External and Internal Drivers for Globalization for the Business - Essay Example

?What do you consider to be the significant external and internal drivers for globalization or localization for this business? The external macro environment is one of the external drivers for the company. The macro environment “consists of political, social, economic and technological factors in the broader society” (Mellahi, 2005, p. 33). These factors can either be specific for the industry, or may be generalized and affect everyone. For instance, the global recession would be considered to be an external driver. The way to analyze this would be by conducting a PEST analysis. The first component of a PEST analysis would be the political environment, which would include government legislation and political risk. The second component would be economic, which encompasses cost of production, currency exchange rates, and cost of capital. The third component is the social environment, which encompasses social change and global convergence. The fourth component is the technological environment, which encompasses global technology scanning and technology clusters and the spread of the Internet (Mellahi, 2005, pp. 37-49). Furthermore, another way of analyzing it would be examining the external environment according to Porter’s Five Forces. These forces would be 1) rivalry – how intense is the rivalry/competition among the firms in the industry? 2) buyers – how much power do buyer have? What can be done to neutralize their power? 3) new entrants – how easy or difficult is it to enter the industry? How can entry barriers be erected? 4) suppliers - How much power do suppliers have? What accounts for their power? What can be done to neutralize their power? and 5) substitutes - are there substitute products or services? What effect do these substitutes have? (Ungson & Wong, 2008, p. 59). For the PEST analysis, it is clear that one of the external drivers for this business is the global recession. The company states that there is a risk that, in global markets with sluggish economies, their products will not have a market to sell and demand for their goods will go down in these markets. This also plays into the Porter’s five forces, for this affects buyer power, in that buyers will have more power due to the fact that there will be lesser demand for the products. Therefore, the buyers for the products will have more leverage to negotiate. Moreover, this also plays into Porter’s five forces at the supplier level. Weak economies would indicate that suppliers will not have as much power as in a good economy, due to the fact that buyers have more power. Thus, in these economies that are weak, Air Products will also be weak. This is shown in the fact that Air Products is facing pricing pressures, and there is excess in the manufacturing facilities, unanticipated contract terminations and project delays. Moreover, there is competition and the inability of the company to compete effectively, which affects sales and financial performance. This plays into the economic aspect of the PEST analysis and the rivalry arm of the Porter’s five forces analysis. The reason why this implicates the economic aspect of the PEST analysis is that the economics of the different countries is the reason for the inability to compete, and rivalry because rivalry with other countries is the external driver that is implicated by the competition. Also implicated in Porter’s Five Forces is the threat of substitutes, for these rivals might produce products that can be a substitute for the products Air Products produces, and these substitutes might be less expensive, which would further cut into Air Products’ market share. The other external force is the fact that there is a shortage of raw materials, and there are increased costs in energy sources. This implicates the economic end of the PEST analysis, because one of the aspects of the economic end of the PEST analysis is the cost of production. Obviously, a shortage of raw materials or the fact that these raw materials are increasing in price affects the cost of production. Furthermore, when looking at Porter’s Five Forces, the shortage of raw materials would affect new entrants into the industry, as the increased costs of the raw material and energy sources would present barriers, thus preventing new entrants from getting into the industry. This might also impact the threat of substitutes, for, if rivals can get the materials more cheaply than Air Products, then they can produce better products with a lower cost of production. Another external force is the regulations Air Products faces in the countries around the globe. Regulations are a significant source of control of business opportunism in democratic societies, and it shows that these governments’ roles are “being a guarantor and enforcer of citizen’s rights and privileges as well as a provider of the institutions and infrastructure necessary for business to thrive” (Wood et al., 2006, p. 9). Included in this is the cost of environmental compliance. This implicates the political environment in the PEST analysis, for these regulations are a function of the different country’s legislatures, and this is what the political environment in a PEST analysis implicates. Again, this factor also implicates rivalry in the Porter’s Five Forces, because stringent regulations will deter new entrants into these markets, because it makes the cost of capital for entry prohibitive. Another external force is the political and legal risks, which includes adverse impact from the nationalization or expropriation of property rights, instability in legal systems and political instability. This implicates the political aspect of the PEST and the rivalry end of the Porter’s Five Forces, for these forces will keep rivals out by creating barriers to entry for them. Other economic external forces affecting the company include interest rate increases, currency fluctuations, and the cost of pension liabilities. These are all part of the economic end of a PEST analysis, for these are economic factors that will drive up the cost of doing business. At the same time, these aspects will also keep out possible rivals, for they present barriers to entry, so it implicates Porter’s Five Forces because it keeps out potential entrants. One way that the technological aspect of a PEST analysis would be affected is the threat that the information technology of the company could be compromised, and that a threat to the information technology of the company could result in adverse effects, such as loss of sales, loss of operation and loss of business reputation. This is an important external driver because technology is one of the most significant drivers of strategic change in the global world (Bradley, et al., 1993, p. 3), so any kind of attack on the technology of a firm would be a significant external driver for that firm. Some of the internal drivers of the company have to do with how the company operates internally. Firms should adapt their resources to take advantage of the external business climate (Mellahi, 2005, p. 132). The internal factors looks at each business as a unique entity, which contrasts with the external driver analysis, that looks at the environment surrounding the firms. In this way, the analysis looks inside the organization for any kind of factors that would influence how they are able to adapt to the global challenges presented. This would include an analysis of the individual firm’s resources, capabilities, and core competencies (Mellahi, 2005, p. 136). In this case, the internal drivers are the risks that the firm will be subjected to litigation and regulatory proceedings and the risk that the firm cannot retain or attract skilled workers. In this way, these are internal drivers, for, while they are related to the external environment, in that, for instance, the inability to attract and retain skilled employees could be either because these employees are working for a rival firm, which implicates the rivalry aspect of the Porter’s Five Forces, or that there is a lack of education in the countries where Air Products is establishing itself, which implicates the social part of the PEST analysis, in the end, the inability to attract quality employees will affect Air Products and the way that they do internal business, so this is an internal driver. Similarly, the risk of litigation is also an external driver, and it implicates the political end of the PEST analysis, because it implicates the regulation, which is part of the political analysis. However, as with the inability to attract and retain skilled employees, this aspect will affect the internal way that the firm is doing business, so this is also an internal driver. In the end, Air Products is much more of a global company than a local company. It is headquartered in the United States, but operates in 40 different countries, and this is where the business is concentrated – on the global market. Since the global market is where the strength of Air Products lies, the business strategy, outlined below, will concentrate on the global nature of the company, in that the main strategy involves entry into global markets where Air Products either does not have a presence or has a limited presence. What future international strategy do you recommend for the business, and what are the key elements of this strategy? The international strategy that should be pursued would be the expansion into countries where the company currently does not have a presence. This would be three of Sheth & Eshghi’s (1989) nine strategies – strategy seven is introducing present products into new markets; strategy eight is introducing improved products into new markets; and strategy nine is introducing new products into new markets (Sheth & Eshghi, 1989, pp. 46-47). Therefore, entering new markets will be a way for Air Products to introduce their present, improved and future products to different markets. One of the decisions would be which countries to expand into - 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). The factors in choosing these markets include competition, service costs, market characteristics and uncertainty (Davidson, 1982, p. 85). There is no indication that the company has a presence in the Middle East or much of a presence in Russia, so these are two markets that would be ripe for expanding. The markets that will be examined to implement this strategy will be Saudi Arabia and Russia. These markets would be considered 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). These two countries would be considered to be customer countries, therefore an analysis of the features of these countries will need to be undertaken to understand the nature and context of market demand (Spulber, 2007, p. 49). The key element in this strategy would be to learn about the climate of each country. 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). Therefore, the cultural challenges and other challenges of each country will need to be examined. 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). Culture “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). Moreover, there are other aspects of a country’s culture that needs to be looked at as well. The first consideration is cultural distance, which refers to how different the origin country and the target country are in terms of culture (Ghemawat, 2007, p. 40). 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 degree of cultural distance can pose many problems for the company that is attempting to enter a foreign market. Each country might have a different business culture or strategy. Therefore, an Air Product operating in a country that has a substantially different culture than the England will attempt to operate differently, and maybe go against long-standing policies of the company. Another problem that is presented with cultural distance is the dealing with local governments and supplies. Ignorance of how either one of these entities operates can lead to conflict (Ackerman, 2004, p. 6). Moreover, there are other dimensions of distance that must be considered as well. Institutional distance is another dimension, and this is made up of both informal and formal aspects. The informal aspects of institutional distance encompasses the cultural differences explained above, along with organizational differences. Informal aspects of institutional distance requires experience to overcome and be understood, and this would necessitate a partner to help the organization understand (Estrin et al., 2007, p. 4). Examples of formal aspects of institutional distance are regulatory and legal differences, and, because of the transparency of rules and regulations, these do not require experience so much as it requires knowledge and study (Estrin et al., 2007, p. 4). Informal distance between the subsidiary and headquarters “inhibit the ability to attain legitimacy in the local context.” (Estrin et al., 2007, p. 10). The problem with informal distance, which includes cultural distance, is that “knowledge about other cultures is often tacit” and these informal rules are difficult for a foreign company to understand. The foreign company's cultural knowledge is lacking, and this makes it difficult to communicate with local peers in the target country, and it is difficult to acquire tacit knowledge (Estrin et al., 2007, p. 10). One solution to the informal distance problem is partnering with a local firm that will provide knowledge about the informal business environment in the target country. This local firm can contact local suppliers, authorities and distributors and help create legitimacy for the foreign company. Another strategy would be for the originating company, Air Products, to acquire tacit informal knowledge of the target country in a gradual way. (Estrin et al., 2007, p. 11). Formal distance, which encompasses regulations and other legal barriers are easier for the originating company to understand, as they are formalized, written down and transparent. At the same time, formal distance, such as regulatory distance, may present another barrier to the originating company, in that high regulatory distance could indicate that the transfer of business practices will be inhibited. Local laws and regulations could make changing existing practices difficult. (Estrin et al., 2007, p. 12). In this way, formal distance might be a higher hurdle to overcome than informal distance. Therefore, in order to evaluate the countries that are profiled, it is crucial to know the cultural, informal and formal distances. That said, the strategy for entrance into Saudi Arabia and Russia will have to take all of the above into account. The first country that will be examined in this regard will be Saudi Arabia. Saudi Arabia is oil-based and the government has strong control over major economic activities. With 20 percent of the world's oil reserves, it is the largest exporter of petroleum. Private sector is encouraged by the government, in an effort to lessen the country's dependency on oil and to increase employment opportunities for its citizens. Private sector and foreign investment participation in power generation and telecom sectors have recently begun to be permitted. Saudi Arabia is a part of the World Trade Organization (WTO), as it needs to attract foreign investment and diversify the economy. (Nelson, 2009, p. 325). It has plans to establish six “economic cities” that will be situated in different parts of the country, and will be used to promote development and diversification. (Nelson, 2009, p. 325). Other factors potentially affecting Saudi Arabia is a decline in oil prices might send the economy and GDP of Saudi Arabia reeling. This would affect new business projects and obviously affect the Saudi people's ability to buy Air Products’ products, if the economy starts to hurt and unemployment rises because of it. A high unemployment may, in turn, lead to social unrest and an anti-foreign sentiment (Rao, 2007, pp. 6-13). On a PEST grid, which analyses political, economic, social and technology, risk assessment matrix indicates that the possibility of the Taliban seizing control represents the highest risk, yet the lowest probability; the possibility of internal power struggle, internal turmoil, rise of militancy, volatility of stock market, labor laws changing to favor the workforce, commercial laws changing to favor domestic companies, depreciation of Riyal currency depreciating due to weak United States dollar, and increase in customs duty and interest rates all represent low probability and medium risk; inflation growing beyond 3%, growth in anti-west sentiment and rigid implementation of Sharia'h law all represent medium risk and medium probability. Representing low risks and low probability are that the king will change, trade unions will strengthen, oil prices will fall below $50 U.S. dollars per barrel, there is a budget deficit, corporate taxes increase, and human rights deteriorate. Saudization, denial of women's rights and increase in corruption all represent low risk and medium probability (Rao, 2007, pp. 6-13). The next country that will be examined will be Russia. Russia is selected as it represents an golden opportunity to enter a foreign market in the world's largest country with “business opportunities equal its size.” (Fey & Shekshnia, 2008, p. 2). Russian economy grew at the rate of 7.5% between the years 2001-2005. There are approximately 144 million people in Russia, has substantial purchasing power growth, and has one of the fastest growing GDPs in the world. Moreover, certain sectors have a lack of competitors. All of this makes Russia very attractive for entering as a foreign company. Large companies that have penetrated Russia's market, such as McDonald's, Wrigley, Mars, Phillip Morris and Telenor have already paved the way, showing that there is money to be made in Russia. (Fey & Shekshnia, 2008, p. 4). However, there are risks associated with this market as well. To help overcome these potential pitfalls, therefore grab more of the rewards, businesses must obey certain commandments. The first commandment is to have leadership that is authoritative but not authoritarian (Fey & Shekshnia, 2008, p. 5). The Russian people have great respect for charismatic leaders, hearkening a tradition of powerful leaders such as Peter the Great and Josef Stalin. Related to strong leadership is a strong organizational culture. The culture must emphasize fairness, transparency, meritocracy and a chance for every individual employee to feel important (Fey & Shekshnia, 2008, p. 7). Employees need to be empowered. Mistakes need to be tolerated and corrected, not severely punished. Employees should participate in the decision-making process, by encouraging them to generate ideas. In short, employees must feel valued and heard, and, since Russian companies have a tradition of severe punishment for mistakes, there must not be this kind of punishment for honest mistakes, but the mistakes should only be made once (Fey & Shekshnia, 2008, p. 7). For all the countries, the products sold should be localized, for each country will have different energy needs and products. Some countries may have stricter environmental regulations and laws, so products that are developed to be cleaner should be concentrated in these countries. Other countries may have law environmental regulations and laws, and for these countries, it would be prudent to sell products that are not as clean, but will probably cost less, because they do not have as many R&D costs behind them. In this way, Air Products will be able to develop products according to the market and needs in each country, and this will also fuel their R&D into innovative, cleaner products, because the countries with strict environmental concerns will give financial backing for these innovations. By What Methods Would You Recommend That This Strategy is Developed? Air Products will have to determine the best entry mode into these two countries. 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). Since these two countries are relatively untapped by Air Products, in that Saudi Arabia apparently has not been entered by Air Products and Russia has minimal involvement with Air Products, it would be advisable to form a joint venture with another firm in these countries. A joint venture is where two or more firms join forces, and each partner takes an active role in decision-making, therefore passive arrangements are not considered to be a joint venture. In a joint venture, there is a parent and a child. The child carries out the productive economic activity for the parent (Harrigan, 1989, p. 115). These joint ventures could include manufacturing arrangements, distribution arrangements or R&D arrangements (Harrigan, 1989, p. 116). If R&D expenses can be spread out over different firms, then this can be favorable for multi-national companies (Doz, 1986, p. 23). Joint ventures are advantageous in that each partner can concentrate on its respective area of competence, and increases the odds that the firms can survive, as joint ventures ease the way for a firm to enter an unfamiliar business arena. In this way, this a way to capitalize on every firm’s strengths (Harrigan, 1989, p. 121). Therefore, Air Products should try to form joint ventures with other firms in these countries, either domestic firms or other multinational firms that have a presence in these countries. Air Products can also consider doing Foreign Direct Investment into local firms in these countries. FDI can be helpful to not only the domestic firms which are the targets, but also the foreign competitors of these domestic firms as FDI affects upstream suppliers in the following ways: 1) by helping local firms adopt new technologies and solve contract problems; 2) through imposing higher grades and standards on the industry and 3) the foreign investor might prefer dealing with larger suppliers to reduce transactional costs, which presumably would mean that even local firms would do the same to compete (Dries & Swinnen, 2003, p. 3). Moreover, FDI can lead to a spillover effect, which improves all firms, large and small, and their access to finance, increased investment and quality improvement by small local suppliers (Dries & Swinnen, 2003, p. 6). This is in contrast to previous studies that found that foreign investment is detrimental for small suppliers who might not be able to comply with high standards and grading, or are cut out by the company to cut transaction costs. (Dries & Swinnen, 2003, p. 6). FDI is advantageous because of the process of vertical integration, which means that foreign processing companies vertically integrate with local suppliers, and, along with this integration, comes reforms, such as enhanced quality controls, access to technology, credit and inputs. Additionally, there is a horizontal spillover effect, in which domestic firms copy these vertical integration strategies, therefore the vertical integration affects the entire industry (Dries & Swinnen, 2003, p. 6). What are the major implications for functional strategies of your corporate strategy? The major implication of the strategy will be that Air Products will be able to enter markets that they either do not have a presence in, such as Saudi Arabia, or have a nominal presence in, such as Russia. These are two very important markets, as they are emerging markets, which means that there is a high potential for growth in both of these markets. Both of these markets are in need of energy, such as what Air Products supplies. Moreover, the major competitor, Praxair, has not really established a foothold in either country. Linde, however, which is another major competitor has established a presence in Saudi Arabia, as it has secured its biggest ever contract for air separation plants in that country. And Linde has also bought a Russian company to supply technical gasses and has several contracts in Russian for plant engineering and gas supply. Nevertheless, if Air Products can diversify their products in these countries, they can have an advantage over the competitors. Moreover, the strategy for forming joint ventures would be advantageous because of the climates of both countries. Both countries present unique challenges that would be difficult for an overseas company to overcome. These challenges are cultural, legal and regulatory, and social, and it would be hazardous for a company to enter these countries without having a partner who is well-versed in these potential landmines. For instance, in addition to the factors mentioned above, Saudi Arabia is almost uniformly Muslim, and because of this, Westerners must know the customs associated with this religion, or else they will get into trouble. For instance, one must adhere to the Muslim work week, and observe all Muslim holidays. (Stanat, 1998, p. 290). Other protocol that must be observed is to not use one's left hand for dining, passing documents or greeting; never allow the sole of one's shoe to be exposed to someone, as when sitting; avoid touching the head of anybody, even small children; do not drink alcohol or eat pork; always respect the religion. (Stanat, 1998, pp. 292-293). As for Russia, in addition to the challenges mentioned above, there is the commandment is that one must obey local customs and rules, yet make one's own road. What this means is that the culture and rules must be respected, but the company cannot succeed by merely copying another local company. The company must adapt their own rules to the local climate, as opposed to becoming a cookie cutter of another company. At the same time, it is vital that businesses form good relationships with local government agencies, as these agencies are notorious for using their power in an arbitrary way that can hurt one's business (Fey & Shekshnia, 2008, p. 13). By partnering with a joint venture, the challenges mentioned above and earlier in this presentation can be overcome. The joint venture must be with a local company that knows that ins and outs of the regulatory and cultural challenges with both countries, and will not only be able to finesse these challenges but also be able to teach employees from different countries about these challenges. This is the best way to enter these new countries. The other strategy of directly investing in these domestic companies is also a good strategy, because it would allow Air Products to have investments that will benefit the domestic firms and themselves potentially by making the domestic firms better, which would increase the return on investment to Air Products. Therefore, everybody wins. Air Products should concentrate on getting a competitive advantage over other companies by raising the quality of their products, and innovating new products. The reason for this is because the energy market might experience volatility in the future, which would make it difficult to beat the competition on price. Air Products has already indicated that pricing pressures are an issue because of the shortage of raw products, along with the challenges of regulations. Therefore, Air Products must concentrate its advantage on quality and innovation - particularly innovation, because of the increased focus on environmental concerns around the globe. If Air Products can innovate products that are environmentally friendly, then it can not only become a leader in its industry, but will also reap goodwill from societies around the globe. This strategy would serve Air Products best. Moreover, Air Products should have decentralized management. This is important, because, as indicated above, different countries will have different cultural and regulatory challenges that should be directly confronted by managers who know the terrain, so to speak. If the corporation had centralized management, then that management would not know how to finesse all the challenges that will occur in these different countries. Therefore, the power should be diffused throughout the globe, with managers having power in each country, and this power should be relatively unbridled and these managers should not be hamstrung by the corporate headquarters in the United States. So, for instance, if the Russian manager needs to bribe some officials to get things done, then he should be allowed to do this, because this is how things are done in Russia. Marketing should also follow this pattern of decentralization, as each country will have to marketed to according to that country’s customs and norms. 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 Becker, Kip (2000). Culture and International Business. Binghamton, NY: International Business Press. Bradley, S.P., Hausman, J.A. & Nolan, R.L. 1993, Globalization, Technology and Competition, Harvard Business School Press, Boston. 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