Global Business Management: Citigroup in China - Case Study Example

International Business Environment Session: BA Global Business Management Citigroup in China Executive summary Citigroup is one of the largest companies in the world and the leader in international banking industry. Nowadays, the company has well-established business across the world, including China. When the company first entered the Chinese market, it was quite challenging time for the company as there were many barriers and restrictions for foreign investors. However, despite the major legal and government restrictions the company recognized the market potential in China, and was strongly encouraged by market drivers. When China became a member of WTO, the main barriers and restrictions were removed, and Citigroup focused on opportunities created in result of opening Chinese economy. The company expanded its business through mergers and acquisition strategy, expanded its product portfolio, and increased its presence in China. Citigroup’s internationalization could be rated as quite effective as the company has managed to concentrate on existing and emerging opportunities and to manage major constraints. Firstly, the company has entered the market by opening representative office as an initial step before more committed investment. Further, the company has signed merger with one of the local players. However, when the Chinese government has opened Chinese economy for foreign investors, Citigroup could take more active approach in acquiring local players. This strategy would give the company greater presence in China, and allow it to gain more sustainable competitive advantage. SECTION 1: Introduction Citigroup is one of the largest companies in the world and the leader in international banking industry. As of 2010, the company’s revenues grown up to $65 billion and the number of customers served across the world reached 200 million. The company has managed to established successful business operations in five major regions, including the US, Latin America, Europe, Middle East and Asia. Citigroup is quite successful in China, one of the most prospective markets (Rugman and Collinson, 2012). However, it was not an easy path for Citigroup before it managed to establish its full-fledged operations in China. This paper aims to provide analysis of the external environment of banking industry in China with identification of major opportunities and constraints, to determine the drivers of Citigroup’s internationalization strategy and distance factors, and finally to analyse the company’s internationalisation strategy and the selected entry mode. SECTION 2: Analysis of opportunities and constraints faced by Citigroup in China PESTEL analysis While entering the Chinese market, Citigroup has faced with several major constraints and opportunities. These constraints and opportunities can be analysed by adoption of the PESTEL framework. Political factors Unfavourable political climate Initially, when the company first entered the Chinese market, its business expansion opportunities were quite limited as the government of China pursued closed-economy strategy with a limited number of opportunities for foreign investors. It was a major constraint for Citigroup till the country has entered the World Trade Organisation (WTO) (Rugman and Collinson, 2012). China as a member of WTO When China joined the WTO, foreign companies have gained great opportunities for expanding business in China. The potential inflow of MNCs and international firms was also a great opportunity for Citigroup to growth its client pool of large and wealthy clients (MNC’s) (Rugman and Collinson, 2012). Economic factors Sustainable conomic growth China is a country demonstrating continuous growth of economy. It is attractive for many international firms. With joining of WTO, China has opened its economy for foreign investors and offered thus new business growth opportunities (Rugman and Collinson, 2012). Fluctuations in currency exchange rate As Citigroup operated in foreign country in banking industry, the company was subject to currency fluctuations. This could be viewed as a constraint to the business (Rugman and Collinson, 2012). Social factors Population growth in China One of the most important social factors for foreign companies entering the Chinese market is the growth of population in China. Growing population in China is one of the key opportunities for Citigroup (Rugman and Collinson, 2012). Cultural barriers Citigroup is the US-based company which entered the market with absolutely different culture. Cultural differences is one of important constraints faced by many companies entering foreign market. For Citigroup as a company that entered the Chinese market cultural barriers were constraints to effective marketing communication with local population (Rugman and Collinson, 2012). Immature customers in banking As it has been mentioned, when Citigroup entered the Chinese market, consumers were not familiar with various banking products as the banking sector was strongly underdeveloped. This was a significant opportunity for the company to offer existing and develop new products for Chinese customers (Rugman and Collinson, 2012). Technological factors Growth of mobile phone market in China resulted in emergence of telecom service providers and product manufacturers. This technology breakthrough created an opportunity for Citigroup to attract new corporate customers (Rugman and Collinson, 2012). Environmental factors There were no specific environmental factors related to Citbank’s entry to China Legal factors Different regulatory system Different legal framework and regulatory system in China posed significant constraints to Citigroup (Rugman and Collinson, 2012). Restrictive legislation Restrictions in legislation disabled foreign companies to enter Chinese market through FDI (until recently. It was also a constraint to Citigroup. Citigroups’s product portfolio was also limited, especially in consumer banking sector (Rugman and Collinson, 2012). Deregulation However, with the deregulation and introduction of new reforms many foreign companies were encouraged to develop international trade with China. Lowered import tariffs resulted in inflow of foreign operators and this also created market opportunities for Citigroup in China. Furthermore, Citigroup gained a great opportunity to offer exchange services to Chinese nationals (Rugman and Collinson, 2012). Absence of credit rating agency Absence of credit rating agency imposed significant constraints of the Citigroups’ credit card business. On the other hand it created opportunity for a company to develop this sector and to get a top position on the market (Rugman and Collinson, 2012). CAGE distance framework Cultural distance Administrative distance Geographic distance Economic distance US_CHINA -different languages; -different cultures; -different religions; -different norms and values -political climate -trade tariffs -legal restrictions -different time zones -differences in economic systems -large market -entry of MNCs In terms of cultural difference, there can be identified major cultural dimensions differing between American and Chinese managers. For example, Chinese people are much more fraternal, status-conscious, indirect and autonomous than Americans. On the other hand, the Americans are more excellence-oriented, honest, risk taking and self-effacing than the Chinese people (Johnson, Whittington, & Scholes, 2011). Chinese culture is highly hierarchical as power distance is high compared to the power distance index in the USA. It means that manager/supervisor keep formal distance with his subordinates and other employees (Meyer, 2014). Therefore, the US managers need to recognise this factor and strive to mentor and protect his subordinates, as well as take care of their interests. Workers will more likely demonstrate obedience and agreement. Understanding of these major cultural differences will allow managers to lead their teams more effectively and reap many rewards and achieve great performance results (Meyer, 2014). Different languages, norms of behaviour, and religions also impose major challenges for management. In terms of administrative distance, there were significant differences in political systems and government approaches between the USA and China. Different political and legal traditions as well as trade barriers imposed significant constraints to US-firms (Rugman and Collinson, 2012). In terms of geographical presence, it is obvious that there was a significant geographical distance between China and the USA. Despite this distance, the bank has managed to establish its international operations in China (Rugman and Collinson, 2012). From economic perspective, the bank has recognized the prospect of Chinese economy and its upcoming boost. Combination of market potential factor with boosting economy were strong drivers for Citigroup. Yip’s drivers of internationalisation Another useful strategic framework that could be applied for Citigroup case study is Yip’s drivers of internationalisation. There are 4 major categories of drivers, including the following: market globalisation drivers, cost globalisation drivers, government globalisation drivers, and competitive globalisation drivers (Rugman and Collinson, 2012). As it is possible to state the Citigroup’s initial entry of China was driven neither by cost globalisation opportunity, nor by government globalisation drivers (Rugman and Collinson, 2012). There were no obvious opportunities for sourcing/logistical advantages or economies of scales. When Citigroup initially entered the Chinese market there were no government initiatives focused on creating favourable business environment and reduction of trade barriers. These factors appeared decades of years after the company entered China. However, after China joined the WTO and the trade barriers have been removed/reduced, Citigroup’s international expansion to China was influenced by government drivers. In case of Citigroup, the main driver of internationalisation strategy was mainly driven by market globalisation factor (Rugman and Collinson, 2012). The company’s management recognised market potential in China and focused on China as a lead country with growing population and economy. The company was aiming to satisfy similar customers’ needs in banking sector. Citigroup pursued a strategy of business growth and international expansion to other countries and viewed China as prospective market for revenue generation. Local and global competitive drivers also influenced the strategic direction of the company and its decision to enter China (Rugman and Collinson, 2012). SECTION 3: Citigroup’s internationalisation strategy in China Citigroup has faced a number of political and regulatory challenges while establishing its operations in China. At the beginning, the company entered the Chinese market through Foreign Direct Investment entry mode. First it opened a representative office in a host country. This decision was dictated by national legislation and the company did not have other choices. However, when the market was deregulated, the company penetrated the Chinese banking sector through merger and acquisition of Shanghai Pudong Development Bank (Rugman and Collinson, 2012). Citigroup’s internationalisation strategy can be defined as multi-domestic strategy when it first entered the Chinese market. The company’s scope of services was limited and restricted in result of government regulations. Therefore, there was low level of international coordination, and the Citigroup in China could be viewed as an independent unit. The company has incorporated locally in order to increase the status of Citigroup as “insider” (De Kluyver, 2010). Thus, Citigroup has managed to get closed to local customers and better understand their needs. Later, when China became a member of WTO, Citigroup decided to make greater commitment to business development in Chinese market. The Company adjusted to changing external environment and focused on transnational strategy, aiming to balance global coordination and local responsiveness. Having entered the Chinese market, the company focused on premium segment, marketing only to large foreign corporate clients. Quite soon, Citigroup adopted differentiation strategy, targeting different groups of customers and aiming to satisfy varying needs of major customer groups (Rugman and Collinson, 2012). While Citigroup’s major customers were wealthy and successful MNCs, the company has also focused on other groups of customers. Citigroup focused on its traditional areas where it has succeeded globally: retail banking (credit cards), home mortgages, and loans to blue-chip Chinese companies (De Kluyver, 2010). As a result, the company has diversified its product portfolio and developed new products, such as personal banking. Citigroup has managed to introduce such products that were new to Chinese consumers: mortgages, personal loans, pension funds, and other financial products (Rugman and Collinson, 2012). Section 4: Conclusions and recommendations Citigroup is one of the largest companies in the world and the leader in international banking industry. Nowadays, the company has well-established business across the world, including China. Even though the company has gained a reputation of first-mover in Chinese banking sector, it could seem that the company had limited presence on the market after the country has become a member of WTO and major trade barriers were removed. Citigroup faced significant competition on the market on behalf of both local and international players. In order to get greater presence on the market, the company had to adopt aggressive merger and acquisition strategy (M&A), focusing on successful local players. This strategy would allow the company to gain local knowledge and expertise, to expand local customer base, and to gain greater geographical presence. References: De Kluyver, C. (2010). Fundamentals of global strategy. [New York, N.Y.] (222 East 46th Street, New York, NY 10017): Business Expert Press. Johnson, G., Whittington, R., & Scholes, K. 2011. Exploring Strategy, 9th edition, Pearson Education Ltd Meyer, E. (2014). Power Distance: You Cant Lead Across Cultures Without Understanding It. [online] Forbes. Available at: http://www.forbes.com/sites/forbesleadershipforum/2014/09/25/power-distance-you-cant-lead-across-cultures-without-understanding-it/ [Accessed 23 Jun. 2015]. Rugman, A.M. and Collinson, S., 2012. International Business, 6th edition, Pearson Education Group Read More