Designing Organizations for International Environment
organization would like to expand its activities abroad, and a lot of them come up due to its own growth as also the changing nature of the global economy today. The motivations may arise from many reasons and not all would be the change in the organization producing the goods or services. It may also be due to the change in the costs and expectations of labor in the home country which makes it impossible for the organization to supply the goods or services at an economic cost. Another problem is with the imposition of different laws by governments which make the production of certain items difficult, if not impossible. Another factor is the availability of suitable locations and raw materials for increasing capacity. There may also be a very high competition in the local market and that may lead to the feeling within the organization that a market abroad may provide a better opportunity to sell the product or service. Sometimes this may be just a method of disposing of goods which will no longer be accepted in the home market. Thus there may be a variety of reasons for going abroad. The difficulty is however in deciding what type of an organization to start there. This may be of four main types as discussed later on. There are advantages and disadvantages of each of the four methods, and the major reason for selection of any one is the suitability to the mother organization. Earlier there were a number of restrictions that were being put up by the governments that one was going to, but it is now a world of free trade, and that has made internationalization simpler. Yet a lot of thought has to go into the form of international expansion that one is thinking about, as after all it is investment of money that one is talking about. A failure will make even the survival of the home organization difficult.
Designing Organizations for the International Environment
Motivations for Global Expansion:
There can be many reasons why a firm tries to go abroad and the most common reason for this is to gain a competitive advantage. This advantage can be due to many different reasons and the first of these is the economies of scale that the company can gain from the access that it can get to many different customers and markets. At the same time the company can get easy access to the resources of another country in terms of labor and raw materials. This may end up in helping the production of the country in any country. When the company goes to less developed countries the organization can gain in terms of extension of the life cycle of the products that the company deals in. When the products get old in one country it may be possible to still sell them in another country. (Global Strategic Management)
The organization also gets a lot of flexibility due to the shift as it can cut costs, benefit due to exchange rates and all such changes can be done over a period of time. Another set of motivation are related to the strategic position of the product, and this may be realized if the product is the first in the country. Then it will get the advantage of being the first mover in the market. It will also help the organization to subsidize the price of the product between different countries. The product can also be sent to the other countries at a transfer price and that is a lower price then when it is possibly brought in by the other producers.
The organization also reduces its own risks with the product and the major factor among these is the microeconomic risks. These take place due to the difference in business cycles differing from country to country. The organization producing the product also gains from the reduction of operational problems that take place due to labor, wars, natural calamities, etc. The other opportunity that international expansion provides to the organization is through the learning opportunities that it gives the company. This happens as the operating environs are different in different countries. The final advantage that the organization gets is from the effect it has on the customers due to the impression that is transferred from market to market. (Global Strategic Management)
The key factor about motivation of different industries is that they with different levels of intensity. This effects the investment in those industries, which also then may be related to these levels. The most important factors for seeking expansion abroad are the search for intangible assets and these arise from the salaries of highly paid human capital and the search for efficiency that can take place. This is critical for the judgment of the possibility of expansion abroad. The personnel also serve as the intellectual capital in certain cases like the information intensive industries. In these industries the costs between different countries for travel and transport is also very low and that need not be taken into account. Where the industry is not information intensive, the main factors in going abroad are the possible expansion of market and seeking a place where the product can be prepared at a lower cost. (The persistence of distance? The impact of technology on MNE motivations for foreign investment)
Evaluation of motivation for international expansion:
It is very important to understand the real reasons why the organization is choosing to go abroad. These may be the stoppages on growth of sales in the home country due to lack of further demand, the high demand for the product or service in the country that one is planning to go, the high cost of changing technology for the product and the necessity to change technology whose cost has to be spread over a large volume or the short life cycle of the product. Whatever it may be, these have to be studied and then decided before a final decision is taken to go abroad. (Going International — Benefits and Costs)
Suitability for international expansion:
It has been seen that some industries are more suited for industrialization than others. The suitability for international expansion is determined some factors and the first among these factors is the cost of the product. This cost often depends on the local availability of resources and these may be essential for the manufacture of the product. The second factor may be the cost of production in the country due to the costs of labor, power etc. The third factor is the potential for the production of the item concerned in a large scale. When the experience of the product is flat to the consumers, it is not likely to be accepted much as an international product. This difference can be seen in the case of select industries. The production cost of facsimile machines drop by about 30 to 40% when the volume produced is doubled, but the furniture industry does not have any sizeable reduction in costs when the numbers produced are increased.
This makes the globalization of the furniture industry much more difficult than facsimiles. Some industries like the aircraft industry have a high expense in R& D. And these industries are relatively easier to internationalize than industries like dry cleaning where the major expenses are in rent and labor. Those industries will not get much of a benefit by becoming an international industry. In general it can be seen that industries where the costs drop by at least 20% when the volume is doubled end up being good industries for developing abroad. The final factor in this regard is the transportation cost that the industry has to face. The costs of transportation depend on the value of the item being considered in bulk or the value in relationship to the weight being considered. The items for this may be thought to be in terms of internationalization of diamonds and ice. (Global Strategic Management)
The second reason for going international is having customers all over the globe. The needs of the customers are for uniform products and it is always better if they have the same supplier at all places. One such group is the automobile industry, and they tend to ask their suppliers to build up facilities at all places where they are assembling the automobiles. The differences to automobiles due to local tastes are only in color, minor modifications, seating capacity, etc. This is followed by the requirements of global customers and this is probably the reverse of what has just been discussed. The automobile ancillary manufacturer probably has to go to all markets where the brand travels. Another main reason for their shifting is that global manufacturers demand standard products for all their production. This is the process of traveling in the global markets and the entire marketing has to be properly coordinated. If the global brands have to give the responsibility for distribution to the local distributors then the process of globalization is likely to be affected.
The last similar reason to for global expansion is the transferability of advertising. When the advertising is carried out in a global manner, the brand names are known in all areas where the advertising reaches, and the advertising does not require many changes for acceptance by customers in adjoining markets. World brands are generally developed from non-dictionary words so that the brand can end up benefiting from a global campaign. Yet the word which means nothing in one language can have nuances in other languages and thus cause difficulties for the brand. The third reason for a brand going international is the existence of a large number of competitors. Most well-known brands have existing competitors internationally, and this compels them to move to every market where their competitors have moved. (Global Strategic Management)
The main reason for such movement is the protection of market share in that market. Regarding the competitors from the local market, it is expected that will always have a cost advantage. When any product starts improving their own local positions through the giving of subsidies to other products of the organization and having a subsidy for the brand in turn, it is time to understand that the brand has come to a level where it should become an international brand. The forth point is that government policies often determine the time when a brand should move to other countries. The relevant policies of the government that affect brands are the trade policies, required technical standards and existing regulations. These have to be the same in both countries for the brand to move to the new country, as otherwise it will find it difficult to continue in the new market.
Stages of International Development:
All organizations move towards the process of developing its brands through the process of international development. They are always on the look out for opportunities that will permit them to move to other markets as that will increase their sales and resultant profits. These increases are also the objectives of any organization. For the development of international markets, the company has to first decide on its goals and objectives. This will permit them to take the full benefits of the opportunities for global expansion. These vary from company to company and depend a lot on its position in the market as also the position of its products. It is difficult to discuss this in general and let us take up the case of W.W. Grainger which is based in Lake Forest, Illinois and are involved in the operating repair and maintenance products.
Like many other organizations, this also had two final objectives — the first was to become the leading supplier of industrial products in the limited area of North America and the second was to deliver a high return on capital. The first objective was for the company under consideration whereas the second is a general objective for most business organizations. The first objective meant that the company had to extend its operations into Mexico and Canada. This is the part of international expansion that it had to do, as the company objectives limited any further expansion. In both those markets, it sells its products and also buys its requirements from suppliers in those countries. (Global Expansion is a Matter of Construction: To take a Company Global, Build a Bridge that Connects the Company to the Right Global Opportunities)
For getting its job done the company has had to establish excellent distribution networks in those countries and today the company is in a position to supply its customers in those countries with a wide range of local and imported industrial products. The targets in the countries and methods of operation in the countries are suited to each country. In Mexico City, it has set up a company called Grainger SA de CV and aims at both the industrial and commercial markets. This was not built up in one shot, but developed slowly and in steps depending on the successes and failures that it had in that market. The company has distribution facilities in fie cities of Mexico and those cities include Mexico City and Monterrey. The cities again are not selected not only on the basis of geographic distances, but also on the nature of the market in the country. This is again country specific. The total market for industrial markets in Mexico has been estimated by the company as being worth ten billion dollars, and this again has to be estimated by the company as all details may not be available regarding these matters in all countries.
In the operation in Canada, the company has set up 5 distribution centers and 176 branches. That market has been estimated to be worth twelve billion dollars. The expansions of Grainger have clearly been led by the corporate objectives and the strategies from the present position of the company. Setting up the operations in Mexico and Canada is a part of the global expansion strategies of the company, while the sourcing of materials from those countries also permits it to increase the market share that it has achieved and improve its overall gross margin. These are directly related to the company’s objectives. Through the capacity to reach new customers in two countries which are worth many billion dollars, the company has succeeded in increasing its reach of the total market in North America. The purchase of local material the company is able to reduce labor costs, and able to reduce the distances that the goods have to be carried before being delivered to customers. It also helps the customers to get products which are totally suited to that country. (Global Expansion is a Matter of Construction: To take a Company Global, Build a Bridge that Connects the Company to the Right Global Opportunities)
Global Expansion through International Strategic Alliances:
When a company decides to enter a new market it has to decide on getting into the market. In general, there are four strategies for entry and these are exporting, licensing which includes franchising, formation of joint ventures, and direct investment in those countries. Which one of these methods will be used in any country depends on the situation in the country and the laws within that country. The local business may also permit certain forms of entry and put up road blocks when other methods of entry are tried. The different methods require different levels of knowledge about the situation in the market as also different levels of investment. The method of entry that is selected will influence the success or failure of the organization in that market. There are no hard and fast rules that can be stated for this purpose, but one can only experiment and then decide on the correct strategy. (Finding the smoothest path to global opportunities)
Of course most organizations would prefer to start with a comparatively low level of investment as this leads to low risks, and this means exports. When one gets a better idea of the market, then one can get into the other levels which require greater involvement. In this context let us take the case of companies in South Africa which when they want to invest abroad are now changing their direction from the earlier direction of Western Europe and North America to Eastern Europe, South America, Asia Pacific and Africa. The size of investments made every year was in the order of Rand 35 million out of which Rand 28 million was collected from the companies where investment abroad had been made earlier. Most of the companies that invest abroad in South Africa have stated they are likely to increase their off-shore investing in the next three years, and the preferred location was Africa.
The aim of all these companies was to establish a sales presence in the areas where they expanded. The planned investment was also likely to increase to about R. 70 million with R35 million coming from their earlier investments abroad. Most of the investment was likely to be made through wholly owned subsidiaries, and then through acquisitions and joint ventures. The attitudes are changing and for future investments, the major investments are likely to be made through joint ventures and not through direct subsidiaries or acquisitions. They prefer joint ventures as they help the South African companies gain from the experience and knowledge of the local partner. This is due to the fact that there are differences in between every country in Africa, and this is probably the only way to get in. (Finding the smoothest path to global opportunities) Thus there are different ways to enter a market and a lot has to be decided by the nature of the country that one is considering, and a joint venture is sometimes the appropriate way to enter some markets.
Analysis of the reasons for going international
Whenever a company is thinking of going international, the first thing is to really determine its own reasons for going international, and this requires finding the answer to some questions. The first aspect is finding details of the market that one is planning to get into. The second question is of studying in detail the different methods of entering that market and evaluating them. All entrees in foreign markets are not necessarily successful and the third point is the study of fallback methods to be taken if the entry is in trouble. The next step is the study of the budgets and timescales that have been worked out, and whether they are realistic. The next point is the determination whether the entire management team is supporting the entry into that market; otherwise there will be a group which will always be trying to find out the faults. When entering any foreign market the impact of culture has to be understood and given full consideration as the people in the country abroad may not appreciate the requirement of your product, brand name or any other item connected with it. When any organization expands into a foreign country, one of the most important responsibilities is to properly train the newly recruited staff. And ultimately it requires a lot of time to be successful in a new country. (Planning International Expansion? 10 Success Tips for Getting It Right First Time)
“Global Strategic Management” Retrieved from http://www.quickmba.com/strategy/global / Accessed on 20 May, 2005.
‘Going International — Benefits and Costs” Retrieved from http://www.internationalgrowth.org/pdfs/skills/Benefits%20and%20Costs%20of%20Going%20International.pdf Accessed on 20 May, 2005
Nachum, L; Zaheer, Srilata. “The persistence of distance? The impact of technology on MNE motivations for foreign investment” Retrieved from http://center.uvt.nl/gs/s.zaheer2.doc
Accessed on 20 May, 2005
Olsansky, Alexander. “Global Expansion is a Matter of Construction: To take a Company Global, Build a Bridge that Connects the Company to the Right Global Opportunities” Retrieved from http://www.dcba.org/brief/sepissue/2003/art4903.htm Accessed on 20 May, 2005
“Planning International Expansion? 10 Success Tips for Getting It Right First Time” (28 February, 2002) Retrieved from http://www.renarc.com/home/downloads/10%20Tips%20for%20Successful%20International%20Expansion.pdf Accessed on 20 May, 2005
Ryan, Claran. “Finding the smoothest path to global opportunities” Retrieved from http://www.btimes.co.za/97/1116/news/news5.htm Accessed on 20 May, 2005
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