Current and Future Development of Vinci International Business - Case Study Example

International Business Name Institution Course Date Table of Contents Table of Contents 2 1.0 Introduction 3 2.0 Background of Vinci Construction Company 4 2.1 History of Vinci International Business 5 3.0 Development of Vinci International Business 6 4.0 Issues of Internationalisation Process 9 4.1 Cross-Cultural Issue 9 4.2 Country Issues 10 4.3 Currency Exchange Issues 12 5.0 Strategy for the Future of Vinci 13 5.1 Be Innovative and Flexible 13 5.2 Investing in Technology 13 5.3 Entry Modes - Strategic Alliance 14 6. 0 Conclusion 14 References 16 1.0 Introduction All-value adding activities such as sourcing, manufacturing and sourcing can be done in the international locations. International trade often involve labour, products and services, technology as well as capital (Chetty and Campbell, 2003). In order to enter into new markets, firms require entry strategies such as exporting, licencing, direct investments and mergers and acquisition. Companies participate in international business for a number of reasons such as to acquire growth and expansion, to serve a large market, to gain competitive advantage, to gain better-value factors of production and to develop economies of scale among others (Chetty and Campbell, 2003). Currently, more and more firms are opting to internationalize more rapidly than ever before. An organisation can choose to expand and grow its operations by reaching markets that are found beyond its national boundaries and makes a decision on the mode of entry to be employed (Douglas, 2009). With globalization and liberalization, it is not difficult for companies to enter into new markets (Thirwall, 2003). The expansion of companies into international markets can be found to be beneficial for the foreign company and to the domestic market. The idea of internalization by foreign companies sound promising for both the company and the new market but it is not as easy as it sounds (Thirwall, 2003). This paper is based on the case study of Vinci Construction Company. The report will describe the background and history of Vinci’s international business and its recent developments in terms of international business. In addition, the report will offer an overview of the management of international operations and the issues that must be address in terms of internalization process. A strategy will be developed for the future of the organisation and to solve the issues faced by Vinci. 2.0 Background of Vinci Construction Company Vinci is a French multinational construction company that was established in 1899. It has operations in different countries and has employed more than 179,000 people across the globe (Vinci, 2011). Vinci is considered the world’s largest construction company by revenue. It is a member of Euro Stoxx 50 Index and has been listed at Paris stock exchange. Vinci was founded by Aleixandre Giros and Lois Louncheur. The company started as a small construction company but grew by acquiring Sogea, a construction company in Korea (Vinci, 2011). The company also acquired Campenon Bernard, Norwest Holst, Groupe GTM and Autoroutes. In the recent years, the company has also acquired some of the well-known construction companies to become the largest construction enterprise in the world. Vinci operates in sectors such as buildings, renewable and nuclear energy, transport infrastructure, environmental engineering and mining (Vinci, 2015). Vinci Construction has divided its operations into three components in order to offer long-term services to the customers spanning a broad spectrum of technical features. The first component is the network of local subsidiaries in mainland France encompassing about 391 local bases and subsidiaries in other parts of the world such as African countries, Central Europe and New Zealand among others (Vinci, 2011). The second component is major projects divisions supporting complex project in France and abroad and the third is specialist activities such as geotechnical engineering, nuclear and renewable thermal energy. 2.1 History of Vinci International Business Vinci started its internationalization attempt in 1986. The idea of expansion in the foreign market came as a way to generate incremental sales (Vinci, 2011). Before any foreign expansion, the company was small in size and only operated and served the French market. Vinci pursued international market as a way to extend the life of domestic services. Vinci has used different entry strategies to enter into different markets. The major entry strategy used by the company includes merger and acquisition, wholly owned subsidiary, and foreign direct investment (Vinci, 2002). The major markets for Vinci include France, United Kingdom, Central Europe, Africa, and New Zealand (Malmaison, 2015). In France, Vinci is considered the market leader with estimations of about €200 billion ahead of Eiffage, Fayat and Bouygues construction companies. The United Kingdom Company is of significant size and is specialized in building and civil engineering. The main competitors in the country are Balfour Beatty, Morgan Sindall and Carillion Construction Company (Vinci, 2012). The market is also estimated at about €200 billion. In Central Europe, the company operates through local subsidiaries with competitors including Metrostav, Budimex and Strabag. Vinci operate in about 20 countries in Africa using medium-sized local subsidiaries (Vinci, 2002). And in New Zealand, the company acquired HEB Construction to become a major player in the market. Other markets of Vinci include Latin America, Poland, and Australia. Over the years, Vinci has utilized FDI to enter into new markets. OLI Paradigm Theory gives an explanation as to why companies refer to use FDI as an entry strategy rather than other modes such as strategic alliance, exporting or licensing (Ben et al., 2002). The OLI factors include ownership advantages, internationalization advantages as well as locational advantages. According to the theory, the decisions to invest are influenced by behavioural factors (Banerjee, Carter and Clegg, 2009). In theory, before investing, an organisation should search for market imperfections and advantages until it finds a market which can generate a risk-adjusted return. If an organisation has ownership advantage such as having knowledge of a target market, the best entry mode will be licencing, it there is internationalization advantage, export strategy will be used. FDI is considered the most intensive strategy and with locational advantage, FDI is necessary (Agosin and Mayer, 2000). Vinci uses FDI as an entry strategy to markets with less strict regulations. The motive for using FDI by Vinci is to gain access to new markets (Vinci Construction, 2012). In the construction industry, many players in the market have operations in more than one country. In order to compete with key rivals and to follow key customers, Vinci has made use of FDI. The most used FDI methods by the company are acquisition and wholly owned subsidiaries (Vinci, 2002). Over the years, Vinci has acquired a number of companies in different countries which have become wholly-owned subsidiaries. Because Vinci has 100 per cent ownership off all subsidiaries, they operate with the permission from the parent company in France. The companies that have been acquired over the years by Vinci include Groupe GTM, Cegelec, ANA Aeroport, Norwest Limited, Solletanche-Bachy, Autoroutes and Norwest Holst among others (Vinci, 2002). 3.0 Development of Vinci International Business The management of Vinci in French has little knowledge on foreign operations. In order to ensure success of foreign operations, the company has developed local subsidiaries in each country where its operations are instituted (Vinci Construction, 2012). Each subsidiary is controlled by local manager who operate independently in order to ensure local responsiveness. Since it’s headquarter in French acknowledges the differences between foreign markets, each subsidiary in foreign markets is allowed to vary its services (Vinci Construction, 2012). Vinci often ensure that in all their operations in foreign countries, managers often come from the host country. This is to ensure that talents from the host countries are utilized (Vinci Construction, 2012). However, although all the subsidiaries in different countries have their own managers, the headquarter in French has control over all the operations in order to achieve maximum integration and to reduce redundancy (Vinci, 2002). Elements such as marketing and research and development among other activities are concentrated at the French headquarter where they are centrally coordinated and controlled. Therefore, Vinci uses transnational strategy which is considered a coordinated approach to internalization whereby the company is responsive to local market needs by retaining sufficient central control in order to ensure efficiency (Vinci Construction, 2012). In addition, management decentralizes some decision-making to local subsidiaries such as service pricing, local market research and marketing. Just like any other multinational company, Vinci Company has entered into new markets for the purpose of creating services that are appreciated by the local market needs and that bring revenues and profits for the company (Vinci, 2015). According to integration-responsiveness framework, companies seek to create a balance between two strategic needs: creating products or services that are responsive to the needs of the local customers and integrating value-chain activities globally (Buckley, 2011). In order to be successful in foreign markets, many multinational companies have implemented global integration in order to take advantage of the similarities between countries (Luo and Tung, 2007). Vinci has emphasized on global integration. This is evident on its competent on a local and worldwide basis (Ross and Heather, 2009). The company has minimized its operating costs through consolidating value-chain practices and creating economies of scale (Vinci, 2002). In addition, Vinci sell their services with the aim of capitalising on satisfying customer needs and tastes at local and international level. In its operations in foreign countries, Vinci Company has tried to create the right balance between its response to local market and global integration. The company has adjusted its service offerings to suit the situations in different markets (Vincy, 2002). For instance, Vinci uses different marketing techniques, practices and processes in order to satisfy the needs of local market. The company realizes the differences between different countries and use techniques that suit individual markets (Vinci Construction, 2012). Based on the outlook of the operations of Vinci Construction, the company is expected to continue with its international business (Vinci Construction, 2012). In some subsidiaries across the globe where the market is still growing, Vinci is expected to continue with its international expansion. In addition, the company is also planning to enter other markets with favourable economic conditions (Malmaison, 2015). One potential market that Vinci is pursuing is Latin America. The company is aimed to lower the costs of its operations on a global scale and exploit opportunities presented in Latin America. In addition, it aims at transferring its capabilities, skills and technologies to the market with huge customer base. In addition, in order to enhance its operations globally, the company has distributed a group of employees internationally who have problem-solving skills that can improve operations (Malmaison, 2015). Vinci Construction chooses its markets according to some important factors. For instance, most of Vinci Construction’s markets have large reserves for raw materials and huge number of high-quality labour. In addition, the company also relies on GDP rate of countries, income distribution of customers and commercial infrastructure. In all of its subsidiaries, Vinci has customized its service offerings and business approaches accordingly (Malmaison, 2015). 4.0 Issues of Internationalisation Process Just like any other multinational business, Vinci is faced with issues such as cross-cultural risk, country risk and currency risks. The major issue facing Vinci’s international activities is cross-cultural issues. 4.1 Cross-Cultural Issue In order to succeed in foreign markets, a company needs to realize that people behave differently in different countries (Varner and Beamer, 2011). Therefore, there is no one right way of doing business globally. Managers must ensure that they are open minded in order to avoid business failure (Varner and Beamer, 2011). As companies enter foreign markets, there is often the change in business environment which allows for the need to acquire cross-cultural competence. Companies need to change their approach and structures in order to be able to face the challenges brought about by the new market (Varner and Beamer, 2011). Variations in terms of diversity in culture and psychic distance require an organisation to have a global mind-set to effectively succeed in foreign markets. One huge challenge facing Vinci’s international activities is cultural differences. Due to culture difference, different countries have different negotiation patterns, decision-making styles and ethical practices. Vinci has been faced with the challenge of changing their operations and approach to fit in new markets (Malmaison, 2015). Due to difference in culture, Vinci has been faced with language barriers since most of its hosts countries speak in English but its major people speak in French. In other countries such as African countries and Latin America, the local employees and customers speak in native languages. This makes it hard for expatriates to communicate with employees and customers. As a result of language barriers, employee’s motivation in some countries is low (Malmaison, 2015). To solve this challenge, Vinci ensures that its expatriates undergo cross-cultural training in order for them to blend well in new cultures (Malmaison, 2015). For, Vinci faced a huge cultural shock when entering South Africa. The company sent expatriates in the country in order to ensure that its operations are running smoothly (Malmaison, 2015). However, as a result of language barriers and new culture, expatriates faced huge problems settling in. The management and relationship among the employees is different from the practices in France. Expatriation led to high employee turnover and lack of motivation which affected its operations (Malmaison, 2015). However, in order to solve the issue, Vinci Construction decided to train its expatriates before sending them in foreign markets. This improved their cross-cultural communication and minimized cultural shock. 4.2 Country Issues The country issues affecting Vinci’s international business include political risks and Economic risk (Dacko, 2002). Vinci is at risk of losing money as a result of changes occurring in relation to trade barriers, act of war as well as strict regulatory environment among others. Economic risk is associated with the financial condition of a country and its ability to pay debts (Mathews, 2006). Issues such as unemployment, low GDP rates and low purchasing power affect the operations of Vinci. For instance, Vinci has suffered in many countries due to the 2008 global economic recession. The major hit was experienced in United Kingdom (Allen, 2016). When the 2008 recession touched down, in the United Kingdom, construction industry was declared to be one of the worst hits. In the country, there was decline in commercial constructions and halt of construction contracts which created many challenges for Vinci to reward and retain its employees (Allen, 2016). Vinci was faced with restrictions imposed on public funding that led to reduce confident of people (Allen, 2016). In the same period, Vinci was planning to join all its activities and businesses by integrating all the employees in the United Kingdom and coordinating and rationalising all their benefits. Due to the economic climate in UK, Vinci forced to take action in order to survive (Khan, 2016). The company came up with benefits strategy to assist in retaining employees during tough economic times. In addition, many countries have implemented strict environmental policies in order to ensure that companies have sustainable operations (May, 2001). Adopting policies of environmental awareness by Vinci has been a challenge for many years. It has been very difficult and expensive for Vinci to select environmentally safe construction materials in order to ensure that they adhere to the environmental policies. For instance, in countries like New Zealand, United Kingdom, and United States, like any other construction companies, Vinci is required to incorporate in their construction work; design work and planning that are safe for vegetation, wildlife and drainage (Cullen and Parboteeah, 2014). Vinci is required to acquire permits before building and all of its construction works are under strict environmental laws. This puts pressure on the company since it is required to assess their environmental obligations before starting any construction project (Cullen and Parboteeah, 2014). In addition, in many companies, Vinci is required to follow strict laws with regard to minimum wages, descrimination, treatment of workers and tax laws. Vinci has found legal laws to be more strict in countries like United States, China and United Kingdom. These laws have put pressure on the operations of Vinci and has minimized its ability to make more profit. 4.3 Currency Exchange Issues Currency exchange issue come into being due to unanticipated changes in exchange rate (Cullen and Parboteeah, 2014). The exchange rates between two currencies are at high risk of fluctuating with time which can result to unexpected gains or losses for multinational companies. Currency exchange issues may be in form of transaction exposure, translation exposure as well as economic exposure (Cullen and Parboteeah, 2010). An organisation has transaction exposure in an event where it has contractual cash flows with value subject to unexpected exchange rates changes as a result of contracts being subjugated in foreign currency. For instance, when a United States company borrows about 100 million yen for one year term with interest rate of 3 per cent and then converts the money to $1 million, it is required to repay the loan with about 103 million yen (May, 2001). When the exchange rates change to $1-90yen, the company will pay $144,444 more to repay the entire loan. Vinci has suffered exchange rates issues which have led to decline in revenue in countries such as France and the United Kingdom. On the other hand, a company’s translation exposure involves the reassessment of foreign assets in terms of foreign currency as a result of changes in foreign currency exchange rates (May, 2001). As a result of this reassessment, an organisation may suffer loss or gain. In addition, in terms of currency issues, Vinci Construction has been faced with tax issues in countries like the United Kingdom. For instance, Vinci revealed that it suffered vast losses of about £217 million at its civil engineering operations in the United Kingdom (Ross and Heather, 2009). The subsidiary suffered key costs overruns on Nottingham project which was approximated to be about £217m pre-tax loss on turnover. In addition, another currency challenge facing Vinci is fluctuation of value of investment. As the France economy improves, Asian and European countries slows down. This makes the value of France to advance against the other currencies. In 2015, the France currency gained more than 5 per cent against yen and euro (Ross and Heather, 2009). The stronger currency has affected Vinci subsidiaries in Asia and Europe. Europe has staggered due to triple-dip recession which affected the operation of Vinci in Europe. However, global integration has assisted the company to minimize the effects of currency fluctuation (Ross and Heather, 2009). 5.0 Strategy for the Future of Vinci 5.1 Be Innovative and Flexible The current international crisis as well as the competitiveness of the construction company has led to decline in sales of Vinci operations and increase in their prices due to increase in taxes. Vinci is required to meet the changing needs of its customers due to technological advancement and the high standards of quality (Rammer and Schimiele, 2008). In order to do this, the company is required to reorganize its strategy, in relation to innovation and flexibility so as to be environmentally friendly and establish competitive prices for its services. In order to achieve these goals, Vinci should direct their attention on better and innovative services, innovative promotion and marketing strategies and more environmentally friendly activities (Rammer and Schimiele, 2008). 5.2 Investing in Technology All these can be done through investment in technology. Technology spread fast and constantly new devices and system evolve. Construction industry is affected by technological changes and therefore, Vinci should invest more on technology in all of its subsidiaries in order to ensure they offer innovative services to its clients (Rammer and Schimiele, 2008). 5.3 Entry Modes - Strategic Alliance In addition, for future internationalization, Vinci should consider other entry modes such as strategic alliance. Strategic alliance is an agreement between two companies to pursue shared objective while remaining independent firms (Kale and Singh, 2009). Two companies create a strategic alliance when each possesses business assets or expertise that is required for enhancing business operations. International business should not stop for Vinci Company. There are many other potential markets that the company can explore in order to expand exponentially (Kale and Singh, 2009). For instance, countries such as India and China are huge potential markets for Vinci Construction. Therefore, Vinci should increase its operations in these countries through strategic alliance. Strategic alliance will be able to increase awareness of Vinci brand among customers of new markets (Kale and Singh, 2009). The company will also be able to acquire knowledge of the new market and this will increase their chances of being competitive (Kale and Singh, 2009). 6. 0 Conclusion Companies often seek new markets for various reasons such as accessing potential market, for expansion and growth purposes etc. Some entry modes used by international companies include licencing, exporting, strategic alliance, merger and acquisition and partnership. Vinci Construction is a French multinational company that was established in 1899. In order to grow and expand, the company decided to enter new markets such as New Zealand, United States, Africa and United Kingdom among others. The mode used by Vinci to enter these markets includes foreign direct investment through wholly-owned subsidiary. Vinci has acquired a number of companies in different countries which have become wholly-owned subsidiaries. Vinci uses transnational strategy to operate its international business. Transnational strategy is a coordinated method to internalization whereby companies retain their central control but respond to local market. In addition, Vinci is faced with three main issues in its international activities; currency issues, cultural-differences and country issues. Economic recession has affected the construction industry in UK which has affected the operations of Vinci. In addition, cultural differences between countries affect factors such as decision making style and negotiation patterns. References Agosin, M & Mayer, R 2000, Foreign investment in developing countries: Does it crowd in domestic investment? Discussion Paper No.146, UNCTAD, Geneva. Allen, K 2016, UK Construction Sector Suffers Sharp Slowdown, The Guardian, https://www.theguardian.com/business/2016/may/13/uk-construction-sector-suffers-sharp-slowdown-ons Banerjee, S.B., Carter, C and Clegg, S 2009, ‘Managing Globalization’, in M. Alvesson, T. Bridgman and H. Willmott (eds.) 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