The main reasons why companies decide to internationalize their activities - Essay Example

The main reasons why companies decide to internationalize their activities The presence of emerging competition in many different markets and industries is one rationale for why companies seek internationalisation strategies. When a business has been operating domestically, thereby building competitive advantages in a market where buyer preferences and characteristics are understood, it gains important marketing-based advantages and profit advantages associated with quality, pricing, or even product integrity. Nonetheless, despite these advantages, in some industries it is growing easier for emerging competitors to enter the marketplace. Porter (2011) identifies how paramount the risks are as they are associated with new entrants in a market when entry cost barriers are reduced or even when technological advancements make it easy for new entrants to replicate competitive products and infuse new competitive forces in the market. Growth in competition after a business’ products are in the maturity stage along the product life cycle and when markets are becoming saturated with emerging competition, it is no longer sustainable to maintain presence in the domestic country. Instead of attempting to diversify the business’ product portfolio, which is not always achievable using existing resources and existing knowledge, firms will seek new foreign markets as an opportunity to build revenues and remove competitive risks. In this capacity, they can maintain the same operational costs associated with product manufacture and create a new demand with foreign consumers as a means of sustaining its profit margin. Furthermore, sourcing and manufacturing is now becoming a more globalised function as industry-wide benchmarks and standards are being established (Cavusgil, Yeniyurt and Townsend 2004). This means that supply chain networks are becoming more homogenous on a global basis which makes it easier for competition in a certain industry to gain the same type of procurement advantages related to cost and distribution. As emerging markets establish the distribution networks and tangible infrastructures necessary to reach foreign markets, competitors are able to benchmark supply strategies and erode any competitive advantages once achieved by another competitor. Further, the ability of competition to achieve replicable value-added activities in procurement drives another competitor to seek new opportunities to regain competitive advantages. Internationalisation as it is related to procurement strategies provides new opportunities to innovate new product development by seeking new suppliers that also maintain innovative products and raw materials not necessarily found in domestic supply chain networks. This serves as another rationale for internationalising when competitive efforts to build strategic alliances along the supply network lower the switching costs for many suppliers and lessen the bargaining power of business buyers that once had dominance over supply chain controls. . This is present in the case study involving Chabros that found advantages in establishing strategic relationships with its many suppliers by diversifying its product lines that would not have been accomplishable without focusing on supply methodologies to differentiate from competition. Yet another reason to internationalise is growth in technology architecture that can now support integration of business activities domestically and for support when entering a developing or emerging market (Cavusgil et al. 2004). There are often monumental costs incurred along the entire business model for companies that once were forced to operate autonomously with each business unit required to absorb expenditures for individualised manufacturing facilities, establish customised technologies to support business operations, and also develop unique sales strategies to support many different business divisions. New technologies, such as SAP or ERP software packages, now allow the business to create a homogenous, integrated business that can avoid autonomous expenditures. As such, the construction of what is referred to as the geocentric firm is now possible, a company that can now be supervised by a single parenting unit that can globalize multiple business functions holistically (Li 2003). This provides many cost advantages as well as being able to align management and human resources from a centralised location that can be sustained through technological integration. Concurrently, this geocentric conception now possible allows the main business unit and its affiliates/subsidiaries to maintain a singular, global business strategy that provides marketing-related advantages. There is yet another rationale for internationalising business activities: improving time to market. By aligning many different business units, there is a much smoother coordination of talent experts within the organisation (knowledge management) to facilitate communities of practice and knowledge transfer so that product and service innovations can be coordinated at the international level. Rather than having autonomous research and development teams, as one example, the business can develop a systematic process of consulting between borders to provide a broader pool of ideas. The end result of internationalising the organisation is achievement of competitive advantages in new product development that was not necessarily achievable through domestic business activities and domestic business consultations. There has also been a trend for companies to franchise a business concept which is accelerating (Welsh, Alon and Falbe 2006). Franchising allows a company to maintain control over important concepts vital to sustaining profitability and competitive advantages without having to absorb costs associated with sustaining multiple business units. Contractual agreements in such areas as marketing promotion gives the main company offering franchising licenses the ability to control its brand and some elements of strategic direction important for maintaining its global philosophy of business. The ability to have independent investors take on the responsibility of operations sustainment across borders gives an excellent incentive for internationalisation for cost advantages primarily. The concept of the presence of more internationally-dispersed value chains was rejected as a popular internationalisation strategy as businesses desiring internationalisation have opportunities to develop their own intermediary networks upon new market entry in a foreign market. For instance, customer service can be developed through experiential learning (emergent learning) upon gaining experience with foreign market characteristics. Service dimensions providing benefits along the value chain are gleaned through market research and practical experience operating in a foreign market. Intangible assets associated with service are responses to the real-time business environment when attempting to align home country culture with foreign culture that would not be predictable until after market entry. The importance of strategic alliances in international business and the reasons why companies choose this growth strategy Strategic alliances give a business new opportunities to share resources with the company the business has aligned with, including sharing of technologies, financial and capital resources, and also management expertise. Not every business has the internal capacity to enter a developing or emerging market using its current level of knowledge and human capital without devoting a great deal of financial investment. The strategic alliance strategy allows the business to confer with management and other personnel in another business about their experiences when working with foreign cultures, foreign political systems, or even as it pertains to marketing strategy to gain new knowledge to give them a more effective presence upon market entry. In essence, the strategic alliance provides a more effective knowledge management system to provide new proficiencies and aptitudes that do not currently reside in the organisation. The partner involved in the strategic alliance may have considerable competency in understanding cross-cultural business relationships that does not currently reside in the other business. Sharing human capital resources can create new innovative ideas on how to better serve a unique international market without having to wait to learn these lessons through experience; a very risky business decision. Even further, one company that is pursuing the strategic alliance may be attempting to enter a new market that requires dramatic customisation of products in order to meet the needs of a unique set of target consumers with very different needs and attitudes than in the domestic marketplace. The partner involved in this alliance, however, might have a great deal of influence with local vendors and a well-established system of product distribution. By allying with the partner with much experience in the new market, it can open new opportunities to gain market access and share distribution networks so that it can expand quickly in the new market region and also save costs. Cost savings in this fashion would occur by not having to devote a great deal of financial resources into many areas of foreign direct investment including building a new warehouse or procuring costly distribution fleets to service the foreign local market. Also, a company that is going to be entering a new market might lack the managerial experience necessary to align human resources with local labourer customs and preferences. Geert Hofstede, a respected cultural theorist, identified two cultural attitudes that determine how labourers will view their role within the business structure. These are long-term versus short-term orientation. Cultures with short-term orientation have a strong respect for the past and tradition, whilst long-term orientation is more focused on achieving positive outcomes associated with future rewards (Hofstede and Hofstede 2005). A business that has been operating in a domestic culture for many years might have established an organisational culture and business vision that is aligned with long-term orientation; a focused future-minded culture willing to adopt risks in order to achieve the most maximised business outcomes. Another company that would be involved in a strategic alliance may have experience working with a foreign culture that has a short-term orientation built on collectivist mentality and hedonism, such as that found in Chinese culture. For a business seeking new market entry strategies in China, but maintains little experience with short-term oriented workers, the alliance would provide valuable knowledge about how to structure leadership and HR strategies to gain maximum motivation and productivity. The ability to create an inter-connected and unified organisational culture has many advantages and serves as vital motivation for pursuing such a short-term alliance to gain new culturally-related knowledge for better inter-organisational planning and development. Equity capital growth is yet another advantage of pursuing strategic alliances, when equity alliances have the ability to provide more capital growth. By establishing ownership in the new entity created through a joint venture, both partners in the alliance can gain additional capital. Depending on the contracted duration of the joint venture and the nature of its business strategy and presence in a new market, the joint venture allows for additional capital procurement without having to sacrifice profitability with the holistic business unit headquartered in the home country of operations. Rather than setting up a holistic, self-owned business entity in the pursuit of gaining profitability, a business unit that must incur many different costs for development, launch and sustainability, the partnered business entity removes certain risks and liabilities in the event of failure of this joint venture alliance. There would theoretically be much less exit costs in the event of such a failure when both parties are absorbing costs and risks than attempting to implement a self-owned and self-managed business unit. This too provides sizeable advantages when developed through a strategic alliance when both parties in the agreement are responsible for absorbing these potential liabilities. Finally, economies of scale are another motivation for pursuing a strategic alliance. This is especially true in areas of finance when sharing resources with a partner in the alliance. A company in the alliance might be able to take advantage of access to different financial instruments available through the credit position of a partner, such as being able to borrow money at lower interest rates due to better credit worthiness of the partner. For companies that must borrow a great deal of capital in order to launch a new business venture, the ability to reduce payments on borrowing payback allows the partner sharing resources and borrowing advantages to maintain more of its cash reserves upon establishment of the new alliance or joint venture entity. Equity strategic alliances were ultimately rejected in analyses for justifying strategic alliances, such as that described in the Citibank case study, as the time by which the alliance gained return on investment was one year. This was due to criticism stemming from the consumer market about the appropriateness of foreign businesses having control over domestic enterprises. Chinese culture is very ethnocentric and according to GLOBE’s nine dimensions of culture, Chinese consumers were evaluating Citi according to its altruism versus profit-seeking activities when considering whether to seek the services of this banking institution. Such criticisms can delay ROI on equity alliances especially when buyer decision-making is based on misguided beliefs about the philanthropic behaviours of foreign firms attempting to gain a foothold in a new foreign market. Cross-cultural theories in explaining how to manage companies in different countries. Provide real examples to support your arguments. For some companies, the business-to-business sales environment is critical to maintaining competitive advantage and ensuring profitability. A business in Western countries, such as the United Kingdom and the United States, is often used to building customer relationship management strategies associated with individualistic cultural values. Under cross-cultural theory, individualism versus collectivism involves the nature by which cultures are either we-conscious or wishes to be recognised for their individual preferences and social attitudes (Cheung et al. 2008). When working with customers that hail from collectivist nations, such as China, there are going to be demands for there to be a repertoire established at the interpersonal level before negotiations are allowed to begin (Cheung et al. 2008). In individualistic cultures, it is generally expected that negotiations will begin immediately where the point of the business interventions are straight to the point. The notion of individualism versus collectivism is very important for managing business-to-business relationships with customers in different countries. Managers used to working with individualistic customers are not familiar with the established social systems that drive business negotiations and may not be equipped to successfully bargain or satisfy collectivist buyers. It would be necessary for a business seeking relationship development with foreign buyers to understand how to give gratuity to specific socially-driven customs in the sales environment and adapt their sales strategies to compensate. To avoid recognition and respect for these traditions and beliefs about business relationship development could lead to discontentment with the business relationship or even irritation for attempting to impose socially-unacceptable hastiness borne of individualistic cultural attitudes. This could have serious revenue production problems long-term and speaks to the magnitude of appealing to collectivist social values to gain advantages over foreign customers with unique and diverse cultural preferences. Furthermore, some cultures have a feminine versus masculine propensity, a phenomenon identified by Geert Hofstede and many other cultural theorists and researchers that define a foreign culture. Masculine traits are associated with aggressive competitiveness, success and achievement either individually or collectively. Feminine traits are more aligned with caring for others collectively and achieving quality of life through humility and social reservation. It would be important for a business attempting to service customers in a foreign culture or work with business buyers to understand these cultural characteristics in order to develop appropriate strategic policies. One can contemplate a scenario in which a business operating in Bulgaria seeks to develop sales relationships with foreign buyers hailing from Japan. Bulgarian society is more feminine, demanding consensus and negotiation when ironing out contractual agreements (Hofstede Centre 2013). Japan, however, one of the most masculine countries in the world, appreciates competitiveness and is very assertive in business negotiations which are borne of a very long-standing patriarchy that favours male opinion and aggressiveness (Hofstede Centre 2013). A Bulgarian business manager responsible for negotiating new strategic alliance contracts, new procurement opportunities, or generic sales negotiations would have to adjust their sales tactics to fit the cultural demands of Japanese buyers with a strong propensity to attempt to dominate these discussions. Attempting to utilise compromise and consensus would likely lead to Japanese buyer supremacy that could erode gaining cost advantages or achieving contractual agreements that share power equally among the two cultures involved in the strategic alliance. It is absolutely critical to understand the cultural characteristics between incongruent cultures if a business leader is to find advantages that favour their own company. Some cultures also have very contrasting values associated with the level of risk that managers and employees are willing to accept when making business decisions. Known as uncertainty avoidance, another phenomenon identified by Geert Hofstede, it is the measure by which a culture will accept decision-making without identifiable and guaranteed consequences and outcomes (Katz 2005). It is not only the business-to-business negotiations between incongruent cultures that matters, it is also internally as it relates to employee relationship development and organisational culture development. A manager used to working with domestic cultures that value risky decision-making as an opportunity to achieve unique competitive advantages long-term would not likely be prepared for being an expatriate in a culture where uncertainty avoidance is quite high. Managers that have been applauded by their domestic parent company supervision for achieving gains associated with risky strategy development may have been able to foster a culture that is willing to make innovative decision-making even when there are many opportunities for liability to be an outcome of the decision-making process. In a new, foreign culture, there could be considerable change resistance if the host culture believes that risks could threaten their job security. Change resistance, especially in dynamic and ever-changing organisations, is a considerable concern for today’s business leaders. Change resistance can conflict rapid strategy execution which is sometimes necessary in a global company that must respond to multiple competitive activities in order to maintain its competitive edge and positive market presence. This is why it is necessary to understand the depths of uncertainty that will be socially and professionally allowed to enter the business model before attempting to impose more Western-founded, risk-accepting values and decisions on a foreign culture. Bridges (1991) identifies that workers and managers in the organisation go through a series of psychological evaluations when expected to comply with change decisions. These psychological evaluations occur in relation to established cultural systems as well as through assessment of how change will be perceived to impact their sanctity within the organisation. A manager of a global company that must work with a new culture where risk is not considered a viable business strategy must adapt strategies to better align them to the cultural preferences and characteristics of this foreign culture if they are to minimise resistance. This is highly critical for understanding as many businesses must respond quickly to competitive actions, such as launching new innovations to gain first-mover advantages in a market, therefore they require the support and dedication of many internal staff members to come up with new ideas to outperform competitive actions and strategies. If employees of a risk-averse culture are asked to adopt risky strategic objectives as part of this competitive strategy development, it could lead to organisational culture break-downs and diminished motivation that would have serious human capital disadvantages and negative outcomes. Ethics were rejected when attempting to justify cross-cultural theory in the pursuit of identifying an appropriate management model for operating in foreign markets. Ethical relativism, the belief that there is no singular definition of right versus wrong in business practices, justifies differing approaches to managing diverse cultures. It would be inappropriate for a business manager to attempt to impose, as one example, Western values on a foreign culture and expect responses from consumers and labourers that would be aligned with home country values and morality expectations. This is a form of emergent learning that occurs with direct experience with internal culture and external consumer markets in which it would be appropriate to maintain tolerance regarding differing moral value systems and not attempt to incorporate ethics as a set of core values until gaining direct experience with the moral and ethical constructs of foreign labourers. References Bridges, W. (1991). 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