The issues of internationalization, the reasons why companies decide to enlarge their operations to the global scale, and the benefits that they obtain are described in this paper in the form of question-answer format. The importance and advantages of strategic aslliances in the global marketplace and the necessity of cross-cultural management are critically analyzed.
Analyze the main reasons why companies decide to internationalize their activities.
In the modern fast-moving world, where all processes and relationships become more and more sophisticated and interdependent, companies are forced to expand their activities internationally. They search for new opportunities of growth and decrease the risks inherent to the situation of being isolated. It should be pointed that internationalization is perceived by the domestic company as the opportunity to conduct new markets evaluation, take the decision of entering these new markets and implement their growth strategies. The company could choose either to penetrate new markets by establishing its own subsidiary, or unite sources, skills, technologies and potential access to the market benefits in the form of strategic alliances establishment.
Companies deciding to go international have also the possibility to export products, establish a joint venture with the sales partner or choose contractual agreements mode in terms of particular distribution. Another opportunity to begin the international business is to establish overseas subsidiary, sell licenses to foreign companies and receive royalty payments, co-marketing agreements or cooperation in research and development field.
It is noteworthy that companies decide to internationalize their activities with the aim to diversify its business involvement, to decrease uncertainty at the domestic market, and to increase customer base and sales volumes. Desire to avoid negative tendency in sales volumes due to the seasonality of business in local markets, and desire to offset costs for business in the home country combined with the increased duties or worsening of the economic or political circumstances are other stimuli.
Moreover, companies are searching for the new markets, especially emerging ones with the low supply and the high level of demand, thus having a great potential for their products. They establish strategic alliances with the local partners, particularly in countries where there are governmental limitations on the foreign trade activities. Such step allows these companies increasing their market share more rapidly and boosting the sales accordingly. The other positive aspect of the internationalization of the company’s activities is the improvement in the image of the company to the level of highly credible business entity, transnational holding or company operating globally.
Advantages of the internationalization for the companies imply spreading various risks in business, conducting in particular political, economic, environmental, social and technological factors. Another advantage is increasing customers’ base and awareness of the company’s brand. Furthermore, international presence allows the companies to exploit existing competitive advantages and search for the new challenges that will benefit and make substantial progress to the current operations, while increasing revenues and investments inflows and having access to the cutting-edge technologies and new information.
The strategies of international expansion are divided into four categories: international, multinational, transactional and global strategies. The growth strategies in the international scale could be carried out as market development strategies (importing/exporting operations or foreign direct investment) and market penetration strategies.
The reasons why companies decide to conduct business internationally include the following economic benefits that outweigh all possible risks of foreign trade. Companies going international enjoy the benefits of the economies of scale. In particular, the possibility of faster growth, opportunity of being ahead of the competition due to the access to the new markets with greater potential than oversaturated domestic market, or enhancing the possibility of using less expensive resources or more advanced technologies. Besides, increased internationalization is explained by trade restrictions reducing at the global market, dispersed value chains, shift to the tri-polar economy, growing bilateral treaties and regional trading arrangements. Companies could obtain higher profits and margins and improve their business knowledge and products ideas. Moreover, companies that decided to operate internationally become more flexible in sourcing.
Regarding the Chabros International Group case, it is necessary to point that Chami, Chabros’s owner, faced the drastic drop in sales in 2009. Taking into account previous huge investments in the Serbia’s sawmill, the company experienced imbalance in the growing supply and dropping demand at the markets where the company operates. Consequently, Chami had to decide whether to reduce production load of sawmill or chose international growth strategy and enter new markets, thus boosting the sales. It is considered that Chabros International Group should not close its operations only within the existing markets, but try to expand its activities and find new markets for its increased production distribution. The company’s leader should conduct deep evaluation of market circumstances (possible country’s commercial, currency, and cross-cultural risks) and determine whether the financial benefits will prevail over inherent risks in the new country of choice.
The key point to note is that companies decide to internationalize their activities with the aim to have better access to the resources and capital market. Other reasons are to react promptly to the growing competition, to have access to the up-to-date technologies and to expand their presence and thus increase the sales.
Explain the importance of strategic alliances in international business and the reasons why companies choose this growth strategy.
Strategic alliances obtain more importance in the internationalized world and enlargement of businesses. Strategic alliances as the equity or non-equity form of business entities cooperation benefit its partners in the possibility to enter a new market more efficiently. As a result, they adapt better to the new business environment, especially with the specific customs, and enjoy the economies of scale.
It is noteworthy that companies choose to follow the way of international strategic alliances as the growth strategy, because it helps them to reduce costs by rationalizing the production, or share costs in research and development field. Strategic alliances provide access to the capital and are essential for the company’s equipment and production facilities. In addition, they give the opportunity to share costs for marketing, enable promotion at the target markets, and increase bargaining power. It is essential, therefore, that strategic alliances allow the partners to lower capital investments and obtain improved operation performance indicators due to the scope or scale of economies. Furthermore, they could disperse fixed costs and risks associated with business operations and lower the costs of one unit production through the pooling resources and skills in the production process.
It is important to recognize that strategic alliances allow the company overcoming trade barriers implemented by the government and neutralizing competitors’ strategy in the efforts of monopoly over the market gaining, due to the vast networks and political and business contacts. Business partners are able to combine complementary assets, enjoy reciprocal benefits due to the costs for the research and development spreading, and cooperate during the new technology market entering.
It is also worth noting that the advantages of the strategic alliances in international business include obtaining instant access to the market. It means possibility to enter new markets and establish profitable operational activities at a higher speed than it would be possible in case of the self-promotion and development at the market. Moreover, companies that have some local presence at the new high-potential markets could strengthen their market position by entering into the strategic alliance and thus increasing the volume of products or services sales. Another important issue to be mentioned is the new level of access to the up-to-date technologies and skills.
Hill and Jones (2009) specify that strategic alliances in the global scale imply the possibility for the company that decides to enter new markets to gain important political contacts base. Furthermore, strategic alliance with the local partner opens the cultural peculiarities of a new market and allows more successful adaption to the local customs and preferences. Companies that are partners in the strategic alliances could share fixed resources and costs and multiply distribution channels for their products. It is often argued that such a strategy improves also the image of the company in the global marketplace.
Citibank is a great example of the banking giant that chose the strategy of adaptation and arbitrage deciding to enlarge the scale of its operations on Chinese market through the strategic alliances. Taking into consideration the changed business environment in China, and steps made by China to open banking sector for foreign businesses in particular, Citibank’s top management decided to act in the direction of strategic alliances creation. This strategy will allow the bank to be represented in the country as the local bank. This means that instead of developing its network of own subsidiaries, in 2008 Citibank signed an agreement with the China Unionpay, a national bankcard association. Such a step was the conscious choice of the emerging market entering from a position of the “insider” with a crucial advantage of the possibility to provide the access of the China Unionpay large network to the clients of Citibank.
Citibank was the first international bank that began its active entering of high-potential foreign market through a strategy of strategic alliances. Local incorporation was the green light for the rapid expansion of Citibank’s operations. Incentives given by the Chinese government in the form of allowance of the product range improvement and increase of the bank’s presence provided closer engagement with the local customers in China.
It is important to note that China’s membership in WTO since 2001 reduced the restriction on various banking operations that were the core competitive advantages for the Citibank globally. These distinctive operations in China included local currency loans to the Chinese companies, operations at the equity and debt markets with the aim to raise funds for the local companies, home mortgages and retail credit cards.
However, one important aspect should be pointed. Despite the promising prospects, Citibank’s top management understood that China was still the defender of the local banks and moved slowly towards the simplification and opening of the banking sector. Consequently, the speed of the Chinese expansion would be also slow and requires patience and a chain of strategic alliances. The examples of such alliances that increase the local presence of Citibank were the five per cent of SPDB shares acquisition, cooperation with the Sino-U.S. MetLife Insurance Company in proposing new insurance product, and further development in the card operations segment.
It is significant that the status of “insider” opened big opportunities for the Citibank in China; therefore the path of new strategic alliances creation was justified and far-sighted.
Evaluate the relevance of cross-cultural theories in explaining how to manage companies in different countries. Provide real examples to support your arguments.
It is first necessary to point that globalization defines the fact that cross-cultural management is an integral part of the companies’ management in the international scale. Global leadership skills require understanding and practical implementation of the possible cultural differences at the different markets, where the company operates. It is clear that such skills are applied with the aim to increase organizational effectiveness in a complex and changing business environment. It is a challenging task for the top management of the company to evaluate national culture critically and the way local people conduct business, as well as their values and preferences. Ability to assess and take into account cultural differences of various countries determines whether the company will be successful in managing and creating effective organizational structure, or will it fail under conditions of new business circumstances.
Analyzing Silvio Napoli at Schindler India case, it is undeniable that Napoli irresponsibly treated the cultural differences between conservative Europe, his own Italian temperament and mentality, and cultural features of business conducting. Applying the cross-cultural management theory developed by Geert Hofstede, he could result in more effective employees’ management. The understanding of Hofstede’s principles and their involvement into Napoli’s strategy of market penetration could improve the future development. The key point to note is that Napoli’s team included experienced employees from the customers’ oriented environment and from local elevator industry, where it was a practice of customization. The biggest difficulty and peculiarity that Napoli had to communicate clearly to his leadership team was the fact that standardization was the global strategy chosen by Schindler’s headquarters. The failure of the targeted plan of sales fulfillment was explained partially through the import fares increase. However, the example of acceptance of the order with customization requirements is the evidence that Napoli communicated corporate strategy and development direction ineffectively and not clearly.
It should be emphasized that Hofstede (2001) proposed to evaluate national culture of a foreign country in such dimensions as power distance, ratio of individualism-collectivism, masculinity-femininity, short-term or long-term orientation and avoidance of uncertainty. Applying the countries’ characteristics developed by Hofstede, it is necessary to describe the differences in India and Italy as the Napoli’s native country that he had to take into account.
According to the Hofstede’s center (2013) maximal score that could be obtained by the country in each of the established dimensions is 100. India demonstrates high score of 77 in the first dimension – power distance. This means that top-down hierarchy is crucial for the society and Indian organizations. It is noteworthy and had to be put at the first place by Napoli that “employees expect to be directed clearly as to their functions and what is expected of them”. Communication is top-down and has directive style.
The score of 48 is an average result got by India in the dimension of individualism-collectivism. “There is a high preference for belonging to a larger social framework in which individuals are expected to act in accordance to the greater good of one’s defined in-group(s)”. Employee-employer relationship is based on the mutual expectations of loyalty from the employee and almost familial support from the employer.
India with 56 points in masculinity-femininity dimension is considered to be more masculine society than feminine. Visible symbols of success at the workplace are essential for the Indian employees, although material gains and competition among co-workers are not so strongly expressed as in more masculine countries.
It is worth pointing out that “in India there is acceptance of imperfection; nothing has to be perfect nor has to go exactly as planned”. Therefore, avoidance of uncertainty got only 40 points. As for the short-term or long-term orientation, Indian score is high and accounts for 61 points. This means that India has a pragmatic culture, and Indian employees react easily to the changing “game plan” that reveals the changing business circumstances.
Taking into account above mentioned cultural dimensions of India, it is crucial for Napoli who represents Europe, Italy in particular, to compare obtained results with Italian dimensions. It should be underlined that these two countries differ greatly on the cultural level, except masculine-feminine score, where Italy dominates with 70 points. Thus, success and competition play more important role in this country for the leaders.
Regarding the power distance in Italy, it should be stated that status symbol of power is crucial for Italians. Inequalities are acceptable among top management and employees, as well as hierarchy. Individualism is much more relevant to the Italian society and “for Italians having their own personal ideas and objectives in life is very motivating and the route to happiness is through personal fulfillment”. Therefore, it is evident that Napoli experiences huge concern about his failure at the first period of operations in India, but he should have tried to focus on his strengths including experience and desire for constant improvement. Moreover, uncertainty avoidance possesses a great place in the Italian society. The high score of 75 is clear evidence. It is very stressful for Italians to face low uncertainty avoidance approach to business conducting. High masculine score and high avoidance of uncertainty explain emotionality and sharp reactions of Italians. He has to understand that his task-oriented leadership style is not appropriate in the current circumstances and he should address existing cultural, business and personal challenges more efficiently.
Moreover, with the aim to strengthen intercultural analysis and apply cross-cultural management skills, it was needed for Napoli to apply Trompenaars’ (1993) theory. He stated that seven dimensions had to be considered when managing a cross-cultural team. They are collectivism-individualism, diffuse-specific, linear-circular, universalism-particularism, neutral-emotional, ascription-achievement, and internal-external control. These dimensions are essential for cultural diversities managing.
The evidence of ignorance of local cultural features is an example of how inability to adapt cross-cultural theories into the business practice could be experienced.PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET AN AMAZING DISCOUNT!
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