INTERNATIONALISATION

WHAT'S INTERNATIONALISATION?

Internationalisation is the process by which firms increase their awareness of the influence of international activities on their future and establish and conduct transactions with firms from other countries (Beamish et al. 1990).

EG: McDonalds, Pricewaterhouse Coopers, Marks & Spencer, Merry Lynch HSBC, amazon.co.uk

WHY TO INTERNATIONALISE?

The most important reason is, undoubtedly TO MAKE MONEY. This reason covers the following ones:

To expand sales (due to a domestic saturation, firms seek another markets where they can increase their sales; it is also a strategy when the product is in the later stages of its cycle life)

To acquire resources:

• Products, services and components (maybe cheaper to purchase in other markets or because they are difficult to find in the local market)

• Foreign capital, technologies and information (going abroad to open up new capital markets; besides, newer and better technologies and know-how can be gained from other companies)

Diversify sources of sales and suppliers:

To minimise competitive risk (a diversification strategy reduces the firm's vulnerability to compete; furthermore, because not only the firms but also the customers are becoming global, if a firm stays and do not go abroad, even if the firm's position in the national market is strong, local customers can shift to a competitor. When trying to avoid the risk involved in “going abroad” the company is actually risking its survival in the local market!).

“ There is no a “global solution”, an unique strategy which will mark the success of a company when going internationally. But what is clear is that there must be a “FIT” between the dominant strategy requirement of the business and the firm's dominant strategic capability” (Barlett and Ghoshal, 1998).

MODES OF INTERNATIONALISATION

Decisions concerning the modes of a firm's entry to a particular foreign market are among the most crucially important that its management will ever have to take. Once an entry method has been selected, its implementation has significant implications for a wide range of International Marketing concerns. The firms need to consider carefully all the available options, the costs, possible loss of control and the risks involved. The choice is constrained by the level of resources available to the firm, although we must also consider: financial, human and other resource requirements. The options for entering into foreign markets are (see chart in next page):

• Exporting and Exporting through agents

• Turnkey operations

• Management Contracts

• Contract Manufacturing

• Licensing/Franchising

• Joint Venturing

• Wholly-owned subsidiaries

Exporting

When exporting, a firm sells products to whole-sellers or end-users in foreign countries. It involves:

• Transportation

• Insurance of the cargo/ Payment for the goods

• Documentation

• Packaging and labelling

• Organising payment

What are the benefits and disadvantages of these criteria?

Once a firm has decided to export, the next decision is to choose between agents and distributors.

Agents put their clients in touch with third parties but then “drop out” of resulting contracts. Distributors purchase a supplying firm's products, and assume the responsibility of results (risky for him/her).

Governments are usually against the importer firm, since it can reduce national companies' sales, at the time that the money does not contribute to the national growth but goes back to the host country (where the Exporter Company has set up activities). For this reason, companies often need to get into negotiations about the terms of the exchange. We can differentiate 3 ways to trading:

COMPENSATION: The buyer will pay some amount of the total sales in cash and the rest in goods that the importer company will sell in another country.

BARTER: Importer goods are exchanged for national products, and no money is involved in the transaction.

BUY BACK: One company sells something to another, according that the first company will buy the results of the production. ( EG: A company exports oranges and sells them to another company who produces orange juice. The agreement is that the orange producer will finally buy the total output of orange juice to the second company).

Management Contract

Contract in which a firm in one country provides a team of expert managers to an enterprise in another for a fixed period under contract (Bennett, 1998). It can be used to supplement a separate licensing, JV or contract manufacturing. It is an example of Turnkey arrangement, where the team also installs a new system, train local personnel and then hand over the entire systems to local control.

EG: PriceWaterHouseCoopers

What are the BENEFITS and DISADVATAGES of this method?

Contract Manufacturing

Agreement in which a firm signs a contract with a foreign firm which is going to manufacture goods with designs and materials provided or to assemble parts into final products.

EG: Marks and Spencer and Laura Ashley

What are the BENEFITS and DISADVATAGES of this method?

Licensing and Franchising

Licensing is a contractual arrangement whereby the licensor (selling firm) allows its technology, patents, trademarks or other proprietary advantages to be used for a gee by the licensee (buying firm). It is appropriate where:

• It is not feasible to set up in a particular country, but where legal protection of intellectual property is required.

• The cost of transporting goods to the local market would be prohibitive.

• “Home-grown” product images will improve sales

• The licensee will have to purchase INPUT components or materials from the licensor

• The licensor is already exporting directly to more markets than it can conveniently handle

EG: UK jeans and casual wear manufacturer Lee Cooper

With a franchising agreement, a foreign firm adopts the franchiser's entire business format in the local market- its name, trade marks, business methods, layout of premises, etc. and the franchiser provides a variety of supplementary management services.

• Franchisor: Retains complete control over the product

• Franchisee: carries all the risk of failure

EG: Holiday Inns has 9/10 international hotels franchised. Samsonite, Ikea, McDonalds

There are four types of License:

ASSIGNMENTS: The licensor hands over all its intellectual property rights in relation to a particular patent, trade mark…

SOLE: The licensor retains rights but agrees not to extend licences to anyone other than a single licensee during the period of the agreement

EXCLUSIVE OR NON-EXCLUSIVE: The licensor can't/can distribute licences to several licensees simultaneously.

KNOW-HOW: Covers confidential but non-patented technical knowledge.

What are the BENEFITS and DISADVANTAGES of this method?

Joint Venture

A JV is a collaborative arrangement between unrelated parties, which exchange or combine various resources while remaining separate and independent legal entities. JV are increasingly popular as a means for entering foreign markets.

EG: When Pepsi-Cola wanted to entry to the Indian market, it faced several problems: 1) Local soft drink companies put pressure on the government to take actions agains the firm; 2) Opposition of politic groups. To cope with these problems, Pepsi formed a consortium of JV with a number of influential Indian businesses:

• Contract deal: the payment for the imported products would be in agricultural products

• Production/Distribution in high-unemployment areas

• Technology transfer

EG: Firms that have opted for this form of internationalisation are those of Meril Lynch and HSBC (giving birth to “Merril Lynch HSBC”), Volkswagen , Peugeot and Artis.

PROBLEM: How to select partners? The ideal JV materialises when participants can pool complementary skills (Bennett, 1998). There are several reasons for a company to opt for a International JV when going abroad, as summarised in the following chart:

We find 3 different types of JV depending on the point of view of one of the firms involved in the arrangement:

EQUALLY: Here all the companies in the contract will share the same portion of profits. In the event of two firms, each would receive 50% of the profits.

MAJORITY: In this case, the firm owns the major portion of the company and so its proportion of the profits will be superior to that of the others. In the event of two companies, the firm would receive more than 50% of the profits.

MINORITY: Now the firm owns a smaller fraction of the company (compared with the other partners), and so its participation in the profits will be inferior. With two companies, this company would receive less than 50% of the profit.

How will the firms decide what company is getting a higher proportion? It will depend on the resource contribution of each company to the JV, determining who is to have more power/control in the relationship and therefore, who is going to receive a greater participation on the profits. In practice, a 50-50 situation is very difficult to be found, as we do not have good measures of the commitment of each party.

What are the BENEFITS and DISADVATAGES of this method?

Wholly-owned subsidiaries

A firm invests money to set up a new firm, which is normally incorporated as a limited company audited with the independent account and taxed independently.

EG: amazon.co.uk.

Discussion: Ericsson in China:

• Production

• HRM

• R&D

• Marketing

• Sales

What are the BENEFITS and DISADVATAGES of this method?

Branches and Subsidiaries

BRANCH: Direct extension of the parent firm into a foreign market. Easy to set up and to dismantle, but complicated tax situations can arise because some nations relate the amounts of tax payable by branches to the world-wide profits of their parent company.

SUBSIDIARIES: Seen as a separate business from the firm that owns it; is responsible for its own debts and is subject to exactly the same taxes, auditing, registration and accounting regulations as any other local business.

EG: BMW: subsidiaries make 50% of the sales of the company's output!

CRITERIA FOR SELECTING AN OPTION (Bennett, 1998)

Internal:

• Financial resources: The business's financial resources and hence its capacity to purchase or set up foreign establishments.

• Physical and technical characteristics of the product (is it easy to manufacture abroad??)

• Experience and expertise in selling and operating abroad:

The ways in which firms internationalise have been at her focus of much research. For two decades, the Uppsala internationalisation process model (Johnason & Vahlne, 1977) has considerably influenced the way this research has been conductd, The model explains internationalisation as a step-wise process in which firms begin their international operations engaging in low-commitment entry models in nearby markets while, over time, targeting geographically and mentally more distant markets through higher commitment entry models. The critical point in the internationalisation pattern is, thereby, the importance of experiential knowledge that precedes the increasing commitment to the foreign operations. The more the knowledge of the market and the commitment, the greater the commitment (importance) and the number of the foreign activities (changing aspects). On the other hand, as the activities performed across international borders are increasing in number and importance, the knowledge of the market and the commitment of the firm will increase.

External:

• E:

• Availability of marketing and general business services

• Degree of market penetration desired

• Availability of trained and competent staff in a foreign country

• How quickly the firm wishes to commence operations in the market?

• Volatility of and competitive intensiveness in the country concerned.

• P&L:

• Local constraints on the foreign ownership of businesses/ licensing arrangement

• Tariff levels, quotas and other non-tariff barriers within a market.

• Political stability of the foreign countries the firm wishes to enter and other risk factors.

• The case with which intellectual property can be protected.

• S:

• Consumer Behaviour

• T:

• Ease of communication with intermediaries (Agents, consortium buyers, etc.)

“Large firms with substantial foreign operators typically find they need to adopt a variety of methods for doing business in various national markets” (Bennet, 1998)

Intermediaries or in-home facilities???

The company should opt for in-house departments when:

The firm has a limited number of clearly identified customers

The costs of international marketing are readily controlled

Minimal after-sales service is required.

FACTORS THAT AFFECT INTERNATIONALISATION

External Environment

POLITICAL:

- Democracy vs Totalitarism

ECONOMIC

• Per capital income

• Quality of life

TECHNOLOGICAL

SOCIAL (CULTURAL):

• Customs

• Values

• Group affiliation

• Language

• Other socio-cultural factors:

• Unceratinty avoidance

• Masculinity vs Feminity

• Power distance

• Individuality vs Collectivity (MRH)

Cultural Needs in Internationalisation Process

POLYCENTRISM: A MNE with a Polycentric predisposition will tailor its strategic plan to meet the needs of a local culture. If the firm is doing business in more than one culture, the overall plan will be adapted to reflect these individual needs, The basic mission of a polycentric MNE is to be accepted by the local culture and to blend into the country. Each subsidiary will decide the objectives it will pursue, based on local needs. Profits will be put back into the country in the form of expansion and growth.

ETHNOCENTRISM: A MNEs with a ethnocentric predisposition will rely on the values and interest of the parent company in formulating and implementing the strategic plan. Primary given will be given to profitability and the firm will try to run operations abroad the way they are run at home. This predisposition is used most commonly by firms trying to sell the same product abroad that they sell at home.

GEOCENTRISM: A MNE with a geocentric predisposition will view operations on a global basis, The largest international corporations often use this approach. They produce global products with local variations and will staff their offices with the best people they can find, regardless of country of origin.

VALUE SYSTEM

COST-BENEFIT OF CHANGE

Internationalisation in Practice (Barlett C. and Ghoshal, 1986)

With all the current attention being given to global strategy, companies risks undertaking the organisational challenge of managing their global operations! Research on 9 core companies all around the world showed that companies usually follow the United States Model, with the general results:

• Most multinationals treat their foreign subsidiaries in a remarkably uniform manner

• Headquarters try to co-ordinate key decisions and control global resources and have the subsidiaries act as local implementers and adapters of the global strategy

These two effects severely limit the organisational capability of a company's international operations in 3 important ways:

The symmetrical treatment results in overcompensation for the needs of smaller or less crucial markets and a simultaneous under-responsiveness to the needs of strategically important countries.

With the centralisation, the head office risks under-utilising the company's world-wide assets and organisational capabilities.

Local managers demotivated and even disenfranchised.

EG: Procter & Gamble: It's European subsidiaries were independent and they grew very much on the 70s. They even started competing against each other, resulting in a “decrement” of the Global firm's profitability. To sort this out, 2 measures were carried out:

PAMPER EXPERIMENT: It created a position (one manager that would control everything) at European headquarters in Brussels to develop a Pampers strategy for the whole continent. By giving this manager responsibility for the Europewide product and marketing strategy, management hopped to be able to eliminate the diversity in brand strategy by co-ordinating activities across subsidiary boundaries. It failed.

EUROBRAND TEAMS: For each important brand, the company formed a management team that carried the responsibility for the development and co-ordination of the marketing strategy for Europe. Each team was headed by the general manager and the appropriate brand group from the “lead” subsidiary (a unit selected for its success and creativity within the brand).This strategy succeed for 2 reasons:

2.1) They captured the knowledge, the expertise and the commitment of managers closest to the market

2.2) Relationships among managers were built on INTERDEPENDENCE rather than on independence or dependence

We must distinguish between three different concepts: depending on the centralisation degree of the company, foreign activities and subsidiaries will be given different roles:

“International subsidiaries shouldn't just be pipelines to move products. Their own special strengths can help build COMPETITVE ADVANTAGE” (Barlett and Ghoshal, 1986)

But what is the strategy the firm must follow? What is the most accurate role for the subsidiaries? It will depend, not only on the characteristics of the firm, but specially on 2 major factors:

• The strategic importance of the local environment

• The competence of local organisations

Strategic Leader: Highly competent national subsidiary located in a strategically important market. The subsidiary serves as a partner of headquarters in developing and implementing strategy:

• Detects signals of change

• Analyses the threats and opportunities

• Develops appropriate responses

EG: UK subsidiary of Philips to create the teletext-TV business

Contributor: Subsidiary operating in a small or strategically unimportant market but having a distinctive capability.

EG: Australian subsidiary of LM Ericsson when developed a successful AXE digital telecom switch

Implementor: A national organisation in a less strategically important market. The market potential is limited and the corporate resource commitment reflects it. It is very common. Without access to critical information, these national organisation lack the potential to become contributors to the company's strategic planing.

• Only generate the funds that keep the company going and underwrite its expansion

• Opportunity to capture economies of scale and scope

• Crucial for most companies' global strategies

EG: Procter & Gamble's European introduction of Vizir: The French company played an important contributing role by undertaking a second market test and later modifying the advertising approach. In Spain, for instance, the subsidiaries were only implementers during the first year of the product life.

The Black Hole: Important market where a strong local presence is essential for maintaining the Company's Global Position. This time the objective in not to manage it, but to manage one's ways out of it! But building a significant local presence in a national environment that is large, sophisticated and competitive is very difficult, expensive and time consuming. How to get a way out???

• By detecting a new development (in the market or by other company) before it occurs

• Strategic Alliances (that will work with co-operation)

EG: Philips in Japan

Corporate management faces 3 big challenges in guiding the dispersion of responsibilities and differentiating subsidiaries' tasks:

SETTING THE COURSE: Every company needs a strong, unifying sense of direction. Without it, the decentralisation can become a anarchy!

BUILDING DIFFERENTIATION: In determining which units should be given the lead, contributor or follower roles, management must consider the motivational as well as the strategic impact of the decisions taken. By dealing out lead or contributing roles to the smaller or less developed units, the headquarters group will give the team a huge incentive. However, the head office has to empower these units to exercise their voices in the organisation by ensuring their access and influence in the corporate decision-making process.

DIRECTING THE PROCESS: In order to control the process, headquarters must adopt a flexible administrative stance that allows it to differentiate the way it manages one subsidiary unit. In units with lead roles, headquarters play an important role in ensuring that the business strategies developed fit the company's overall goals and priorities.

Summary: Recommendations for Internationalisation Process

1. The need to develop a global vision or image of the world. This applies to all firms regardless of size. There is no panacea for responding to globalisation. Differences in levels of internationalisation vary between sectors and sub sector. This means keeping up to date with market trends, competition, rivals, merger, joint venture activity within the industry segment. But also taking account of political, economic in more risky markets. It also means being prepared to adapt to the needs of customers in each key market whilst at the same time trying to gain some economies of scope/scale.

2. The importance of a visionary leader or person to champion the internationalisation process. Central to this is a clear statement of international mission/objectives/goals, commitment by top management team and serious evaluation of the company's international orientation, resources and experience in foreign markets. Thus international business strategy should integrate structure, culture, performance, orientation. and should be both `bottom up' and `top down' (and proactive). Reactive internationalisation can be `shifted into gear' by building on experience and knowledge gained in order to take this further into proactive internationalisation (whether in small or large steps). However, greatest success will be in cases where there is a fusing of corporate organisational culture and international activity.

3. Internationalisation proceeds by incremental growth process whereby experience and learning is gained in different stages and steps in different markets at different times. The success of this will depend on implementation of double loop learning. The success of incremental learning will also determine modes of entry into key markets but once experience is developed then market penetration is the usual strategy.

4. The importance of transaction cost analyses for examining contracting, subcontracting or cooperative activity in a cross border context. Also, evaluation of inter-organisational networks in both home and cross border contexts can provide wide resources in terms of contacts, information and opportunities. These should be exploited more fully.

CASE STUDY: MCDONALDS

How was the business of McDonald's influenced by the law in Russia?

• The partnership of the JV is the government

• Law did not allow the company to have a subsidiary

Why did McDonald's set up a JV with Moscow City Council?

- Because the government did not allow the company to open a subsidiary.

How was the business of McDonald's influenced by the planned economy in Russia?

• Establishment of a processing centre (supply difficulties)

Pamper= mimar

Asegura, apoya.

International Business Strategy (week 2): Internationalisation -- page 16

Product Cycle Life

Decline

Maturity

Growth

Introduction

Sales

Time

What can we do if our product is in a declining phase? We can expand to other new markets, and so the cycle starts again.

• Fewer credit risks

• Distributors assume full responsibility for selling the items.

• Less supervision needed

• Local image for the good

• Distributor pays for storing the goods.

• Contract can specify precise selling prices and procedures.

• Agents operations are subject to direct client control.

• Agents can conduct or commission local market research on behalf of the client firm.

• Agents can arrange long-term after-sales service.

Existing New

Markets Markets

Existing New

Products products

To diversify into a

new business

To strengthen the

existing business

To bring foreign

products to local

markets

To take existing

products

to foreign market

Change aspects

Current activities

Commitment decisions

State aspects

Market knowledge

Market commitment

The UppSala Framework (Internationalisation Process)

External factors that influence international business

Technological

Political

Social

Economic

Internationalisation/

International Business

PROS CONS

• Argument over a number of issues

• Little control on price set in foreign markets

• Little risk of failure

• Little management effort involved

PROS CONS

• Difficult to verify sales figures

• Lower revenues to the licensor

• Licensee acquires know-how and may set up in competition

• Quality levels might not be maintained

• Complex contractual arrangements

• Many possible conflicts and misunderstandings

• Licensee might not fully exploit the local market

• Licensee's firm could become insolvent and cease production

• Licensee might be less competent than first expected

• No capital investment

• Can be undertaken by small firms

• Immediate access to local expertise

• Rapid entry to a market

• No tariff or transport costs

• Materials and components might be sold to the licensee

• Licensor usually receives an initial lump sum payment

• Risk of failure shared with the licensee

• Allows entry to markets otherwise closed to exports

• No export know-how required

• Licensee doesn't have to invest in research and technical development

PROS CONS

• Disagreement of foreign management teams and local managers

• Few overheads are involved.

• Returns are determined.

• Little risk of expropriation

PROS CONS

• Disagreement of foreign management teams and local managers

• Few overheads are involved.

• Returns are determined.

• Little risk of expropriation

PROS CONS

• Difficulties of monitoring and maintaining quality levels

• Difficulties of protecting any intellectual property embodied within the manufactured item

• Difficulties of preventing foreign firms setting up in competition

• Substantial technical backup

• Trained employees.

• Easy withdrawal from high risk markets

• Not having to invest large sums of money in capital equipment

• Avoidance of involvement in industrial relations with local workforces

PROS CONS

• Potential for argument and disagreement

• Difficult to integrate into an overall corporate strategy

• The importance of venture may change over time

• Problems of coordination and control

• Shared profits

• Dissolution may require protracted negotiation

• Locked into long-term investments from which it is difficult to withdraw

• Shared knowledge and resources

• Can include partners from many countries

• Substantial control over production and marketing

• Direct feedback on local conditions

• Instant access to local expertise

• Instant access to partner's distribution system

• Shared cost and risk of failure

• Avoid the need to purchase local premises and hire local employees

PROS CONS

• Incorporated as a limited company

• Taxed as if it were a separate local business

• Accounts must be independently audited

• Carries a local identity

• No need to disclose the accounts of the parent

• Shares in the company can be sold to outsiders.

• High start-up costs

• Difficulty with the local government agencies

• Parent liable for all debts

• Special tax rules apply depending on the country concerned

• No company formation or winding up procedures are needed

• Branch employees can be regarded as employees of the parent company

• Total Control

• Easy implementation of management ideas

High

Low

Competence of Local Organisations

High Low

Strategic Importance of Local Environment

IMPLEMENTOR

BLACK HOLE

CONTRIBUTOR

STRATEGIC LEADER

Multinational Company

Personal Control: Informal HQ-sub relationships overlaid with simple financial control

Multinational Mentality: Management regards overseas operations as a portfolio of independent businesses.

Decentralised Federation: Many key assets, responsibilities and decisions decentralised

International Company

Administrative Control: Formal management planning and control systems allow tighter HQ-sub linkage

International Mentality: Management regards overseas operations as appendages to a control domestic corporation

Coordinated Federation: Many assets, resources, responsibilities and decisions still decentralised but controlled from headquarters

Global Company

Operational Control: Tight central control of decisions, resources and information

Global Mentality: Management treats overseas operations as delivery pipelines to a unified global market.

Centralised Hub: Most strategic assets, resources, responsibilities and decisions centralised.

Barlett and Ghoshal, 1998 (Managing across borders)

Assembly

Manufacturing

Distribution

Administration

Wholly-owned subsidiaries

With firms in many countries

With local firms in a single country

Joint Ventures

Marketing of output is itself contracted to local firms

Contracting companies markets the goods

Contract Manufacturing

Sale exclusive and non-exclusive licences

Know-How

Assignments

Franchising

Licensing

Branch Offices

Mail Order

Travelling salespeople

Use of an export management company

Use of exports merchants and buying houses

Direct

Consortium

Indirect

Exporting

Piggyback Arrangements

Low High

Degree of risk and Extent of Investment

Bennett, 1998

CONS

*Expensive

*Loss of contact with end consumers

*No control over marketing methods

*Intermediary might not promote the product

*Final selling may be set at an inappropriate level

PROS

*No Knowledge of export procedures necessary in the employing firm

*No financial risk of foreign non-payment

*Ideal for the firs-time exporter

*No need for foreign sales organisation

*No need to visit the market

*Knowledge of the work of many client companies

*Can be used to supplement in-house skills on an ad hoc basis

*Knowledge of export techniques

* Objective viewpoints

*Extensive contacts with ancillary services

INTERMEDIARIES

CONS

*Might engage in organisational politics

*May lack broad perspectives on export marketing

*Possible lack of specialist expertise

PROS

*Staff are committed to the employing firm

*Have knowledge of all aspects of company operations

*Complete familiarity with the product

*Staff can move on to senior management positions and champion the export marketing cause

*No commissions payable to outsiders

*Ease of control

*Continuity of the personnel engaged on export projects.

IN-HOUSE DEPARTMENTS

Foreign Production Sources

- Contract Manufacturing

- Licensing

- Assembly

- JV

- Wholly-owned subsidiaries

Direct Export

- Foreign Distributors

- Agent

- Overseas subsidiaries

Trading Company

Export Management Company

Piggyback

Indirect Export

Production In-Home