o Why Companies Grow
   o Why Companies get involved in International Business
   o Reactive Reasons, Proactive Reasons for exporting

updated last 2009 July 09

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INTRODUCTION Many businesses are forced into international selling due to the competitive environment. While it might be wonderful to stay the same size and just focus on quality, the problem is that the competitive environment creates situations where your competition continues to grow - so, if you do not grow and expand you will lose customers. 

Your former customers will move to larger vendors that can offer lower prices (because they sourced components internationally and can offer economy of scale).

from Page 15 in the textbook by Richardson http://www.witiger.com/universityoftoronto/textbookC44scan.jpg
Why Companies Have to grow The main purpose of business is to make money for the people who own the business. All other objectives are secondary to achieving this goal - it may sound heartless, but it is the essence of capitalism.

Achieving this goal obviously means making enough money to stay in business several years in order to pay back any money you borrowed to get started, and make enough money that it is worth your while to have developed the endeavour. Therefore managers seek to increase or to stabilize profits, which partly depends on

  • foreign sales
  • foreign resources
Why does business have to grow?
Why can't a business just stay the same size?
Why does a business have to sell outside the territory of its original customers?
Why does a business have to access resources outside the territory of its original base?

The answer to these questions is the answer to why International Business exists - and will be explained in the lecture.

A big part of the answer to why business has to grow is simply based on the fact that business cannot stay the same size - if your business does not grow, the competitors will grow, and soon you will lose your customers to competitors who grew, and had more selection, or made cheaper products.

So you have to grow because the nature of the competitive environment will not let you stay the same size


Why Companies do IB.. Why Companies get involved in International Business

There are 4 major operating objectives that may cause companies to develop International Business
   1  To expand sales
   2  To acquire resources
   3  To diversify sources of sales 
   4  To diversify sources of supplies

Which, if you do #3 and #4 leads to
    o Minimizing  competitive risk

Reasons for IB Growth Overall general reasons for International Business growth

There are many many reasons why international business has grew enourmously in the 1990's and the first decade of Y2K - but essentially these reasons can explained due to 4 main influences

    o increasing use of technology in manufacturing
    o increasing use of technology in the process of consuming products
    o increasing use of technology in delivering products 
              o transportation technology, packaging technology etc.

Government trade policies liberalized (made less restrictive)
    o recognition that trade increases standard of living
    o access to more products enhances lifestyles
    o trade increases technological opportunites
    o trade increases chance more people in the society can make money
Development of institutions to support and facilitate International Business
    o like the TWO, IMF, OECD etc
Increased Global Competition

from Page 303 in the textbook by Richardson
COMMENT So this leaves companies with the challenge of why go international. Sometimes they think of the situations (mentioned above) and decide, in a proactive way, that they should start exporting, or importing in order to be more competitive.

Sometimes they don't have a specific corporate direction to go international, it just happens because they are forced into it and they are reacting to some competitive or economic or technical pressure.

So we describe these two directions as being Proactive or Reactive.

from Page 303 in the textbook by Richardson http://www.witiger.com/universityoftoronto/textbookC44scan.jpg

click to hear
reactive - from reaction, to receive information, then act

Reactive reasons for going international include

  • Market - the company is responding to demand it discovers in another location
    • it could make this discovery by accident, or by having an affiliated company give them a tip
  • Competitive Environment - it sees competitors going to a particular place
    • for example when Honda set up shop in Ohio, some other Japanese auto parts companies also moved to Ohio to continue supplying Honda
  • Political Environment changes - Trade Barriers
    • tariff or non-tariff barriers: if an exporting company finds that the government in the recipient country starts to build tariff or non-tariff barriers to block the export, then it might be a reason for the exporter to set up a manufacturing operation overseas in order to avoid the tariffs
    • "buy-local" policies: exporting companies may find that "buy-local" policies may restrict their exports - which may cause the exporter to set up a local alliance or relationship
  • Political Environment changes - Regulations
    • environmental regulations or changes in work/safety regulations may cause the company to go overseas to a less restrictive location
    • some Asian companies (selling in to the U.S. market) have moved manufacturing and assembly operations from the southern U.S. to Mexico where pollution and labour regulations are not so restrictive as in the U.S.
  • Economic Environment changes
    • costs of production at home increase, forcing the company to find a cheaper place to produce
      • many Canadian garment manufacturing companies have moved production out of Canada in the 1990's for the simple reason that labour is a huge cost in clothing production and there have been cheaper places found to make clothes in Asia and South-Asia and parts of Latin America
  • chance occurrence
    • sometimes a company goes international for the most simple reason, the CEO went some place on vacation and thought it would be a good place to do business, or a friend made a suggestion to a senior executive about an opportunity, so the company seizes on it to do something
    • you would be surprised how often it is chance occurrence that causes someone to get on a airplane and go somewhere - and, keep in mind, most int'l business is done by companies with less than 50 people
click to hear
proactive - means to act in advance, to anticipate something happening, and plan for the situation. Companies who are proactive in international business are, in most cases, better positioned than companies that simply react. If you simply react you might make a mistake and not do things properly because you are stressed for time, money or manpower.

Proactive reasons for going international include

  • expanding sales by strategically seeking out advantages
    • access to resources which may save on shipping or processing costs
    • producing inside newly created political or regulatory boundaries (such as free-trade zones or multi-lateral groupings of countries like the EU or ASEAN)
    WestJet adds 11 new routes in U.S., Caribbean
    UTSC student Aarani P. in July 2009 sent an email saying 
    "I was just reading the newspaper and I came upon a perfect example of  something we were talking about in class last week.  We were talking  about reasons to engage in International Business, and one of the  reasons that came up was to expand sales.  WestJet, who previously  only had domestic flights, is looking to add 11 new destinations to  the US and the Caribbean starting in the Winter."
click to hear
Proactive reasons for going international include
  • launch an offensive into a new market before competitor does (eg. like Pepsi into Russia, before Coke)
  • power and prestige
      click to hear eg. in the early 1990's, a lot of Canadian law firms merged to form bigger firms, and also boasted about having affiliated law offices in other countries)
  • incentives
    • sometimes the host government will offer special tax breaks to entice an investment
  • lower costs of labour, production and energy
  • less stringent rules and regulations effecting pollution and labour


Prof. W. Tim G. Richardson © www.witiger.com