Causes and Results of Globalization - Essay Example

? Topic: Lecturer: Presentation: Introduction Globalisation has resulted into increased competition for organisations thereby creating the need to enlarge their presence by entering foreign markets. They deal with diverse products and many geographical markets and comprise range of different businesses in a subsidiary company within a holding or divisions within multidivisional structure. As such, choosing the right and appropriate market entry strategy has seen growing importance over the years. As Tielmann (2010) puts it, the strategic decision making in a global environment determines the overall direction of the organisation. To compete successfully in foreign markets, a comprehensive framework for achieving a company’s main goals needs to be formulated. This framework is the international strategy or strategic planning which is formulated by senior managers and executives detailing decisions regarding key issues such as where and how to produce goods or services, what products to sell, where to sell, and how and where to get resources for the production process. They must also decide how to compete with competitors and the key success factors for the company and product. Firms enter new markets for various reasons such as increased competition, discovery of new foreign markets, reaction to domestic market changes among others. Whatever the reason, the managers must chose the right market entry strategy and align it to corporate objectives (Andexer, 2008). Different strategies are linked to different entry modes depending on the situation, financial, economic, and environmental factors. The role of timely accurate marketing research and analysis to guide decision making is increasingly becoming critical. Depending on its situation, a firm may choose to use export, joint venture, direct investment, franchising, licensing, mergers and Acquisitions or global supply chains to enter new markets. The paper is going to analyse the market entry strategies of NatWest Bank since 2008. Company Background The National Westminster (NatWest) Bank is the largest retail and commercial bank in the U.K. It was established in 1968 after a merger of National Provincial bank and Westminster and District bank and began its operations in 1970. It has 1600 branches and 3400 cash machines across Britain. It also operates more than 7.5m customers and 850000small business accounts. It also has separate operations at Coutts & Co, Ulster bank, and Isle of man bank. It has been expanding over time and became a part of the Royal Bank of Scotland Group Plc (RBS) which is the second largest bank in UK in terms of assets and the fifth largest in the world by market capitalisation in 2000. However, it operates as a distinct brand though most functions were merged with those of RBS. The bank has many subsidiaries and offers both banking and insurance services to personal, business and commercial customers across brands and channels. It is regulated and authorised by Financial Services Authority and it is also a member of the British Bankers’ Association (Worldwide web, 2012). Global Business Development Strategy International strategy is a comprehensive framework to help a business in achieving its fundamental goals (Andexer, 2008). It is more complex than a single country strategy for a firm in that it involves dealing with complex issues such as differences in language, culture, labour, political, legal, and currency among others. The strategy is aimed at attaining global efficiency, international flexibility and worldwide learning and can take the form of home replication, multidomestic strategy, global strategy and transnational strategy (Tielmann, 2010). Home replication focuses on transferring competitive advantage from home market to foreign market. In this case, the firm develops a strategy and uses it in international firms. It is used when the need for flexibility and global integration is low. A firm may also use multidomestic strategy by having a strategy for each subsidiary thus allowing the subsidiaries to focus on the needs and wants of customers of the target market. The top level management of such subsidiaries are thus given power and authority to manage the branches. This method is effective when cultural differences are big and the firm needs to adapt to local conditions in each country. However, it may result in low economies of scale. The global strategies on the other hand, focuses on standardising products and processes hence the customers are viewed as homogenous (Bradley, 2007). In this case, the firm’s power and decision making is centralised at the head quarters; all subsidiaries are managed centrally. The transnational strategy combines both global and multidomestic strategies; some operations are centralised such as research and development while others such as HR department and marketing are decentralised. This enables the company to balance efficiency and flexibility hence enabling it to adapt to the local environment and culture. However, before determining the strategy to use, the firm needs to determine the market entry strategies that it can utilise for effectiveness. A market entry strategy is a planned method of delivering goods or services to a target market and distributing them (Craig & Douglas, 2000). It is used when a company wants to diversify its operations to a foreign market. It may be in form of direct and indirect exports, franchising, licensing, joint venture, mergers/Acquisitions, and direct investments. The market entry strategy to use depends on costs and risks involved among other factors but before making a decision, a market analysis needs to be conducted. This is to gain knowledge of the market as pertains to competitors, customers, pricing, trade barriers, cultural differences and other factors that may influence business success. Market expansion is not a smooth sailing operation as although the business may be performing well in the current market, the same results may not be achieved in another market. This is due to the fact that you are not well conversant with the new market unlike the current market where you are well connected with suppliers, buyers, competitors and are aware of what works and what does not (Tielmann, 2010). In the new market, the managers have to deal with new customers, new competitors, and since the business is now operating on a larger scale, there are more employees to deal with not forgetting diverse cultures, and new laws since it is a foreign country. Thus, when considering market expansion, caution should be exercised. However, the company has an advantage since it has already established channels of distribution, a product line, and has already succeeded in one market. There are many factors to consider in choosing the right strategy. One of the most important factors is timing. According to Lymbersky (2008) the company has to decide on the country and time depending on its financial resources, product lifecycle and product itself. Investing in another country requires a clear understanding of the workings of the market in that country, culture and government regulations. What works in one country may not work in another country due to change in preferences and values by the target market customers. The government may also put restrictions on foreign traders such as tariffs thus making the venture costly. For example, NatWest has branches in United States, Canada, and Australia and in the Far East. These branches need different products and services especially local employees as they deal with customers directly hence need to know their culture. The product lifecycle also determines when to undertake the strategy. When product reaches maturity stage, the firm may consider expanding to new markets where its effects have not yet been felt or where there is no competition. Considering the product itself is also essential, it is in demand in another market, the firm may decide to enter that market. This is often practiced with agricultural products whereby countries export what they have in surplus and import what they need. For example, NatWest in 2007 improvised a new product to enhance security. This device is hand-held and used with banking card to authorise online banking transactions. The device does not retain personal information but it can verify numbers during transactions. NatWest can use the new product to enter new markets where there is no or little competition. The global banking industry has introduced complex products that use risk and securitisation in business models and diversified financial services which can allow it to venture in new markets (Worldwide web, 2012). Another factor to consider when choosing market entry strategy is sourcing. Some strategies like direct investments require a huge investment thus the company should be able to source the funds needed for expansion. The company has to decide where or how to obtain products; should they make or buy? If it does not want to make products it can utilise an already established firm for sourcing and distributing products using such strategies as licensing or franchising. This involves giving rights to a company to use manufacturing, processing, trademark, and know-how. The method is not expensive as the only cost incurred is signing agreements (Aaker & McLoughlin, 2010). The company may also decide to make products and this will require a different strategy such as exporting. Investment and control are also crucial factors to consider. The firm should make a decision on the amount of control it wants to exert in the market (Bradley, 2007). If it chooses to use entry methods such as licensing it will lose control of the global business but it wants full control it can choose direct investment or joint venture which offers some form of control. The firm also decides on whether to concentrate on few segments in few countries, or concentrate on one country and diversify into market segments. Availability of infrastructure is also crucial. If distribution channels are well established then the firm has no problem in venturing into the new market, but if the infrastructure is not well developed it can consider other options such as the use of intermediaries. Labour costs are also vital elements. A company can consider venturing into a country where labour cost is low so as to minimise operating costs. The labour laws of the target country may also influence the decision to use a certain strategy (Andexer, 2008). For example, if the target country has many restrictions or tight labour laws then direct investment may not be an option. Market analysis involves evaluating the market to determine its viability. This can be done through use of various techniques such as SWOT, PESTLE, and Porter’s five forces. SWOT analysis involves assessing the internal strengths which can be exploited to take advantage of opportunities, the weaknesses that must be overcome, and the threats facing the organisation such as competitors. PESTLE involves assessing the political, economic, social, technological, legal, and environment factors that have an impact on success of business and might hinder the expansion strategy. The Porter’s five forces is an essential tool in assessing the competitive nature of the market thus establishes its attractiveness. The companies also must also determine the marketing mix that suits the intended target market (Johnson, 2008). The corporate, business, and operational strategies of a company should be aligned with business development strategy. NatWest Bank is under the RBS Holdings and therefore cannot be studied in isolation. The mission of RBS Holdings according to the RBS Annual Report is “to focus on re-building standalone strength, we will achieve this with integrity, transparency, and by serving our customer well” (RBS, 2008). Its aim is to become the world’s premier financial institution with global clientele. Its objectives include; organic growth of business, increased return on equity, and durable customer franchises. Johnson (2008) defines corporate strategy as company decisions that indicate the business purpose, and objectives, the plans for achieving the goals, and the range of businesses to be pursued by the company. The corporate strategy thus dictates what the business needs to do in future and guides its operations at corporate, business, and operational levels. Strategic management decisions need to be made to determine long-term direction of the business. The internal environmental factors show the capability, resources or culture that drive the business while the external factors show the attractive opportunitities available to the business and are mostly used for strategy development. Organisations operate in a complex environment comprising of technological advancements, workforce dynamics, and competition, political, economic, social and cultural influences. To thrive in the turbulent environment an organisation thus needs to understand its environment by carrying out an evaluation and make use of opportunities available to expand the business (Brown, 1998). These factors also help in setting prices, choosing distribution channels, deciding on the product to sell, and promotion activities. The RBS/ Natwest use these techniques to analyse the market and determine its global business development strategy. PEST analysis is very crucial especially for businesses that want to invest or enter foreign market. The political environment under which NatWest operates is relatively stable. Its operations are situated in US, China, Europe and the Far East thus no threat from the environment. Political instability can have a negative impact on the business investments due to loss of resources and customers and reduced activity; many customers would shun away from banking services (Johnson, 2008). Politically stable nations offer security to businesses especially the financial sector through regulations. The NatWest ban is under the Financial Services Authority and is also a member of British banking Association. In times of difficulties, the government can also bail-out the banks thus political environment is conducive for business expansion. Due to regulations, it is possible to enforce contracts. Moreover, trading blocs such as the WTO ensures smooth trading by removing any barriers to trade in services and protecting intellectual property rights hence making it easy for the bank to render its services to many geographical regions. The economic environment is in a bit of turmoil due to the Global financial crisis. After the housing bubble that started bursting in US, many banks were left without liquidity and the major banks had to be bailed out. The sector is yet to recover from the effects thus expansion of financial services to new markets may not be viable. Such variables as exchange rates are not volatile in the market and the monetary policy committee ensures inflation rate is controlled thus the Bank can start a venture in any part using the distribution channels already in place. For example, in 2009 NatWest and RBS converted their debit cards from maestro to visa debit without any problems. (RBS, 2008). Any business is affected by the social environment under which it operates. Demographics keep changing and class structures are prevalent especially in the US due to the many races that exist. The company thus is very careful in developing its products and it has to take care of the changing trends. More so, the bank has to give back to the communities under which it operates and act ethically. Corporate social responsibility is thus a key factor to watch while entering new markets (Brown, 1998). Another variable that affects the banks operations is technological advancements. The global business industry is developing complex product offerings each day hence the bank needs to keep u with emerging trend (RBS, 2008). The bank has been on the forefront in implementing the green IT system to reduce water and electricity usage. For example, in 2005 it introduced mobile banking service and faster payment service in 2008. The legal environment includes government policies and regulations which businesses must observe to operate effectively. Whatever activities the company is undertaking whether local or international it ensures they are legal to avoid conflicts and lawsuits and consequent loss of business (Johnson, 2008). Businesses that fail to follow legal means risk being shunned away by customers and investors hence may lose business easily. For example, most companies operating sweat shops exploit their workers by giving them low wages and mistreating them hence have been criticised a lot especially in Asia. SWOT analysis is used by organisations to assess their internal capabilities and external pressures. The bank has much strength that it can count on to explore opportunities in new markets. First, it is regarded as the largest retail and commercial bank in the UK hence it has already developed a reputation which it can use to expand its services (RBS, 2008). The bank is also an innovator thus it has wide of range products and it can easily penetrate new markets. It was nominated by Mortgage magazines best bank for mortgages awards 13 times in the last 12years. In addition to that, products such as MoneySense launched by RBS and NatWest in 2008 made the bank the organisation the first high street bank to offer free, impartial financial guidance to all, including customers of other banks and those without bank accounts (Rbs.co.uk). Its weakness is that it has been involved in aggressive expansion strategy leading to losses and job cuts. In 2008, it had a loss of ?24bn leading to 9,000 job cuts. Its movement into complicated derivative products that it does not understand can be attributed to poor management. Its internal controls and risk management have also been criticised a lot leading to resignation of chief executives who are at the helm of the organisation (Rbs.co.uk). For example, it acquired the Dutch bank ABN AMRO in 2007 at a time when the environment is turbulent leading to a bail out in 2008. The Porter’s five forces is another tool for analysing the competitive nature of the market. The five forces include strength of buyers, strength of sellers, threat of entry, threat of substitutes and industry rivalry (Johnson, 2008). The threat of entry by other players is imminent due to the profitable nature of the business. However, this is overcome by the innovative strength of the business that enables it to produce unique brands and maintain brand loyalty. The company needs to continue creating more products to act a barrier to new entrants and get loyalty from existing customers. The intensity of rivalry is high in the banking and financial sector. The bank thus has to formulate effective strategies to ensure that it retains its position as the largest or leading bank in UK and among the top banks in the world (Rbs.co.uk). This is achieved by strategic planning which ensures that corporate objectives are aligned with other objectives such as those of operational levels or HR strategies. This is crucial in beating the rivals who also have their capabilities. The threat of substitutes is also apparent in the banking industry. Most banks offer similar services hence differentiation varies with quality of service. The company thus continues to make innovations so as to remain relevant in the industry and this helps to improve its reputation and customer loyalty. The company also utilises technology to reach more customers and penetrating in rural areas hence gaining an advantage over competition (RBS, 2008). Buyer power affects the pricing of products in the market and it determined by the level of concentration of buyers. However, the company can minimise this effect by concentrating on customer needs and developing products suited to their needs hence gain commitment from them and avoid losses which have been occurring over few years. The supplier power is high when the company has a few suppliers. Few suppliers n the market can dictate the price at which to supply their products while many suppliers are vice versa. To determine if a business has the resources required to enter a new market, it is essential to assess its financial performance. The RBS group recorded a decline in revenue and losses in the year ending December, 2008. It recorded a loss of ?24bn and a loss of ? 1.93bn in 2010. In 2007 it had an operating profit of ? 9832 million. The group thus recorded losses after its expansion strategies and this means it should t least avoid its expansion policies until it has enough resources to finance the investments (RBS, 2008). Market Entry Strategies An organisation can choose to export, franchise, from mergers/Acquisitions, licensing or direct investments. The common form of entry into new markets is export either direct or indirect. Exporting involves marketing goods produced in one country to another. It requires coordination between exporter, importer, and transport providers as well as the government. According to Foley (2006) export strategy is used under various conditions. First, it is used where there is limited sales potential in the target country thereby requiring just a little product adaptation. It is also useful where distribution channels are available hence minimising costs and ensuring efficient delivery. If it is services such as banking services, a channel may be internet. It can also be used where production costs in target country are high making it sensible to import rather than produce. The target country also needs to have liberal import policies for exports to take place. Exports may be direct or indirect. Direct exports involve the use of agents, distributors, an overseas subsidiary or a government agency while indirect marketing involves use of middlemen. The advantage of using this strategy is that since manufacturing is home based, it is less risky. It also enables the firm to learn about the overseas markets before they decide to invest directly. It allows speed of entry and maximises scale as production is done using existing facilities. However, it is disadvantageous due to lack of control leaving the exporter at the mercy of agents. This affects pricing and promotion of products as they are managed by the agent. Other costs incurred include transport and tariffs. The exporter also has limited access to local information of target market. Licensing is another strategy used where there are import and export barriers, legal protection, low sales potential in target market, large cultural distance and where licensee lacks ability to become a competitor (Lymbersky, 2008). In this case, the licensor allows the company in another country to use its manufacturing, processing, trademark, know-how or some other skills. The advantage of using this method is that it minimises the risk and investment, allows speedy entry and high rates of return on investments due to low investment by the licensor but the returns may be lost as it is the licensee who produces and markets the products. There is also a linkage between parent and receiving partner interests hence none loses. Another advantage is that capital is not tied up in foreign investment. The method may also be disadvantageous due to limited participation by licensor. The duration of licence is short as the licensee develops skills fast and he may also become a competitor. A company can also engage in joint venture. This is an enterprise in which two or more investors share ownership and control over property rights and operation. It is used to avoid import barriers. It is used where large cultural distance exists, assets cannot be fairly priced, and there is high sales potential. Where foreign ownership is restricted by the government, the companies can engage in a joint venture (Lymbersky, 2008). The advantage of using this strategy is that the company is able to overcome ownership restrictions and cultural distance. It is also viewed as an insider and fewer investments are required for entry. The two companies join resources therefore have potential to make returns and defeat competition in the market as well as distribute risks. Companies also have a potential for learning from each other and penetrate the market easily. However, it is difficult to manage and the company loses some of its control to the partner. If the partner decides to become a competitor then there is an increased risk of losing business. The two companies may also have different views on expected benefits and on new markets. Knowledge spill over is expected hence the company loses monopoly or power over the partner. Mergers and Acquisitions are also apparent in the industry as an expansion strategy. This is where an exporter merges with domestic company in the target market to create a new entity whereas Acquisition is whereby exporter takes over domestic company in the target market. The company may still operate under its own name but it is controlled and owned by the exporting company. The advantage with this strategy is that it reduces the time needed to penetrate the market since the operating company has already an existing distribution network and product line. A merger can also be formed to act a barrier to new entrants in the market since it would be hard to match their capabilities (Andexer, 2008). Mergers are also formed to overcome entry barriers that may exist such as skills, technology, suppliers and patents. The disadvantage with this method is that it leads to increased risk, poor integration, overestimation of market potential and inadequate due diligence. Another serious problem is that the two companies have different cultures and it is difficult to change culture hence incompatibility. The last strategy is foreign direct investments. In this case, the company decides to invest in a new company and become owner. It is useful where cultural distance is small, low political risk and import barriers are present. The company thus establishes a subsidiary in the target market which is managed through head quarters or it may be given autonomy. Most companies are attracted to invest in other countries due to political stability, absence of barriers such as tariffs, cheap labour is available and labour laws are favourable. It is advantageous as the company has control of marketing and distribution; greater knowledge of local market, direct contact with customers, access to local capital, minimum knowledge spill over, improved credibility and the company becomes an insider. Disadvantages of this strategy is high risks, more investments are needed, and difficulty in managing local resources (Foley, 2006). RBS/NatWest has utilised various strategies over the years. It was involved in the Acquisition of ABN AMRO in 2007 which made it sink into losses. It also operates subsidiaries such as Ulster in Northern Ireland, Isle of man Bank and Coutts. It also acquired stock broking firms and home loans. It also engages in direct investments by owning branches in US, Canada, Australia, Europe and Far East (RBS, 2008). Companies face various challenges in their expansion strategies. Government regulations may hinder their operations. It has a great impact on the culture of the organisation and it takes time to change culture. There may be resistance from employees since they are used to a certain way of doing things (Brown, 1998). The strategy also affects the structure of the organisation and management as it becomes more complex. Managers need to keep updated with current knowledge and knowledge of the market is a necessity. They also have to deal with foreign employees hence have to understand the culture and labour laws of the country. Conclusion Globalisation and competition is putting pressure on businesses to enter new markets in order to gain competitive advantage. As business grow, they also need to diversify hence have to make strategic decisions on which products to offer, where, and how. Choosing a market entry strategy has therefore become critical for businesses. The managers should consider the cultural distance, method of control they want to use, entry barriers, costs and risks involved. A business can decide to export, licence, form a merger/Acquisition, joint venture or engage in foreign direct investment depending on risk and resources available for investment. Business expansion has great impact on the culture, structure, leadership and functional strategies of the business. However, strategic decision making can help to eliminate any barriers or problems that may arise. References Aaker, D.A. and McLoughlin, D., 2010. Strategic market management: global perspectives. West Sussex: John Wiley & Sons. Andexer, T., 2008. Analysis and evaluation of market entry modes into the Asia-Pacific region. Germany: GRIN Verlag. Bradley, N., 2007. Marketing research: tools and techniques. New York: Oxford University Press. Brown, A, 1998.Organizational culture: strategic change and the management process. FT/Prentice Hall. Craig, C.S and Douglas, S.P., 2000. International marketing research. UK: John Wiley & Sons Foley, J.F., 2006. The global entrepreneur: taking your business international. UK: John Wiley. Johnson, G., Scholes, K. and Whittington, R.,2008. Exploring corporate strategy. 8th ed. FT/Prentice Hall. Lymbersky, C., 2008. Market entry strategies: texts, cases and readings in market entry management. Hamburg: Management Laboratory Press. Tielmann, V., 2010. Market entry strategies: international marketing management. Germany: GRIN Verlag.[Accessed August 6, 2012] . Read More