Auer Waffelns International Expansion - Essay Example

?Introduction In the case study that was presented, Auer essentially was a multi-national corporation, which is “a form of capitalist enterprise withan unprecedented scale and scope of operations” (McClarke, 1985, p. 1). Based on what is known about Auer Waffeln’s international expansion into a variety of markets, there are distinct stages and phases in their entry process. There are also a number of decisions that need to be made in each stage of process. One of the decisions is what type of market Auer wants to enter – with developing markets, there is the potential for high growth and a high concentration of market share; with maturing markets, cash is generated, but not used, and there is little potential for high growth; with matured markets, there is low market share and low potential growth for the company; and undefined potential, in which the opportunities are open for the organization (Gendron, 1988, p. 3). Auer went into matured markets, including Egypt, Germany, Italy, and the United States. Hungary might be considered a more of a developing, or emerging, market, which is in line with where the world market is going, in that “most of the world’s growth is expected to occur in today’s emerging markets” (Cavusgil, 2002, p. 1). The factors in choosing these markets include competition, service costs, market characteristics and uncertainty (Davidson, 1982, p. 85). Based upon what you know about Auer Waffeln’s international expansion into a variety of foreign markets, can you identify distinct stages or phases in the entry process? What are the decisions that must be made at each stage? According to Johanson & Wiedersheim-Paul (1975), there are different stages for a firm when they decide to internationalize, and these stages represent successively higher degrees of internationalization commitment (Johanson & Vahlne, 1977, p. 23). When firms go international, each additional market commitment will happen in incremental steps (Johanson & Vahlne, 1990, p. 211). The firms go through these stages, from a low degree of international involvement in Stage 1 to a high degree of international involvement in Stage 4 (Phing & Au, 2001, p. 163). The first stage is where there are no export activities. The second stage is that there is exportation via agents or independent representatives. The third stage is where an overseas sales subsidiary is established. The fourth stage is overseas manufacturing/production units (Johanson & Wiedersheim-Paul, 1975). With his entry into the Middle East, Waffeln conducted direct exportation of his products. This was the first stage of his entry into the market, and one of the biggest decisions that needed to be made when conducting the export business is how to circumvent, so to speak, the unique cultural challenges that exporting directly to the Middle East presents. Cultural challenges is one of the major barriers that internalizing firms face, and it is necessary to understand the cultural differences between the firm and the clientele (Copeland & Griggs, 1985, p. 52). Cultural “shapes business practices and processes in widely varying ways” (Caslione & Thomas, 2002, p. 24). Negotiating these cultural differences is considered to be one of the most important skills for the international manager (Brooke, 1986, p. 225). Cultural competency is one of the most important factors in gaining a competitive edge (Elashmawi, 2001, p. xvi). How managers interpret and respond to strategic issues is dependent upon the surrounding culture (Becker, 2000, p. 90). Culture can be spread across six different cultural dimensions – how does the society look at the nature of people; how does society look at the relationship between a person and nature; how does society look at the relationship between people; what is the primary mode of activity in society (accepting status quo or changing things to make them better); what is the conception of space in a given society (are meetings held in private or public); and what is the society’s dominant orientation towards time - past, present or future? (Carroll & Gannon, 1997, p. 39). Because Waffeln learned his lesson, which was that the Middle East region is a region that is fraught with difficulties, he sought a joint venture with a firm called the International Confectionary Company, with Auer responsible for production technology and quality oversight, and the partner being responsible for purchasing, supply chain management, production, marketing, distribution and sales. This would represent the second stage of Johanson and Wiedersheim-Paul’s theory, which is that a firm exports via an independent representative or agent (Johanson & Wiedersheim-Paul, 1975). Acquiring a joint venture is intelligent when dealing with foreign countries, because “in a complex, uncertain world filled with dangerous opponents, it is best not to go it alone” (Barham & Oates, 1991, p. 18). Acquiring a partner can take a number of different forms, and this is a decision that needs to be made at the outset – Auer can acquire a foreign firm or setting up a joint venture (JV) abroad with a foreign partner JVs require that the partnership be partially integrated; acquiring a foreign firm requires full integration (Ackerman, 2007, p. 2). Alternatively, another partnership form can take the form of a greenfield plan, in which staff is recruited and chained individually, and the institutional arrangement can resemble that of the parent company (Estrin et al., 2007, p. 8). While Auer entered the Middle East via a JV, his entry mode into the United States was somewhat different, in that he essentially hired, as an independent contractor, a company named Brenner, to sell Auer’s products in the United States. This is an example of Stage 2 of Johanson & Wiedersheim-Paul’s theory, in that Brenner would be considered to be an independent representative (Anderson, 1993, p. 210). The problems that were encountered in this endeavor is that distribution of items needed to be in small quantities and be put out quickly, and direct shipping took too long, so Auer solved this problem by opening up a distribution center in the United States. This would be considered to be Stage 4 of Johanson & Wiedersheim-Paul’s theory, in that Stage 4 is when a firm invests in an overseas production/manufacturing unit. Sales initially grew, until Brenner became disinterested and an earthquake destroyed several of Auer’s warehouses. Likewise, his European market entry resembled the Second Stage as well, as Auer partnered with firms in Germany, Italy and Hungary to sell his products. Why did Auer Waffeln decide to take his company to the international stage? Was Auer Waffeln ready to internationalize? How would you assess a company’s ability to enter foreign markets? Which of Auer’s motivations to go abroad can be considered pro-active, and which would be considered reactive? The next issue that needs to be examined is why Auer decided to internationalize, whether he was ready to internationalize, how to assess a company’s ability to enter a foreign market, and which of Auer’s motivations would be considered pro-active and which would be considered to be reactive. Auer decided to internationalize for a variety of reasons. One was that he wanted to get a leg up on his competitors, who were already internationalizing. Two, the environment in Austria was highly competitive, which means that the market for his products was proving to be too small if he simply concentrated on domestic sales. Three, the time was right, as Auer had acquired expertise by selling his domestic products, and this expertise could translate to selling the products internationally. Phing et al. (2001) theorize that there are two types of firms that are likely to internationalize. The first kind of firm is a firm that has a dominant domestic profile who want to go ahead and try to increase their advantage by selling overseas. These are the leading firms. The second are considered to be following firms, and these are firms that have a medium market share, who want to avoid head-on competition with dominant domestic firms through growing oversease (Phing et al., 2001, p. 163). In this case, it would seem that Auer would be a following firm, as it did not seem to be the dominant firm in its field, and part of the reason why Auer decided to internationalize was to avoid some of the head on domestic competition that dominated the market. As for whether he was ready to internationalize, this is debatable. Auer apparently went into the Middle East by trying to directly export without using an intermediary of any sort. Moreover, when he went into the Middle East, he was learning as he went, about packaging and the tastes of the people, as well as learning about the political and government climate of the country of Egypt. Because this was such a steep learning curve, Auer initially failed when he went into Egypt. That said, he appeared to be a quick study, as he figured out that he would need to go to Stage 2 and get an agent in the country. At that point, Auer was ready to internationalize, for he committed himself to the second stage of international commitment, which showed that he was serious about the endeavor. That said, the Egyptian partners proved to be unreliable, as they managed their local facilities poorly and could not resolve marketing and sales issues. Therefore, it could be said that this was another case of poor planning, which might show that Auer was still not ready to internationalize, as he apparently did not screen his partner too well. In the United States, as with Egypt, there apparently was poor initial planning as well. When Auer internationalized into the United States, he was beset with problems that he probably should have foreseen if he would have done him homework about the country. And, as with Egypt, he apparently did not screen his partner too well, for, even though the partner initially did good work for him, they lost interest and just kind of dropped his firm. What finally did in the partnership, the earthquake, could not be helped, and Auer probably should have handled that a little better, in that he attempted to blame his partner, Brenner, for the damage done to his warehouse, when, in reality, it was nobody’s fault, so attempting to blame Brenner for the damage proved to be a bad business decision. The way to assess a company’s ability to internationalize would be to determine if that company is willing to do the homework on the target country. That would mean doing a thorough work up of the market, finding out the barriers and possible pitfalls before going into that country. Auer did not do this in the early days of internationalizing, and it showed, as Auer eventually failed in Egypt and the United States, which are two places where he kind of went in blind. The other countries went smoother, as it was apparent that Auer knew more about these countries going in. As for which actions seem reactive, and which seemed proactive, in the Middle East, getting a partnership in Egypt was a reactive decision, as it was a direct reaction to initially failing in Egypt because of the lack of knowledge about the country and the country’s regulations. Contracting with Brenner, on the other hand, was a proactive decision, as it was not in reaction to any adverse event, but was a move that was made to head off any problems. The same thing with Germany. In Italy, as with Egypt, partnering with Fugar was a reactive decision, as Auer apparently tried to sell in Italy without a partnership or a distributor, and failed, so he had to get a partnership. Therefore, that was a reactive decision. And, the decision in Hungary to partner with a firm that could distribute Auer’s products locally was proactive, as Auer did research on the country and found the best way to enter the country, and his move there was a proactive move designed to avoid problems there. Did Auer’s modes of entry resembles the Stage Theory of Internationalisation? What external and internal factors that can help explain Auer’s choice of entry mode? What are the advantages and disadvantages of the entry modes that Auer chose? Do advantages outweighed the disadvantages? Auer’s modes of entry do not resemble the Stage Theory of Internationalization, in that Auer did not go through these stages. Rather, he stayed with Stage Two, in that, in every one of the countries, he partnered with a domestic firm in one way or another. He never attempted to establish a subsidiary. He did establish in the United States manufacturing units, so this was a way of working through the Stages somewhat, but, for the most part, Auer stayed with Stage 2. The external and internal factors driving Auer’s decisions to partner with domestic firms is that these firms provide a sense of security in that they know the country, the culture and the temperament. There are certain considerations that any multi-national firm (MNF) account for when entering a foreign market. “When firms go abroad, become multinational enterprises, and compete in foreign market, they have to find ways to transfer or adapt their institutional arrangements.” (Estrin, et al., p. 3). The first consideration is cultural distance, which refers to how different the origin country and the target country are in terms of culture (Ackerman, 2004, p. 5). There are four dimensions to cultural distance: power distance – how unequal are people of different statuses treated, and how much is the hierarchy of power valued; uncertainty avoidance – to what degree are the people of the culture threatened by uncertain or unknown situations; individualism – are the ties of the people loose or tight; masculinity – how distinct are gender roles. Cultural distance is determined by calculating the square root of all the dimensions for each country, then comparing the results (Ackerman, 2004, p. 5). The advantages of the way that Auer approached his internalization process is that, by partnering with domestic firms, he was able to circumvent all of the above. The domestic firms know their own country, what the regulatory hurdles are, what the culture is, what the distance dimensions are for the given country, etc. If Auer did not partner with these companies, then he would be flying blind in each country, because it would be very difficult for a foreigner to grasp the intricacies of a given country’s cultural distance measures. The disadvantages is that Auer really did not go through all the stages, which means that he did not attempt to establish a subsidiary and, aside from the attempt to open up a few warehouses in the United States, he did not attempt to actually produce product overseas or manufacture overseas either. Because he did not go through all the stages of internationalization, it seems that he did not really commit to the process, and, perhaps if he did commit to the process and go through the steps of establishing subsidiary and manufacturing overseas, he would have been more successful. Were the products that Auer developed were good products for international marketing.? What makes a product good for international marketing? These products were good products, because there seemed to be little competition for them in the different markets that he went to. This is the hallmark of what makes a product good for international marketing – if there is little domestic competition for the good, then there is an open market for them, which makes them much more likely to be successful. Sources Used Ackerman, A. (2005). The effect of the target country's legal environment on the choice of entry mode. Retrieved from: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=622822 Anderson, O. (1993). 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