Strategic Management: Internationalization Case Study and Theories - Essay Example

Strategic Management: Internationalization Case Study and Theories This paper examines the theory of strategic management, analyzing the types of corporate strategies and uses Yip’s model of internationalization drivers to explain the integral factor behind the internationalization strategy. Similarly, the civil aero-engines and the global grocery industries are compared in accordance with Yip’s model, outlining the challenges that grocery retail giants Wal-Mart and Tesco faced in China. The paper also provides a brief discussion of Tesco’s strategy and their relation to the company’s mission statement. Lastly, the paper tries to analyze the strategic alliance adopted by Rolls-Royce and their effectiveness (Lessard, 2003:3). Essentially, this paper explores internationalization in the civil aero engine industry and the global grocery industry, as well as reviewing the commonalities of failures and success in the industries and importance of joint ventures and strategic alliances. Introduction Industrial analysis is an integral element in all strategic questions. It involves the assessment of industry’s attractiveness and the potential or actual strengths in the industry, such as share, growth, weaknesses, and strengths compared to other firms (Doz, Jose, and Williamson, 2002:124). Yip provides a comprehensive discussion on the factors that institute international competition and analyzes into four major categories. Yip presents these factors graphically, with the upper dimension representing market conditions. This factor analyzes the effectiveness of markets in one or geographically defined segments due to their differences or similarities in requirements, channels, tastes, and other elements. The left dimension refers to sources that increase returns to scales in productivity. The right scale represents the competitive or comparative advantage of particular segments, such as dynamic advantages that emerge due to experience (Eleanor and Gupta, 2003:94). Lastly, the lower dimension represents regulatory interventions that bar the geographical scope of the industry, including non-tariff and tariff barriers on trade and cross border investment. Yip’s Internationalization Drivers Consider the globalization drivers for the global grocery and civil aero-engines industry. In general, the commercial aircraft industry is global as far as terms of sales, knowledge advantages, and large economies of scales are concerned. In contrast, the grocery retailing is much lower as far as all these dimensions are concerned, but retail giants such as Wal-Mart and Tesco dominates the industry in sales as well as advertising mastery, rapid knowledge transfer, and financial strength (Rugman, and Richards, 2001:338). However, local players also exist, though with different strategies such as lower price, little advertising, and substitute products. Even for the grocery retailing leaders, the larger percentage of their value added is local. Similar features of the aircraft and grocery retail industries include research, highly internationalized brand name-based companies coupled with firms selling and producing generics that are regional or local in scope (Ghemawat, 2001:141). In this sense, globalization occurs in characteristics depending on the transportation costs and production scale economies, with firms in industries such as civil aero engine companies characterized by highly concentrated production and integrated sales, commonly known as international firms (Yip, 2001:154). On the other hand, companies in the grocery retailing industry and other consumer products often having global brands with high distribution activities and dispersed production, common as multinational firms. According to Yip, the four-globalization drivers for the aircraft industry are competitiveness, market, government, and costs. The industry ranks highest for market internationalization drivers due to the similar needs of customers (airlines) despite the difference in geographical location. Therefore, these customers search for these products all over the world. Similarly, competitive internationalization drivers are high because of the high import and export and the large number of globalized competitors for different geographical locations. Cost internationalization outranks all other industries because of the global economies of scale where national markets are not large enough for effective business among competitors (Yip, 2000:95). Lastly, the enormous costs of development and production in the industry drive firms to liquidate these costs across different markets in the world. The use of US dollars for nearly all aircraft contracts shows the high level of industry internationalization. Considering the aircraft industry, Boeing commands 70% of the market with more than 80 passengers. However, Airbus has been rapidly gaining market shares. Three companies produce airplane engines, which contribute to over 20% of the value of the final aircraft: General Electric, Pratt and Whitney, and Rolls Royce (Fleenor, 2001:135). On the other hand, the internationalization drivers for the global grocery retail industry include external factors, such as saturation of national markets. For instance, the European grocery retailers developed international operations as compared to their US counterparts because of their smaller home market size. According to Yip, the market internationalization drivers show the same idea of motivation of retailers to pursue growth overseas due to limited home markets. A prime example of firm influenced by this driver is Wal-Mart. The other drivers are internal, such as the search for higher margins and growth that the firm believes is achievable overseas. Companies, such as Tesco, consider risk limitation by market diversification as a reason for developing international operations (Wright, et al., 2005:34). Furthermore, the growth in size gives the firm a greater bargaining power over other transnational suppliers, which is very important in the retailing industry. Another driver is competitive advantage. According to Yip, firms may apply particular expertise as a driver for internationalization. Indeed, new concept development or technological innovation may give a retailer competitive advantage of pioneering in the new market segment. The competitive advantage could be unique global sourcing, brand recognition, knowledge of operating modern, large-scale stores, supply channel, and customer and marketing management technology. However, the food retailing industry has one significant weakness: new formats and ideas are instantly available before the eyes of the public, thus replication is easy. Analyzing the drivers for the both the industries, competitiveness, market, cost drivers are similar to both industries. However, the internationalization of the grocery retails occurs due to internal factors, such as the pursuit of higher profit margins and profits (Mathews, 2006:16). The most significant (and strongest) internationalization drivers for both industries are market and competitiveness. Internationalization Strategies for Tesco and Wal-Mart in China Wal-Mart entered the Chinese market through acquisition. At the time, strategic alliances were inappropriate, as competition was relatively moderate. After establishing, the firm used local adaptation as a strategy to penetrate the Chinese market segment (Thomas White Global Investing, 2010). After a comprehensive test and research on the Chinese society, the firm began offering a wider range of perishable goods popular among the Chinese palate. Moreover, the company opted to source products from local suppliers and global suppliers. The reason for this combination was the pressure from the government to purchase local goods and the desire of customers for US-made consumer goods. On the other hand, Carrefour adapts a decentralized approach, allowing local store managers to make independent supply and purchasing decisions (Carrefour, 2011). The pros of these strategies applied by the two retail giants include acquisition of considerable market shares and customer base. Consider Wal-Mart’s localization strategy for instance: the firm may attract many local customers, but risk spending extra initial and operating costs. On the other hand, the independent decisions of local Carrefour managers may have some biases, including possible corruption and other unethical business activities that may harm the image of the retail giant. China is an emerging economic powerhouse. Interestingly, the Chinese people prefer buying goods in small quantities. Combining these facts with the enormous Chinese population makes China a potential market for retailers. As such, not investing in the country may cost a firm significant competitive advantage as well as revenue. Furthermore, retail markets in Europe and the US are already saturated, making Asia (particularly China) a prospect market (Adler, 2003:124). Tesco’s Strategy In general, the mission statement of a company is a qualitative statement of the aims of that company. Often, the language used seeks to motivate employees and other stakeholders in the firm, as well as convince customers, suppliers, and other outside stakeholders of the firm’s commitment and sincerity. Tesco PLC, a UK retail giant, has such a mission statement, which also represents its image. According to the firm’s website and other documentations, the mission statement of the company shows that it seeks to “create value for customers, and earn their loyalty”. Tesco employs several strategies that dictate the way they do business, including seeking to understand the customer, striving to do their best, and maintaining an energetic and innovative customer services (Yan, 2003). Despite the different retail locations, the entire Tesco retail chain is one team: the Tesco team. The firm encourages the employees and other stakeholders to work together, trust, and respect each other, as well as strive to use their strengths to give unbeatable value to customers. Tesco has numerous long-term aims from which the firm derives its objectives. These objectives determine the development of the company, provide a platform purpose for all the stakeholders, provide a collective view, encourage commitment, and build teamwork spirit. Tesco’s objectives and plans are to provide quality customer service and value to the more than ten million weekly customers, as well as ensure that all the customers receive exceptional value (Colla and Dupuis, 2002:108). The aim of the company is to provide all the customers enjoy their shopping experience, thus making the retail giant a reliable and high standard customer care service. Tesco’s human resource strategy concerns revolves around challenging unwritten rules, simplification, streamlining core values amongst employees, and performance management associated with achieving steering-wheel objectives. Indeed, this provides some explanation on how Tesco’s business measures closely relate to performance management. The company ensures that all employees get the opportunity to understand their individual role in contributing to the company’s core values and purpose (Fong, 2006). This requires innovative induction programs that cater for the styles of learning and commitments of the different cultures. The company considers the frontline employees as the ultimate reflection of Tesco to its stakeholders, though all employees play a very crucial role in turning the customer commitment and core values into a daily routine practice. The human resource strategy has enabled Tesco to top the fiercely competitive UK retail industry (Hartley, 2004:56). According to their future strategic policy stated in their reports, the retail giant aims to free up store employees to enable them to improve customer service and achieve more. Based on the report, the strategy seeks to provide a clear manner of defining responsibilities, roles, and activities. It guarantees the responsibility, accountability, consultation, and information of all employees. The strategy plan uses 13 integral management techniques to improve the core skills of the labor force, including cause analysis, plan-do-review, problem solving, coaching for high performance, and situational leadership. The long-term strategy of Tesco is to continue emphasizing on the value of employee training and integrating this into its organizational culture (Cullen and Parboteeah, 2005:164). Tesco uses this strategy to maintain its competitive edge. Indeed, the HR department at Tesco is proactive, avoiding the daily administrative functions. Their model encourages high commitment and best practice. Subsequently, the company has managed to focus on human resource practices such as training. In this sense, we may argue that the company’s mission statement, vision, and objectives are the core drivers of the organization’s strategy, culture, and practice (Geringer, Frayne, and Milliman, 2002:26). The emphasis of human resource training ensures quality customer service and employee commitment to assigned roles and responsibilities. Rolls-Royce Strategic Alliances and Joint Ventures Rolls-Royce is among the leading manufacturers of engines in the military and civil aeronautical industry. The company organizes its structure of manufacturing centre network in such a manner that each centre specializes in a single or more engine component, which enhances technical specialization and greater economies of scale. Accordingly, no single centre is capable of manufacturing an entire engine on its own, unlike the 1960s organization (Cullen, Johnson, and Sakano, 2000:234). To understand the structure of the network, it is important to understand that each engine project or model has different supply chain on the network according to a predefined set of basic premises. Each manufacturing network utilizes external and internal resources that it requires, including research centers, own manufacturing centers, component and technology suppliers, and horizontal collaborations with other engine-manufacturing companies. For instance, the General Electric and Rolls-Royce formed a collaboration to manufacture an engine (Das and Teng, 2001:46). Different components of the engine may come from either of the two centers. Below is a simplified diagram that shows the origin of the different engine components. In today’s business world, firms need to focus on their main competences to offer a greater value addition to the supply chain. As a result, many companies are increasing turning to subcontracting of the manufacturing process to external suppliers or collaborators (Dekker, 2004:39). The conventional relationship between component suppliers, vertically integrated manufacturers, and distributors are undergoing reconstruction and constant comparison with horizontal business collaborations between highly specialized technology, Original Equipment Manufacturers, distributors, and components suppliers that form changing collaboration networks depending on each client, product, and time. In such Global Manufacturing Virtual Networks, the company in question needs not maintain internal manufacturing resources to manage unpredictable demand variations. Instead, the company is based on relations with the different components of virtual networks that enable the main firm to design a particular supply chain according to each specific contract or client (Hadjikhani and Thilenius, 2005:142). In this sense, the network type does is not dependent on the possession of particular resources that dictate productivity, but rather on sharing and managing the network resources. A prime example of such networks is the strategic alliances o Rolls-Royce in China. The company has various suppliers, including Xian Aero Engine Company, Sichuan ChengFa Aero Science and Technology Limited, and Shengyan Liming Aero-Engine Group Corporation. Each of the suppliers provides Rolls-Royce with a different engine component. Drawing upon strategic alliances theory by Elmuti and Kathawala, we may argue that Rolls-Royce seeks to achieve four strategic objectives: operative excellences, access new technology, diversify financial risks and access new markets (product, geographical, compensation strategies, and client segments) (2001:210). Examining the Global Manufacturing Virtual Network adopted by rolls-Royce, companies must consider four integral factors. First is the internationalization of the manufacturing process. The manufacturing process ceases to be a single production centre, but rather includes dispersion and expansion plants according to the current strategy of the company (Kauser and Shaw, 2004:26). Second, the different tasks in the manufacturing system and the network require definition throughout the product value chain, as well as specification of the stage of chain and the party that controls the tasks. This comprehensive view of the manufacturing process will enhance optimization by selection of external and internal collaborators, activities, and control types established, thus increasing efficiency and achieving significant competitive advantages. Third, the company seeking to form such a network must assess a broad range of intercompany collaboration forms, from specific collaborations on particular projects to long-term strategic alliances and joint ventures (Park and Ungson, 2001:49). Last, the three mentioned factors require integration into the manufacturing system in accordance with a preferred strategy. Conclusion Based on the evaluation of the drivers of internationalization of the civil aero engine and global grocery industries, it is evident that the former is an international industry and the latter is a multinational industry as far as the level of internationalization is concerned. This is due to the highly concentrated production and integrated sales in the civil aero engine, such as those evidenced by Rolls-Royce and global brands with high distribution activities and dispersed production such as those of Tesco and Wal-Mart (Yan and Gray, 2001:406). Despite the various differences, both industries show some similarities and differences in the rates of success and failures. These are largely attributable to the uniqueness of the market and other integral factors. 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