Internationalization and the Global Market - Case Study Example

Divestment in Emerging Economies Table of Contents 1Internationalization and the Global Market 3 2Divestment: Definitions 3 3Wal-Mart 4 4History of Wal-Mart 4 5Case: American Investment Group 5 6Case: eBay 5 7The General Trend 5 1Economics 5 2Local attitudes 7 8Investment Affects Divestment 9 9Summary 10 10Recommendation 11 Reference List: 12 1 Internationalization and the Global Market Globalization has led to more opportunities for both small and large firms to be able to access the international market (Klein & Wöcke, 2007, P.320). With this opportunity knocking on the door, many firms have tried to venture into emerging markets. The emerging markets such as China, Brazil and India have become a centre of attraction for most established multinationals from the western world. However, in the recent past, there has been a trend where most of these firms end up having to close their businesses in these emerging markets and thus shutting their dream of expansion. This is because globalization of markets, as Czinkota, et al (2010) says, has also led to the globalization of business risk. There can be a myriad of reasons for these divestments but there has not been any detailed research to investigate the underlying factors that affect the divestment. 2 Divestment: Definitions The most generic definitions of divestment is a situation where a business willingly sells off some of its assets as a result of a discontinuation of part of it operations (Nees, 1978). Divestments can therefore happen locally or in a situation where a firm requires divesting from a one of its overseas branch (Davis, 1974, p. 16). There are some generic reasons why a firm may opt to divest. These include raising funds, need to focus on core business, specialization, asset consolidation and cleansing (removing dysfunctional parts of the firm) etc (Hamilton & Chow, 1993, p.479). The current trend to divest from international markets may indicate that none of these may be involved and therefore there is a need to investigate the real dynamics behind multinational divestments from emerging markets. 3 Wal-Mart This case is a report to Wal-Mart with the aim to help identify some of the hurdles that the firm may face in its attempt to invest in any of the emerging markets. 4 History of Wal-Mart Wal-Mart is one of the oldest and most successful retail chains in the US. The firm runs hundreds of stores in America and across a number of other countries across the world (Wall Mart, 2013). Wal-Mart was one of the first retail chains to use information technology to help in meeting customers’ needs and also in increasing efficiency. To achieve this, the firm uses high end computer servers and system that make data sharing easy and efficient. The firm is able to have a real time data sharing using a wide area network that connects all its stores. With this kind of sharing of data the firm is able to increase efficiency and therefore make customer service better (Wall Mart, 2013). For instance, data collected at the point of sale units in every Wal-Mart satire is sent to a computer in real time. This data is used in managing inventory and also in helping suppliers to be able to respond quickly to the needs of Wal-Mart. Wal-Mart is also known as one of the sheer few retail store that works extremely closely with suppliers in order to manage costs and also to increase efficiency in the way suppliers reach the firm’s stores. The firm is known for its strict policy in supplier control and it is known to be majorly involved in supplier operations and will only work with those suppliers who are willing to allow the retailer to control their internal functions. 5 Case: American Investment Group One of the multinationals that have found it harder to sustain their investments in the emerging markets is American Investment Group. AIG divested billions of dollars worth of assets from most of the emerging economies such as Brazil, China, and India (AIG, 2013). 6 Case: eBay EBay is another firm that failed to hold its ground in china after it tried to penetrate the market. Like Google, eBay’s divestiture from the Chinese market was riddled with accusations of government interference (eBay, 2013). There were accusations that the government was cracking down in foreign firms in order to reduce completion for local internet markets. 7 The General Trend One of the principal reasons that were identified was the fact that these western firms failed o be able to align with the local culture and therefore were not accepted (Amit & Wernerfelt, 1990, p.530). With regard to emerging markets, one key and crucial issue is to be able to comprehend the local culture and therefore design the products of the firm to meet the local culture. Failure to align the business to the local culture will mean that the business will not fit in the local market. Aligning the local culture will have to consider at the below areas 1 Economics The businesses that fail in these emerging economies have one thing in common. They fail to be able to differentiate the economics of their home economy from the economics of the foreign countries where they go to invest. Going into a foreign market brings a new set of market entry issues (Peng, et al, 2008). To be able to benefit from the emerging economies, extreme receptiveness to the desires of the home market is utterly necessary (Luo, 2003, p.295). A good example of a multinational firm that has been able to align itself with the local culture of the emerging markets is the German car manufacturer, BMW. BMW was able to recognize one notable purchasing factor in china (BMW, 2013). While all other western car manufacturers were still stuck in assuming that the emerging markets will work for them just like in their homes, BMW realized that it would be beneficial for them to be able to look into the purchasing patterns of the local market. Within no time, BMW was able to understand that in the Chinese market, the average buyer of a BMW is younger than a buyer in the European market. They were also able to realize that a majority of the buyers are those who only use chauffeur during the business days and drive themselves during the weekend, together with their families. To capture this market, BMW developed a car that was suited for the market and this gave it success while other firms such as GHM were failing miserably in the market (BMW, 2013). This kind of thing also happened to Procter and Gamble, the American manufacturer of home products. P&G was able to realize that the Brazilian market was different in a number of ways (P&G, 2013). To begin with, the firm realized that the local people were more willing to buy products in smaller affordable quantities as opposed to buying in larger qualities. The per capita income in Brazil is much smaller and most people only earn enough to spend for the day. Because of this, they are willing to buy smaller quantities and may not have the cash to purchase in larger qualities. As a result, P&G responded by changing their packaging to have smaller packets of such products as washing soaps. The other thing that the P&G realized with the local market in Brazil is that the people preferred a washing soap that foamed also because they associated this with more washing power. Prior to this discovery, P&G had been producing a soap that did not produce as much foam but had higher washing power in terms of washing enzymes. The local people did not like this soap because they did not find it to be powerful in terms of washing power. Most people in Brazil are manual laborers which mean that their clothes require a lot of washing and this was probably the reason they preferred a soap that produced much foam. Upon realizing this local need, P&G was able to act swiftly and started producing a foamy soap and also advertised it and after this, P&G was able to capture the local market (P&G, 2013). This kind of exploitive learning is hugely crucial for both local and foreign firms in the emerging economies (Hitt, 2005). According to Edmondson (2011), managers can make learning from failure a corporate culture. 2 Local attitudes Most firms have failed in the emerging market as a result of failing to be able to understand the local attitudes. Most of the emerging economies such as China, India, and Brazil are countries with a truly unique code of culture, especially with regard to their moral beliefs. Failing to understand this code of culture is a significant hindrance and it is able to flush a business out of ht market. While there is a cultural change that is happening in these nations as people change into a more westernized culture, it is also apparent that they are extremely far with regard to their cultural revolution (Peng & Heath, 1996 p.493). This cultural orientation is also held up even at the governmental level (Peng, 2002, p.257). For instance, in china, the main reason why there was a row between the Google search engine company and the government was the fact that the government was accusing Google of promoting unhealthy western culture. In most of these nations such as China, Brazil and India, the government controls a lot of what the people consumer especially with raged to culture and the moral code. While governments in the emerging economies may also be playing a prominent part in making the operations of the foreign firm harder, some suffer from inflexible corporate policies. A good example is coca cola. While many authors have reported that the exit of coca cola from India in the early seventies was due to the harsh government policies (Gopinath, 2012, p.14) argues that the main problem was that coca cola failed to have flexible corporate strategy. As a result, being able to survive in the emerging economies would require one to be able to not only understand the local market but to also adhere to the agreed standards. Failing to do this will lead to fights with the government and at the same time deny the firms market. This has been seen t happen to a number of western firms such that end up being flushed out of the market and out of the country with by the government or are forced to close their business doors after they fail in the market. A good example of cultural misunderstands between western firms and local firms can be seen in what happened to one advertisement made my Motorola, the technology from America. The advertisement featured people wearing funky hairstyles and funky clothing. After watching the advertisement, most of the local did not like the advert because they wondered why anyone would like such looks. Obviously, if the target market does not like the advertisement, it is obvious they will not be in a position to associate well with the product being advertised. Simple misunderstandings like this one about the cultural attitudes of the local people can spell failure to a business and the business will be flushed out of the market (Arthur, 2009, p.251). Understanding the local culture is therefore as valuable as the business strategy itself because this understanding of the local culture will affect the business strategy in a hugely significant way. According to Meyer et al (2010), when a firm decides to invest in foreign markets, they have to understand how to mingle with various local contexts including the local culture and local legal systems. 8 Investment Affects Divestment According to Yiu (2010, p.251) when organizations seek to go to foreign markets, the assumption is that they will take with them an inherent advantage that the mother firm has. However, Yiu’s analysis may not necessarily be correct especially where cultural differences existing between the home and the foreign market. Needless to say, the way a business invests in the emerging market can and will determine how success the firm will be in the local market. When a business decides to go to au of the emerging market, it would be better for the business to understand that all the investment polices and strategies that are applicable to the western economies cease to be applicable once the firm has crossed the borders. The reason for older business failing are different from those of a new business failing (Thornhill & Amit, 2003 p. 500). The way the business invests and the investment strategy that a business uses in the emerging market will determine whether the business will succeed the local market or not. With regard to the kind of investment used, the main idea here is the amount of investment and whether the business uses such strategies as joint venture in its investments (Welch, & Welch, 2009, p.570). Maxwell (2009, p.290) also had this view and argues that each business should analyze the market and understand its position in the market rather than assuming a generic market view. Joint venture with local firms can be extremely beneficial because the foreign firm will not need to understand the local culture as the local firm will help in that through its management (Ahlstrom, Bruton, & Kuang, 2008, p. 395). This concept is therefore closely tied to the two cultural issues discussed above. Apart from using mergers, the other important this that the firm can use to make sure that the firm does not sink in the miry pit of divestment is making smaller investments at a time rather than investing one large investment at once. Smaller investments are useful in that the firm has enough time to learn about the market and the firm will not have an enormous burden of investment. This will help in making sure that the firm will be in position to take its weight in the foreign and emerging market and that the firm will be able to withstand any pressure in the market. Smaller investments will also mean that the firm will be able identify more prominent areas of investment as time goes by. For instance, if the firm has a $100 million to invest in the emerging market, instead of investing the whole amount at the same time, the firm can choose to invest smaller quantities in order to wait and identify which are the most critical areas to invest in. Once these areas are identified, the firm will still have more funds to invest. However, if the same firm invests all the funds at the beginning and after some time the firm identifies other areas that are critical for investment, the firm will have funds constraints and this will mean that the firm will not be able to make this critical investment which could then lead to failure. 9 Summary The main reasons for divestment in the emerging markets my western firms can be summarized as lack of cultural understanding, failing to align with the local culture and falling to adopt investment strategies that suit the local emerging markets. Firm that wants to move from the west and be successful in the upcoming economies like China and India will therefore have to have a better understanding of the local cultures in the emerging economies. The cultures to be understood include the social culture as well economic cultures which involve the purchasing habits and purchasing power of the people. Failing to understand and adopt these cultures in the business strategy will only lead to failure and eventual divestment. However his come be overcome by creating mergers with the local businesses and also by having an appropriate investment strategy that suits the local market. 10 Recommendation It is crucial for Wal-Mart to understand that if it is to succeed in the emerging market, it will need to work in conjunction with local businesses so as to be safe. The good thing with most of the emerging markets is that they have many businesses that would be willing to create mergers with western firms. Any merger between a local firm and a western firm can only be seen as symbiotic because each of the firm will be able to bring some form of advantage into the association. For instance, if Wal-Mart joins with a Brazilian retailer, the Brazilian retailer will help Wal-Mart to understand the culture and the local market and Wal-Mart will help the firm to be able to have quality management. Wal-Mart should therefore consider mergers in these nations, whether it is India, Brazil China or South Africa. This will also help to be able to apply the foreign investment strategy discussed above. If Wal-Mart uses mergers instead of investing as a sole business, it will require fewer funds for investment and it can invest more gradually in order to avoid overloading its cash flow. Reference List: Ahlstrom, D. B. (2008). Private firms in China: Building legitimacy in an emerging economy. Journal of World Business , 395. Alexander, N. &. (2012). International retail divestment. International Journal of Retail & Distribution Management , 114. Amit, R. &. (1990). Why Do Bussinesses Reduce Risk?,. Academy of Management Journal. , 530. American Investment Group., 2012. Accessed on 13th Feb 2013 from: http://americaninvestgroup.wix.com/aig-group Arthur, P. (2009). Modern International Businesss: Understandign Business Environment in the Emerging Economies. New York: Pearsong Books. 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