Strategies for Reaching Global Markets - Coursework Example

Strategies for reaching global markets March 200 0Introduction Today’s business environment is increasingly becoming more turbulent, chaotic and challenging than ever before and to survive, it is vital that a firm can do something better than its competitors ( Wonglimpiyarat 2004:1). Globalisation has not only altered the nature and the intensity of competition but has had to dictate and shape organisations in terms of what consumers want, how and when they want it and what they are prepared to pay for it (Hagan 1996:1). Kanter (1995:71) argues that success in the present day business is not for those companies that re-engineer the way they do things, or for those fixing the past. According to Kanter (1995) such an action will not constitute an adequate response. This is so because success is based on an organisation’s ability to create, rather than predict the future by developing those products that will literally transform the way the world thinks (Kanter 1995:71). Within the context of today’s global competition, businesses and firms no longer compete as individual companies but try to corporate with other businesses in their activities (Wu & Chien 2007:2). These researchers went further to argue that, this strategy has become quite common in many businesses. The conventional vertical integrated company based business model is gradually being replaced by collaborative relationship between many fragmented, but complementary and specialized value stars and constellation (Wu & Chien:1). Against this background, this paper examines the various strategies used by companies to reach the global market. The first part of the paper, examines forms of foreign direct investment, the second part appreciates each of the methods while the last part of the paper presents the summary, conclusion and recommendation. 1.1Overview of Foreign Direct Investment and Multinationals In the years that follow after the Second World War, trade and investment have become increasingly intertwined. Within the first few decades after the war, most countries from Asia and Africa viewed Foreign Direct Investment (FDI) with suspicion, and wariness and the flow of FDI towards these areas has been relatively slower (Buckley 2004, Sumelong et al., 2003). To most of these countries, the presence of Multinational Enterprises (MNEs) was seen as an impeachment to their national sovereignty. The situation was further aggravated with previous colonial experience and the fact that to some, FDI was a modern form of economic colonialism (Sumulong, Fan & Brooks 2003). According to the World Trade Organisation (WTO), the flow of FDI has substantially changed the international economic landscape. From1980 it has been argued by a handful of researchers (e.g. Hill 2007, Sumelong et al 2003, Buckley 2004, and Reis & Head 2005) that FDI outflow has overtaken the growth of world exports. The expansion in FDI became relatively pronounced during the period 1985-2000, a period characterized with scores of mergers and acquisitions, the Asian financial crises, the oil boom and privatization programs in Latin America (Hill 2007, Sumelong et al., 2003). 1.2International Expansion Strategy by Multinationals The very act of going international multiplies company’s organisational complexities. Recent changes in the international market scene, politics and environment have forced companies in the quest and optimisation of various options (Ghosal et al 2002). Moving global, shouldn’t be an overnight decision in multinational enterprises. Such a move should be carefully given a second thought, as it involves not only a total strategic reorientation but a major change in an organisations capabilities, resources and challenges (Ghoshal 2002, Caves 1996). Companies going global should be able to face the challenges of thinking globally and implementing locally. There is no doubt operating in internationally rather than domestically presents organisations with many new opportunities. From the quest of access to new markets, tactical and strategical positioning to a pool of information for subsequent product development; international entry mode is often defined within these features (Markusen et al 1998). Going international at times looks logical when we look at these pull factors. Hill (2007) contends that FDI takes on two main forms: Greenfield investment, mergers and acquisitions. Hill (2007) went further and argue that, in Greenfield investment, the firm in question establishes a new operation in a foreign country while the later involves acquiring or merging with an existing firm in the country. Acquisition however is usually hostile, because this is usually done against the wish of management (e.g. CEMEX’s acquisition of RMC of Britain and Southland in the United States (Hill 2007, Buckley 2004). According to Johnson et al. (2007), four forms of entry strategies are common with multinationals. This include indirect exporting; joit venture; franchising or wholly own subsidiary. In the later situation a new firm could create large-scale subsidiaries abroad or could even be formed for international business purposes (Hill 2007). 1.2.1Franchising Today, in international business franchising is used as a vehicle for market entry option, franchising is increasingly being used to enter new markets and maintain a company’s image (Hill 2007, Johnson et al 2007). Through franchising a company will be able to break through local market saturation, gain market potentials, and make financial gains. Franchising is the granting of the right by a parent company (the franchiser) to another, independent entity (the franchisee) to do a business in a prescribed manner. This right can take the form of selling the franchiser’s products; using its name, production, and marketing techniques; or using its general business approach. Usually franchising involves a combination of many of these elements (Sim & Ali 1998, Johnson & Scholes 2007). Many researchers today have postulated that, major forms of franchising include manufacturer-retailer systems for example what IKEA the Swedish furniture giant used as a market entry strategy, manufacturer-wholesaler systems with noted and common examples found in soft drink companies, and service firm-retailer systems such as lodging services and fast food outlets (Sim & Ali 1998, Johnson & Scholes 2007). According to Johnson et al (2007), franchising as an international market strategy has made impressive gains in the past decade. The reasons for the international expansion of franchise systems are market potential, financial gain, and saturated domestic markets. In some cases, franchising expansion is also a defensive reaction to competitors entry into foreign markets (Johnson et al 2007). Many franchise systems have run into difficulty by expanding too quickly and granting franchises to unqualified entities (Johnson et al 2007. The following have been identified as possible problems associated with franchising: Control of franchisees; Location problems and real estate costs; Patent, trademark, and copyright protection; Recruitment of franchisees; etc Availability of raw materials 1.2.2Wholly Own Subsidiaries Here the foreign company seeking international expansion might set up a foreign subsidiary. Here, the advantage lies in the protection of technical know-how. Here; local firms are better placed to benefit from the transfer of sophisticated technology. Looking at it from this direction, one will not hesitate to note that by circumventing a wholly owned ownership structure, the internalization advantages likely to result will include; Preservation of Proprietary know how Minimise losses due to opportunistic behaviour Protect the organisational cultural identity Confined capital structure of the organisation. Christos, et al., (2007) argued that cultural differences decrease firm value by imposing a barrier to the exploitation of internalisation advantages listed above. 1.2.3 Joint Ownership Smarzynska, & Mariana., (2008), argued that affiliates with joint domestic and foreign ownership may face lower costs of finding local suppliers of intermediates and thus may be more likely to engage in local sourcing than wholly owned foreign subsidiaries. Tseng Hui Chuing (2007) however, postulated that in situation where the advantages and capabilities that MNEs embrace, is location specific (labour, technology, natural resources, expertise etc), or difficult to be redeployed or rebuilt in a new market, then Join ownership should not be given a second thought. These are in accordance with Dunning (1993) findings that there are four generic location specific advantages for MNEs. Natural resource seeking advantage Market seeking advantage Strategic assets seeking advantage Entering into join venture is only possible option when assets seeking multinationals lack capabilities to duplicate or acquire needed assets or where the pros of sharing assets outweigh the cons of ownership (White & Lui 2005). By entering into a join venture ownership structure, the partnership will provide an advantage to easily gain access to resources that are costly or prohibitive to be reproduced or transfer outside of the firm that controls the resources (Oliver 1990). Makino & Neupert(2000) went further to substantiate that a wholly owned structure has an advantage of a greater discretion or latitude to leverage the resources when compared to join venture. Tseng Hui-Chuing (2007) argued that MNEs equipped with capabilities to attain assets seeking objectives are more likely to choose an internationalization of foreign operations than a shared ownership mode. In this direction, diversification of institutional power is reduced, corporate identity is preserved, and opportunistic behaviour resulting from shared ownership is minimized. 1.2.4 Merger and Acquisition The coming together of companies to gain synergistic effects has been seen in recent times as the most profitable way of investment. We often hear of this or that company merging with another or taking over another. It is common knowledge as today prominent portion of broadcasted news and columns in business papers have of late been dedicated to mergers and acquisitions as they are the most important forms of investment today (Randeniya and Roivas, 2004). This paper is aimed at reviewing mergers and acquisitions, the distinction between these two, the reasons or motives behind their pursuance and the post merger integration issues that firms may face. It starts by reviewing mergers and an acquisition and then proceeds to drawing a line between them. A merger can be seen as the coming together of two or more firms of fairly the same size following a joint decision to form an entirely new firm, sharing power equally. (Gustafsson and Hukkanen, 2002; Randeniya and Roivas, 2004). Three types of mergers can be identified: vertical integration where two firm engaged in different stages of production of the same good/service come together, horizontal mergers where two firms at the same stage of production come together and conglomerates where two firms producing unrelated goods/services come together (Gustafsson and Hukkanen, 2002; Randeniya and Roivas, 2004). Vertical can further be split into forward vertical and backward vertical mergers.(Gustafsson and Hukkanen, 2002). A merger may occur to achieve the following results. Increased profitability; Increased strength on market by eliminating competitors; Economies of scale; Risk diffusion and diversification and; To buy management. (Almqvist and Johansson, 2005) An acquisition on the other hand is a union of two firms where one survives and the other goes out of existence. (Gustafsson and Hukkanen, 2002). In certain occasions, the absorbed company may retain its individual identity if it is an important strategic element, for example, when Ford acquired Volvo, Volvo was still allowed to keep its brand name.(Randeniya and Roivas, 2004). In an acquisition, the surviving firm usually has greater power, and can thereby rule the integration process on its own, usually usurps the weaker firm, acquiring its assets and liabilities. (Gustafsson and Hukkanen, 2002; Karin and Elisabet, 2006). 1.5Conclusion and Recommendation This paper presents a critical analysis of different entry mode employ by multinational companies to enter a foreign market. Why each of the methods ranging from a joint venture, wholly owned subsidiary, licensing, merger and acquisition has both merits and demerits, there is no one size fit all. The choice of any of these entry strategies depends on the objective of the expansion. For example, Tseng Hui-Chiung (2007) argued that, foreign subsidiaries are preferred to joint ventures in a situation where multinationals are able to tap into host innovatory dynamism through their technological capabilities and to access local natural resources by leveraging corporate scales. The researcher cautions that multinationals face difficulties in deploying marketing knowledge in different contexts: References Almqvist, J., Johansson, C. (2005) What did you say? - A study of communication with links to anxiety during a merger. Department of Management and Economics, Linköping University Gustafsson, S., Hukkanen, M. (2002) Managing the Integration Process in a Merger. Case: Cloetta Fazer. Linköping University, Department of Management and Economics. Hagan, M. C., (1996).The core competence organisation. Implication for Human Resource Practices. Human Resource Management Review Vol.6, No 2. 1996, Pp. 147-164 Jensen, M.C. (1984). Take Overs: Folklore and Science. 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