International Business (Embraer Corporation) - Essay Example

?Outline Introduction 2. Company Overview 3. Internationalization Theoretic Background 4. Embraer Internationalization Strategy Analysis 5. Recommendations for Further Strategic Direction a. Top Management and Organizational Culture b. Domestic Economy Development c. Strategic Partnership Development 6. Conclusion Introduction Multinational corporations, as well as international business strategies, are regarded as the integral part of the globalization processes all over the world. It is often emphasized that international business has also become an essential part of the international relations, political processes, and diplomacy; therefore, international economics rule the world. The internationalization strategies that the companies resort to, often involve numerous factors. In the light of this fact, it should be stated that most governments are interested in attracting the financial resources of the Multinational Corporations. Therefore, while some companies develop their product, extend markets, increase the amount of workers, the others win governmental tenders, invest, and look for partners. Another aspect of the trade globalization strategy is closely linked with the opportunity to create employments all over the world. While the governments get an opportunity to reduce unemployment rates, the MNCs enjoy lower labour costs. The aim of the research is to analyze the globalization and expansion strategy of the EMBRAER (EMBRAER - Empresa Brasileira de Aeronautica S.A.). Since it is one of the largest aeronautical and aerospace conglomerates, it should be highlighted that the Brazilian globalization experience may be regarded as a universal path to success for other corporations with headquarters located in the developing countries. Company Overview The company was founded in 1969 as a government owned corporation. It was engaged in developing and building aircrafts, including commercial and military machines. The globalization process of the EMBRAER Corporation started in 1994 when the company was privatized. The manufacturing capacities are concentrated in Brazil, and by 2010 the company had occupied the third place among the largest commercial aircraft suppliers (jointly with the Canadian Bombardier), while the first two places righteously belong to Boeing and Airbus. The total number of employees exceeds 17 000, and the expected net income in 2012 approaches to $ 350 million. Business units of the corporation are located in Brazil, USA, China, France, Portugal, and Singapore. In general, the internationalization of the aircraft business became the key driver of the expansion processes in EMBRAER. (King, 2006) In accordance with the official data, given on the website (Embraer Profile, 2012), the growth in 2000s was mainly stipulated by the increased demand for the ERJ aircrafts family. Considering the fact that the world demanded high flight safety after September 11, 2001, the company succeeded to adapt to the changed requirements of the aircraft building industry. The expansion strategy of the EMBRAER Corporation is mainly associated with the opportunity to invest into the aircraft and air transportation industries. Therefore, as it is stated in Kronemer (2006), American Airlines operates up to 200 ERJ jets. Regardless of the fact that AMR owns these aircrafts through the American Eagle Company, the EMBRAER had an opportunity to provision up to R$583.2 million. In the light of this fact, it should be stated that the described decision could influence the secondary market for medium sized jets, and the company performed essential restructuring the financial management oriented at international markets. Johnson and Turner (2003) emphasize that such a restructuring was needed for covering potential expenses, and getting financial guarantees linked with the ERJ 145 jets supplies. The next step was linked with the investments into the customer support network. Executive aviation is regarded as the sphere with the highest priority. On the other hand, the commercial aviation investments were intensified as well. Internationalization Theoretic Background The theoretical aspect of the internationalization process is mainly associated with selecting a proper strategy. Therefore, any company or corporation needs to follow the algorithm given below: In accordance with the research by Menkhoff and Gerke (2002) these are the key steps for effective internationalization. Embraer had to increase the overall profitability of the enterprises, increase the efficiency of the manufacturing capacities, as well as create more additional value for improving its investment powers. Therefore, launching the ERJ 145 line, Embraer managed to create additional value. This step helped to conquer additional overseas markets, and persuade potential customers in the reliability of the company. In general, such a strategy is one of the two possible ways of creating sufficient value. Another way is to launch a low-cost product line. On the one hand, it shows that the company possesses sufficient reserves and capacities, on the other hand, such strategy creates the positive image of the company within the target audience, hence, the internationalization strategy may be focused on the attractiveness of the final product. Strategic positioning is sufficient for the additional value creation, as well as hitting the target audience. In fact, the positioning defines the company’s image among potential and existing customers; therefore, EMBRAER had to create an image of a reliable, successful, and constantly developing partner. Additionally, Embraer has made emphasis on commercial, military, agricultural, as well as exclusive (which may be attributed to commercial segment) segments of the aircraft building. Hence, in order to make proper strategic positioning, the management had to define the inner positioning from the perspective of value and costs. Such a decision helps to evaluate the overall positioning strategy, as well as fit the management principles to the necessary internationalization practices. Therefore, the company had to define its efficiency frontier, and regulate it in accordance with the supply and demand values. (Tolentino, 2005). Than, the company had to configure the inner operations in order to maintain the selected diversification strategy. Embraer Internationalization Strategy Analysis Considering the necessity to adjust the overall managerial practices, it should be emphasized that Embraer Corporation managed to confirm that the aircraft building industry needs mid size commercial airplanes, as well as military jets for lower prices, in comparison with the prices offered by the market leaders. In fact, Embraer had to prove that it is capable to act globally. Consequently, while the demand level on the national market is quite low, the total amount of the aircrafts built exceeded 1000. 96% of these aircrafts are outside Brazil, which totalled in $390 revenue. Considering the global strategic management, it should be emphasized that Embraer is performing large sales operations in both Americas, Europe and Asia. Additionally, the corporation managed to improve its research capacities through the global operation. The most important internationalization step was associated with the financial management. Hence, the company had to appease its investors all over the world, and ensure their investments. 95% of the financial operations performed by the Embraer are made in hard currency, and the company is planning to increase the share of Euro by 2015 (Perry, 2011). Considering the necessity to improve its efficiency, the company had to reduce costs without lowering the quality of the airplanes. In accordance with the industry review (in Maldifassi and Abetti, 2008), the average wages in Embraer Corporation are lower in comparison with the industry leader – Boeing. Most engineers are employed in Harbin, China. The company has revealed that China is notorious not only for the low labour costs. The workability, as well as career ambitions jointly with talents, is the common feature for the Chinese qualified workers. In general, the cost lowering was performed in accordance with the scheme given below: The necessary investments were provided by Brazilian Government, which helped to create the necessary technological basis for effective production. Low labour costs included employing qualified specialists abroad. Lower production costs caused the increase of the production volumes, which automatically helped to conquer additional markets. The following step was based on strategic management regulations. Strategic management, performed by the Embraer Corporation is based on the industry principles and backgrounds. In fact, it should be emphasized that the key requirement for the effective global performance is associated with accurate and flawless planning. Hsu (2006) highlights that this requirement is associated with the fact that the aircraft building industry involves numerous aspects: 1. Aircraft creation (from an idea to first flight) takes 8 years in average. 2. Technology development can not be controlled, therefore, proper planning required close monitoring of the world R & D for timely implementation, and staying on the edge of the industry development. 3. Aircraft industry is seriously subjected to changes associated with flight safety. Therefore, the company has to be ready for regular upgrades, post services, and modernizations of the aircrafts. Additionally, the company has to adapt aircraft for the needs of every particular customer. Proper customization and adaptation is achieved by accurate allocation of the manufacturing forces, so that fewer efforts were spent on adaptations and principal changes in the aircraft construction. This means that planning should be combined with flexibility, which is critical. The following scheme represents the structural activity of the company The infrastructural activities are closely linked with the necessity to maintain the operational effectiveness of the company. Therefore, IS, Logistics and HR practices are needed to keep the primary activities “alive”. Considering the fact that the corporation operates on several continents, theses processes should be adapted to regional features that influence the overall business operation. Primary activities, in their turn, are intended for proper strategic performance, as well as global market positioning of the company. Hence, R&D, Production, Marketing and Sales, as well as Customer Service are needed for improving the overall quality of the production, as well as finding reliable partners, signing long-term contracts, and winning governmental tenders. EMBRAER had to establish proper infrastructural control for developing the efficiency of the primary activities, and this is regarded as the fundamental step for improving its image on the international market. The globalization and internationalization strategy of the EMBRAER Corporation is mainly associated with the financial activities and policies executed by the headquarters. In accordance with the research by Brandenburger (2007), this strategy is not unique, since investments are regarded as the universal internationalization instrument. Additionally, the company made accent on the diversification of its production, by adding agricultural, exclusive, and executive planes. This segment involves at least 22% of the company’s financial activities. Maldifassi and Abetti (2008) emphasize that the defence and security segment is estimated at 14.7% in 2012. The other segments are allocated in the following order: Aviation services – 12% Related business – 1.3% Cooperation with Atech Negocios em Tecnologias S.A – 50% In fact, the Atech S.A. acquisition is regarded as the largest deal for the EMBRAER since its privatization in 1994. On the one hand, it is hard to view this merger as an effective internationalization tool, on the other hand, this became a proper diversification method, that helped EMBRAER to extend the target market. SWOT analysis of the internationalization strategy Positive Negative I N T E R N A L Strengths: Proper manufacturing capacities allocation Innovative capital structure Flexible long-term planning Extended model line Low manufacturing costs Effective and qualified employees High customization capacity Effective R & D Weaknesses: Poor investment ability Governmental “Golden share” that restricts company’s decisions concerning the military segment of the aircraft building Absence of a full-fledged aircraft testing base E X T E R N A L Opportunities: Effective strategic positioning Customer-centric strategy Developing national economy and education High investment attractiveness Reliable strategic partners Threats: Pressures for further cost reduction Pressure for local responsibility New market players Weak activity on European market Increased competition in “large jets” segment From the perspective of this analysis, it should be stated that the general strategy executed by the EMBRAER Corporation is mainly linked with lowering the manufacturing costs, as well as establishing reliable partnership with airline companies. As for the investment strategy, the experience with Atech Negocios em Tecnologias purchase appeared to be successful enough, however, the investment capacities of the Corporation are not sufficient for turning it into the main internationalization instrument. Recommendations for Further Strategic Direction Internationalization strategy of the Embraer Corporation is mainly associated with the traditional economic globalization tools. On the one hand, this strategy is quite effective, on the other hand, its effectiveness is essentially restricted. Strategic recommendations that the company requires for stable internationalization development are mainly associated with reviewing the internationalization experience of other MNCs. Therefore, the key aspects that should be considered are as follows: 1. Top management efficiency and organizational culture 2. Domestic economy development 3. Strategic partnership development Therefore, these aspects should be developed in accordance with the requirements of the global tendencies. Top Management and Organizational Culture The efficiency should be increased by regulating payment options, developing corporate culture, establishing long-term incentives for stimulating managers grow professionally. In general, it is expected that the solid corporate culture, restructured payment and compensation strategies, jointly with the opportunity of professional growth will stimulate the growth of the corporate responsibility. As it is stated in Amatori and Jones (2003, p. 178): The responsibilities of the CEO do not necessarily diminish. Hence, the information-processing perspective complexity requires that more tasks be shifted toward the collective effort of the top management. Greater reliance on non-CEO managerial members requires commensurately greater levels of human capital reporting to the CEO. Consequently, companies that make required investments in TMT human capital through higher levels of TMT pay enhance their ability to attract and retain talent. In the light of this fact, it should be emphasized that attracting and retaining talents is one of the key challenges for most MNCs, and Embraer Corporation needs to consider the experience of other companies for ensuring the efficiency of the HR management strategy it implements. On the one hand, the HR principles have nothing to do with the business globalization. On the other hand, properly built team increases the overall efforts applied by the company. Strategic initiatives implemented within the culturally unified team take less time to execute. This is explained by the statement that such teams are less risk subjected, since the communication process is better arranged in culturally strong teams. Organizational culture, in its turn, can be achieved considering the following factors: Implementing effective fine/bonus system; Stimulating developing effective and reliable partnership (successfully performed deals increase the morale level); Create specific working environment that stimulates workers for effective personal and professional growth; Encourage professional curiosity; These factors are crucial for developing healthy team with properly arranged communication. Corporate culture is often viewed as a decisive factor for risk management, developing strategic cooperation with other companies, participating in tenders, and creating investment attractiveness. Since these factors stimulate effective internationalization (Shin and Mirza, 2009), Embraer Corporation will have to include the factors, mentioned above, into the development strategy. Domestic Economy Development While the company operates on the global market, and arranges representatives in other countries, the domestically grown specialists may be hired by competitors. Therefore, there is a need to stimulate national education, economy, and political situation. Highly developed national education will be able to provide qualified experts for various branches of the company’s activity. In fact, the returns will not be available for the first 5-7 years (Zeng and Shen, 2010); nevertheless, this will create sufficient intellectual and HR reserve for the following development. Considering the long-term planning requirements for the successful aircraft building industry activity, long-term intellectual investments will not violate the natural development process. Political stabilization is needed for keeping the loyal attitude of the politicians towards the company. Political struggles, absence of lobbyists in the government may create serious barriers for company development. Hence, while specific business decisions are taken by the government, (according to the “golden share” rule) the political administration should be loyal to the company. Strategic Partnership Development While this aspect is often regarded as the most obvious, it should be emphasized that strategic partnership is essential for disclosing and expanding the actual potential of the company. On the one hand, partnership is helpful for enabling all the hidden resources of the company (Whitley, 2004), on the other hand, reliable partners are crucial for effective risk management. Considering the specific nature of the industry, risks are inevitable, and partners are needed to cover the possible holes in risk management strategy. Another factor is associated with the development of corporate culture. Partnership may be used for experience exchange among specialists, and internships for the personnel. Strategic partners are also regarded as the information sources. While economic information may be unavailable, the gaps may be filled with the assistance of the partners. Considering the fact that information is the crucial factor for business development, the partners should be reliable and trustworthy. Therefore, the key paradigm of the internationalization process is based on the aspects of internationalization advantages (such as strategic partnership, high quality products, investment attractiveness), localization (70% of manufacturing powers and test equipment are located in Brazil) and ownership (acquisition of Atech). The key development path has to be oriented at expanding the investment strategy. The company will have to look for talents, original start-ups and term projects among the students of engineering faculties. Pett and Fracis (2004) emphasize that such a strategy is the most reliable expansion opportunity considering the nature of the nowadays business. Conclusion Embraer Corporation is the third world aircraft manufacturer and supplier. Its internationalization strategy is based on standard economic tools, such as reducing costs, arranging proper customer relations model, as well as investments. In fact, the investment aspect of the corporation is not sufficient for effective globalization, therefore, the key recommendations for further expansion and internationalization involve non-economic tools, such as stimulating national education, staying attentive to the global tendencies, and investing into private, but original and potential projects, as well as developing strategic partnership with other companies. These recommendations are intended for covering all the aspects of the effective and successful internationalization. Additionally, since the company depends on governmental decisions (the “golden share” rule), there is a need to participate in the political life of Brazil. This is required for having the group of lobbyists, as well as maintaining the sufficient loyalty level among government executives. Works Cited Amatori, F., & Jones, G. (Eds.). (2003). Business History around the World at the Turn of the Twenty-First Century. New York: Cambridge University Press. Brandenburger A. (2007) Value-Based Business Strategy. Journal of Economics and Management Strategy. 5, pp. 55-74 Embraer Profile. 2012. Annual Report 2011. Available at: http://www.embraer.com.br/RelatorioAnual2011/eng/ra/08.htm Hsu, C. (2006). Internationalization and Performance: The S-Curve Hypothesis and Product Diversity Effect. Multinational Business Review, 14(2), 29 Johnson, D., & Turner, C. (2003). International Business: Themes and Issues in the Modern Global Economy. London: Routledge. King, D. R. (2006). 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(2004). Divergent Capitalisms: The Social Structuring and Change of Business Systems. Oxford: Oxford University. Zeng, S., Shen, Q. (2010). Internationalization Paths of Chinese Firms: Evidences from an Emerging economy/Kinijos Imoniu Internacionalizavimo Budai: Tam Tikri Augancios Ekonomikos Bruozai. Journal of Business Economics and Management, 11(2), 297. Read More