Introduction
Today, more than ever before, business organizations are increasingly being faced with issues of the microeconomic and macroeconomic environment that challenges them in multiple dimensions. To remain competitive in the marketplace, organizations are investing heavily in the development of strategies to effectively deal with economic and market conditions, stiff competition, shifts in consumer needs and demands, global distribution patterns, and new opportunities and threats, among others (Nix, 2001).
The demands of the 21st business environment are leaving no alternative to many businesses other than to embrace the patterns that are dictating the pace such as technology and the global marketplace (Kotabe & Jiang, 2008).
These new patterns of doing business come with enormous benefits, but also with intricate limitations that can be detrimental to the performance and productivity of organizations, especially those engaged in global business. It is the object of this paper to evaluate if businesses that compete globally face more challenges in the distribution of their goods than businesses that only compete locally or nationally.
Brief Overview
Business analysts are of the opinion that success in any international business venture is dependent on the comprehensive understanding of a broad range of socio-cultural, fiscal, legal, and political variations between nations, including having a clear understanding of the market segments, competition, and customer perceptions (Nix, 2001). According to Tovasszy et al (2003), the last couple of years have witnessed a steady expansion of international development in the distribution of goods, triggered by the worldwide growth of the global economy and lessening of international trade barriers.
In the U.S., numerous companies are engaged in the distribution of goods to their subsidiaries and customers in other countries around the world. More often than not, these companies are faced with a tough challenge of promoting their brand names to get a foothold on customer brand loyalty in foreign soils. The major challenges for these companies, however, lies in the development of an efficient supply chain of their goods to the global market to avoid idle inventory, lost sales opportunities, unnecessary rework, and overall customer displeasure (McDonald, 2008).
There are several risks and challenges that organizations characteristically anticipate to encounter in the international distribution of goods that are not present in local or domestic distribution. These include political risks, customs and tariffs, currency fluctuations, natural disasters, logistics or infrastructure, language disparities, and other externalities of the business environment (Atkinson, 2003).
According to the analysts, these challenges are multifaceted in nature because not only do they affect the international distribution of goods, but they also affect the procurement and sourcing of raw materials used to produce these goods, resulting in considerable unexpected costs and augmented interruption to the supply chain (Hart, 2008). Nix (2001) suggests that “…most discussions about the difference between doing business on a global versus a domestic basis highlight the increased complexity and uncertainty associated with the global environment” (p. 31). Below, a critical analysis of how some of these challenges affect the global distribution of goods by U.S. companies is presented.
Currency
According to Atkinson (2003), currency risks in the global distribution of goods occurs when expected movements in exchange rates lead a particular company to sell its goods at extremely low prices or, worse still, miss out on opportunities to competitively price its products against other products from other countries due to high prices. It is imperative to note that businesses engaged in the distribution of goods at a local or domestic level rarely suffer from exchange rate fluctuations mainly due to the fact that they are paid for the goods domestically using the US dollar. International distributors, however, must understand that currency exchange rates varies across countries, resulting in an intricate set of variables that must be carefully considered if the companies are to benefit from doing business in multiple countries (Nix, 2001).
According to Wild & Wild (2007), the international business would be a lot easier if countries used the same currency in conducting their inter-trade transactions. This, however, is not possible, leaving business entities at the mercy of the ever-changing currencies. In our particular case, though, various other factors need to be evaluated before coming to the conclusion that U.S. companies competing globally in the distribution of goods face more challenges than domestic companies. First, the strength and stability of the dollar against other world currencies need to be evaluated.
To use an example, suppose company X based in the U.S. has distribution interests in country Y, based in Africa, for its 5 subsidiaries based there. In normal circumstances, company X will stand to benefit if the value of the currency used in country Y relative to the U.S. dollar goes down as this implies that company X will use much less money to fund its distribution activities in country Y. In equal measure, company X is bound to make a loss if the value of a country’s Y currency relative to the dollar goes up. This, according to Hart (2008), implies that the distribution of products in foreign countries becomes more expensive if a foreign currency gains ground against the U.S. dollar, and equally, the distribution becomes cheaper if a foreign currency cedes ground to the American dollar.
The U.S. dollar is largely viewed as stable against other major world currencies if past patterns are anything to go by (Wild & Wild, 2007). Ideally, it would mean that other currencies may fluctuate, mostly to the negative, hence making it possible for U.S. companies engaged in international trade to benefit from the transactions. Nevertheless, the situation dramatically changes when the U.S. dollar starts to cede ground. According to KPMG (2009), “…changes in the dollar value relative to other currencies can produce varying translation effects…when the dollar is low, those selling products in markets with stronger currencies often benefit from the translation of the foreign sales price back into the U.S. dollars at a stronger foreign exchange rate” (p. 3).
This implies that U.S. companies dealing in the international distribution of goods stand to benefit if they transact business in countries with stronger currencies than the U.S. dollar, or during times when the U.S. dollar is in a downward spiral against other major countries as it happened in the 2001 terrorist attacks and the 2008 economic meltdown that had its epicenter in the U.S. As such, a favorable foreign currency for US companies dealing with the distribution of goods is synonymous to an increase in profitability, while an unfavorable foreign currency will ultimately dip the companies into loss-making (KPMG, 2009).
The above points out the complexity involved in international business for American companies. It should also be remembered that most international companies involved in buying, selling, or distribution of commodities prefer to transact business in dollars (KPMG, 2009). It becomes difficult for these companies to predict whether the prices for their products will soar or tumble during periods of economic upheavals as it happened in the 2008 economic turbulence. The uncertainties of currency exchange and instability of the global market occasions what business and financial analysts’ term as expectations of contracting worldwide economic conditions, further eroding the confidence of international businesses especially in manufacturing and distribution segments due to increases in energy, operating, and freight costs (KPMG, 2009).
The domestic players in the business of goods distribution are never exposed to such vagrancies, and as such, it would be prudent to argue that businesses that complete globally face more challenges in the distribution of goods due to currency fluctuations.
Still, in currency considerations, the U.S. firms competing globally in the distribution of goods face other challenges that include the transaction risk, translation risk and the economic risks (KPMG, 2009; Wild & Wild, 2007). The local firms, by virtue of operating in a domestic environment, are not affected by any of the mentioned risks. In transaction risk, the U.S. global companies are exposed to the unfavorable risk of distributing goods outside their domestic markets, and hence forced to finance international operations that may be counterproductive to the respective firms depending on currency fluctuations (Wild & Wild, 2007).
In translation risk, the U.S. companies are exposed to potential loss-making when financial results of their subsidiaries operating abroad are finally consolidated into the parent companies’ financial statements. This risk is known to pull down the total value of the parent company since overall earnings may most probably be pushed downwards as provisions are made to cater for currency fluctuations from the subsidiaries. This risk has forced some U.S. companies such as Cadbury and GlaxoSmithKline contemplate pulling out of some foreign markets with very weak currencies (Wild & Wild, 2007). Finally, U.S. firms must purchase properties in the foreign countries they intend to invest, and pay dividends and royalties to shareholders of foreign subsidiaries, resulting in economic risk.
The above discussion undoubtedly reveals that businesses that compete globally face more challenges in the distribution of goods than businesses which only compete in the domestic scene when currency influences are taken into consideration. To ride out the storm, global businesses must create a fully-fledged foreign exchange risk management strategy to deal with the externalities discussed above (KPMG, 2009). Such a plan, according to KPMG, must reflect the organization’s exposure report and risk tolerance in relation to the prevailing market conditions. Other corrective measures include comprehensively understanding where the organization’s exposure lies and ascertaining the most favorable currency the organization should use to conduct its foreign transactions (Wild & Wild, 2007).
Language
The cultural environment serves as yet another barrier to international business. Language – either written or spoken – is a cultural tool used by communities to facilitate communication (Wild & Wild, 2007). It is within our realms of understanding that there is always a possibility of misunderstanding when two individuals communicate with each other even if such individuals come from the same community or country.
It therefore follows that the possibility of misunderstanding considerably rises when communication involves people from different countries. According to Collins (2007), disparities in communication techniques demonstrate variations in culture – the system of shared convictions, values, world views, and behaviors that oversee the interactions of members of a particular civilization. Cultural differences, especially in language variations, generate challenges to successful global business dealings.
In the U.S., the predicament of language as a socio-cultural obstruction continues to persist despite the employment of English as the international language of communication. This problem is multifaceted, especially for companies engaged in international business (Wild & Wild, 2007). First, despite the comprehensive efforts put by non-English speaking individuals from other countries to learn and master the English language, little effort is made by English-speaking individuals to learn other languages from foreign countries, especially if such individuals have business interests in the foreign countries.
The result is that many individuals with business interests in foreign countries depend on interpreters to get their message across (Harzing & Feely, 2008). According to the authors, this is the wrong approach in any business endeavor since it is practically impossible for the interpreter to objectively rephrase the communication without bias or misrepresentation of facts, issues of competency notwithstanding. Such a scenario may bring disastrous results; hence language presents more challenges to U.S. businesses competing globally in the distribution of goods than it does for organizations operating domestically.
Organizations operating in the international arena need to advertise their goods to the local populations so that adequate exposure is achieved to attract more customers and increase sales. According to analysts, language barriers may hinder effective advertisement since language is the principal vehicle of expression (Harzing & Feely, 2008). It is suggested that language plays an important function in advertising, and as such, specific employment of words and phrases is instrumental to the effectiveness of an advertisement.
Any misrepresentation of meaning or facts may be costly for a company engaged in international business as experienced by a certain U.S. software company with business interests in Argentina. According to Wild & Wild (2007), the interpreter in the advertisement read the word ‘software’ as ‘underwear,’ considerably confusing and offending the English-speaking population in Argentina.
In many countries across the world, only a segment of the populace, mostly the educated upper class, speak and understand English. The larger populace, which is typically the market targeted by international businesses, is very much at home speaking local dialects but not English (Harzing & Feely, 2008).
It therefore become challenging for businesses operating at an international level to penetrate the market segment of the target population since they must first address the language discrepancies before any synchronization is achieved between the organizations’ objectives on one hand and the values, worldviews, and perceptions of customers on the other (Wild & Wild, 2007), This, however, is not usually the case for business enterprises operating in the domestic scene. According to Kotabe & Jiang (2008), local distributors end up spending much less resources in ensuring that their objectives are in total synchrony with the needs of the target population since they share a similar language with customers. The situation is characteristically different for companies engaging in international business.
The language barrier also affects the management of the businesses that compete globally in the distribution of goods. In the case of multinational corporations (MNCs), for example, a significant number of managers tasked with the responsibility of operating the subsidiaries in foreign countries may be competent in English, but may divert from the real issues sponsored by the parent companies back in the U.S. due incoherencies of meaning. According to Harzing & Feely (2008), “…most MNCs routinely experience the interaction between managers belonging to different language groups. Even if the managers in question are relatively competent in the language of the other party, loss of rhetorical skills is always present as the use of humor, symbolism, sensitivity, negotiation, persuasion, and motivation requires a very high level of fluency” (p. 9).
In most occasions, the loss of rhetorical skills in an organizational set up occasions misunderstanding, uncertainty, and anxiety. It is worthwhile to note that organizations competing in the domestic scene rarely go through these challenges since the players are on the same page regarding language issues. Consequently, the concept that language variations in a cultural context can present noteworthy challenges to organizations competing globally cannot be refuted (Collins, 2007).
Customs and Tariffs
Customs and tariffs are taxes imposed upon goods as they cross from one national boarder into another. The major objectives of these forms of taxes, usually levied by the government of the importing nation, include raising money, and protecting the domestic industries from extreme exploitation and other practices such as dumping by foreign business enterprises (McFarlin & Sweeny, 2005). Some countries are known to have exploitive tax regimes, therefore making it difficult for international companies to conduct business in such counties (McDonald, 2008). Overall, the fact that customs and tariffs offer a formidable challenge to international businesses engaged in the distribution of goods cannot be disputed.
First, the customs and tariffs imposed on international trade keeps on changing both within the trading country and also between countries (Wild & Wild, 2007). Not only does this fluctuations in tax regimes brings a lot of confusion and uncertainty, but they are costly to manage for the exporting organizations since they have to engage tax consultants to manage their tax portfolio in the countries they export their goods to or risk being on the wrong side of the law for under-declaring their tax obligations (Kotabe & Jiang, 2008).
Cases have been reported of business entities, which have ended up being fined millions of dollars for noncompliance to tax rules, not because they willingly wanted to escape from paying taxes, but because they did not know how the tax structures of the host countries operates. While international companies have to struggle to remain afloat in the face of ever-changing tax regimes orchestrated by the host countries, domestic companies only contend with paying domestic trade taxes as per the U.S. tax regulations. The disadvantage for international companies is further widened by the fact that, in addition to paying customs and tariffs to foreign governments, the enterprises must also comply with the domestic tax regimes (KPMG, 2009).
Customs and tariffs have a direct impact on the cost of goods sold in international markets by the exporting businesses (McFarlin & Sweeny, 2005). More often, the expenses incurred in mopping up the taxes are passed on to the customers, thereby considerably increasing the prices of goods in relation to their actual market value. This scenario has a multiplier effect, not only to the consumers who have to part with more money to purchase the goods, but also to the business enterprises since their goods may take a long time to sell due to the hiked prices. In more than one occasion, companies have had to significantly cut down their profit margins in an attempt to remain competitive in the international market.
This, according to Ardakani et al (2009), can only be achieved by reducing the prices of the goods, implying that companies in the international market are more often than not forced to shoulder the tax burdens arising from their engagement with foreign countries. This challenge does not arise when competing in domestic markets.
According to Jun (1995), “…tax rules affect the ability of U.S. foreign subsidiaries to compete in foreign markets with local companies and with local subsidiaries of companies based in other countries” (p. 95). In most cases, the tax regimes are arranged in a manner that gives advantage to domestic companies at the expense of international investors. As such, it becomes strenuous for U.S. companies engaged in the distribution of goods to break even in foreign countries since the customs and tariffs exert undue influence on the pricing of goods as they enter the consumption market. As if the customs and tariffs imposed on goods at the point of entry are not enough, international companies are also subjected to numerous layers of taxation by the host countries, including withholding tax, corporate tax, among others, upon selling the goods.
The worst part is that the overlapping tax jurisdictions may end up subjecting international companies to both domestic and host-country taxation, further constraining the profitability of such enterprises (Jun, 1995). Companies which compete locally or nationally are never affected by such externalities.
Infrastructure
Infrastructure is the backbone of any economic activity, and can be defined as the central physical and organizational arrangements needed for the effective operation of a business enterprise (Atkinson, 2003). Infrastructure is fundamentally important for businesses engaged in the distribution of goods, either at the domestic level or internationally. Willis (2010) posits that the development of comprehensive supply chains has led to significant development in levels of international trade.
The freight forwarding industry in particular have been boosted by the rapid growth of international business, with shipping lines, road haulers, and air couriers raking the most profits from the deals. Nevertheless, individual businesses engaged in global distribution of goods in foreign countries have little to smile about as far as infrastructure is concerned.
The businesses must find the most effective means of distributing their goods at the least cost to reach the customer, who is the final destination in this intricate web of relationships. Many questions arise as the management of these companies attempt to develop cost-effective and timely distribution strategies (Mehta et al, 2006). To remain competitive in the international business scene, the goods must reach the intended customers in time, not mentioning the fact that they must be fairly priced to attract the attention of potential customers. These two variables inarguably depend on the infrastructure used to distribute the goods, among other factors such as customs, tariffs, and currency fluctuations (Hart, 2008).
It is imperative to note that domestic companies are only concerned with laying the logistics of distributing their goods across the U.S., and therefore, their tasks are much more easier compared with businesses engaged in distributing their goods internationally, who must contend with both domestic and foreign distribution networks.
According to Kotabe & Jiang (2008), to remain competitive in the international arena, companies should utilize the already existing natural distribution channels instead of coming up with their own. The strategies, however, may be altered to meet the needs and demands of the companies and their customers. It may sound an easy task on paper, but according to Punnett & Ricks (1997), succeeding in the global distribution chain is no mean feat especially if the international businesses are entering an emerging market. Prior research must be undertaken to establish the most effective distribution channels in the host countries involved, may they be direct shipment, closed loop shipping, airfreight, railroad, or parcel services (Hart, 2008).
The research into the effectiveness of such distribution channels comes as an added expense to the operations of businesses engaged in competing globally in the distribution of goods. Domestic businesses don’t face this challenge in their distribution operations. It should be remembered that utilizing the natural distribution channels as well as the natural resources widespread in the host countries “…allows firms to overcome weaknesses in infrastructure and fragmented retail structure prevalent in emerging markets” (Kotabe & Jiang, 2008, p. 471).
Infrastructure is fundamentally important for organizations transacting international business if they are to leverage opportunities and develop calculated approaches for gaining market access (Mishra, 2008). This implies that it is difficult for companies dealing with distribution of goods at an international level to benefit from the available markets if the distribution channels for the goods are wanting. This is especially so if the business is dealing with fast moving consumer goods (FMCG).
For example, a U.S. company engaged in the distribution of fresh farm produce in foreign destinations may utilize all options available to ensure it uses the most efficient distribution channel for its goods or risk attracting massive losses in damaged produce. Still, even if all precautionary measures are undertaken to secure safe distribution channels of goods in international markets, it is possible for the channels to be disrupted by extraneous factors such as natural calamities, occasioning massive losses to the businesses (Punnett & Ricks, 1997). It is imperative to note that most businesses operating in the domestic scene are mostly shielded by such vagrancies of the external environment.
Conclusion
Whether a business enterprise is well-established, growing, or a new entry, the prospect of engaging in some form of international business is gradually increasing by the day due to the globalization trends of the 21st century. By any standards, more businesses have a global presence today than it was the case a couple of years ago. Their entry into the global market scene is dictated by a myriad of factors, which include new and emerging markets, customer preferences, and the need to rake in more profits for the respective business enterprises (Kotabe & Jiang, 2008).
This paper, however, have highlighted the many challenges that exist in international business, including currency fluctuations, customs and tariffs, language barriers, and infrastructure. Of course there exist many other challenges for businesses engaged in the distribution of goods at the international level such as political temperatures in host countries, natural disasters, costs of capital, and lifestyle variations (Tovasszy et al, 2003).
Many analysts are in agreement that international business is in principle not diverse from local or national business as the enthusiasm and the actions of enterprises involved in a transaction do not change essentially regardless of whether the transaction is across international boarders or not (Kotabe & Jiang, 2008). The main difference, however, is that international business is capital-intensive and challenging than domestic trade due to the reasons fronted in the main discussion of this paper. Consequently, it is only plausible to conclude that businesses that compete globally indeed face more challenges in the distribution of their goods than businesses engaged in domestic competition.
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