Small Business Management Chapter 18 PowerPoint

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CHAPTER
18
Global Opportunities
for Small Business

LEARNING OBJECTIVES
By studying this chapter, you should be able to…
18-1 Describe the potential of small businesses as
global enterprises.
18-2 Identify the basic forces prompting small
companies to engage in global expansion.
18-3 Understand and compare strategy options for
global businesses.
18-4 Explain the challenges that global enterprises face.
18-5 Recognize the sources of assistance available to
support international business efforts.

INTRODUCTION
• Globalization – The expansion of international
business, encouraged by converging market
preferences, falling trade barriers, and the
integration of national economies.

18-1 SMALL BUSINESSES AS
GLOBAL ENTERPRISES (slide 1 of 2)
• Many startups and even the smallest of
businesses continue to expand internationally.
• Startups and small businesses are responsible for
almost one-third of all known exports.
• Born-global firms – Small companies
launched with cross-border business activities
in mind.
• Starting out with this mindset accelerates business
growth.

18.1 Where in the World Are Entrepreneurial Companies Doing Business?

18-1 SMALL BUSINESSES AS
GLOBAL ENTERPRISES (slide 2 of 2)
• As access to affordable technology increases, talent becomes
more mobile, the costs of global travel and communication fall,
and trade agreements pry open national markets to foreign
competition, entrepreneurs are focusing more and more on
international expansion opportunities.
• Size does not necessarily limit a firm’s international activity.
• Before going global, it is important for a small business owner to
determine whether his or her company is up to the task.
• Small business owners who decide to go global must study the
social, technological, economic, and political forces in a foreign
market to determine how best to adapt their business practices,
as well as their products or services, to ensure smooth market
entry.

18.2 Questions to Consider before Going Global (slide 1 of 2)
Management
Objectives
• What are the company’s reasons for going global?
• How committed is top management to going global?
• How quickly does management expect its international
operations to pay off?
Management
Expertise and
Resources
• What in-house international expertise does the firm
have (international sales experience, language skills,
etc.)?
• Who will be responsible for the company’s
international operations?
• How much senior management time should be
allocated to the company’s global efforts?
• What organizational structure is required to ensure
success abroad?
Production
Capacity
• How is the present capacity being used?
• How much additional production capacity will be
needed at home and abroad?
• What product designs and packaging options are
required for international markets?

18.2 Questions to Consider before Going Global (slide 2 of 2)
Financial Capacity • How much capital can be committed to international
production and marketing?
• Will the company be able to cover the initial expenses
of going global (e.g., the costs of finding customers
abroad, expanding production to support international
sales)?
• What other financial demands might compete with
plans to internationalize?
• By what date must the global effort pay for itself?
Source: Adapted from International Trade Administration, A Basic Guide to
Exporting: The Official Government Resource for Small- and Medium-Sized
Businesses, as cited in John B. Cullen and K. Praveen Parboteeah, Multinational
Management: A Strategic Approach, 7th ed. (Cincinnati, OH: Cengage Learning,
2017), Exhibit 7.4.

18-2 THE PRIMARY FORCES
DRIVING GLOBAL BUSINESSES
• The basic forces behind global expansion are:
1. Expanding markets.
2. Gaining access to resources.
3. Cutting costs.
4. Capitalizing on special location features.

18-2a Expanding Markets (slide 1 of 3)
• Since more than 95 percent of the world’s population
lives outside the United States, globalization greatly
expands the size of a firm’s potential market.
COUNTRIES TARGETED
• The large emerging markets known as the BRICS
countries (Brazil, Russia, India, China, and South
Africa) are attracting small firms that wish to tap their
enormous market potential (especially in India and
China).

18.3 BRICS Markets
Country
2017 Population
(in millions)
2017 Wealth
(GNI per capita)*
2017 Economic Growth
(GDP growth, %)**
Brazil 209 8,580 1.0
China 1,386 8,690 6.9
India 1,339 1,820 6.6
Russia 144 9,232 1.5
South Africa 57 5,430 1.3
World 7,530 10,366 3.2
*GNI = Gross National Income (Atlas Method, Current U.S. Dollars)
**GDP = Gross Domestic Product
Source: From data provided by The World Bank, “Data: Countries and
Economies,” http://data.worldbank.org, accessed July 19, 2018.

PRODUCTS PROMOTED
• Because of converging preferences and delivery
systems around the world, products that sell at home
are more likely to be introduced very quickly abroad,
often with little or no adaptation necessary.
• Small businesses with a highly differentiated product
may need international markets in order to increase
sales enough to recover product development costs.

MAKING THE MOST OF EXPERIENCE
• As a venture expands and volume grows, it usually can
find ways to work smarter or generate efficiencies.
• Experience curve efficiencies – Per-unit savings gained
from the repeated production of the same product.
• Most credit the gain in efficiencies to learning effects
and economies of scale.
• Learning effects – Insights, gained from experience, that lead
to improved work performance.
• Economies of scale – Efficiencies from expanded production
that result from spreading fixed costs over more units of
output.
• The benefits of learning effects and economies of scale are
especially apparent in startups based on complex technologies.

18-2b Gaining Access
to Resources
• Small businesses may go global to gain
access to resources, including raw materials
and skilled workers.

18-2c Cutting Costs
• Many firms go global to reduce the costs of doing business.
• Among the costs that firms have traditionally reduced by venturing
abroad are those related to raw materials, labor, and manufacturing
overhead.
• Businesses of all sizes have been slashing costs through
international outsourcing or offshoring.
• International outsourcing – A strategy that involves accessing
foreign business operations through contracts with independent
providers.
• Offshoring – A strategy that involves relocating operations abroad.
• Countries have been forming regional free-trade areas and other
forms of regional economic integrations in which commerce has
been facilitated by reducing tariffs or simplifying commercial
regulations.
• These cost-cutting measures can be a powerful inducement to small
firms to move into the prescribed area.

18-2d Capitalizing on
Special Features of Location
• Small businesses may want to capitalize on
the special features of an international location
to create authenticity by being local, to
enhance a brand’s reputation, or to follow a
large client firm.

18-3 STRATEGY OPTIONS
FOR GLOBAL FIRMS
• Strategy options for global firms include the
following:
1. Exporting.
2. Importing.
3. Licensing.
4. Franchising.
5. Forming strategic alliances with international
partners.
6. Locating facilities abroad.

18-3a Exporting (slide 1 of 2)
• Exporting – Selling products produced in the home country to
customers in another country.
• The U.S. Small Business Administration (SBA) recently
announced that small firms represent more than 98 percent of
American exporters, contributing 33 percent of the value of
exported goods.
• Some U.S. companies are steadily moving toward overseas
markets because they recognize that foreign-owned companies
are already competing against them in the United States.
• Exporting is one of the most popular international strategies
among small businesses because it provides a low-cost way to
expand into the international arena.
• Exporting can be facilitated by using the Internet to increase firms’
international visibility.

18-3a Exporting (slide 2 of 2)
• Exporting involves many potential challenges for a small business:
• Communicating in a language other than English.
• Translating payments into dollars from other currencies.
• Setting up international shipping to get products to overseas buyers.
• Modifying products to meet government standards or the unique
interests of buyers abroad.
• Lacking powerful government connections, which may very well put a
company at a great disadvantage in negotiations.
• Dealing with unfavorable exchange rates, which can make it difficult or
even impossible to offer products at competitive prices and make a profit.
• Governments may not allow entry into the market unless the
company is willing to reveal the specifics of its core technologies,
which are often the bedrock of its competitive advantage.
• Many government websites and resources are available in
assisting with exporting.

18-3b Importing (slide 1 of 2)
• Importing – Selling products produced in another
country to buyers in the home country.
• Importing should be used when products manufactured
abroad have market potential at home.
• One of the most important factors for success in
importing is finding a good product vendor.
• Importing holds great potential for a small business,
especially if the following guidelines are followed:
• Learn as much as you can about the culture and business
practices of the country from which you will be sourcing.
• Do your research, and be sure to select a source that is not a
competitor or a company that hopes to learn from your
operations in order to compete against you in the future.

18-3b Importing (slide 2 of 2)
• Protect intellectual property so that suppliers cannot easily
take it from you.
• Consider requiring sourcing partners to sign nondisclosure
agreements so that they cannot patent the item in the country
where the sourcing takes place.
• Don’t rush the process of forming a relationship with a
sourcing partner.
• Take time to ask difficult questions about important factors such
as quality standards and capabilities, manufacturing flexibility,
and time to order fulfillment.
• Work out transportation logistics ahead of time.

18-3c Foreign Licensing (slide 1 of 2)
• Foreign licensing – A strategy that allows a company in another
country to purchase the rights to manufacture and sell a different
company’s products in international markets.
• Licensee – The company buying licensing rights.
• Licensor – The company selling licensing rights.
• Royalties – Fees paid by the licensee to the licensor for each unit
produced under a licensing contract.
• Advantage:
• Foreign licensing is the least expensive way to go global, since the
licensee bears all the costs and risks related to setting up a foreign
operation.
• Disadvantages:
• The foreign licensee makes all the production and marketing
decisions.
• The licensor must share returns from international sales with the
licensee.

18-3c Foreign Licensing (slide 2 of 2)
• Both tangible products and intangible assets
(such as proprietary technologies, copyrights,
and trademarks) can be licensed.
• Foreign licensing can also be used to protect
against counterfeit activity.
• Counterfeit activity – The unauthorized use of a
company’s intellectual property or manufacture of its
products.

18-3d International Franchising
• International franchising – A strategy to sell
a standard package of products, systems, and
management services to a company in another
country.
• The franchisor offers a standard package of
products, systems, and management services to the
franchisee, which provides capital, market insight,
and hands-on management.
• International franchising is the fastest-growing
market-entry strategy of U.S. firms.

18-3e International
Strategic Alliances (slide 1 of 2)
• International strategic alliance – An organizational
relationship that allows companies in different
countries to pool resources and share risks as they
enter new markets.
• It matches the local partner’s understanding of the target
market or its access to low-cost labor with the technology or
product knowledge of its alliance counterpart.
• Advantage:
• The partners take comfort in knowing that they are not “going it
alone.”
• Disadvantage:
• The parties involved will have to share the rewards.

18-3e International
Strategic Alliances (slide 2 of 2)
• To avoid disappointing results or absolute disaster with a shared
venture, it pays to follow a few basic guidelines:
• Assess whether you have what it takes to make a joint venture work.
• Choose your partner carefully and make sure you understand one
another.
• Commit resources needed to establish and develop the relationship
over time.
• Retain experienced legal counsel to create a sound joint venture
agreement.
• Clearly communicate performance expectations, but be flexible, as
needed.
• Be prepared to exit the joint venture if it doesn’t work out by spelling
out termination conditions in the joint venture agreement.

18-3f Locating Facilities Abroad
(slide 1 of 2)
• A small business may choose to establish a
foreign presence of its own in strategic
markets, especially if the firm has already
developed an international customer base.
• Most small companies start by locating a production
facility or sales office overseas, often as a way to
reduce the cost of operations.
• However, an overseas office is costly to establish, staff,
manage, and finance, so anticipated advantages are
sometimes difficult to achieve.

18-3f Locating Facilities Abroad
(slide 2 of 2)
• Cross-border acquisition – The purchase by
a business in one country of a company
located in another country.
• Greenfield venture – A wholly owned
subsidiary formed from scratch in another
country.
• The commercial potential of a wholly owned
international subsidiary may be great, but the
hassles of managing it can be even greater.
• A firm may have to learn about running an enterprise in a
foreign country, managing host-country nationals, and
developing an effective marketing strategy.

18-4 CHALLENGES TO
GLOBAL BUSINESSES
• Global small businesses face challenges on a
larger scale than small businesses that do not
expand globally.
• Beyond managing cultural differences,
entrepreneurs need to pay attention to political
risks, economic risks, and the relative ease of doing
business in countries where they want to extend
operations.

18-4a Political Risk
• Political risk – The potential for political forces
in a country to negatively affect the
performance of businesses operating within its
borders.
• Often, this risk is related to the instability of a host
nation’s government.
• Potential problems range from threats as trivial as new
regulations that restrict the content of television advertising
to a government takeover of private assets.
• Political developments can threaten access to an export
market, require a firm to reveal trade secrets, or even
demand that all work be completed in-country.

18-4b Economic Risk
• Economic risk – The probability that a
country’s government will mismanage its
economy in ways that hinder the performance
of firms operating there.
• Two of the most serious problems resulting from
economic mismanagement are inflation and
fluctuations in exchange rates.
• Inflation reduces the value of a country’s currency on the
foreign exchange market, thereby decreasing the value of
cash flows that the firm receives from its operations
abroad.
• Exchange rates – The value of one country’s currency
relative to that of another country.

18-4c The Ease of
Doing Business Index
• The World Bank’s “Ease of Doing Business
Index” can help a small company anticipate the
overall level of difficulty of entering a specific
country market, based on legal and regulatory
requirements.

18.4 Ease of Doing Business in Different Countries

18-5 ASSISTANCE FOR
GLOBAL ENTERPRISES
• There are a number of resources available to
assist small companies with international
aspirations.

18-5a Analyzing Markets
and Planning Strategy
• Two challenges for small firms that are especially fundamental to
success abroad are:
1. Finding international markets that fit the company’s unique potential.
2. Putting together a game plan for entry into targeted markets.
• A small business should begin its research by exhausting
secondary sources of information.
• The U.S. government offers a number of publications on how to identify
and tap into global market opportunities.
• Many state and private organizations supply trade information, trade
leads, and company databases.
• Talking with someone who has lived in or even visited a potential
foreign market can be a valuable way to learn about it.
• The best way to study a foreign market is to visit the country
personally.

18-5b Connecting with
International Customers (slide 1 of 2)
• Resources that are available to help a small
company connect with customers in targeted
international markets include:
• Trade leads.
• Trade missions.
• Trade intermediaries.

18-5b Connecting with
International Customers (slide 2 of 2)
TRADE LEADS
• Accessed most often via the Internet, trade leads offer an inexpensive way
to establish vital links with buyers and suppliers in target markets.
TRADE MISSIONS
• Trade mission – A trip organized to help small business owners meet with
potential foreign buyers and establish strategic alliances in an international
market.
• Trade missions usually involve groups of five to ten business executives
and are set up to promote international sales.
• Members of the group typically pay their own expenses and share in the
operating costs of the mission.
TRADE INTEMEDIARIES
• Trade intermediary – An agency that distributes a company’s products on
a contract basis to customers in another country.

18.5 Trade Intermediaries Most Suited for Small Businesses (slide 1 of 2)
Confirming
House (Buying
Agent)
• Works for foreign firms that are interested in buying U.S.
products.
• “Shops” for lowest possible price for requested items.
• Is paid a commission for its services.
• Is sometimes a foreign government agency or quasi-
governmental firm.
Export
Management
Company
• Acts as the export department for one or several
producers of products or services.
• Solicits and transacts business in the names of the
producers it represents or in its own name in exchange for
a commission, salary, or retainer plus commission.
• May provide immediate payment for the products or
services by arranging financing or directly purchasing
products for resale.
• Usually has well-established networks of foreign
distributors already in place.

18.5 Trade Intermediaries Most Suited for Small Businesses (slide 2 of 2)
Export Trading
Company
• Acts as the export department for producers or takes title
to the product and exports it under its own name.
• May be set up and operated by producers.
• Can be organized along multiple- or single-industry lines.
• Can represent producers of competing products.
Export Agent,
Merchant, or
Remarketer
• Purchases products directly from the manufacturer,
packing and marking the product according to its own
specifications.
• Sells the products overseas under its own name through
contacts and assumes all risks.
• Requires the producer to give up control of the marketing
and promotion of its product.
Piggyback
Marketer
• Is a manufacturer or service firm.
• Distributes another firm’s product or service.
Source: Adapted from International Trade Administration, A Basic Guide to
Exporting, Chapter 5, “Methods and Channels,” https://2016.export.gov/
basicguide/index.asp, accessed March 30, 2018.

18-5c Financing for Small
Global Enterprises (slide 1 of 2)
• For assistance in financing its entry into a
foreign market, a small firm can turn to private
banks and programs initiated by the Small
Business Administration.

18-5c Financing for Small
Global Enterprises (slide 2 of 2)
PRIVATE BANKS
• Exporters use banks to issue commercial letters
of credit.
• Letter of credit – An agreement issued by a bank to
honor a draft or other demand for payment when
specified conditions are met.
• A letter of credit ensures that the exporter will receive
payment only when the goods are delivered, and it also
guarantees that the exporter will be paid.
• A bill of lading must be received before the bank will pay on
the letter of credit.
• Bill of lading – A document indicating that a product has been
shipped and the title to that product has been transferred.

Key Terms
bill of lading
born-global firms
counterfeit activity
cross-border acquisition
economic risk
economies of scale
exchange rates
experience curve efficiencies
exporting
foreign licensing
globalization
greenfield venture
importing
international franchising
international outsourcing
international strategic alliance
learning effects
letter of credit
licensee
licensor
offshoring
political risk
royalties
trade intermediary
trade mission

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