Category: Case Study

In the World We Live Today, Firms Must Globalize or Die

Opponents of globalization mostly base their arguments on the theory of protectionism. They believe that globalization of the business might decrease domestic production levels due to increasing overseas competition. However, one should recognize the basic rule of economy, which states that resources are scarce and should be used in the most effective way to ensure success. Consequently, companies that internationalize their operations either get access to the lower resource prices or obtain the best usage of available supply. Moreover, today markets in most countries are rather open, and competition is heavily supported by legislation. Also, transportation costs declined considerably and there is plenty of information available for potential customers via the Internet. The aforementioned factors critically impacted the ways companies conduct business. Fight for the customers’ demand now requires involving international operations such as importing raw materials or workforce, exporting finished products into unsaturated markets, building a representative office or a full process subsidiary abroad. Moreover, completing different production stages in several countries with best resources might be a strategy.

Going international is one of the toughest decisions faced by organizations large enough to accomplish the expansion. The strategy might be driven by saturation of the local market, serious competition, tightening of legislation rules, seeking for higher profits and other factors. Respectively, reasons to become an international company might include strategic objectives to broaden the existing market, search for new technologies or suppliers, and enhance production efficiency due to larger scale of operations in low-cost locations. Also, avoiding political, legal or competitors’ hurdles, and other advantages motivate businesses to globalize (Ehrhardt & Brigham, 2011). Contemporary firms globalize their operations to survive, as otherwise they will be acquired by stronger competitors in the industry.

Potential Dangers to Firms of Globalization

One of the most successful globalization strategies was introduced by Wal-Mart Stores, Inc. starting from 1991 and continuing now. Since its foundation in 1962, Walmart has experienced enormous growth as a network of discount stores. The corporation is traded on the New York Stock Exchange (NYSE), employs 2.2 million workers, has about 11,000 stores in 27 countries worldwide, and the presence in all 50 states of the USA (YahooFinance.com, 2015). Over the past two decades the group is rapidly expanding in North and South America, Asia, Africa and Europe. Nearly 30 % of the corporation’s turnover is coming from international markets, which shows the importance of its past decision to expand internationally. However, the company completely failed its expansion in European markets and has now stores only in the United Kingdom.

The corporation had negative experience in Germany and had to leave the market recently. In Germany, Wal-Mart received several important lessons for future globalization processes. The corporation tried to apply the strategy of acquiring weak retail chains and further remodeling them in compliance with own outlook. However, stores acquired in Germany were modernized very slowly, had rather unpopular locations and did not obtain common way of appearance, which distorted recognition of the Wal-Mart brand in the country. Besides, the group failed to comply with certain important local legislative requirements that also damaged its reputation among potential customers (Knorr & Arndt, 2003). Thus, in spite of long-term experience in the process of expanding internationally in various countries, the corporation made critical mistakes in European markets that did not allow it to become a recognized player there. The reason of the failure is that European markets are the least attractive for international expansion of a large US-based merchandise network today due to current significant saturation and high level of competition faced by any entrant (Minke, 2012). Consequently, the competitive advantage either in the lower prices due to scale of supplying purchases or in the company’s format is a requirement. However, other European stores are very similar to those introduced by Wal-Mart. Thus, without any constructed relationships with the local customers, the corporation would have challenges entering Europe prior to international recognition in other parts of the world.

Another famous example of a large corporation that failed in its globalization plans is Starbucks. Although the company is widely recognized as the best coffee shop in the USA and operates successful in some European countries, it lost the markets in Israel and Australia for two different reasons. In Israel, the company did not put necessary effort in studying local culture and preferences. Thus, the customers simply did not like how Starbucks coffee tasted and the six shops had to be closed. In Australia, the company did not consider proper service and atmosphere expected by local customers at coffee stores. Contrary to Starbucks’ philosophy of fast servicing customers and total standardization of offered products, Australians are used to hospitality, home atmosphere and originality of every drink in the local shops (Patterson, Scott & Uncles, 2009). Expectedly, Starbucks did not succeed in Australian market. The main reason for failure was lack of familiarity with local culture.

Mattel had done a mistake when entering Chinese market. The company is a famous producer of Barbie and a range of other toys. It has enormous success in the Western markets and operates in huge volumes. Being encouraged by large potential market in China, Mattel chose very aggressive strategy of entering the country. In 2009, the company opened its first Barbie building in Shanghai that occupied an area of 36,000 square foot and included Barbie-devoted spa salons, display cases, cocktail bars, playgrounds and other attractions (Mattel.com, n.d.). However, local customers were not that familiar with the Barbie world. Thus, in spite of enormous investments in the project, Mattel realized huge losses and left Chinese market in two years.

Revealed unethical behaviors can also seriously challenge globalization plans of any company. For instance, Nestle faces boycott today in a range of countries after its African scandalous expansion project. In 1970-s, the company tried to enter the market with advertising “pure and clean water” in places, where people experienced lack of any kind of water for drinking and had related health problems. Also, the company was accused of breaking the International Code and advertising substitute for the breast milk that could have fatal result for babies (INFACT Canada, n. d.). Therefore, unethical internationalization project was not only a total failure for the company, but also caused dramatic decrease in sales in its established foreign and domestic markets.

Recommendations to a Firm going International for the First Time

If a company decides to expand abroad, it has to make several choices, such as selection of proper time to internationalize, first and future expansion markets, appropriate entry mode, further development plan, and extend of the operations’ globalization. Proper identification of time to internationalize is the first step in making the critical change in a company’s business activities (Ehrhardt & Brigham, 2011). Related driving factors generally help in defining the most appropriate moment. The management should consider both internal and external business matters. First of all, a company that expands internationally should have significant capacity to cover new markets and adequate financial strength to finance the chosen entry mode. Besides, the common rule is that current and potential benefits should overweigh costs of becoming a global player. Consequently, a company starts internationalizing only when it expects that profits from the new markets will be potentially higher than the amount of initial and future investments required for an entry combined with opportunity cost of remaining a purely domestic organization. The risk analysis should include time effect, risk premium and avoided expenses from being purely domestic such as declining revenues, market capitalization, or costs of fighting with competitors. Finally, external environment should both allow and require internationalization through new legislation, economic development, market saturation, enhanced competition, etc.

Upon realizing the necessity to expand internationally and defining the proper time for it, a company faces the need to choose the market for its entry. The choice plays a critical role in the entity’s success as a potential global player because first entry generally requires the most significant allocation of time, efforts and financial resources. Besides, in the modern interconnected world, it is not always necessary to enter the neighbor markets. Today, geographically distant countries might represent better opportunities for the first entry provided lower barriers and higher potential returns. Thus, each company should thoroughly analyze all alternatives before choosing a certain market for the internationalization of its operations.

Another critical factor in succeeding globalization projects is the proper choice of an entry mode. Companies might enter international markets in several ways. The less costly and fast option is exporting goods or services produced domestically. More complicated option is franchising or other forms of licensed cooperation. The most complex, risky and costly ways involve foreign direct investment in the form of a joint venture, acquisition or building a new owned facility.

Conclusion

In general, it is possible to highlight several main factors of successful internationalization for other companies. First of all, it is valuable to consider cooperation with local suppliers and existing competitors in the same industry. Having established joint ventures or acquired existing retailors and suppliers, an entity automatically gets access to the local network of business partners and obtains better understanding of foreign business practices. Also, management should put considerable time and effort in studying local culture and customer preferences. International expansion should always start with small steps, especially in a new unknown market with cultural differences. Thus, it is important to analyze specifics of foreign countries and adapt merchandizing mix and customer service practices to the expectations of customers in a certain location. Besides, a firm should consider local competition and perceive it as an existing threat. An entrant has to do careful research of local real-estate market and popular places among potential customers. The failure to popular locale was the primary mistake of Wal-Mart in Germany, although the corporation had experience of real-estate market researching in its domestic country while entering new states and locations. In order to win competition, a corporation should declare strong reason for being in a certain location abroad. Such statement should differentiate the entrant from other local competitors and global market players. Besides, reasons for choosing a certain market will shape the entrant’s behavior in the new location and its relationships with resident customers, suppliers, and regulatory authorities. Finally, it is necessary to analyze local regulatory requirements, business practices, infrastructure and logistics before a projected entry. The extensive assessment of foreign market will facilitate the process of internationalization and might significantly reduce future costs related to taxes, fines or improper location of an established business unit.

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