International Business Strategy - Case Study Example

 Executive Summary This report has been prepared for an Indian automobile manufacturing company; India Motors Inc. is based on the literature concerning the major issues involved in the technology transfer within the MNCs. The report evaluates the importance, for effective transfer of technology, the issue relating to cultural and institutional differences at both national and organisational level between HQ managers and subsidiary or joint venture managers. Problems associated with too much or too little subsidiary or joint venture autonomy, and too much or too little entrepreneurial behaviour by subsidiary or joint venture managers. The report analyzes the internationalisation strategy required in identifying and selecting a suitable country in Europe that will best meet the major objectives of the Indian Motors in terms of both technology and manufacturing aspects. In addition, this business strategy report identifies the existing cultural and institutional differences between the domestic location of the parent company and the host location of the proposed European subsidiary. The identification of differences is followed by the evaluation and assessment of the existing differences that are likely to influence the operations of the parent company in the host location and hence affect the achievement of the primary objectives of India Motors. And accordingly the report provides recommendations and suggestions as how to deal with these differences. Lastly, the report provides suggestions for the adoption of basic organisational structures and the control strategies that will be in enhance the minimisation of institutional and cultural differences. Table of Contents Introduction 3 Company Background 4 The European Connection 4 Internationalisation Strategy for India Motors Inc. 5 Selecting a Foreign Country 5 Preliminary Screening 6 In-Depth Screening 7 Final Selection 7 Recommending a European Country for India Motors Inc. 7 Conclusion 10 References 11 Introduction According to Michael E. Porter, “the prosperity of a nation is not inherited but created” (Porter M.E., 1990). He emphasizes that the prosperity and opulence of a country does not stem out of its national inheritance or bequests or for that matter a nation’s labour resources, its currency value or the interest rates. But a nation’s competitiveness and the conclusive prosperity depends on the capability of the nation’s industry to upgrade, innovate, create and harness its limited resources to the maximum (Porter M.E., 1990). Due to the rapid advancements made in technological and information spheres, the economic developments in the last few decades have witnessed a rapid increase in the global integration of economic activities worldwide. Major countries and cities are being assimilated into the global network through the flow of technology, commodities, capital, information and labour (Dawson J.A. & Larke R., 2003). This development which is more commonly referred to as globalisation has made industries and companies to look beyond its domestic horizons towards international destinations and markets to upgrade, innovate, create and harness their limited resources to create a sustainable competitive advantage that will result in the overall national prosperity. Companies, business firms and enterprises in every industry today, want to take advantage of this modern phenomenon of globalisation so as to increase and sustain their competitive advantage. Their search for new and more effective strategies to benefit from this phenomenon has lead to companies resorting to global strategies, which in the economic terms is known as internationalisation strategy. Strategic alliances, international partnerships, Foreign Direct Investments (FDIs) making entries into the international markets are some examples of internationalisation strategies. The basis of these strategies is to gain competitive advantage over its competitors and the long term sustenance of the gained competitive advantage in the domestic level as well as in the international level. This paper discusses such an internationalisation strategy recommended for an Indian automobile manufacturing company, India Motors Inc. to further its developments in the sphere of Research and Development and product development by making an entry into Europe. An internationalisation strategy through which the enterprise will be able to achieve its main marketing objective that is to use the technological knowledge gained through its investments in Europe to develop products and the production process in their domestic operations and also use the expertise to expand their exports to European and the American markets and the other potential international markets as well. Like for example, Wal-Mart an American retail enterprise using expertise and ideas about retail brands gained from the ASDA in U.K. to promote their domestic operations (Dawson J.A. & Larke R., 2003). Company Background India Motors Inc. is one of India’s fastest growing automobile manufacturing companies. Established in the year 1978, India Motors has been highly successful in making its presence felt all across the length and breadth of India in the three decades that followed. For the fiscal year of 2007-08, the revenue that the company generated was close to $2 billion. The manufacturing base of company is located at Jamshedpur in the state of Jharkhand, the same place from where the Tata Motors originally comes from. Currently, India Motors specialises in the manufacturing of passenger and utility vehicles and automobile parts. However, in the following years the company plans to shift gears to the manufacturing of compact family vehicles, luxury cars and SUVs like the LandRover. In the year 2003, the company entered into an international joint venture with one of the leading German MNC automobile manufacturing company; however, currently the joint venture is not sailing in smooth waters. The German MNC is unhappy with the performance of the joint venture and it regards the joint venture to be a strategy adopted by the Indian company for pilfering its intellectual and technological property. The European Connection Internationalisation of operations in the European markets, will present the company with more and better opportunities both in terms of finance and growth. Apart from the gaining technological knowledge the company will also be able to comprehend the financial and operational intricacies of international competition that are required to perform effectively on a global scale. This internationalisation experience can prove to be expensive and will definitely increase the complexity of decision making upon numerous strategies; however, for any upcoming company like the India Motors that wants to go global, avoiding the global trends of the industry that it does business in can prove to be fatal. The avoidance of the global trends on the part of the company will inevitably result in the weakening of its market position as the company’s customer base will begin switching to other global competitors, those that are able to leverage their international scope in order to lower their cost and as well as stimulate new innovations (Walkar G., 2003). All these factors in addition to the main objective of the India Motors Inc. makes the need for the internationalisation as in making an entry in to Europe all the more important and necessary. Internationalisation Strategy for India Motors Inc. India Motors Inc.’s current international joint venture with the German MNC has not been as fruitful and profitable as expected. The implications laid by the German MNC on India Motors for pilfering their technology and knowledge property has added more fuel to the earlier existing tension between the two companies. Going by the present alliance ties between the two companies, the termination of the joint venture just seems to be round the corner, giving yet another reason for the India Motors to select a more suitable country in Europe to internationalise its operations. Therefore, in order to ensure that history does not repeat itself, the company needs to learn from its past experiences of its international joint venture with the German MNC and plan a stratagem based on these learning. The strategy for making the entry into the Europe should be more precise and professional making the entry viable and profitable at both ends on a long term basis. It is recommended, that the strategy of India Motors should be based on the following vital attributes of internationalisation: Why internationalise their operations. Selection of the country, as where to internationalise the operations and The methods of entry, as in how to make the entry (Dawson J.A. & Larke R., 2003). The need for the internationalisation of India Motors operations has been already highlighted in the Introduction and the European Connection sections of the paper. The following sections of the paper will discuss the next two attributes of internationalisation, which are “where” and “how”. Selecting a Foreign Country The classical approach to the analysis of the international expansion discusses the “push” and the “pull” factors that define the selection of a suitable country (Kacker M., 1985). The push factor refers to those factors that push the retailers abroad. Usually, these factors arise from limited domestic market and the regulatory constraints. As a result of these factors a retailer may be pushed or forced to an international expansion to minimize its competitive risk. On the other hand the “pull” factors include all the characteristics that make a particular foreign country attractive to expand one’s operations to (Gripsrud G. & Benito G.R.C., 2002). In the context of India Motors, the push factors relates to the company’s plans to enter Europe to develop its capabilities in the areas of R&D and product development. On the other hand the attractiveness of the European automobile industry for India Motors has been European’s countries superior technological and intellectual knowledge base in the area of automobile industry. So far, two types of country or foreign market selection models have been proposed in the literature (Papadopoulos N. & Denis J.E., 1988). Both these proposed literatures are general and context-specific that is the proposed literatures are applicable to specific industries and different categories of companies or business situations. In the first Eclectic model, the location advantages are analyzed in terms of the factors that make it profitable and viable to locate any given business activity like manufacturing in a particular country, e.g low wage level or availability of superior skilled labours, cultural similarities etc (Gripsrud G. & Benito G.R.C., 2002). The second model that was originally suggested by Johansen and Vahlne (1977) is based upon the behavioural theory of the firm or the theory of gradual internationalisation process. This theory emphasises the importance of experiential knowledge and suggests an expansion pattern towards where the company is gradually moving, which are highlighted by moving into- the more demanding entry modes and more distant countries in terms of culture and psychic. However, differences in approaches of both these models are very insignificant and hence negligible. Generally these models are composed of three stages which Kumar, Stam & Joachimsthaler (1994) refer to as: Screening- Preliminary Screening and In-Depth Screening. Identification and Final selection. Preliminary Screening This is the first stage of an international country selection and is concerned with the identification and the elimination of the countries with unfavourable climates regarding the particular industry or business, through the application of macro-level indicators that will give clues to the existing discrepancies between the objectives of the organisation and the characteristics of the given foreign industry or market (Kumar, Stam & Joachimsthaler, 1994). The main objective of screening is to reduce the number of attractive countries and focus on those remaining countries that need greater attention by way of more detailed analysis. The reason for the unsuitability of a country particularly arises from political instability, currency contemplations, intimidating climatic conditions and institutional and cultural dissimilarities or even via restrictions within the foreign countries (Mahert K.F., et al, 2004). In-Depth Screening This second stage of screening comprises the gathering of specific information on the industry in which the company operates. Once the relevant information is gathered on each of the remaining foreign countries, the information is evaluated and analysed. The attractiveness of each country is evaluated on the objective criteria of the company. The particular industry of the foreign market should be in alignment with the company’s objectives in order to be moved to the next stage of selection. Outsourcing to a foreign industrial agency that is more familiar with the particular foreign industry can be more preferential rather than conducting one’s own analysis at this stage (Kumar, Stam & Joachimsthaler, 1994). Final Selection For the final selection of the foreign country where a company should extend its operations three forms of limitations has been proposed by Koch (2001): The objectives of the company. The internationalisation strategies. Resources. Recommending a European Country for India Motors Inc. As discussed above, India Motors wants to take over an EU based company to get access to its technology prowess and R&D knowledgebase. Once it has access to the new technology, it aims to integrate new technologies with its manufacturing prowess to create commercial and passenger vehicles that offer a great value for money. It is all but evident that the combined intellectual capital of an organisation lies more among the team members and less in the physical assets of the company. In this scenario, India Motors should look for its target company by keeping in mind a few important parameters like language, cultural similarities, trade patterns, the role of the Governments of the respective countries and history of the alliance between the two countries. 1. Language is one important barrier that organizations face on its path of internationalisation. Difference in languages between countries impedes the exploitation of any business opportunity that might exist between them. When companies come together and operate on a global level, it is important that there is one official language to communicate. Effective communication is the key to success of any business venture. Language barriers not only hamper communication but can also lead to potential miscommunication and much hassles. To coordinate business efforts domestically and abroad efficiently, the team members and top level managers need to exchange ideas quickly and effectively. In case of differences in language a lot time and effort is wasted in translation from one language to another. Before venturing out it is desired that companies will make a detailed analysis of the country of investment and learn the nuances of language. More so is the case when considering integrating human capital. Language barriers can cause much harm to day-to-day business operations. Language training to employees is a sheer wastage of time and resources. A company should enter a new market only if it is familiar with the language of the country. In this case, since technology transfer is the primary idea and objective, language is even more important. If there exists a language barrier, employees of the domestic country would face much difficulty in picking up new knowledge and implanting them in the business processes. The challenge facing Tata Motors was the identification of a country that will have no language differences. Once this is ascertained, Tata Motors can be sure of a smooth functioning of business. Minimal or no language difference will lead to faster adoption of technological know how and implementing the same in the production process. 2. Cultural uniformity or comfort level between countries goes a long way to establish good successful business ventures. Differences in culture have the potential to make or break alliances. Many a times cultural differences exist but not on the surface level. However even subtle but meaningful cultural differences can make the management feel that the solid ground beneath their feet has suddenly turned to quicksand. When starting operation in a new country, the lower end of the employee pyramid is hired locally, however the top level executives and managers move from the domestic country. As a result any potential cultural differences can come in the way of the business. So much so that even differences in food habits can cause a lot of trouble to the employees. On a superficial level this might not appear as important a factor, however a deeper analysis reveal that such issues has the potential of decreasing the productivity and efficiency of employees. When the primary objective is to learn new technological processes and get adapted to them, the time frame set is very narrow and thus employees need to be ultra efficient and adaptive. Such cultural differences should be avoided as much as possible. Cultural and language differences not only affect the mental and physical being of the employees but can also affect the long run profitability of a venture. For example, there might exist differences between the measuring systems of the two countries. Such instances can do a lot more harm than what can be imagined. To make sure that businesses operate smoothly beyond the confines of national boundary, it is important for the venturing business houses to analyse and take stock of the situation prior to investing. So is the case with intellectual capital and technology transfer with MNCs. 3. In case of trade alliance, it is important to figure out if the rules and regulations pertaining to trade are similar between the two countries. Too much of restrictions or strict rules can hamper the trade flow. For instance rules relating to intellectual property protection, remittance and visa application and approval play a major role in determining the fate of the investment and viability of the venture. More the rules in a country are relaxed the more attractive it is to an investor. No investor would be interested to invest in a country which has a rigid set of laws. As such prior to investing, a company should find out in detail about the trade and other policies of the country it is considering for investment. Often getting a visa on time causes much trouble for the management as well as the employees. Under such circumstance the investing company need to find out if the commerce department of the country works smoothly and there is not much hassles in getting visas. Since Tata Motors need to set up an operating unit in the foreign country, it needs to take all these into consideration. Only after a critical review of all the valid parameters will Tata Motors be in a position to identify the right country. 4. Apart from the parameters mentioned so far, there is another one factor that helps to restore the peace of mind of the investing company. No company would like to be the first one to go to a country and do business there. The past of the country in terms of business and international trade serves as a testimony to the investing company or nation. An analysis of the performance of the former players in the country would help in self forecasting and thus effective future planning. There are certain universal set of laws that help in defining a good investment destination. Such things like cost attractiveness and incentives offered by Governments play a major role in determining the worth of a country in terms of investment. Tata Motors needs to identify such a country has always been a top investing destination and also the country is economically and politically stable. After considering all the parameters, the country that appears to be the best fit for investment by Tata Motors is UK. UK and India are much aligned in terms of language, culture, trade regulations, and many more such parameters. The official language of India is UK English and thus for the employees of Tata Motors it will not pose any difficulty to relocate to UK and pick up new knowledge and make business operate seamlessly. Also India because India had been a colony of the British for more than a century, it has inhabited the British ways of functioning. Under such conditions, UK is certainly the best place for Tata Motors to invest in. Conclusion Strategy building thus remains to be an important domain of business operation. For seamless and smooth functioning, organizations brainstorm till they land on some exquisite and innovative strategy. It is only through effective strategizing that companies bring about revolution. Through this report the concept of international business strategy building has been addressed and demystified with the help of a case study. The chosen company is Tata Motors and through a comparative analysis it has been found out that the best place for Tata Motors to invest is UK. However unlike majority of the cases were companies expand internationally to exploit a new market, here Tata Motors aims to develop its capabilities in the areas of R&D and product development through its alliance with the European company who has the proven expertise in the mentioned fields. References Cavusgil, S. T., November, 1985, Guidelines for Export Market Research. Business Horizons, pp- 27-33. Dawson J.A. & Larke R., 2003, The Internationalisation of Retailing in Asia, Routledge, pp-177. Kacker, M. 1985, Transatlantic Trends in Retailing. Quorum Books, Westport, Conn. Koch A. J., 2001, Selecting Overseas Markets and Entry Modes: Two Decision Processes or One? Marketing Intelligence & Planning, 19(1), pp. 65-75. Kumar V., Stam A. & Joachimsthaler E. A., 1994, An Interactive Multicriteria Approach to Identifying Potential Foreign Markets. Journal of International Marketing, 2(1), pp. 29-52. 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