intensity vary substantially.

Despite the positive results from international businesses or MNCs, there is a number of factors that may lead to the failure of the same. This includes lack of adaptability, poor market acceptance, poor communication, etc. The most crucial of the many challenges faced by managers of MNCs is the transfer of knowledge across national borders. Not only does physical distance pose a challenge for international businesses, there is also the challenge represented by cultural differences. The management challenge for many MNCs is to be able to adapt their organizations to culturally distinct environments without losing organizational consistency.

Culture refers to the systems of meaning – values, beliefs, expectations, and goals – shared by members of a particular group of people which distinguishes them from members of the other groups. Cultural differences can be found at many different levels- professional, class, and regional. As individuals, we usually observe are the cultural dissimilarities – the differences in greeting rituals, dress codes, forms of address, and taste. Some countries are not aware of other countries’ cultures and this leads to misunderstandings and misinterpretations between people from different countries. Therefore, it is imperative to be able to understand these differences and to know how to behave towards groups from other countries.

Hofstede’s Four Dimensions

Gerard Hendrik Hofstede established a theory by taking a survey of employees in 40 different nations, questioning their opinions regarding management style and work environment in their respective countries. He then took the average of all the answers and made an initial analysis which revealed 4 factors, namely:

1. Power distance index (PDI): Power distance is the degree to which the less powerful members of the organization accept and expect that power is distributed unequally. A high PDI score implies that a company accepts unequal hierarchical distribution of power and that people understand ‘their place’ in the company. A low PDI score indicates that power is shared and is generally scattered. This means that society does not accept circumstances where power is distributed unequally. Example: As per the theory, in a high PDI nation such as Malaysia, colleagues’/team members will not start any activity, and they like to be assisted and directed to finish a task. If the manager does not take responsibility, they may feel that the task is not relevant.
2. Individualism Versus Collectivism (IDV): This is the degree to which individuals are integrated into groups. People are expected to stand up for themselves and their immediate team members. A high IDV score demonstrates weak interpersonal connection among individuals who are not part of the core team. In a collectivist society, individuals are expected to be loyal to the group in which they belong and in return, the group will defend their interests. The group is usually bigger and individuals take responsibility for each other’s well-being. Example: There is a clear gap between developed and western countries on one hand and less developed and Eastern countries on the other. Central American countries like Panama and Guatemala have very low IDV scores. In these countries, a marketing campaign that emphasizes benefits to the community would be well received.
3. Masculinity versus Femininity (MAS): This refers to the distribution of roles between men and women. Masculine cultures’ values are competitiveness, assertiveness, demonstrating success, and being strong and fast, these are seen as positive qualities. Whereas feminine cultures, greater importance is placed on good relationships and quality of life. Example: Japan has the highest MAS score whereas Sweden has the lowest. Therefore, if you open an office in Japan, you should recognize you are operating in a hierarchical, differential, and traditionally patriarchal society. Long hours are the norm and thus it can make it harder for female team members to gain advancement, due to family commitments. By comparison, Sweden is a very feminine society, so people focus on managing through discussion, consensus, compromise, and negotiation.
4. Uncertainty Avoidance Index (UAI): This means how well people can deal with uncertainty, anxiety, and ambiguity. It reflects the extent to which people can cope with anxiety. A high UAI score indicates that people try to make life as predictable and controllable as possible. People in low UAI scoring countries are more relaxed, open, and inclusive, they accept and feel comfortable in unstructured situations or changeable environments and try to have as few rules as possible.

Example

Greece has the highest UAI score and Singapore has the lowest. Therefore, during a meeting in Greece, you may be eager to initiate discussions because you may perceive that there is a tendency for colleagues to make the safest, most traditional decisions, despite any emotional outburst. The aim is to urge them to become more open to various ideas, but it might be useful to give a relatively restricted, structured set of alternatives.

The second most important factor(s) responsible for the failure of international business is the incomplete study of PESTEL analysis. Francis Aguilar is said to be the creator of PESTEL analysis. PESTEL is an acronym for Political, Economic, Social, Technological, Environmental, and Legal factors. It is a useful tool in understanding the bigger picture of the environment in which a business operates, it helps in understanding the risks associated with the market, and helps in reviewing business strategies, marketing propositions, etc.

A detailed interpretation of Aguilar’s theory, explaining the causes of failure due to PESTEL analysis is described below.

1. Political Factors: These factors determine the degree to which a government may impact the economy or a specific industry. Political factors include tax policy, fiscal policy, trade tariffs, monetary policy, audits, labor laws, etc., that a government may levy, and it may affect the business environment. The better the relationship with the government, the better are the chances of survival for the business. Example: Japanese carmaker Suzuki introduced “Samurai” to the USA in 1985, but a global financial crisis combined with a serious downfall in American sales lead to the decline of the Japanese automaker in the US.
2. Economical Factors: Economic factors include all the determinants which directly or indirectly impact a company’s long-term objectives. It consists of the GDP of a country, import-export, foreign exchange rate, inflation rate, interest rates, recession, etc. Therefore, businesses must analyze this factor based on their environment, so as to form strategies that fall in line with all the changes that are about to occur. Example: UK-based grocery chain, TESCO Fresh & Easy opened doors in America in 2007, on the edge of a recessionary cliff, when American consumers’ appetite for food was declining. Five years later, Tesco announced it was shutting down approximately 200 stores on the west coast.
3. Social Factors: These factors examine the social condition of the market, and measure determinants like cultural trends, demographics, population, tastes and preferences of consumers, market trends, lifestyle choices, etc. Social factors mostly depend on the location. It is not necessary that what works in the west will work in the east. These factors are prone to change and must be consistently observed. Example: Group-buying deals site Groupon made errors after entering the Chinese market. The company staffed mainly foreign managers, who didn’t have a solid understanding of the Chinese purchasing landscape and utilizing advertising strategies that were counter to what Chinese buyers typically react positively to.
4. Technological Factors: These factors consist of innovations in technology, research and development, technological advancement, and the amount of technological awareness that a market possesses. Technology changes every minute and therefore, companies need to stay connected and integrate when needed. These factors must be analyzed to understand how consumers react to technological trends and how they can benefit from them.

Example 

eBay failed to succeed in the Chinese market as it couldn’t compete with Taobao. Taobao’s built-in instant messaging system was the reason for its edge over eBay.