The Strategies of Different Companies - Essay Example

 The Strategies of Different Companies Introduction There are many uncertainties when a company plans to exports to another country where conditions differ from the Home country (Erramilli & Rao, 1993). Conflicting data and its interpretation make it difficult to arrive at decisions (Boyacigiller, 1990), and in absence of adequate information it is impossible for companies to project consequences of their strategic decisions. (Achrol & Stern, 1988). Indeed this may lead to wrong and harmful decisions effecting performances overseas. (Lee, 1998). To overcome this difficulty Johanson and Vahlne (1977, 1990) and Wiedersheim-Paul, Olson, and Welch (1978) suggest that it is best if the target country is closely similar to the Home country to ensure success. Undoubtedly similarities are easier to manage, less challenging and more likely to succeed. But it is not sufficient to be similar in outlook, culture and language to be able to be successful in the international markets. International market is inundated with problems as is evidenced by large number of failures. Aims and Objectives The aim of this paper is to explain the various problems that companies have to face before and after they become international in their operations and the objective is to find what are the implications and how best to overcome them. This paper will try to outline strategies with examples of various companies that have succeeded in the globalization of their efforts Literature Review and Critique International trade is as old as civilizations and has progressed with every age and time as can be evidenced from the patterns of change in theories. Mercantilism is a 16th century theory that symbolizes gold as wealth and propagates that exports should be subsidized to meet competition and imports should be penalized with tariffs to protect home industry. This severely limits the benefits and is a zero sum game (David Miller eds, 1987). This theory was also more applicable to earlier protectionist regimes and since protectionism is now largely abandoned, it is practiced only in isolated cases like in Japan where the state still prefers protectionist policies through control of imports. The Absolute advantage theory was originated by Adam Smith, the father of modern Economics, and he proposed that one should produce in a place where one can be most efficient and should trade where production is marked by inefficiency. By and large this theory is in practice today in different shades (Smith. Adam, 1776) and remains as the underlying principle in a broader sense. The Comparative Advantage theory states that production should be decided on basis of relative advantage and if advantage is unavailable one should import rather than produce even if efficiency is more than that of the exporting nation. (Ricardo. David 1817) In contrast Heckcher (1919) and Ohlin (1933) theorized that one should produce and export goods from locally abundant factors of inputs and import those goods for which these factors are costly locally. While this is true but it fails to elaborate the global operations of MNE’s of later generations and other advantages and disadvantages of location. Wassily Leontief (1953) developed his Paradox theory that states that Government policies affect availability of input factors as well as capital and labour. This is too totalitarian in approach. However this has its merits too. A prime example is the emerging economies like South Korea which has achieved great economic expansion because of the state’s activism and the institutions patronized by the government for strengthening and expanding foreign trade. The Country Similarity theory advocated by Linder in 1961 extended the previous theories by adding that nations with similar demand pattern trade with each other. While there is much truth in it, but the current scenario of using a specific location to serve as a platform to service another location defies the logic of this limited theory. The Product Life Cycle theory by Raymond Vernon in 1960 concluded that there are four stages of lifecycle of a product and international trade is related to them. In the first innovation stage the product is manufactured/produced in its home country; in the second when it reaches its growth level it is produced in another developed country; when it is in maturity it is produced in a developing country and in the last stage where it reaches the declining stage of its life it may be produced just anywhere. This is how international trade in a product takes place. Paul Krugman (1979) projected that in his Market Imperfection theory the nation gains from its vantage point of specialization and economies of scale and having the first mover advantage takes centre stage with the assistance of the government. Here the use and need of the government factor is the limiting factor. Michael Porter (1990) put forward the Diamond Theory in which he stated that Basic Factors like natural resources, climate/location, and demographics when added to Advanced Factors like communications, skilled labour and technologies result in efficient production. This product is in high demand by sophisticated consumers looking for quality and innovations and firms cater to them and each feeds on the other to create International trade. There are other factors in the Diamond like related support industries, strategies in marketing, international, and domestic competition that either hinder or help in promotion of trade. These factors contribute to a company’s competitiveness. The diamond needs re-enforcement by adding two layers of International Trade and Global Trade with further factors built in. But this is a good base to start from. Foreign Direct Investment Various studies sought to identify additional and more precise determinants of International Trade through Foreign Direct Investment (FDI) as they would apply to specific industries or host countries. The diverse concepts were analyzed by Dunning who then conceived the eclectic paradigm over the period of several years. The main features of this paradigm was that Dunning (1993) deduced that all firms develop certain inherent internal qualities that he termed as Ownership advantage or the O-Advantage. When these advantages were used for maximum effect at particular locations using the advantages offered by the location in terms of external resources they become the Locational or L-Advantage. Further when the firm extends its ownership advantage to its subsidiary, even if it the organizational culture, it is called the Internalization or I-Advantage. These three together become the OLI advantage that is the most practical way of determining FDI. While these theories explain one or many views of why and how internationalization trades have taken place traditionally, in the global context of contemporary emerging markets, a new meaning has been sought to explain the new globalization move. The motives behind the internationalisation effort are the basic reason said to be the prime movers for firms going international. Motives Motives for FDI may be summarized in a categorization formulated by Behrman (1972) and supported by Dunning (1993) who introduced a model of internationalization including four different categories of motives. These categories are market seeking, resource seeking, efficiency seeking and strategic resource seeking motives. Market and Resource seeking motives have been the two most recognized categories of motives (Dunning 2000). These two are the main reasons for most first time internationalization attempts by firms. It often happens that resources fall short in the home country which limit growth of firms and in turn maces them inefficient, whereas the required resources may be readily available abroad. This would tempt the firm to go international for just the reason of acquiring resources to become competitive in the home market. Many an MNE like Nike and Nokia have exploited cheaper labour and raw material abroad for reducing costs of their products for sale in the home countries. Similarly markets at home saturate sooner or later forcing firms to seek larger markets for maintaining economies of scale and consequent competitive advantage. With globalization and liberalisation, many emerging economies are becoming viable markets with large middle classes now having much larger disposable incomes and a penchant for quality goods. This gives impetus to firms to internationalize seeking larger markets. However, efficiency seeking and strategic asset seeking motives increase in importance and are more common as motives for those companies who are already engaged in multinational activity. As competition increases in the home countries, costs also go up along with rising standards of living. Servicing now forms an integral part of marketing and retention of customers is becoming vital to the economic wellbeing of firms. Hence these services which are non-productive yet vital are cheaper to maintain from locations in host countries with large and cheaper educated labour force that can accept such outsourced jobs at a fraction of the rate increase the efficiency of the firm. In the same vein the strategic asset seeking motives are gaining more ground than ever before. The fact is that it takes a very long gestation period to commence production facilities in any location. Firms wanting to increase their presence in international markets now resort to takeovers, both friendly and hostile, of rivals and competitors to enhance their capacities. The new mergers and acquisitions (M&A) are becoming popular as they provide immediate sources of production, marketing as well as sourcing facilities which would otherwise tae very long time to materialize and mature. They also reduce the pains of erecting, assembling, organising and planning of new facilities and a host of other problems like obtaining permissions and clearances from authorities. The strategic assets are sought after for reasons of FDI as they present an opportunity for foreign investments minus the initial headaches. Dunning also confirms that closer relations with customers and durable relations with suppliers were equally important motives. Supply chains and establishments of value chains have proven advantages for the success of firms. Besides, he suggests that internationalisation was driven by opportunities abroad rather than threats at home. Opportunity has been described in a different vein by Williamson (1975). He states that incomplete contracts and missing markets gave rise to opportunistic behaviour. To fill the void companies chose to face the challenge through replacing external contracts by direct ownership and internal hierarchy. The Eclectic Paradigm and FDI Dunning’s eclectic paradigm is useful in analysing the complex decisions made by Firms to go international. The three OLI factors help to explain why production is based in a foreign land in place of home country. It explains the value additions available to a company in host countries on account of OLI. Each of these factors offers some advantage that enhances the competitiveness and performance of the firm. Basically the home advantage of Ownership is transferred to the host countries for competitiveness. These are then transferred to specific host country where the best the Locational factors exist through FDI. Finally the Internalization or the internal expertise, partly due to O factors accounts for the competitive advantage that was originally the objective of the exercise. This has been confirmed by the similar internalization theory of Rugman (1984). The main difference between the two has been described by Dunning himself stating that his eclectic paradigm is different from Rugman’s internalization theory in that it treats the competitive (so-called O-specific) advantages as endogenous or internal rather than as exogenous external variables (Dunning, 1995) The Financial Aspect There have been further additions by considering further riders to focus on the finer points of FDI. Oxelheim et al. (2001), for instance, argue that the FDI literature and the OLI paradigm in particular would be enriched if finance-specific factors are explicitly incorporated as drivers of FDI. Proactive or positive financial strategies actually are behind the OLI advantages but have not got their due respect from academics except Oxelheim et al (2001). This may have been so that as finance is always considered an inherent part of any activity or transaction and therefore a laid back attitude is adopted for it. This taken for granted attitude fails to point out that finance is the backbone of successful strategies and therefore needs to be considered alongside with them. Some amount of importance has been shown when transaction costs are considered, as will be seen elsewhere in this report, but largely it is not considered as a motive for FDI or part of the OLI advantages. Oxelheim et al (2001) have identified three kinds of proactive financial strategies. First among these is gaining and maintaining of global cost and availability of capital. This clearly an ownership advantage and is acquired in five ways. a) Competitively sourced capital, b) By organising preparatory cross listing, c) By offering total transparency in financial matters, d) By having competitive banking and commercial relationships, and e) By obtaining a competitive credit rating. The second proactive financial strategy suggested is the negotiation of reduced taxation or subsidies in order to improve cash flows. The third kind of strategy is a combination of other financial capabilities under the OLI advantage. Risk management is an important factor and it may be considered as the fourth proactive financial strategy. Such strategies and their identification as motives or inducers of FDI is recognition of their importance when considering the Internationalization moves. Also by considering these as vital to FDI planning a competitive edge will be sought and obtained for minimizing the cost of capital required for this venture. These are however part of the tangible ownership advantages. There are other intangible ownership advantages like patents, technologies developed by the firm and these need to be factored in at a diminishing rate as over a period of time their value erodes or disappears altogether. But they do offer an ownership advantage in the interim period. Inflation affects the financial issues on capital investment decisions. Management recognize that inflation exists but rarely include inflation in the analysis of capital planning, because they take for granted that with inflation, both net revenues and the project cost will change proportionately and companies think that it will not have much impact. But this is far from the truth as it affects both the Discount Rate and the Cash Flow. Investments are discounted when results are expected at a later date and with increased inflation the discount rate goes up, and present value reduces. Similarly Cash flows are results of sales revenues. When inflation goes up the real value of revenue reduces as the cost of the product goes up and impacts profits and net returns are lower. Inflation is understood as rising prices but this also means a fall in the value of money. The GDP is the market value of all finished goods and services of a country and is a key indicator of the value generation in the economy. Paltek needs to understand that unless it takes cognisance of these issues its effort towards FDI will be incompatible with other strategies. Organizational and National Cultures Another important aspect that needs to be understood is that despite similarities in economic conditions between home and host countries there will always be a cultural and language difference. These create barriers for international trade. These difference need to be understood and respected if the effort is to succeed. Human Relations, whether in terms of employees, suppliers or the customers, are influenced by the culture of the nation where the company intends to operate. The company needs to cultivate a different organisational culture in the host country. Some elements of its own culture are inevitable as this is part of its internalisation advantage that it must carry to the host country. According to Nelson and Winter (1982) routine interactions within the working environment forms the basis of organizational culture and a predictive pattern emerges. Deal and Kennedy (1982) describe it as “the way we do things here”. The importance of this routine is gaining importance as has been acknowledged by Cohen et al (1972) and Hedberg et al (1976). Ritual activities form another view of practices as shown by Trice and Beyer (1984, 1985). The culture of the organisation has been defined by Edgar Schein (1985) and acknowledged at three levels of cultural phenomenona: basic assumptions, values, and artifacts. Basic assumptions are the conditions taken for granted in an organisation and considered to be the "correct" way of doing things. These are the foundations and are the deepest level of culture and are the most difficult to change. At the next level are values and these are perceived to be changeable and also that need to be changed. The artifacts are behavioral usages at the front like rules, procedures, communications and technology that are readily changed and indeed do not change values or traditions but are mere change of presentations or mannerisms. Nevertheless, HR practices are at variance in different countries due to several reasons; amongst main causes are different business structures (Schuler et al 1994, Pieper 1991); employment laws of the country (Florkowski and Schuler 1994); model of competency and decision making used (Sparrow et al 1994); and most importantly the national cultural practices (Hofstede et al 1990, Hofstede1991). The most crucial is the national culture and this dominate the International Human Resource Management (IHRM) scenes in successful companies. These are the impressions and practices picked up in early childhood and called software of the mind by Hofstede (1993). These are less explicit and are the main drivers of customs and eventual behaviours (Jaeger 1986). When these values are undermined, workers are dissatisfied, distracted, uncomfortable and uncommitted (Newman and Nollen 1996). Similarly if the managers are unmindful of local culture they are likely to fail in either getting substantive support of the workforce and will face problems with local suppliers and customers as well. Hofstede has also charted the behavioral patterns of different countries and regions but this is static in nature and other practitioners have been quite critical of this view. In their view culture can be worked around with a positive attitude. When there is similarity in cultures it paves the way for that culture in which a group of people solves problems and reconciles dilemmas internally by themselves (Trompenaars and Hampden-Turner 1997). In fact they have complimented Hoftede’s work by using his platform to work on integration of compatibilities to produce superior performances. The Question of Cultural Fit A question has arisen in ‘Whether a good “cultural fit” between the HR practices and their local environment by firms has any effect on their performance’. In the light of above statements it appears to be so. A firm has to adapt to fit the local conditions for getting the benefit of the host markets both for profitability and growth. But while this is acceptable, this is not the only reason for success. Firms grow and become profitable due mainly to their exceptional leadership and the competitive advantage they create for themselves. There is need of adopting local cultures without giving up entirely on the core culture of the organisation that has been originally influenced by its home country culture. International Marketing Research It is also prudent to make a careful research of the target market. The data for this research is often available at government data collection agencies of the market as well as private agencies that collect data with different objectives. It is important to be able to ask for and obtain the right data as this can sometime be misleading as perspectives differ. This is the secondary data and primary data can be collected through talking directly to various distribution channels. A good way for deciding on choice of market is the twelve point framework known as the 12C framework for analyzing international marketing Country – Check PESTEL Analysis of the potential market Currency – Check for currency stability or fluctuations Culture - Check for cultural differences that will affect Product/Advertising/Brand Equity Control & Co-ordination - Check for Organising and Monitoring after sales service possibilities Concentration (of markets) - Check for market segmentation Commitment – Check resources/time/skills required and plan for a minimum period for investments. Communication - Check for language/communication problems both inter-personal and media Choices (of consumers) – Check out competition with other foreign/local brands. Channels of distribution – Check for Logistic support and transport problems of area Contractual obligations – Check out for Legal issues while contracting with different stakeholders Capacity to pay – Check out the ability to pay factor of consumer as well as regulations like local taxes/tariffs. Caveats (laws) - Check out for local restrictive laws and regulations Conclusions Being and remaining competitive is the demand of the day and in case of companies it is now the survival of the fittest. A fit is when ideally all activities relate to each other in a tight way and when each is as strongly linked to the other like a chain. Furthermore each link in the chain is equally strong so that the fit is complete and such a fit cannot be copied. Consistency, complementary activities and optimal effort are the ingredients of a fit. This is what brings sustainability in strategy. A strategy has to be sustained for very long periods for pay-back and it should be inimitable by competition. This can happen only when activities are performed differently. It is here that the leaders play a decisive role in shaping strategy. These two factors, Leadership and Strategy, prove that it is possible for a firm to perform well despite being at variance with local conditions in several countries. Paltek already operates internationally by offering its products to a variety of markets. Becoming an International company is therefore the natural progression and when done prudently will fetch handsome returns. The above paper has presented a well documented study covering areas of financial, cultural and locational issues that will make it easier to plan an international presence. Recommendations Having arrived at a decision to export based on above factors it is recommended that a screening is done of the regions to find out what is the most attractive destination for the company. Contrary to mainstream thinking that FDI flows are towards the emerging or developing markets, the fact is that developing countries still attract major FDI due to their superior infrastructure, markets that have purchasing capacity, effective governance both at the political and firm level and a well educated work force. Whatever FDI that flows into the so called emergent markets of China, India, Russia and some Latin American countries is due to their liberalization policies and large middle income population that has got new purchasing power. It is rare to find that low labour cost is the sole factor for FDI inflows though it still has a role to play in highly labour intensive industries. There are 193 countries in the world that are recognised by most developed nations and they are spread into 5 continents; North America, South America, Europe, Africa, and Asia. A 5 point criterion is suggested to assess the suitability of the selected country for Paltek entry. The country which will pass this test will be the most suitable destination for its International venture. The criteria are high industrial activity especially in defense and electronics related industries, an educated workforce, westernised or under western cultural influence, excellent infrastructure and communications and trade channel support. Since Paltek is located in the UK the obvious choice is Europe both for proximity as well as meeting the above criterion. The company has already identified the Nordic belt in Western Europe earlier but the joint venture with a local company failed to take-off due to change in its management. However the opportunity may now be exploited on its own. The company already imports most of its components from Asian manufacturers. Therefore and assembly plant can be easily instituted in any of the four countries Norway, Sweden, Denmark and Finland. Of these the first three are also English speaking to a large extent and therefore the cultural clash will be the least. This will assist in a quick set-up and assure a flying start. The target markets will be mostly German and French as they have advanced industrial activity in defense as well as in electronics and a niche market can easily be developed from the Nordic base. In view of the above discussions we would recommend the following strategy for Paltek. The company should set up a subsidiary in either Norway or Denmark as it will enjoy the following advantages. 1 The countries are compatible culturally with UK therefore UK managers that will head the venture will adjust easily. 2 Language too will not be a barrier as English is generally spoken and understood in these countries. 3 Distance from home country is small and communication with larger markets within Europe is well established. 4 Infrastructure, legal and financial framework and political stability point towards greater industrialisation that create a steady market for its products. 5 The company can start with supplying products manufactured/assembled in UK through the subsidiary and at a later stage can even establish a manufacturing base in these countries as its main suppliers are located in Asia and can supply components to this destination as easily. 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