Picture of Globalization and Going Global Strategies - Term Paper Example

? A study on the opportunities and challenges of expanding business into Chinese Market Summary This essay is intended to give a clear picture of globalization and going global strategies adopted by the companies. The essay begins by giving an explanation of the importance of globalization to the world economy. Based on the analysis of the various dimensions of the global economy, recommendations are provided. It is found that the main factors that a company should consider while expanding into the Chinese market are availability of cheap labor, massive market size, complicated cultural factors and better bureaucratic relationship. Introduction Globalization has been the mantra of the corporate world for more than a decade now. Companies across the world talk and frame strategies for cross border expansion than domestic expansion. Once a brand name is established within the home country firms intend to take it to the global market. The obvious intention of this is more market share and enhanced brand value. “Globalization is a process of interaction and integration among people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology.” (The Levin Institute, 2011) The above definition by Levin Institute gives a clear understanding of what globalization is. It is in fact an all encompassing term. It consists of people, companies, governments, nations, information technology, environment and so on. Every single element in globalization is linked to the other element. It is a situation of mutual benefit for everyone though in the reality the benefit for each is a matter of controversy. How far each element will benefit is depended on the way the whole system is built. This report is intended to make an analysis of the reasons for which companies expand into global markets. The various aspects of globalization and its importance to global economy will be discussed in the beginning. This will be followed by discussions on various strategies to be adopted by companies for expanding globally. This will be discussed in the light of cultural and political differences among various countries. This paper will specifically deal about the cultural and political aspects of China. Based on this analysis, the final part of the paper will give suggestions for companies that intend to expand into Chinese market. Global World Economy World Economy today runs on the core concept of globalization. Globalization has been the reason for such a massive growth in the global economy in the past decade. This made the world more interconnected than before. Situations and tensions in one country or region seem to impact the others. Turmoil across the world followed by the fall of Lehman Brothers in 2008 proved us the intensity of such interconnection. Recent years have seen more and more developing countries emerging into the global market place to compete with the super powers. China is the leading one among them. All these are the results of globalization. World economy cannot progress without globalization. The importance of globalization can be explained on the basis of the following. 1. Development of a nation 2. Faster economic growth 3. Exchange of resources 4. Economies of scale and 5. Better standard of living. (Intriligator, 2003) Development of a nation: Globalization plays a very crucial role in the development of a nation. Development and happenings around the world has proved this phenomenon. Countries which were never known on a global market are now among the leading driving force of the global economy. More and more developing nations are getting admitted to world organizations because even their opinion seems to be relevant now. The emergence of Asian countries like China, India and Brazil to name a few proves that a nation can develop fast only when they participate in the global economy. Countries that chose to adopt protectionism failed to achieve and develop. Only by expanding globally a country can expand its international trade in goods and services by having better access to new technologies and ideas. “With its ascent to the world's second largest economy, China has indeed set a shining example for others in managing its economy, especially during difficult times.” (Iuyuan, 2011) Faster Economic Growth: Faster economic growth can be achieved by a nation only when they expand globally. With economic activity confined only to the domestic market, the development will be slow. But with a world trade link, countries can achieve a much faster growth. India was growing at very slow growth rate until 1990. But it achieved a tremendous growth ever since its economy was opened up in 1990. Similar is the case with China. China’s economic reforms began in 1978. As of 2009 Chinese GDP was 4.99 Trillion USD. Exchange of Resources: Another advantage of globalization is exchange of resources. A country will not have all the resources that are necessary for its development. It will have to depend on other nations which are abundant in such resources. Crude oil is one of the most important among them. Only through a mutual trade and understanding can exchange of resources happen. It is a give and take policy. This is the reason why barriers to imports and exports have to be removed. Economies of Scale: Economies of scale and low cost of production is another advantage of globalization. In a globalized economy companies search for expansion into a country which gives them the best advantage. Some of the main factors they consider are availability of resources, low cost of production, accessibility to the market, better infrastructure and the like. The main factor that attracts international players into China is its low cost of production. Availability of low cost man power is the main reason for that. Due to this low cost companies have scaled up their operations in China and are taking advantage of economies of scale. Dell Computers have their production facility in China. When a customer places an order at the Dell’s online portal, the production facility at China gets the intimation through their ERP system. The machine is produced there and shipped back to the respective country. Better Standard of living: Better standard of living is another advantage of globalization. In a globalized environment, better products are available to the people at an affordable price. This helps to improve the standard of living of the people. “From typical Third World poverty in the 1950s, each has achieved a standard of living today equivalent to that of industrialized nations, with per-capita incomes in Hong Kong and Singapore rivaling those of the wealthiest Western nations.” (Griswold, 2000) China has adopted a very aggressive globalization strategy for the past many years. The economic impact of globalization on China was very impressive. Developments across the nation have proved that globalization can raise a country from under developed to one of the fastest growing economies. “All material and non-material indicators show a rise in income, quality of live and standard of living. The HDI in China has risen from 0.527 in 1975 to 0.768 in 2004.” (Piet, 2009) Globalization had its positive effects on trade, finance, economic growth, standard of living, investment. But at the same time globalization had cast its negative effects on inequality and environment. The ill effects of China’s faster growth on the environment have been critical issues on the world environment front. But then that is an issue with every developed nation. Developing sustainable growth strategy is the solution for that rather than saying no to globalization and development. Cultural and Political Differences Cultural and political differences are two main factors that are considered by managers while expanding abroad. Cultural and political factors determine the success of a business than any other factors. Countries with too much of political unrest are not usually preferred for expanding into. Similarly, in terms of culture, companies always alter their products and marketing efforts to suit the culture of a country. This can be explained with examples of various cases. McDonalds India is an important example of cultural differences in market. McDonalds is a very successful fast food across the world. McDonalds entered into the Indian market during the time when fast food culture was at a nurturing stage in the country. They initially introduced all their international products in the country without much of product adaptation. But things turned against of the company as 40% of the population of India are vegetarians. Moreover, eating beef was considered to be against the religious values by the Hindu population of the country. Thus majority of McD’s products had to be altered to adapt to the Indian culture. The famous Big Mac was placed by Maharaja Mac and beef items were replaced by Chicken. As a respect to the Indian culture, no beef or pork items are sold in India. It also introduced various vegetarian menus specifically for India. Another notable feature is that only vegetable oil is used for cooking all items. Now McDonalds is one of the most successful international fast food chains in India. (Rangnekar, 2011) Failure of business due to cultural and political differences isn’t a case only with India. There is another recent case of Starbucks regarding the issues it faced in the Chinese coffee market. Starbucks entered the Chinese market with not much difference than their strategies in US. China has developed and emerged to be the second largest economy in the world in terms of purchasing power parity. “With the adoption of market-driven economic policies, more Western companies have been entering the Chinese market. U.S. food companies such as McDonald's, KFC, and Pizza Hut have been able to capture the Chinese customers' taste.” (Harrison et. al, 2005) China is traditionally a tea drinking country. It was Nestle who first introduced the coffee culture in India. More than 40% of the Chinese beverage market is comprised of tea drinkers. Starbucks entered the Chinese market through a joint venture. Unlike McDonald’s entry into India, Starbucks made good planning regarding their branding and expansion strategies for China. Before communicating the brand experience to the consumers, Starbucks China made effective plans to build the brand image among its employees. They intend to reach the customers through the employees. The second major strategy adopted by the company is to offer peaceful and more psychological space away from the day to day activities for the customers. One of the main cultural and political issues faced by Starbucks in China is when it opened up outlet in The Forbidden City. The Forbidden City is considered to be a heart and symbol of Chinese tradition. When Starbucks opened its coffee shop in the region, it was seen by many people as an intrusion into their tradition. (IcmrIndia, 2011) But beyond all these, Starbucks is now the largest coffee retail chain in China with the number of outlets expanding at a very high pace. Starbucks now has presence in over 400 locations in China. It is anticipating increasing the number to 1500 by 2015. Such a growth rate is more than what it has in US. Even with a market presence which is lower than that in US, Starbucks is now one of the top 20 brands in China. China will be the core focus of international expansion for Starbucks in the coming years. (Horovitz, 2011) Values and ethics are different for different cultures. KFC, another leading fast food chain in the world has altered its menu to adjust with the cultural and ethical values of certain countries. KFC has pork menus in some of the regions, mainly US. In US pork menu is one of the famous items. But it could not take this menu to many parts of the world. KFC in Middle East took away the pork menu as eating port is considered to be taboo in the Muslim culture. Middle East is one of the highest growth engines for KFC. This is achieved even by avoiding one of the most famous pork menus from the list. Had they introduced the pork menu in Middle East, the story would have been different. This proves that a company can be successful in a market only if it adopts necessary product and marketing strategies to adapt to the market. Similarly doing business in India has also been challenging for many businesses. The greatest challenge for a company in India is its cultural diversity. The country has varied culture across different stages. Marketing strategies adopted in southern states of India may not succeed in the northern states. “Of all the cultural influences that most impact Indian business culture, hierarchy plays a key role. With its roots in Hinduism and the caste system, Indian society operates within a framework of strict hierarchy that defines people's roles, status and social order.” (Kwintessential, 2011) India has considerable number of population from all the religions ethnicity. This means that cultural factors are very crucial in the region. Political factors are also a cause of concern in the region. As the country is the world’s largest democracy, the general public has good say in the political situation. International beverage leaders Coke and Pepsi had faced severe political issues in India. But the political stability is considered to be favorable for companies to operate in India. Going Global Strategies This part of the essay will discuss about going global strategies, the intention of companies by expanding globally, the strategies adopted by companies for competing globally, the advantages and disadvantages of each, and the factors that influence a firm’s decision of market entry. Reasons for going global: Better profitability and more market share is the main intention of companies by going global. Specifically mentioning, the reasons are Growth, Employees, Resources and Ideas. Growth is the primary objective of a company for going global. Growth involves introducing products into new markets, increasing the customer base and profits. Toyota was basically a Japanese auto major. But when it expanded the market by introducing its models in various countries, it became one of the largest auto companies in the world. The second major objective is the availability of best and low cost employees. Many companies seek to expand into the countries where skilled labor is available at lower cost. Indian IT sector is an example for this. There are highly skilled IT companies available in India at much lower cost than their counter parts in US or UK. This is the reason why most of the biggest IT companies in the world established their business centers in India. The third objective is ideas. Innovative ideas are very crucial for the success of a business. It is not necessary that a company can get better ideas from its domicile. It they intend to expand they need to seek for ideas across the globe. Vivante Corporation, of the leading player in the graphics and gaming industry has opened recently opened its second Research & Development facility in China. The company is very much confident about this facility and is expected to be one of the growth drivers for its coming years. (PRNewswire, 2011) Strategies for competing globally: Companies adopt various global strategies based on their size and nature of business. Some of the most common strategies entering and competing globally are exporting, licensing and franchising, FDI and strategic alliance. Based upon the nature of business market conditions, companies adopt various strategies. These can be discussed as below. Exporting: Exporting is the most common expansion strategy. Exporting involves the production activity being set up in one country and shipping the products to different markets. This is one of the common strategies adopted by small and medium scale companies as it does not involve the cost of establishing new facility in the new market. The products are either sold through a local partner or by the company itself with its regional office. However, exporting has its own advantages and disadvantages. The first advantage of exporting is the easy access to new market. A company can expand its market share without considerable investment in additional facilities. The second advantage of exporting is that companies gain knowledge about the international market and it promotes the potential for corporate expansion. Thirdly, the company can increase its sales and profits by selling products in the new market. The fourth advantage is that a company can utilize its excess production capacity by expanding into the new market. The main disadvantage of exporting is the risk of default in payments. A company can lose huge profit by not getting proper payment from debtors. Lack of direct monitoring is the second disadvantage of exporting. As an exporting company may not have a direct office in the host country, administration of the market condition is difficult. Anticipation of the market changes is not easily possible in this case. Hurdles and problems in export licenses is another disadvantage of exporting. Licensing and Franchising: Licensing and Franchising is another most common international expansion strategy. This strategy is more used by companies in the retail sectors. It involves establishing a relationship with a local partner by authorizing them to use the company’s brand name upon payment of license fee and share of profits. This strategy is most common among fast food chains. Fast food chains such as KFC, McDonalds, Pizza Hut, Starbucks, etc. gained their huge market presence mainly by adopting this strategy. Like any other strategy even licensing and franchising has its own share of advantages and disadvantages. One of the main advantages of franchising is that it gives quicker access to a new market. Moreover, the business is carried on in the host country by the company which has better knowledge about the host country market. The second advantage is the increased market reach. The expansion will be at a higher rate in the case of franchising. The most common disadvantage is the lack of flexibility of the system. As the business is operated by host country partner the scope of flexibility in operations is less. The second disadvantage is the risk of poor services by the franchisee. Since the franchisee does not own the brand, the service quality of the franchisee can be poor at times. This will affect the brand name of the franchisor. FDI: FDI or Foreign Direct Investment is the most common market entry strategy adopted by large companies. These are adopted by companies which has immense market potential in the international market and that has huge expansion capacity. Companies that adopt FDI usually aim at huge market share in the host country. Some companies also adopt FDI for taking advantage of the low cost of production in the host country. Better control over the business is the main advantage of FDI. The company is fully independent in the case of FDI. The flexibility is also higher in this case. The second advantage is that the company will have better knowledge about the market. It can frame strategies based on anticipation of the changes in the market. Long breakeven point is the main disadvantage of FDI. As the initial investment is higher, it will have to wait longer for the business to breakeven. The second limitation is that the business is more exposed to the economic and political risk of the country. There is also greater uncertainty about the future. Strategic alliance: Strategic alliance is another good strategy adopted by businesses for expanding into the international market. Like FDI strategic alliance mostly adopted by large companies. Strategic alliance is another form of FDI but strategically different from usual FDI. It involves partnering with another company in a market to purse an agreed upon goal by using the each other’s facility and knowhow. This strategy is adopted by companies to achieve better competitive advantage. The main advantage of strategic alliance is that a company can use the facility and knowhow of the other for better market advantage. This will reduce cost. The second major advantage is that a company gets easier access to the target market. The main disadvantage of strategic alliance is that the company with which alliance is established can emerge as a potential competitor in the future. The second major disadvantage is that company’s knowhow gets exposed to the other partner. Thirdly, there is a greater amount of financial risk in strategic alliance. Factors influencing decision of market entry: A firm’s decision to enter an international market is influenced by various factors. Some of the main factors that influence a firm’s market entry strategy are as follows. Better market potential: Anticipation of a market potential is one of the main factors that influence a firm’s market entry strategy. When a company foresees a potential in a market, it tries to enter the market and make maximum profit out of it before its competitors does. A company will try to achieve early mover advantage by doing so before the competitors. Cost advantage: Cost advantage is the next factor that influences a firm’s decision to enter international market. If a company finds a region where cost of production is lower when compared to its domestic market, it tries to set up production facilities in the new region. The company will then export the products to the other markets where it has good market potential. Political stability: Political stability of a country is one factor that influences a company’s expansion decision. Certain countries are highly prone to political instability. Such countries are not usually preferred by companies for their expansion. But definitely companies expand into countries which are politically stable and supportive for business environment. Economic growth: Economic growth of a market is another factor that influences a firm’s expansion decision. A better economic growth rate of a country implies that there are huge demand for products and services in that country. Therefore, companies are regularly involved in tracking and making decisions for choosing the right country to expand into. Suggestions and Recommendations The analysis of various factors has given a clear idea of international expansion strategies to be adopted by a company. China is one of the fastest growing economies in the world. All the factors dimensions of international marketing that are discussed before apply even to the Chinese market. Companies that intend to expand into the Chinese market can consider the following factors with regard to the country. Availability of cheap labor: For manufacturing companies that intend to reduce cost of production, China is the best place. Quality labor is available in China at extremely lower cost. Companies can have both skilled and unskilled labor in the country at the lowest cost than anywhere else in the world. Massive market size: The size of Chinese market is very huge. Companies thus have immense potential in the Chinese market. But the companies will have to frame proper strategy so that it can tap the huge markets. Developments are not even in China. Therefore, firms will have to frame sub strategies within the market. Complicated cultural factors: China’s cultural factors are highly complicated. English speaking population is very less in the nation. Therefore, most of the marketing communications will have to be done through regional language. Moreover, people are highly sensitive about culture. Firms have to be very careful that its operation does not cast any harm on the cultural beliefs of the people. Better bureaucratic relationship: In China, a company cannot establish properly without having good relations with the politicians. Any company that wishes to enter Chinese market should first establish good relations with the politicians. Works Cited The Levin Institute (2011). What is Globalization. Retrieved April 1, 2011. From http://www.globalization101.org/What_is_Globalization.html Michael D. Intriligator. (2003) Globalization of the world economy. Retrieved April 1, 2011. From http://www.milkeninstitute.org/pdf/globalization_pb.pdf Iuyuan (2011) China’s Economic Development in the Past Decade. Retrieved April 1, 2011. From http://english.cri.cn/7146/2011/01/31/1942s618587.htm Daniel Griswold (2000) The Blessings and Challenges of Globalization. Retrieved April 2, 2011. From http://www.cato.org/pub_display.php?pub_id=10891 Piet (2009) Economic Impact of Globalization on China’s Economy. Retrieved April 2, 2011. From http://www.bukisa.com/articles/92710_economic-impact-of-globalization-on-chinas-economy Amit Ragnekar (2011) Case for Strategic Adaptation. Retrieved April 2, 2011. From http://www.scribd.com/doc/2303069/Case-McDonalds-India-Launch Jeffrey S. Harrison. Exporting a North American Concept to Asia. Retrieved April 3, 2011. From http://www.entrepreneur.com/tradejournals/article/132354507_2.html IcmrIndia (2011) Starbucks’ Success Story in China. Retrieved April 3, 2011 From http://www.icmrindia.org/casestudies/catalogue/Business%20strategy/Starbucks%20Success%20Story-China%20Case%20Studies1.htm Bruce, Horovitz (2011) Starbucks eyes grocery stores, China, digital for growth. Retrieved April 3, 2011. From http://www.usatoday.com/money/industries/food/2011-03-23-starbucks-annual-meeting.htm Kwintessential (2011) Doing Business in India. Retrieved April 3, 2011. From http://www.kwintessential.co.uk/etiquette/doing-business-india.html PRNewswire (2011) Vivante Opens Second R&D Facility in China. Retrieved April 3, 2011. From http://www.prnewswire.com/news-releases/vivante-opens-second-rd-facility-in-china-112863489.html Read More