Chapter 18 Global Opportunities for Small Business
CHAPTER OUTLINE
Spotlight: PharmaSecure, Inc.
(http://www.pharmasecure.com)
1 Small Businesses as Global Enterprises
Describe the potential of small firms as global enterprises.
 Globalization
 The expansion of international business, encouraged by converging market
preferences, falling trade barriers, and the integration of national economies
 National economies were isolated
 Trend toward convergence of economies to form global economic system
 Born-global firms
 Growing number with cross-border business activities in mind
 Important for owner to determine if the company can handle additional effort
 Must study political, cultural, and economic forces in the foreign markets to
determine how to adapt products and ensure smooth entry (Exhibit 18-1
Questions to Consider Before Going Global)
2 Forces Driving Global Businesses
Identify the basic forces prompting small firms to engage in global expansion.
 Motivation to go global
 Globalization is risky
 Global challengers must be met through innovation
 Exhibit 18-2 Basic Forces Driving Global Enterprises
 Expanding markets
 Cutting costs
 Gaining access to resources
 Capitalizing on special features of the location
 Expanding Markets
 Countries Targeted
 Those with the greatest commercial potential
 Exhibit 18-3 BRIC Markets
 Products Promoted
 Products that sell at home are likely to be introduced very quickly abroad
 Highly specialized products
 Making the Most of Experience
 Experience curve efficiencies – per-unit savings gained from the repeated
production of the same product.
 Learning effects – insights gained from experience, that lead to improved
work performance
 Economies of scale – efficiencies that result from expansion of production
 Gaining Access to Resources
 Traditionally for raw materials
 Increasingly the focus is on skilled labor
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Chapter 18 Global Opportunities for Small Business

International outsourcing – a strategy that involves accessing foreign labor
through contracts with independent providers
 Offshoring – a strategy that involves relocating operation abroad
 Cutting Costs
 Raw materials, labor, and manufacturing overhead
 Through relocation
 Capitalizing on Special Features of Location
 Unique features of local environment may be a benefit of the location
 Appeal of regional free trade areas
 Small businesses sometimes follow large client firms to their new locations
3 Strategy Options for Global Firms
Understand and compare strategy options for global businesses.
 Exporting – selling products produced in the home country to customers in another
country
 Internet caused growth in exporting
 Exporting very challenging
 Communicating in other languages
 Translating payments to other currencies
 International shipping
 Exhibit 18-4 Strategy Options for Global Enterprises
 Importing – selling products produced in another country to buyers in the home
country
 Product from overseas that has market potential at home
 Link up with vendors at international trade shows
 Most important factor for success is finding a good product vendor
 Global outsourcing guidelines
 Learn about culture and business practices of the country to avoid making
deal-breaking mistakes
 Do research and select a source that is not a competitor or a company that
hope to compete against you in the future
 Protect your intellectual property
 Carefully form a relationship with a sourcing partner
 Work out transportation logistics ahead of time
 Foreign Licensing – allowing a company in another country to purchase the rights to
manufacture and sell a 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
 Counterfeit activity – the unauthorized use of intellectual property
 International Franchising – selling a standard package of products, systems, and
management services to a company in another country
 Variation on licensing theme
 Especially popular with U.S. restaurant chains
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Chapter 18 Global Opportunities for Small Business
 International Strategic Alliances – a combination of efforts an/or assets of
companies indifferent countries for the sake of pooling resources and sharing the risks
of an enterprise
 Used by small companies to gain advantage internationally
 Allows sharing of risks
 Locating Facilities Abroad
 Overseas sales office
 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
 Often difficult to set up
4 Challenges to Global Businesses
Explain the challenges that global enterprises face.
 Political Risk – the potential for political forces in a country to negatively affect the
performance of businesses operating within its borders
 Exhibit 18-5 Ease of Doing Business
 Risk may be related to instability of a nation’s government
 Economic Risk – the probability that a country’s government will mismanage its
economy in ways that hinder the performance of firms operating there
 Foreign economy may affect the business environment adversely
 Exchange rates – the value of one country’s currency relative to that of another
country
 The “Ease of Doing Business Index”
 Underscores to businesses and government the large impact that regulatory
conditions have on economic growth and development
5 Assistance for Global Enterprises
Recognize the sources of assistance available to support international business efforts.
 Analyzing Markets and Planning Strategy
 Finding international markets that fit the company’s unique potentials
 Creating a game plan for entry into the targeted markets
 Connecting with International Customers
 Trade Leads
 Trade Mission- a trip organized to help small business owners meet with potential
foreign buyers and establish strategic alliances in an international market
 Trade Intermediaries – an agency that distributes a company’s products on a
contract basis to customer in another country
 Financing
 Perhaps biggest barrier to international expansion
 Private Banks
 Letter of credit – an agreement issued by a bank to honor a draft or other
demand for payment when specified conditions are met
 Bill of lading – a document indicating that a product has been shipped and the
title to that product has been transferred
 Small Business Administration
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Chapter 18 Global Opportunities for Small Business


Valuable information from SBA
Extensive list of financial assistance programs
SOURCES OF VIDEO AND OTHER INSTRUCTIONAL MATERIALS
The Fire Within is Program 1, a DVD from the series entitled Venturing: The
Entrepreneurial Challenge, Produced by Vermont ETV. The program introduces the
concept of entrepreneurship and discusses the qualities and capabilities frequently
found in entrepreneurs: passion, the ability to embrace and welcome risks,
persistence, commitment, desire, self-confidence, good business skills, and the ability
to delegate. http://www.worldcat.org/title/venturing-the-entrepreneurialchallenge/oclc/029686147.
Direct your students to watch the Q&A videos on two home-based business at
http://www.iquestions.com/browse/career/home_business. Also, a selection of
articles, blogs, and videos on various aspects of entrepreneurship are available at
http://www.allbusiness.com/.
ANSWERS TO END-OF-CHAPTER DISCUSSION QUESTIONS
1. What is a “born-global” enterprise? What factors are encouraging the increase
in the number of these companies?
A “born-global” enterprise is a small companies started with cross-border business
activities in mind. The Internet has increased efficient global communication, trade
agreements open foreign markets to competition, and expanding networking
options are some of the factors encouraging the increase in “born-global”
enterprises.
2. Discuss the importance of a careful cultural analysis to a small firm that wishes
to enter an international market.
The chapter discusses how costly mistakes are made when firms do not understand
the cultural characteristics of a foreign market. Students may respond to this
question using examples from the textbook.
3. Do you believe that small companies should engage in international business?
Why or why not?
This is a question that obviously calls for an opinion, so responses will vary.
However, the chapter points out that going global can provide many benefits such
as expanding markets, cutting costs, gaining access to resources, and capitalizing
on special features of location. These are strong incentives. Furthermore, "born
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Chapter 18 Global Opportunities for Small Business
global" and other internationalized small businesses have shown that small firms
are often up to the task, so the arguments against going global clearly would need
to be qualified.
4. Identify the four basic forces driving small businesses to enter the global business
arena. Which do you think is the most influential?
The four basic forces driving small firms to internationalize are the appeal of (1)
expanding markets, (2) cutting costs, (3) gaining access to resources, and (4)
capitalizing on the special features of location. No strong evidence exists to suggest
that one of these is more important than the others in drawing small firms into the
global business arena, so opinions may vary. Nonetheless, students are likely to
focus on market issues and thus may lean toward expanding markets as the most
influential force.
5. Give examples of some emerging motivations persuading small business owners
to go global. Are any of these motivations likely to remain powerful forces ten
years from now? Twenty years from now?
Several shifts seem to be emerging in the forces driving firms to globalize. Whereas
firms once did this to extend the product life cycle, now the push is on to find buyers
for specialized products. Cost cutting was accomplished by internationalizing to
reduce labor and transportation costs, but obtaining tariff reductions seems to be a
stronger motivation in recent times. In the old economy, accessing raw materials
was a great motivation, but this seems to be giving way to a search for human
resources in the new economy. Finally, tapping the unique features of a foreign
location continues to be an important goal of internationalizing firms, but following
large client firms as they locate abroad seems to be an emerging motivation for
small firms. These trends are likely to continue for the next 10 years, but all bets
are off when projecting out so far as 20 years.
6. Why is exporting the most popular global strategy among small businesses? Do
you think this should be the case?
Exporting is popular among small firms because it represents a way to get into the
global game with minimal costs and commitment of resources. It also offers other
advantages such as promoting business in the domestic market. Thus, exporting is
a good way for small firms to get their international feet wet. However, the
alternatives hold great potential and should not be overlooked. Indeed, many small
firms that have been exporting for some time may have passed over more resourceintensive options that they could manage to try and that offer greater profit
potential. Furthermore, those that have not attempted to open avenues in foreign
licensing and international franchising may be leaving money on the table from
markets that the firm will never be able to exploit in any other way. These
alternatives obviously require various investments from the firm (time, capital,
managerial attention, etc.), so there are limits to what can be done in all cases.
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Chapter 18 Global Opportunities for Small Business
7. What impact has the Internet had on the globalization of small firms? How do
you think small companies will use the Internet for business in the future?
Obviously, the Web has opened up new opportunities for small companies that want
to penetrate international markets. It provides cheap access to consumers around
the world, at least for those who have access to the Internet. The ways in which
small firms will use the Web in the future is a matter of speculation. Students
should be encouraged to pursue this avenue of thought, but there are few definite
answers.
8. What non-export strategies can small businesses adopt? In view of the unique
needs and capabilities of small firms, what are the advantages and disadvantages
of each of these strategies?
Foreign licensing, international franchising, international strategic alliances, and
establishing an international presence (e.g., cross-border acquisitions, greenfield
ventures) are possible alternatives to exporting for small firms. Foreign licensing
may offer the small firm the easiest and quickest alternative but does require it to
give up a great deal of control. International franchising offers drawbacks and
benefits similar to foreign licensing, but involves only service-based firms.
International strategic alliances are more complex but may offer certain advantages
that result from sharing risks and pooling resources. Finally, establishing an
international presence yields the greatest control for the firm, but the cost of such
an operation places this option out of reach for most small firms, except perhaps
where overseas operations are focused in one or a few markets.
9. What are the three main challenges small businesses face when they go global?
What strategies can a small company use to deal with each of these challenges?
First, small firms must take into account political risk. To deal with this risk, small
firms can take a number of approaches, such as avoiding the country or passing the
risk along to a third party through various forms of insurance. Second, economic
risk can have a significant impact on the success of small firms involved in
international business. The most apparent impact from this risk comes in the form
of currency exchange rate fluctuations, and small firms can deal with this risk by
taking contracts in US dollars or using buy-forward contracts and other financial
instruments with which a knowledgeable banker can assist. Finally, small firms
will continue to run up against managerial limitations. Many questions will arise
that relate to products, marketing, financial strategy, management, accounting
systems, legal issues, etc. Small firms can take care of these by going slowly and
learning along the way through trial-and-error (hoping to limit losses along the
way) or they can get assistance from various services that are available through the
SBA or by employing the services of trade intermediaries and consulting firms.
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Chapter 18 Global Opportunities for Small Business
10. What forms of assistance are available to small global firms? Which is likely to
be of greatest benefit to small companies? Why?
Many forms of assistance are available, including materials and advice provided by
government agencies (such as the SBA) or visiting with first-hand observers--these
can help with market analysis and strategic planning. Small businesses can connect
with international customers through published trade leads (many available online),
by joining trade missions, or by using the services of a trade intermediary.
Financing is another serious hurdle to internationalization, but sources such as
private banks and the SBA are available to help. None of these should be
overlooked. However, the sources of information and assistance from the
government will probably provide the greatest benefit because they are relatively
comprehensive (i.e., the government provides support to deal with just about any
problem that may be encountered) and inexpensive, if not free.
COMMENTS ON CHAPTER “YOU MAKE THE CALL” SITUATIONS
Situation 1
1. What additional information would be helpful to Aburto as he ponders this
decision?
As Aburto considers moving to another country he must consider such things as
political risk. For example, how stable an environment exists in the two locations?
As the students look at Exhibit 18-5 Country Risk Rankings Map, they should see
that Mexico is considered in the least risky category while India is considered
moderately risky. Economic risk is another consideration that must be examined.
With the U.S. in a rather shaky situation itself, this factor could be even more
important in decision-making. The managerial limitations may affect much more
of the firm than the overseas functions and should be considered carefully. For
example, in the finance category, how will the additional expenses for travel
between the two countries affect the rest of Aburto’s business expenses?
2. What additional advantages and disadvantages can you think of that Aburto
should consider when choosing between offshoring this work to India and
“nearshoring” it to Mexico?
Small companies doing business in other locations (offshore or nearshore) will face
advantages and disadvantages in both locations. For this example, India provides a
pool of well-trained employees who expect very low wages and who have technical
skills. In Mexico skilled workers are available and travel will be less expensive. In
terms of disadvantages, travel costs and working between time zones along with
the cultural gap affect the connection with India (although most educated workers
speak English in India). In Mexico, wages are significantly higher, but once you
hire staff laws in Mexico make it difficult to fire these people. Other questions in
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Chapter 18 Global Opportunities for Small Business
the text that might be helpful as Aburto examines the two locations should deal
with government restrictions that might hinder the planned product, will the product
be sold in international markets and if so how will market research be conducted
(from that location?), how cash flow will be affected by the location, how
government policy (in both the U.S. and the other country) will affect capital
transfers, whether local laws will allow profits to be sent back to the U.S. from the
foreign market, whether barter or other forms of countertrade will be necessary to
do business and other consideration that deal with management, accounting and
legal issues.
3. Which location would you choose—India or Mexico? Be sure to build a strong
case for your final decision.
This will be individual to each student. However, the student should build a case
that is strong and considers all the possibilities listed above as well as the other
country information suggested within the chapter.
Situation 2
1. What types of businesses would prosper in China? Why?
China offers opportunities for small businesses that produce goods as well as those
that provide services. Small manufacturers in certain high technology industries,
including wireless telecommunications and computers, may find success in China.
Large businesses tend to dominate the hardware side of telecommunications and
computers, though, so small businesses may be successful by providing
components, peripherals, or supporting equipment. This may be done by partnering
with large firms with established brands or by selling these items directly to
consumers. The demand for consulting services in China is high. Small businesses
with knowledgeable employees who can provide consulting, training, or
information technology services have numerous opportunities in the market. Since
China is shifting further toward a free market economy and has even joined the
World Trade Organization, Chinese firms (privately-owned and state-owned) are
seeking greater understanding of Western business practices. Chinese firms are
hiring Western firms for training and consultation.
2. What are the challenges and risks associated with doing business in China?
Small companies doing business in China face a number of challenges and risks.
While the potential upside of the Chinese market is its large size, the income levels
in China are lower. Businesses must therefore consider the actual size of the
potential market rather than the size of China’s population. If producing or selling
goods, particularly ones that are tied to brand image or brand names, the potential
for counterfeiting must be recognized. Language and cultural differences pose
additional problems. Business practices differ significantly in China, compared to
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Chapter 18 Global Opportunities for Small Business
the U.S. Another challenge, which is related to and complicated by language and
cultural differences, is building relationships with key constituents (e.g., customers,
government agencies, distributors, suppliers). Guanxi (or connections) are close
links between friends and relatives that have developed over many years. In many
cases, these connections are critical to success when conducting business in China.
3. What steps should Moss take to address these challenges and risks in order to
increase his chance of success in the market?
There are a number of approaches to addressing the language and cultural
differences. The ideal way to bridge the language gap is to speak the language.
Unless a company has employees who already speak Chinese, however, there may
not be sufficient time to learn a new language before entering the market. Small
businesses can hire translators or may hire new employees who speak Chinese.
Education and training can help businesses and employees to understand cultural
issues and differences. This is likely to make the employees more aware of such
differences, but they may not be fully equipped to address these differences.
Forming a strategic partnership with a Chinese firm may help overcome language
and cultural barriers. In addition, partnerships can facilitate market entry if the
chosen partner has already established relationships with distributors, target
customers, and others needed to conduct business in China. Finding a partner and
negotiating a partnership agreement, in itself, may prove a challenge for small
businesses. However, small businesses can draw on their existing relationships
with other businesses and governmental agencies that have already developed ties
in China. One goal for Moss in forming such a partnership should be to begin to
develop his own relationships with Chinese customers, suppliers, and distributors.
He must also remember that patience is required for doing business in China.
Results may not come immediately.
Situation 3
1. In your opinion, what new country markets would be likely to hold the greatest
potential for additional sales for Friedman’s company?
Answers will vary on this but might include:

Tapping into high density Christian based countries (South America, Some
European countries, Canada, etc.)
2. Of the major strategy options mentioned in this chapter, which is Holy Land
Earth currently following? Which of the others would offer the safest path to
further global expansion? Which would offer the fastest path to such growth?
Which would offer the best path? Why?
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Chapter 18 Global Opportunities for Small Business
Holy Land Earth is currently an importer of soil. In order to diversify and gain
market share, they may consider exporting their product to the countries mentioned
above. They may also consider locating facilities abroad if they determine there is
enough demand for their product. If they are looking for a fast growth path they
may consider forging an international strategic alliance with a small company to
gain a competitive advantage. Both companies will share the risk of failure and
cost challenges but this would be the quickest form of entry for Holy Land Earth
into a foreign market.
What are the greatest challenges Friedman is likely to face in the future? What
sources of assistance would you suggest that he use as he takes on those
challenges?
Friedman may likely face Political risk (instability of a nation’s government in the
country he is doing business) and Economic risk (economic market factors could
have a severe impact on his business). To minimize these problems Friedman
should conduct a thorough analysis of the markets he would like to penetrate. In
fact, he may need to pay an expert to do this analysis for him. Based on these
findings he will need to develop a thorough entry, operational, and exit strategy.
Planning will be his best resource for success in this venture.
SUGGESTED SOLUTION TO CASE 18: SMARTER.COM
1. What is the primary force that motivated Tsao and his partner to
internationalize? Did they make a good decision when they relocated their
software development operations to China? What other countries should have
been considered? Why?
Tsao and his partner expanded to China based on the need to expand their website and
decided inexpensive labor could make the difference between making a profit and
shutting down the business. Tsao and his partner should have more closely examined
the cost of moving the business to China. They were surprised by the additional 40%
cost of doing business there. In addition legal hurdles, security issues, and the foreign
workplace culture, which surprised them, should have been discovered before moving.
Tsao mistakenly determined that he knew much about the China scene because his
parents were from China and he know Mandarin and Shanghaiese dialects and thought
he knew how to navigate Eastern business culture. Two other countries that might have
been useful to explore are 1) India, where English is spoken and might have been easier
to understand and deal with, and 2) the Ukraine that the partners thought they had
grown beyond but perhaps could have trained the workers to a higher standard (since
they were already doing business in that location).
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Chapter 18 Global Opportunities for Small Business
2. What global strategy option did Tsao and O’Neill select for their move to China?
Did they choose the right strategy?
The global strategy might have been less stressful if the partners had examined the
four sets of questions to consider before going global (see Exhibit 18-1 on page 467
in the chapter0 which include questions in the areas of management objectives,
management experience and resources, production capacity, and financial capacity.
The strategy options listed in the chapter were locating facilities abroad, exporting,
importing, foreign licensing, international franchising, and international strategic
alliances. Tsao and his partner chose to locate their facilities abroad because Tsao
had roots in China because his parents had emigrated from China. Their global
strategy option was based on cutting costs, however, they didn’t explore the
Chinese legal hurdles, security issues, and foreign workplace culture extensively
before quickly moving there. Once Tsao had hired the first set of workers he was
surprised to discover another 40 percent expense in expenses that had to be covered
although the amount was not in the budget. In addition he learned that workers in
China had a strategy of taking a job, quitting that job and taking another job in a
company with a better position, on a quick turnaround basis. He they had to deal
with such things as meal subsidies, hiring a staff trainer, a quarterly fun budget, and
learning how to get employees to provide their opinions. The strategy was a good
strategy, but need to have more research before the partners jumped in with both
feet.
3. Do you think Tsao’s adjusting his management style will make a difference in
the performance of his new workforce in China? What do you think he did right?
What do you think he did wrong? What recommendations do you have for Tsao
that would help him improve the performance of the Shanghai office?
Tsao’s adjustments appear to meet the needs of the Chinese workforce. He has
learned to ask employees questions to get opinions. In addition, rather than bonus
incentives (expensive), he now provides public praising. Tsao appears to have
adjusted to the workplace by providing perks that are the norm for quality
companies in China, making the company more attractive to present and future
employees. Tsao erred in going to China thinking he knew the workplace without
exploring it first. Tsao apparently has made a good start on the Shanghai location.
Students should provide their suggestions for improving the performance of the
office and will probably have suggestions based on their experiences and
background. One suggestion might be to continue to research the possibilities for
expanding the company in Shanghai and continuing the work with present
employees to maintain the workforce for longer periods of time to avoid constantly
training new employees.
NOTE: The One Minute Manager by Ken Blanchard and Spencer Johnson, 1982,
could be useful here with the One Minute Praising process.
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Chapter 18 Global Opportunities for Small Business
4. Given the details of this case and other key facts that you know about China,
assess the opportunities for U.S. firms in China. What features of the country
should be particularly attractive to small businesses that are seeking to expand
internationally?
Companies planning or considering moving to China should consider the
differences in the workplace that were discovered by Tsao and O’Neill. Several
areas of difference were discovered once Tsao moved to China and these would
have been very good to know before moving. For example, the increased costs that
the budget had to cover for employee expense—a 40% increase is a large
investment when not considered beforehand. In addition, the political climate in
China must be considered before moving. The company ranking with regard to risk
is important as a business could easily set up shop and lose its investment if the
political climate is not considered. In addition, the political climate can change
rapidly and that aspect should be considered carefully.
5. What challenges to doing business in China did Tsao experience? List any issues
that may present distinct problems for other small U.S. firms that may want to do
business there.
The challenges include the 40% increase in expenses, the constant requirement for
training new employees, the meal subsidy for lunches, the need for a staff trainer
to coach employees, the quarterly fun budget, the difference in responding to
questions due to employee reticence. Small firms probably would find employee
turnover and the increase in expenses the aspects that could be the most troubling.
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