Organizational Expansion into Global Sector - Assignment Example

?Executive Summary The following report is on Clippy Bags, which is a London operation that is concentrated on offering customizable bags, such as totes, makeup bags and purses. Clippy is interested in internationalizing its product and would like to know the best way to accomplish this. The introduction introduces Clippy and its line of products, along with a brief outline of how Clippy should internationalize its products. The second section deals briefly with importing and exporting, which is the first step that Clippy should take in the internationalizing process. The third section deals with overall strategies that any global firms should take when initializing internationalization processes. The fourth section deals with specific entrant strategies that Clippy should take. The fifth and final section deals with the overall recommendations and conclusions on how Clippy should internationalize. Introduction Clippy bags is a London operation that seems like its time has come. Specializing in customizable bags that may be designed with the individuals’ favorite photographs or print, the bags may become the next big thing. That said, Clippy must roll out a careful globalization plan if it is to capitalize fully on its idea. If it attempts to globalize too soon, in the wrong markets, or with the wrong plan, then it may not be successful in all markets, which might lead to the demise of the company. Further, if it does not partner with domestic firms in the targeted countries, at least at first, then it may succumb to any number of pitfalls that would cause it to fail in that market. These pitfalls range from regulatory hurdles to cultural barriers that are subtle and must be mastered by individuals who are native to that country. The following report recommends the proper strategy for Clippy to use to internationalize. First, it must research countries with the proper analysis of the political, economical, social and technological factors (PEST), along with doing an analysis of the rivals in each country and the relative strength of buyers verses suppliers in each country, using Porter’s Five Forces. From there, it should roll out a gradual strategy of internationalizing, beginning with imports/exports to these countries combined with foreign direct investment. From there, it should gradually establish a presence in each country with a joint venture strategy, followed by a parent-subsidiary strategy, with finally implementing a strategy of opening up retail chains, along with manufacturing and distribution centers in these countries. Therefore, the strategy for Clippy is based upon the internationalisation process (IP) model, which states that firms must first acquire market knowledge and gradually internationalize in a series of steps. This reduces the risk that firms take when entering foreign markets. Moreover, countries with smaller cultural distance, as explained below, are the countries that will be the first countries to enter, according to the IP theory, followed by countries with gradually larger cultural distance (Eiche, 2010, p. 6). These are the steps that Clippy should take to ensure success. Exporting and Importing One way that Clippy can get involved on the international stage would be importing/exporting her goods. International trade is important to a growing firm, as it is linked to a firm having higher productivity, a larger size and greater capital intensity then before it begins to export/import (Bernard et al., 2009, p. 514). Further, multi-national companies who engage in importing and exporting pay higher wages than firms which do not do either of these, and also tend to be the leader in innovation in their respective industry (Bernard et al., 2009, p. 514). Moreover, trading tends to be concentrated in a small number of firms. For instance, Bernard et al. found that the top 1% of firms, in terms of international trading, accounted for 82% of all trades in the United States (Bernard et al., 2009, p. 515). Moreover, while most firms trade only a small percentage of goods to a relatively small number of countries, the firms who trade a large amount of goods to many countries are able to employ more people at their firms and account for most of the importing and exporting activities (Bernard et al., 2009, p. 515). When deciding to enter the international stage, Clippy would do well to first investigate the possibility of exporting their goods before committing further to entering different countries. As explained below, every new country will provide a set of challenges and hurdles that is difficult for firms to overcome, unless they can partner with a domestic firm or form a joint venture, or directly invest in the target country’s domestic firms through foreign direct investment (FDI). Actually establishing a presence within a country through establishing a subsidiary in the country, or actually establishing manufacturing and distribution sites within the country carries a great deal of risk, as outlined below. Also, as explained below, firms go through different stages of internationalization, and each successive stage represents increased involvement in internationalization. Exporting to countries without further involvement would mean that Clippy is involved in gradually internationalizing, and this is how Clippy should go about it, because incremental internationalization processes is one way to successfully negotiate the risks of internationalization. Specifically, when targeting a country for entry, Clippy should start, with each successive country, with exporting/importing activities before moving on to successive involvement. The reasons for this are outlined extensively below. The Strategy of International Business Before a business enters a new country, the best strategy would be to conduct both a PEST analysis of that country and to evaluate that country according to Porter’s Five Forces. Moreover, a value chain analysis must also be done. A PEST analysis begins with an examination of the external macro environment, which is an external driver for the company, which takes into the consideration the political, social, economic and technological factors of each country. (Mellahi, 2005, p. 33). These factors may be general, in that they affect the country as a whole, or they may be specific, in that they affect only the particular industry of the firm. An example of a general external driver would be the culture of a particular country, which is explained below. In that case, the country’s culture would be an external driver for everybody, in that every new entrant into the country would be dealing with the same problems presented by the country’s culture. A good example of an external driver that would be specific to the industry would be, in the case of Clippy, a shortage of raw materials that are used to make the bags. Since these raw materials would not be used by every industry, this shortage would be industry specific. With this in mind, Clippy’s first strategy would be to examine each of the countries that it wants to expand into by using the PEST analysis. In this case, the “P” in a PEST analysis stands for political, which encompasses such aspects as legislation, regulation, and political risk. The “E” stands for economic, which would include such aspects as currency exchange rates, the cost of capital and the cost of production. The “S” stands for social, and this means any kind of external factor that affects the social fabric of the country, such as the culture of the country, social change and global convergence. “T” stands for technology, and this means anything that would affect the technology of the country, such as the spread of the Internet or the threat of viruses. (Mellahi, 2005, pp. 37-49). Another analysis is a value chain analysis. In this analysis, one must examine what the range of activities that must be done to get the goods into the market. This goes from conception, to the intermediary phases, to delivery, to disposal after use (Kaplinsky, 2000, p. 122). Therefore, the products that Clippy offers will have to be analyzed as to how the products will be rolled out in the different countries, from start to finish. The other analysis that Clippy must conduct would be an analysis of the countries vis a vis Porter’s Five Forces. These five forces deal with the threat of rivals, by examining how intense rivalry/competition is in these countries; by examining how difficult it would be for new rivals to enter the countries; and what the threat is that these rivals can supply substitutes for the product in question. Further, Porter’s Five Forces looks at the power of buyers verses the power of suppliers, in that either the buyer or the supplier would have more power in a particular country, and, obviously, the countries that afford more supplier power to entrants into the countries would be more advantageous to these new entrants. (Ungson & Wong, 2008, p. 59). In order to conduct a proper PEST analysis, Clippy would need to research each country’s climate, then attempt to overcome any obstacles by partnering up with a domestic firm in each country or by investing in a domestic firm through a foreign direct investment strategy (FDI). This is one way for Clippy to “transfer or adapt its institutional arrangements” (Estrin, et al., p. 3), which is important for any firm who is attempting to globalize. One of the most important and crucial area that Clippy needs to research with regards to these countries would be the cultural challenges that might be faced in each country, as these challenges are one of the major hurdles in entrance to any country, and could create a barrier for Clippy. These challenges refer to the differences in cultural understanding between the firm and the local clientele (Copeland & Griggs, 1985, p. 52). Clippy’s business practices will be shaped by the culture of the target country in a variety of ways (Caslione & Thomas, 2002, p. 24). An international manager must be successful in negotiating these cultural differences if he or she is to be successful (Brooke, 1986, p. 225). Furthermore, if Clippy hopes to gain a competitive edge in any of the countries were it hopes to enter, it must have a sense of cultural competency (Elashmawi, 2001, p. xvi). The country’s culture will determine how the firm will respond to strategic issues, and how these issues are interpreted (Becker, 2000, p. 90). There are six different cultural dimensions, and they are 1) how society sees the nature of its people; 2) how society sees the relationship between its people and nature; 3) how society sees the relationship between people; 4) do the people accept the status quo in society, or do they concentrate on making things better?; 5) how does the society conceptualize space, such as personal space and whether meetings are held in public or private? And 6) how does the society conceptualize time, and is it oriented towards the past, the present or the future (Carroll & Gannon, 1997, p. 39). While the above factors describe a country’s culture in general, there are aspects that need to be examined specifically by businesses who are attempting to enter the countries. The first consideration is how culturally distant the two countries are, meaning the firm’s country of origin and the target country. What this means is the two country’s culture must be examined to see how far apart they are. For instance, a Western country, such as the U.K. might have a great cultural distance from an Eastern country, such as China, or a Middle-Eastern country, such as Saudi Arabia. (Ghemawat, 2007, p. 40). There, are four dimensions to cultural distance, and these are 1) power distance, which refers to how different statuses of people are treated, in terms of equality, and how much the power hierarchy is valued; 2) uncertainty avoidance – to what degree are the people of the culture threatened by uncertain or unknown situations; 3) individualism, which looks at how loose or tight the relationships are between the individuals in the populace, and whether the society is collective or individualistic; and 4) masculinity, which looks at the distinction of gender roles. For instance, a society, such as Saudi Arabia, which is very paternalistic, would be a masculine country. A Western country that has a high regards for the rights of women would be less so. Cultural distance is determined by calculating the square root of all the dimensions for each country, then comparing the results (Ackerman, 2004, p. 5). How much of a cultural distance exists between the entering firm and the target country can be problematic for the entering firm. For instance, Clippy’s products are geared towards women, therefore, one of the biggest aspects of cultural distance that Clippy needs to examine is the masculinity aspect, as well as the power aspect. This is because Clippy obviously would not necessarily want to enter a country that has a high degree of masculinity, women are treated as second-class citizens, and women do not have much of a voice. This would be a recipe for failure, as the women in these countries would obviously be discouraged from buying these products. Another dimension of distance is institutional distance, which can be either formal or informal. Informal distance is comprised of cultural differences and organizational differences, and is difficult for a foreigner to understand and overcome. When there is a great deal of informal distance between the entering firm and the target country, the entering firm will have difficulties attaining local legitimacy, as the cultural rules are often tacit rules, which makes these rules difficult for foreigners to understand (Estrin et al., 2007, p. 10). In order to circumvent the hurdles put into place by informal distance, an entering firm must partner with a local firm, for the knowledge required to get around informal distance aspects is not necessarily knowledge that can be gained by studying and reading about the country. (Estrin et al., 2007, p. 4). This local firm can contact local suppliers, authorities and distributors and help create legitimacy for the foreign company. On the other hand, formal aspects of institutional distance, such as regulations and legalities are often transparent, so it is just a matter of studying regulations and legalities, can be understood by the entering firm, because these and reading. (Estrin et al., 2007, p. 4). However, formal distance may also provide a hurdle because the business practices of the entering firm may be inhibited to a certain degree by local laws and regulations (Estrin et al., 2007, p. 12). Another consideration, when examining the target countries, would be what kind of markets the target country has. If the target country is a developing market, this means that the country is experiencing strong growth and industrialization, as the country was previously not as industrialized as mature markets. Some examples of developing markets are countries that have encountered recent upheaval, such as the countries that were once a part of the Soviet Union, along with countries that are experiencing a resurgence, such as India and China. Most of the global growth is experienced in these markets (Cavusgil, 2002, p. 1). With these markets, there is a potential for high growth, as there are relatively few firms competing in these countries, which also would afford Clippy a high degree of market share (Gendron, 1988, p. 3). On the other end of the spectrum is the mature market, which means that the country has experience equilibrium, so growth is slower in these countries than the emerging market countries, such as with countries such as the United States and European countries such as Italy, Spain and France (Gendron, 1988, p. 3). With these types of markets, there is much less of a chance to gain a good market share then in the emerging markets, and growth potential is likewise lower in these countries (Gendron, 1988, p. 3). The factors in choosing these markets include competition, service costs, market characteristics and uncertainty (Davidson, 1982, p. 85). Moreover, each firm, before deciding to enter foreign markets, must also perform an internal review of its drivers. This means that the firm must examine its own company and company structure for strengths, weaknesses, opportunities and threats. These can be examined both by examining the internal structure of the company, along with examining how well the internal structure of the company is designed to meet the opportunities and threats that may present themselves in the external environment. In this way, the SWOT analysis may be cross-referenced with Porter’s Five Forces and a PEST analysis, to examine what the external drivers are and how the internal drivers are suited to meet these challenges. Entry Strategies and Alliances While the above describes a good strategy for internationalizing one’s business, in that each country that is the target for internationalization should be examined with a PEST Analysis, Porter’s Five Forces analysis and an analysis of the overall culture and climate of the country, this next section will describe what the best entry strategies would be for the target countries, which would depend upon the analysis that is conducted using the factors above. A good way to develop a strategy would be to do it gradually and through stages in each individual country (Johanson & Vahlne, 1977, p. 23). Each additional market will similarly occur in incremental steps (Johanson & Vahlne, 1990, p. 211). The earliest steps involve a low degree of internationalization, while the higher steps involve a high degree of internationalization (Phing & Au, 2001, p. 163). When a firm is in the first stage, there are no export activities. In the second stage, there is exportation to the target countries, and this is done through agents and independent representatives. In the third stage, an overseas sales subsidiary is established, so that the relationship is between the parent company, Clippy, and the “child” company, who is owned by Clippy. In the fourth stage, Clippy would establish her own manufacturing and distribution units within the target country (Johanson & Wiedersheim-Paul, 1975). Additionally, Clippy may enter the markets by the use of a joint venture, which will help her circumvent the difficulties and entry barriers that each country may present (Barham & Oates, 1991, p. 18). This joint venture may take a number of different forms. For instance, Clippy may decide to acquire a domestic firm, which requires full integration. She may also partner with a domestic firm, which requires partial integration. (Ackerman, 2007, p. 2). Alternatively, a greenfield plan may be set up. This is where the institutional arrangement resembles the parent company, but the staff is recruited and chained individually (Estrin et al., 2007, p. 8). Yet another way for Clippy to enter markets would be to directly invest in domestic firms, which is known as Foreign Direct Investment (FDI). FDI is helpful for both the domestic firms and the foreign competitors, because upstream suppliers are affected in a positive way. This is because FDI helps to upgrade the entire industry through the imposition of higher grades and standards, while lowering transactional costs (Dries & Swinnen, 2003, p. 3). FDI also helps the industry in the target country, as access to finance is loosened, investment is increased and small local suppliers improve the quality of their goods (Dries & Swinnen, 2003, p. 6). Therefore, FDI lifts all boats, so to speak, by lifting the quality of the entire industry within the target country. This, in turn, would lead to an increased return on the investment to Clippy, because if the industry standards are increased, along with access to credit and other reforms that are made possible by FDI, then the domestic firm in which Clippy invests will have a better chance of succeeding, and a higher chance for profits, plus risks will be reduced. Conclusions/Recommendations The first thing that Clippy needs to do for each country it is interested in, as far as globalization, would be to do a PEST analysis and an analysis involving Porter’s Five Forces. For each country, Clippy needs to do research on what the political climate is in the country; how the economy is faring in each country; what the socioeconomic status of the average person in the country; how the technological infrastructure is in each country; what are the legalities, restrictions and regulations in each country; how women fare in each country; how paternalistic is each country; and how much receptiveness each country would have towards the product. Whimsical bags are a product that would not do well in Saudi Arabia, where women are encouraged to dress conservatively with long dresses, for instance (Travel.State.gov). On the other hand, Turkey, another middle-eastern country, might be a good market to evaluate, as it is a secular democracy with Western ideals (Nelson, 2009, p. 326). In other words, Clippy cannot just group countries into regions and eliminate the entire region, but, rather, must evaluate each country individually, because there will attractive and unattractive markets within any given region. And, surprisingly, the United States might not be the most attractive market for Clippy to target, due to the fact that the United States, as a mature market, will not provide much room for growth and expansion. Clippy would do well to target emerging markets, because these markets are still expanding and growing, and there is much potential. But first, of course, Clippy must evaluate the countries by how well they are pulling out of the recession. After doing a PEST analysis of the individual countries, Clippy should do an analysis using Porter’s Five Forces. In other words, Clippy must evaluate who the competitors are, and what threats they pose, as well as evaluate who has the power in the country – the supplier or the consumer? This is important, because in countries where the consumer has the power, because the market is oversaturated with product, or there are too many people involved in the same business, then this would lead to a depression of prices for Clippy, and this would ultimately mean that Clippy would have to pull out of that country. Therefore, a country that has fewer rivals would be a country that would be more attractive to Clippy, because that would mean that the chances of consumer power being more than supplier power would be lessened, which, in turn, would mean that the chances of a price depression would also be lessened. Moreover, Clippy should look at the hurdles that new entrants into the market would face, and determine if it can meet those hurdles. A country that has hurdles for new entrants is a double-edged sword, of course, because barriers to entry mean fewer rivals. Yet barriers to entry also mean the possibility that Clippy would not be able to enter the markets. Of course, the most favorable markets would be the ones that have barriers, so to keep out too many competitors, yet these barriers are those that Clippy can circumvent. Further, Clippy needs to do a value chain analysis. In this way, it needs to analyse the best way to roll out the products, and the range of activities it needs to do to get the goods into these countries. Therefore, the products that Clippy offers will have to be analyzed as to how the products will be rolled out in the different countries, from start to finish. This would encompass the market research, as indicated throughout this paper, along with research on what products would be most suitable in which countries, and how to get these products into the different countries, plus how to market the individual items in the individual countries, for this will be different in every country for every individual product. Once Clippy has done a careful evaluation of all the countries it is interested in, Clippy then would have to make a decision on how to enter the countries. As indicated above, the best bet would be to gradually increase its presence in each country with a roll-out strategy. For instance, Clippy might decide that the first country targeted would be Poland. The initial means of internalization would be to open up an importing/exporting arrangement with domestic firms, combined with a strategy of foreign direct investment with other domestic firms. Once this is established, Clippy can look into the possibility of a joint venture with a domestic firm, in which each firm has equal power, but, perhaps, the domestic firm will handle the regulatory, legal and cultural hurdles within the country, while Clippy will be the supplier. The management of these partnerships will be decentralized, in that each of the firms will have its own management. The next step would be to establish a subsidiary, in which the domestic company is fully integrated with Clippy, Clippy is the parent and the management is centralized in Clippy, who directs the subsidiary’s day to day operations. The final step, if the market will allow this, would be for Clippy to establish a presence in the country, by opening up stores in the Clippy name, and a distribution and manufacturing center. For each successive country, Clippy should enter in the same way, in the same steps. The advantages to this strategy are obvious, in that Clippy will need partners in each country while establish a foothold. As indicated above, each country will be full of potential pitfalls and landmines, and, if Clippy just decided to go ahead and open up a store in these countries, then the venture is bound to fail because of the learning curve each country presents. However, if Clippy begins by importing/exporting, then it can learn about the country and the pitfalls, and, by establishing a joint venture, it can learn still more. With this knowledge, it can feel more confident in establishing a subsidiary, and, finally, establishing a firm presence in the country. Further, this roll-out strategy will help with marketing as well. Marketing in each country will entail knowing the culture of the country, because only through knowing this can an effective marketing plan be accomplished. While marketing is less an issue when Clippy is in the early stages of importing/exporting, once Clippy actively starts to establish a presence in these countries, it will be necessary for it to have a partner to help market its products. Clippy has a strength in that its product is somewhat unique, in that whimsical bags is not necessarily something that is offered by every firm, and the idea of customizing bags with personal photographs or favorite prints is one that is unique and would have definite appeal, but marketing these bags would have to something that local firms will do, as these firms have familiarity with the market. In the end, Clippy has a marketable product, one that just might “take off” like the Snuggly blanket or roller blades, as individuals may start seeing these bags on the street, and word of mouth may push these bags to the next level. However, without an excellent internationalization strategy that is coupled with a superb marketing strategy, the idea may never take off globally. With these sound strategies outlined above in place, Clippy has the best chance to become an international phenomenon. Sources Used Ackerman, A. 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