International Strategy in The World Pulp and Paper Industry - Essay Example

Case Study Solutions Ans The paper and pulp industry has been vigorously growing as a result of its buoyant demand in the globe. Companies in this industry are now not only catering to their local customers but they are also meeting to the needs of their global clients. They are pursuing a global strategy to sustain their businesses because their local markets and technological infrastructure have become matured and in addition competition in this industry has increased severely. Most of the companies in this industry have expanded through mergers and acquisitions and according to a report, the value of mergers and acquisitions in this industry have crossed $ 41 billion in United States (Cook at al 2008). Considering the significance of global expansion we will analyze the benefits and costs of these strategies in paper and pulp industry. Benefits The global strategy allows companies to derive substantial profits in several ways. Firstly, companies which possess undeniable advantage over their competitors can easily rivet the attention of the prospective customers and make them a part of their company. For instance, International paper’s possesses a competitive advantage in the domain of uncoated papers therefore it can easily target a group of people at any location of the world. There are several places in the world where the demand is not met by any local source in the paper and pulp sector therefore many companies have expanded internationally and have properly responded to that demand and are now enjoying the benefits. In contrast to that, stiff competition in the local industry has also reduced the local demand. It is estimated that United States demand for uncoated free sheet will reduce by 2.2% in year 2008 (Cook at al 2008). As a consequence of this many companies have planned to invest in foreign markets to diversify their risks. Companies which expand globally reap the benefits of location economies. Firstly, there can be an availability of cheap labour and lower raw material costs in that region which can reduce the total costs by a substantial amount. For instance, companies in Canadian markets have recognized that pulp capacity will be going down which will increase the production costs for pulps therefore some of the Canadian companies have planned to make investment in locations where there is a lower cost of pulps with an adequate supply which will be able to fulfil their demand (Cook at al 2008). Secondly, the strategic location also provides transport economies by linking the establishments adjacent to one another (e.g. a pulp plant supplying raw material to an adjacent paper plant) (Diamond, Chappelle & Edwards 1999). Over and above that, certain location may have eliminated their trade barriers through their regulations which results in reduced costs. Further, strong locations also allow companies to distinguish and differentiate itself from its competitors and thus allowing them to charge a premium price (Hill & Jones 2002). Finally, customers residing in that location can have high disposable incomes and are willing to pay for your quality products. Companies which have entered into the global markets have increased their bargaining power over its suppliers which have resulted in cost minimization. Finally, expansion to the global market of pulp and paper industry has allowed many companies to gain an insight to the intellectual capital (human resource) of the foreign countries. This diversity of workforce has allowed the companies to come up with inspiring ideas and develop innovative products. The global strategy has not always been expedient for companies in paper and pulp industry. As the chief executive officer of world renowned company International Paper says that “It is not a bigger better strategy. Instead, it is whether we can create the best set of businesses and create shareowner value. For IP “Big” is to be more successful in the eyes of shareowner and our customers” (Shaw 2004). This shows that expanding globally is not always advantageous rather it has some drawbacks. Here are some of the costs for global strategy. Costs Global strategy demands that company should coordinate and collaborate effectively with all its locations. This requirement for increased cooperation and additional staff has pushed up the costs by copious amounts. The decentralization of operations have undermined the morale of local workforce and hence reduced the organizational productivity. At the global level, organizations are required to produce customized products which fulfil the demand of each local customer but since these products have prohibitive costs therefore these organizations used to produce standardize products which do not meet to the custom needs. Many of the major players do produce standardize products in pulp and paper industry and hence they do not meet the demand of each customer segment. When companies expand globally then they are exposed to fierce competition from their rivals who are more powerful than the local competitors. At the global domain, currency fluctuations are recurrent therefore this increases the risk of fluctuation in revenues. Organizations that expand themselves globally face two kinds of unrelenting pressures; to reduce their costs and to be responsive to the local demand. These pressures put incongruous demands on a company (Hill & Jones 2002). As for the second part, we can assume that the global benefits and costs are almost same in the case of paper industry and automobile industry but they are not absolutely identical because the nature of products and industry are very different from each other. In the case of paper industry, the raw material and its location is of vital importance to the organizations because it would determine the structure and magnitude of their costs whereas in automobile industry we would find that the raw material is not of that much importance rather it is the condition of an economy which determines the target market. Ans. 2) With an exception to merger and acquisition, there are various other strategies employed by organizations to expand globally. Here are the methods explained with their pros and cons: Exporting: Exporting allows companies to expand globally by manufacturing the products in one’s own country and than transporting them to the country where the customer is located. It is the most adopted form of international expansion. Advantages Disadvantages Exporting allows companies to avoid huge costs of capital expenditures because the manufacturer will not have to establish a manufacturing plant in the host country. If there is an optimal location other than your country through which you can supply products to the host country than exporting is not the preferred option. Costs of transportation can be enormous due to the distance between two countries. In many countries, the government charges high tariffs and custom duties on certain kinds of goods which again reduces the attractiveness of exporting. Joint Ventures: Under this form of global expansion two companies consolidate to form a third new company by either sharing their equities or making investments or transferring some form of technology. Advantages Disadvantages Companies who do not possess knowledge about the foreign market use joint ventures to take advantage of their partner’s knowledge about the host country conditions and systems. By using joint ventures companies can directly take control of an established market, its distribution systems and enjoys economies of scale. It allows a company to rapidly enter into a competitive foreign market when it seems that entry unfeasible with your limited resources. Each of the company reaps the benefits in a predetermined portion. If a company is aiming to invest in a costly technology and has no means to afford that than it can accomplish its goal by forming a joint venture. Two companies forming a joint with distinct core competencies can easily create synergy. This synergy in the form of people, customers, suppliers, plants provides leverage for the joint venture. On many of the occasions joint ventures allow companies to get escape of high tariffs and duties which can be costly if any other mode of entry is chosen. It can be very difficult to recuperate the amount of capital ploughed in the venture. Two companies will always have different goals and objectives thus there can be disaccord between the partners on several issues. This phenomenon also engenders an atmosphere of distrust in the organization and reduces the efficiency of joint venture. There can be reluctance among both the companies to share vital resources. Greenfield Site: This form of global expansion implies that a company builds it manufacturing unit or plant in the target market and all the business processes are conducted over there. Advantages Disadvantages It gives the company a physical existence in the host country and allows it to minimize its costs by taking benefits of cheap labour or lower raw material costs. This form is mainly deployed in developing countries where the government provides tax incentives to the companies therefore this again minimizes their overall costs. It allows companies to take absolute control over its all functions such as sales, marketing, finance and manufacturing thus it allows effective management of the resources. The company can adapt itself to the local environment to the local market without incurring huge developmental costs. The company can substantially increase its profit margin by reducing the transportation costs and other duties. It requires a huge initial investment and substantial efforts to jump into the new market. The management of the two companies need to provide substantial input because each of them differs in terms of mindset. There might be issues pertaining to the country of origin which have a profound impact on the brand image of the company. For instance a product manufactured in Uganda is certainly to be perceived as of low quality. Licensing: Licensing involves allowing someone else to use something of a company such as the right to use the intellectual property such as patent, trademarks, technology, and production process in return for the payment of a royalty (Hisrich, Peters & Shepherd 2005). Advantages Disadvantages It is the least risky method of expanding internationally because it allows you to put your minimal resources at stake. It does not require development costs It’s an attractive option for a company which do not want to invest in a sensitive market. If a company grants a license to other company without any careful and comprehensive analysis, than it may find that license has fallen in to a wrong hand because that company might be its biggest competitor in the future. It does not give and control over any of the business functions of the target company. Franchising: Under this category of global expansion, the franchisor sells its limited rights to a franchisee to use its brand name for an exchange of fee. It is similar to licensing except it is mainly use in service industries whereas licensing is used by manufacturing industries. It has the advantages and disadvantages identical to licensing. BIBLIOGRAPHY Cook, C. et al, 2008. Expect more major merger, deals. Pulp and Paper Week, 82(1), p.30-37. Diamond J., Chappelle D. E., Edwards, J. D., 1999. Mergers and acquisitions in the forest products industry. Forest Products Journal; 49, (4), p 24-36 Hill, C. W. L. and Jones, G. R., 2002. Strategic Management: New York: Routledge Hisrich, R. D., Peters, M. P. and Shepherd, D. A. 2005, Entrepreneurship. London: Routledge Shaw M. 2004. BIG & BETTER, Pulp and Paper Week, 78 (4), p.24. Read More