Risks and Rewards of Internationalization Strategies - Essay Example

? RISKS AND REWARDS OF INTERNATIONALISATION by Risks and Rewards of Internationalization Strategies The advent of globalization has drastically changed the way is which business is conducted by firms. Globalization has affected the business practices of not only big multinational corporations but also small and medium enterprises. The barriers to trade which existed earlier are now being broken down all across the world. Corporations cannot exist in a cocoon now days. They have to compete with local as well as foreign firms. Many firms are founding new investment opportunities and new avenues of profit by going international. Internationalization also brings along with it its fair share of challenges. Firms have to adapt quickly in order to survive in the new world order. Internationalization has now become an important part of a firm’s strategy. It has become important to realize which strategies can be transferred abroad and what strategies are to be imported .Different markets pose different challenges, some of them may be solved by using global means whereas others need to be tackled through local strategies. In view of this; glocalisation is the new term which has been developed by researchers. Ohame (1994) has claimed that glocalisation means thinking global and acting local. (Hagiu, 2009) Although Internationalization has presented firms with numerous growth opportunities it also has presented various challenges such as an uncertain cultural, political and legal climate. The emerging markets such as India and China have unstable political and legal frameworks. It is difficult for firms to adjust to them and May sometime lead to collapse of the internal organization. Consequently firms have to find the best possible alternative when going for internationalization. They have to decide whether they want to go alone or venture into a partnership. This paper will analyse all such issues and the possible risks and rewards associated with internationalization. Internationalization: Definition Internationalization in simple terms can be defined as the process through which firms identify the international markets which are lucrative for them and try to enter it. Internationalization as a strategy can be adopted by firms by either acting alone or by acting in collaboration with other firms. (Cavusgil, 2009) Firms which act alone usually set up subsidiaries in the market which they want to enter or they may even buy up firms which are already present in that market. An example of this technique can be seen when Vodafone entered the Indian market it bought a majority stake in the company Hutch which already had a presence in the Indian market. Most firms are wary to go alone in a new market and that too market of an emerging economy. So they prefer to partner with other firms and make a strategic alliance with one or more than one partners. These partners may be local business firms or multinational corporations who have been present in that market for a long time. E.g. – Honda ventured in the Indian market by tying up with Hero – the local Indian partner. (Ferná, et al., 2005) Ways to Penetrate New Markets Different methods can be used by firms looking for internationalization of their business. Some of them will be discussed here - Export Method This is the simplest method of entering an international market. This was the method utilized by firms in the times before globalization. Export method is also very relevant today if the international market is not promising enough and the sales number do not explain setting up shop in the country. The advantage of this method is that the firm does not have to build up infrastructure nor does it have to partner with clients. (Jones, 2009)The firm simple pays the custom duty and its products enter the market. However if the firm is looking to capture the market of the country; export method is not a viable option unless you have an advantage which cannot be removed. Cases in point here are the Chinese manufacturing firms. Most of the plastic products that we use in USA are exported from china. These products are dirt cheap due to the low cost of labor in china. Most USA firms cannot compete on the basis of costs; thus it perfectly makes sense for Chinese companies to simple export the product to USA without getting involved in the hassle of opening up shop in USA. Cost is not the only advantage. Firms such as Apple export their products to half the world. Here the competitive edge is technology and innovation of the product. (Olusoga, 1983) Joint Venture Most firms follow this route in order to enter a new market. A joint venture is formed either with a local firm or with an international firm which has conducted business in that market for a long period of time. Both partners involved in the joint venture bring something to the table so that the partnership is win win for both the firms. One of the firms usually is the local firms which has knowledge of the local market as well as distribution market in the entire country ; other firms has the technology to make products which can reach the masses through the distribution network of the former firm. An example of such partnership can be seen between the Japanese Suzuki and Indian Maruti. Maruti had the local market knowledge as well as dealers whereas Suzuki provided the technology. This joint venture operated for more than 25 years and gave immense advantage for both the firms. (Geringer, 2006) Franchisee Option (Giving Licenses) Many international food joints such as MacDonald’s and Pizza Hut are present throughout the world. There are many few countries in which they are not present. They have expanded tremendously in USA as well in other countries by utilizing the franchisee model. Under this model they provide their local partners the license to use their name and charge loyalty in return. The firms maintain strict controls on employee conduct; HR policies being followed in these firms and also the quality of product being served to people. (O', et al., 1996) However apart from these controls; the day to day functioning is left to the local partner. They provide incentive to the local partners to expand the business by sharing their marketing expenses but the actual marketing effort is left to the local partner. This model prevents the initial start up costs associated with a new country; cultural clashes are also minimal as entire management is local. Although this model looks lucrative but it can be highly risky. If the local partner defaults in any way MacDonald’s will have to pay up for no fault of their own as they have lent out their brand name. Buying Out Local Firms Buying out firms is the latest fashion among multinational firms.Laxmi Mitaal became one of the richest persons in the world by buying out local steel firms. Buying out a firm provides many advantages for the firm which is trying to internationalize. With this method the firms are able to directly enter the fray without any partners and they have the advantage of not having to start from scratch. The distribution and marketing network of the company which has been bought can be used to gain an advantage. (Pradhan, 2006)However research proves that a very small fraction of these takeovers are successful; most of them fail. The challenge for the firms following this strategy is the clash of cultures which is bound to happen in such a takeover. Every firm has a different company culture; add to that the fact that the takeover has crossed international borders the cultural clash becomes even more severe. Asian countries in general have large power distances as compared to western countries. Due to this power distance; their style of management is entirely different from western firms. If the western company tries to make them do the business their way a clash of egos is bound to happen. This clash of egos can destroy even the best of takeovers.HR and management practice integration between the two firms is the biggest challenge to overcome in this internationalization strategy. Overseas Office and Subsidiary Company Set up This is the most expensive and time consuming method of internationalization. In this method the company sets up shop in foreign country from scratch. It has to build its own distribution network and its network of dedicated employees. It depends on the nature of business whether such a step should be taken by the firm. Many factors such as cost advantage, long term feasibility of the market and future growth strategy of the company should be considered before considering such a move. This move also has a gestation period. The company cannot expect profits to start pouring in from day one. So the firm should have an appetite for enduring some losses. FMCG companies such as Nestle, Unilever follow this approach in developing countries where they want to expand. Some firms may start off with the joint venture model and may at later stage decide to go alone. (Prashantham, 2008) An example of this path has been Honda which initially enters a market through joint venture with a local partner and later goes alone once it has established a strong network in the country. Advantages of Internationalization In the previous section we have analyzed the different methods which can be utilized by firms for internationalization and the risks and rewards associated with each of the strategy. Going forward we will list down the major advantages which internationalization provides to firms regardless of the strategy that they adopt. Increase in Customer Base Most firms which are going international nowadays are expanding in the emerging markets of Asia. These markets are witnessing strong growth in the recent times. Countries such as India, china and Brazil are consistently growing at a rate greater than 6%.Such strong growth provides opportunities for firms. Organizations such as Pepsi are now earning most of their business from markets outside the American continent. Most businesses have realized that Asia is where the future is. American and European markets have now matured and present limited growth opportunities. Firms looking for growth in their customer base have to look east and internationalize. (Cavusgil, 2009) Offset Seasonal Fluctuations Many industries such as the steel industry are cyclical in nature. Having a global presence can offset some of this cyclical fluctuation in business of companies. Global presence can also safeguard against a slowdown in the economy of the home country. We will explain this point with an example.USA and Europe are reeling under an economic slowdown since 2009.India and China have been effected a bit by this slowdown but still enjoy high growth rates of about 7%.Companies which have presence in India and China have been able to offset their loses in the western markets whereas firms who do not have presence in these markets have been badly hit due to recession. Reduction of Costs This was perhaps the first benefit which attracted USA firms to the emerging markets. Most manufacturing firms have outsourced their production to China and most of the software jobs have been outsourced to India. (Jones, 2009) It is highly unlikely for a firm operating out of USA to compete with a firm whose production facilities are situated in China. This is largely due to the cheap labor costs of these countries. Recently a lot of protest has been taking place in USA to bring back the jobs lost to these emerging countries but it s phenomenon which is highly unlikely to happen. The benefits of outsourcing have been enjoyed not only by firms for increasing their profits but have also been passed on to the consumers. It will be very difficult for firms to go back to the high cost of production which existed earlier. However this advantage may reduce significantly when India and China move up the value chain and are no longer satisfied with outsourced work which adds little value to their employees. Increasing Brand Awareness and Image A multinational firm is always more respected as compared to a local firm. When a company decides to go international it increases the brand awareness among customers, suppliers and other partners of the firm. Internationalization also increases the value of the firm among the shareholders. Access to New Technologies and Information Cost reduction is not the only advantage which is open to a firm which goes international. Different markets have different strategies regarding supply chain, marketing and other value creation activities. Some of these activities may be better I some of the markets. Internationalization presents an opportunity to accumulate the best practices being followed all around the world and incorporate them in your business. (Olusoga, 1983) Cost cutting strategies can be learned from emerging markets whereas technical expertise can be gained from mature markets. Firms such as Tata Motors whose origin is in developing countries internationalize in order to gain cutting edge technology. The recent takeover of Range Rover by Tata Motors helped the firm to gain new technology which can be used by the firm in its home markets. Firms such as Google and Microsoft entered India to cut costs but were impressed with the talent of the employee’s available there. So many of these firms have also moved their R&D centers to Bangalore. Thus globalization and internationalization can present many benefits regarding improvement in technology. Risks Associated with Internationalization Although internationalization provides many benefits to companies; it also has risks associated with it. These risks need to be managed by firms looking expand their operations beyond the national barriers. Cultural and Language Barriers Cultural and language barriers are visible even within the nation. The way a person from Alaska looks at things will be entirely different from the way a person in Florida looks at life. (Pradhan, 2006)These differences are compounded multiple times when we cross national boundaries. Due to differences in culture; the way of doing business is also different in different countries. There is a visible difference in the way people relate to each other in Asia as compared to western countries. People in countries such as Japan take actions more collectively whereas their western counterparts are more independent in their actions. These changes the way managers handle their employees and also management practices. Cultural barriers are in fact the biggest obstacle that a firm has to overcome when it intends to go international. It has to think international but act local. International strategies need to be toned down and adapted according to local cultures and traditions. Failure to do so may lead to collapse of the internationalization strategy. (Prashantham, 2008) Political Instability In the present times most internationalization strategies of western firms are related to expansion in the emerging market. These markets provide tremendous growth opportunities but are also highly politically unstable. Institutions such as rule of law are quite weak and at nascent stage in these countries. This can prove to be a very big challenge and risk for western firms which are used to work in a regulated environment. Most developing countries also face the problem of corruption. In order to do businesses in this unstable political environment firms have to adjust quickly. Any wrong move can jeopardize the future of the company in these countries and put to risk the huge amount of investments made in infrastructure and manpower. Government Regulations Most of the emerging countries suffer from the problem of political instability and anarchy. However countries such as China and India are politically quite stable. But businesses operating out of these countries face different problem of government overregulation. China is a communist country and India also has socialist inclinations. Government in these countries is quite powerful and can make regulations to restrict foreign players completely or put conditions on their operations. Firms have to adjust according to these regulations. They have to be prepared for stricter controls than those which are applied to local firms and also greater scrutiny of their operations. These curbs and regulations are generally eased when the firm spends a considerable amount of time in the country and significant demand for their products start coming from the public. Financial Commitments Venturing into international markets also require a huge amount of financial commitment on part of companies. These financial investments take a large amount of time to give returns as the company is entering a new market and there is a period of learning which has to be taken into account. (Tuppura, 2007)Thus the firm must be willing to invest money for a considerable period of time. If finding cash is difficult it should try and find ways of entering market which require lesser amount of financial obligations. Training and Recruitment of Employees Any new operation requires the hiring of new employees. Internationalization further compounds this problem. The firm has to ensure that it hires employees who are in sync with the core values of the organization and are still able to relate to the local work environment of the local market. Finding the proper management is the real problem for most companies. Do they bring foreign managers who know the culture of the company better or do they hire local managers and train them according to needs. These employees may be working on technological platforms which are backward when compared to western countries. This will require significant training costs for firms. Employees also need to be rotated among different international operations on a regular basis to familiarize the different parts of the organization and to ensure that each country’s unit does not operate in isolation. Conclusion Internationalization provides a tremendous opportunity for firms to grow beyond their home market. Apart from the growth opportunities it also presents the firm with some unique challenges which needs to be sorted out in order to succeed in the international market. A firm might have to change its business practices or even the way business is conducted by the firm. Internationalization can be highly profitable for firms which are able to manage change. However firms unable to do so may not be able to reap those benefits and may even destroy their home market in an effort to capture the international market. References Alina, Hagiu, (2009). The Internationalization Strategy in a Global age. In The International Conference on Administration and Business. Romania, 14 - 15th November 2009. Romania: University of Bucharest. 375 - 385. Cavusgil, S. and Knight, G. (2009) Born Global Firms: A New International Enterprise,2nd ed. New Jersey: Business Expert Press, p... Fernández, Z. and Nieto, M. (2005) Internationalization Strategy of Small and Medium-Sized Family Businesses: Some Influential Factors, Family Business Review, 18(1), p.77 - 89. Geringer, J. et al. (2006) Diversification strategy and internationalization: Implications for mne performance, strategic Management Journal, 10(2), p.109 - 119. Jones, M. (2009) Internationalization, entrepreneurship and the smaller firm: evidence from around the world, London: Edward Elgar Publishing, p... Melin, L. (2007) Internationalization as a strategy process, strategic Management Journal, 13(S2), p.99 - 118. Olusoga, S. (1983) Market Concentration versus Market Diversification and Internationalization: Implications for MNE Performance, International Marketing Review, 10(2), p.23 - 32. O'Neill, P. (1996) In What Sense a Region's Problem? The Place of Redistribution in Australia's Internationalization Strategy, Regional Studies, 30(4), p.401 - 411. Pradhan, J. and Alakshendra, A. (2006) Overseas Acquisition versus Greenfield Foreign Investment: Which Internationalization Strategy is better for Indian Pharmaceutical Enterprises?, MPRA, .(.), p... Prashantham, Shameen , 2008. The internationalization of small firms: a strategic entrepreneurship perspective. 1st ed. Washington D.C.: Routledge Perkins, Stephen J., 1997. Internationalization: the people dimension : human resource strategies for global expansion. 1st ed. New York: Kogan Page. Tuppura, A. et al. (2007) Linking knowledge, entry timing and internationalization strategy, International Business Review, 17(4), p.473 - 487. Read More