Nike and Apple's Strategies of Internationalization - Case Study Example

? Transaction Cost Economics and Resource Based View in Terms of their Usefulness in Explaining Firms’ Internationalising Strategies Theories The first theory developed for the concept of internationalization in business explains that when a firm have attained competitive advantage in the domestic market, it tries to exploit the advantage in the market. However, if this cannot be done in the domestic market without undue transaction cost then the company seeks to exploit its competitive advantage in the international markets outside the domestic territory. The second theory of internationalization introduced over time describes the process of rise in the retail trade of goods and services in the international market. However, in the modern approach, internationalization only explains the relationships existing between companies (Revilla, Cordeiro and Sarkis, 2011). Transaction cost of economics according to Williamson (1981) explains the cost incurred by a buyer or a seller to execute an economic dealing. It also explains the process via which the firm takes its decision to operate in the open market or in hierarchy. Transaction cost includes aspects of specificity, uncertainty and government mechanisms (Grover and Malhotra, 2003). Asset specificity is the primary explanatory factor of transaction cost theory (Williamson, 2008). Asset specificity refers to the transferability of the assets in business. The extent of asset specificity is directly proportional to the level of effectiveness of occurrence of an economic transaction. The resource based view explains that the firms may attain sustainable competitive advantage by using non-substitutable rare resources. And this advantage in turn helps the firms to frame strategies for international business. Figure 1: Transaction Cost in Buisness (Source: Stephen, 2013) As shown in the above graph, the rise in the scale of business operations helps a firm to achieve competitive advantage and thereby helps it to reduce the cost the transaction cost of business. Thus competitive advantage facilitates internationalization of firms business by reducing their business operating costs. Application of the Theories The theories of transaction cost under the resource based view helps to justify the wide practice of internationalization in the modern world. In the last 30 years in the global economy, firms with large financial resources have turned into Multinational Corporations that undertook the process of foreign direct investment in business. These firms expand their competitive advantage by efficiently allocating resources in business and thereby reducing the cost of transaction. This has been facilitated after the emergence of globalization and liberalization in the world economy. The business firms in the modern world try to use unique resources in business to attain competitive advantage and thereby reduce the cost of any business transactions. These firms appoint the resources on the basis of VRIN analysis. The resources used by these companies are valuable, rare, non imitable and non-substitutable in nature. Weakness of the Theory However, there have been several weaknesses in the theory of transaction cost of economics under the resource based view. In reality, it becomes almost impossible to find a resource that suffices the conditions of Barneys VRIN analysis. It is also believed by analysts that resource that provided competitive advantage to a firm may be converted into a weakness if a sudden unfavourable change in the environment takes place. A resource cannot provide competitive advantage as that can easily be purchased by other companies. The concept of sustainability is highly versatile in nature. Today, the firms can only enjoy sustainable competitive advantage if its rivals in the industry do not imitate their competences. Alternative Perspectives According to the theory of transaction cost of resource based view, the modern business firms try to attain competitive advantage in their business activities in order to reduce the cost of operations. There are various advantages of this analysis: If the firms achieve the rare resources (VRIN) in business, then they achieve competitive advantage in the market. This often helps the firms in reducing the cost of production by which they can win over a larger share of economic surplus (Barney, 1991). With the help of competitive advantage, a business firm can bring diversity its manufactured goods and services and thereby augment the market demand for its goods and services. A contemporary business firm can always reduce its impending business risks with the benefits of competitive advantage. Case Studies on Two Companies There are many companies in the current global market that have tried to use VRIN resources in business to get a lead in the competitive market. The use of these resources has made these companies special and has helped them to win over competitive advantage in business. Apple and Nike are the examples of such companies which abide by the principles of transaction cost theory resource based view. Data on business and business environment Apple Computer Inc is a multinational American company with its headquarters in California. The company engages in the manufacture of computer software personal computers and consumer electronics. The company was founded in 1976 but has grown over the years as a market leader. As recorded in 2012, the company generates a net income of about $41.733 billion. It generates about 80000 employees across the world. It acquires a net asset of about $176.064 billion. With more than 400 retail outlets, the company trades in almost all the countries in the world. The computer hardware and software industry in the global market has grown rapidly over time since 1959. Constant improvement in the state of technology in the present time has helped the software and electronics companies minimize the cost of manufacture. This has helped them to diversify their product lines in the market. As recorded in 2010, the worth of this industry at present is almost $1451 billion (Apple Inc, 2013). Nike Inc is another American multinational company that was founded in 1964. The company engages in the production of apparels and accessorises. It generates about 44,000 employment opportunities in the global market as recorded in 2012. The net income of the company was almost $2.223 billion in 2012. The gross asset accumulation of the company is about $15.465 billion. With its headquarters in Washington the company operates in almost the countries in the world (Nike Inc, 2013). With the rise in the Gross Domestic Products of all the countries over time, the per capita income levels have substantially increased over time. This has facilitated certain improvements in the living standards. The apparel and accessories industry have also grown over time with the rise in the aggregate demand in the industry. It is estimated that by 2012, the industry will be growing by almost $20 billion. As recorded in 2010 the industry is worth $16.5 billion (Nike Inc, 2013). Arguments For Both Nike Inc and Apple Inc invest almost 5% of its gross income in research and development purposes. The company desires to acquire unique technological knowhow with the help of which it can easily build up core competences in the market. Indeed this is the reason for which Apple products like, i-pod is highly popular and in demand in the market. Despite of its relatively high prices, the product has good sales in the market for its special features. These companies also operate in all the economies in the world as their competitive advantages associated with their technological resources have helped it to reduce business dealing or transaction cost. The competitive advantage of these firms helps them to exploit the resources most efficiently. Efficient allocation of the resources helps them to achieve economies in scale in case of production. Thus production of goods at a lower cost helps these firms to bear the transaction costs efficiently. Against The resources due to which these companies had decided and managed to achieve its competitive advantages have also been generated by its potential competitors in the market. Competitors of Apple like Samsung, Dell and those of Nike like Adidas, Puma etc are the names of other multinational corporations that attempt to improve business core competences with technological advances. This is the reason for which Apple and Nike cannot act as monopolies in the market. These companies face cut throat competition in the global market. The external environments conditions also affect the internationalization strategies. It has been seen that these companies try to further extend their business in the emerging or developing economies of the world like China and India as the economic growth and per capita income growth of these latter mentioned countries have been more since the last few years than the developed economies (Kraaijenbrink, Spender and Groen, 2009). Conclusion The success of a modern business firm not only depends on resource competences, the business strategies used by the officials of the firms also matter. With an exception of patented innovations, in the contemporary world, business firms can easily analyze the VRIN resources in business using technical tools. A corporate organization will only succeed if it uses efficient business management methods along with the possession of unique productive resources. Thus, the strategies for internationalization of business firms cannot be framed only by transaction cost theory of resource based view. Effective management principles in business, efficient resources and positive externalities in the business environment all together help a firm to form strategies of internationalization. Reference List Apple Inc, 2013. Apple. [online] Available at < http://www.apple.com/> [Assessed 24 October]. Barney, J. B., 1991. Firm resources and sustained competitive advantage. Journal of Management, 17 (1), p. 99-120. Grover V. and Malhotra, V. K., 2003. A transaction cost framework in operations and supply chain management research: theory and measurement. Journal of Operations Management, 21, p. 457–473. Kraaijenbrink, J., Spender, J. C. and Groen, A., 2009. The Resource-Based View: A Review and Assessment of its Critiques. [pdf] Muenchen. Available at [Assessed 24 October]. Nike Inc, 2013. Nike N7 and Pendleton Woolen Mills Partner to Create Nike N7 Blanket. Available at < http://nikeinc.com/> [Assessed 24 October]. Revilla, E., Cordeiro, J. and Sarkis, J., 2011. Transaction Cost Economics and the Resource Based View’s Influences on Supplier Environmental Collaboration. [pdf] Clarku. Available at < http://www.clarku.edu/departments/marsh/news/WP2011-18.pdf> [Assessed 24 October]. Stephen, S., 2013. Release More With Less. online] Available at [Assessed 24 October]. Williamson, O. E., 2008. Transaction-cost economics: the governance of contractual relations. Journal of Law and Economics, 22, p. 233-61. Read More