Global Business Strategies - Case Study Example

Global Business Strategies Student Name Instructor Name Course Code and Name University Date of Submission Global Business Strategies Introduction China has become one of the fastest growing economies to date and this has meant that there is a need for companies operating in China to expand into new markets. Therefore, the intention for Chinese car maker Geely to purchase a European automaker, Volvo is more of a strategic decision than just business expansion. One benefit that is associated with such an acquisition is that Geely will gain the market share that was previously held by Volvo (Dunne 2002, p. 5). It is a sure way of gaining competitive advantage in a highly competitive global car market as it places the Chinese automaker on the global market compared to when it was only known in China. Therefore, this paper will analyze the global business strategies that could be available for Geely as it seeks to grow its business. Market Entry Strategies FDI Vs Exporting There are numerous ways Geely is able to penetrate the foreign market for its brands, as well as the Volvo brand. It is important to note that Volvo is one of the most respected European automaker thanks to its European technology that would be transferred to its owners, Geely on acquisition. In addition, foreign market entry strategies depend on the risk involved with the transaction. From the case study, Geely’s acquisition of Volvo can be described as a foreign direct investment (FDI) where they would have ownership of Volvo’s production units in Europe as well as its existing market (Neery 2008, p. 64). The fact that Geely invests in the Swedish automaker makes it an FDI where it gets 100% ownership of Volvo. This means that Geely would have the technology used in the production of Volvo which may be essential as it may enable them to also implement such a technology in the production of their vehicles. Aside from that, Geely is also able to enjoy the economies of scale that were previously enjoyed by Volvo, which has a long history and reputation in the global auto market. In particular, it was the vision for Geely to secure access to Volvo’s modern automotive technology. Geely may also use the acquired marketing units of Volvo to market their existing product line a case which also provides a large market for Volvo in the Chinese market. Since Geely has full ownership of Volvo, it will be able to have a tight control over its operations and its technological competencies. However, direct investment through a wholly owned subsidiary method of foreign market entry may be too costly as it was the case with Geely. In particular, Geely spent about $1.8 billion for full ownership of Volvo which was rather expensive considering the level of risk associated with such a venture, especially with declining auto sales (Dunne 2002, p. 6). In addition, Geely will be needed show more commitment to such a venture as they take up all the operations of Volvo. Finally, there may be a backlash from the nationals and government in the home country of Volvo majorly due to the low quality associated with Chinese products. European vehicles are known for their quality, and this may be difficult to maintain with a Chinese owner as it is considered a European tradition. FDI is of two forms, namely FDI through horizontal integration, and through vertical integration. Horizontal FDI is where a firm duplicates the same activities in multiple countries compared to vertical FDI where the firm locate different stages of production in different countries (Neery 2008, p. 64). However, in the case of Geely, they applied a horizontal FDI where they retained Volvo’s production locations in Europe. The reason why horizontal FDI is preferred compared to vertical FDI is that it is beneficial to gain market access compared to reducing production costs. Another market entry strategy is through exporting, where considering the size of Geely in comparison to Volvo may be a favourable approach. Exporting refers to the mercantile activity of shipping and selling goods in a foreign country (Terpstra & Sarathy 2007, p. 3). This is one of the common foreign market entry strategies and takes the form of either direct or indirect exporting. Direct exporting is where a company like Geely takes part in the marketing of its brand in the foreign markets by taking part in the direct selling (Terpstra & Sarathy 2007, p. 4). On the other hand, indirect exporting relates to a situation where Geely only manufacturers and sells the vehicles to Volvo for the company to export to foreign markets (Terpstra & Sarathy 2007, p. 6). Since Geely has full ownership of Volvo, it would be easier for them to implement direct exporting as it will acquire market information from the long history of international marketing for Volvo. In addition, it would benefit from the global distribution channel which would enable them to reach the markets that it previously did not reach. Direct exporting is comparable to FDI only that the former makes Geely directly participate in the sales of their products in the markets that Volvo sold. In addition, both as similar in that they entail Geely committing their corporate resources and incurring a level of risk to ensure that both strategies are viable and successful. Indirect exporting may be applied with Geely where Volvo’s stores in China are used as buying office, which in turn sells the vehicles in other markets, making Volvo acts as the distributing company for Geely (Terpstra & Sarathy 2007, p. 6). Another option may be through the use of Volvo’s market coverage which makes it attractive to distributors (Terpstra & Sarathy 2007, p. 6). This would mean that Geely will distribute their vehicles through these trading companies, but the problem with this form of indirect exporting is that they also carry competing products. However, the Volvo brand would make them a priority for the trading companies, thus an easier way of foreign market entry. Indirect exporting is the cheapest foreign market entry strategy as it requires a very limited capital outlay and entails minimal risks. Aside from this, Geely’s intention to buy Volvo was to concentrate production in China where the cost of production was low compared to Europe, which made their vehicles very expensive. The dilemma with concentrating production in China would affect the luxury tag associated with the Volvo brand something that may explain the failure of Geely to make the acquisition a success to date. Although Geely had the intentions of transferring production and assembly of Volvo to China due to its favourable factors of production, they decided to retain the operation in Europe. This decision was mostly meant to preserve Volvo’s brand integrity which was only achieved by retaining European Plants and management team through FDIs, but has turned to hurt Geely as it had to bear the high costs of production. However, Geely has been able to deploy Volvo’s technical innovations in its product line a factor that has made the company ranked highly for having best designs and reliability. Greenfield Vs Acquisition Investments Both acquisition and Greenfield investments are foreign market entry methods that Geely could have considered before they came to the decision of the acquisition of Volvo. Greenfield investment refers to the investment in a new subsidiary, in a new market, while acquisition relates to the purchase of an existing business as the case with Volvo (Harzing 2002, p. 211). The major distinction between these two methods majorly stems from the level of control that is established under each method. In particular, the management at the headquarters would like to have a level of control over the operations at Volvo (Harzing 2002, p. 211). Given that Geely’s adopted a multi-domestic strategy, the management at Volvo was retained as it was and employed the locals, as opposed to expatriates. The case would be different for a Greenfield investment as Geely would be required to send managers from the headquarters in China to its new operations in Europe if they were to establish a new location in Sweden. For that reason, this means that there is a relatively high level of expatriate presence with Greenfield investment compared to acquisitions, meaning that the relationship between the head office and the subsidiary is strong with Greenfield investments compared to an acquisition (Harzing 2002, p. 211). The intention for Geely to pursue an acquisition strategy was to exploit the specific advantages drawn through the acquisition of Volvo. This is confirmed by the decision by Geely to retain an all European management at Volvo, meaning their decisions in China did not necessarily have to be applied at Volvo. The benefit of an acquisition is majorly drawn from the market that an existing business as well as the reputation that it has been able to maintain over the period of its existence. A Greenfield strategy would be beneficial for a business that seeks to spread its specific advantages to through global expansion. The Chinese automaker was rarely heard of prior to the acquisition thus a Greenfield foreign entry strategy would be detrimental to the company as it has virtually nothing to bring to the new market. It is only through acquisition that Geely would gain western technology that would enable them to compete effectively in the global auto industry. Volvo provides that opportunity of an established international business and superior vehicle designs and modern automotive technology. Sources of Competitive Advantage for Geely The acquisition of Volvo alone does not guarantee Geely competitive advantage over its competitors. In particular, Geely needs to pursue other strategies that would grow their competitiveness in order to gain market share in a highly competitive industry. The market position of a company explains how competitive it is thus the acquisition of Volvo would guarantee the market share previously held by Volvo for Geely (Pan & Tse 2000, p. 535). Volvo is considered a small producer with a global market share of 1-2 percent compared to Geely whose presence was only in China. Therefore, the combination of both companies’ means that they cover a larger market; thus, increasing their market share, which in the long term guarantees their competitive advantage. In addition, the fact that Volvo is a renowned automaker means that there is likely to be internal rivalry between the Volvo line of products and Geely line of vehicles. It is this level of rivalry generated through the acquisition that is likely to provide Geely with a competitive advantage in the Chinese market as well as in the global market. The Chinese market is still unexploited in terms of luxury cars for the growing middle class population. The acquisition of Volvo provides them an opportunity of attracting this market that is growing which would surely increase their market share. As mentioned earlier, the experience curve is very essential for gaining competitive advantage. For Geely, the experience curve comes in the form of the long period of operations at Volvo. Volvo is more experienced in producing luxury vehicles and has been known to embrace the latest technology in production, which in turn lowers the cost of production (The Economist 2009, p. 15). Therefore, with the combination of the production of both Volvo and Geely the cost of production is likely to decrease further, thus provide competitive prices for their vehicles in the market thus gaining competitive advantage. Conclusion From the discussion, it is evident how the decision to settle on the purchase of Volvo was based on the various types of global market entry strategies. China continues to enjoy a growing economy, making it the leading economy in terms of GDP growth. This has various advantages both to local companies as well as multinational corporations that want to gain a slice of this lucrative market. For Geely, was beneficial for them to acquire full ownership at Volvo because of its experience in the auto industry. For, Geely it would project their company into the global market competing with big auto giants like GM and Toyota. Furthermore, ensured Geely gained competitive advantage due to the experience curve as they acquire the production technology of Volvo. However, being a FDI through horizontal integration, it means that Geely will have to duplicate roles in retaining production, in Sweden and China. This would increase the production cost that they were intending to reduce. However, for now the decision to retain production in Europe may more to penetrate the market that reduces the cost but in the long term depending on the volumes of Volvo that are sold in the market production may shift to China. In conclusion, the decision to acquire Volvo surely gave Geely a competitive advantage over the other global automakers. The competitive advantage is attained due to the experience and global brand that Volvo has grown for the long time it has been in existence. List of References Dunne, M 2012, “Stuck in the Zoo: The Geely-Volvo Deal, Three Years Later,” The Wall Street Journal, Dec. 03, 2012, Viewed from http://blogs.wsj.com/chinarealtime/2012/12/03/stuck-in-the-zoo-the-geely-volvo-deal-three-years-later/ Harzing, AW 2002, “Acquisition versus Greenfield Investments: International Strategy and Management of Entry Modes,” Strategic Management Journal, vol. 23, no. 3, p. 211-227. Neery, JP 2008, “Trade Costs and Foreign Direct Investment.” International Review of Economic and Finance, vol. 18, no. 2, p. 207-218. Pan, Y & Tse, D 2000, “The Hierarchical Model of Market Entry Modes,” Journal of International Business Studies, vol. 31, no. 4, p. 535-554. Terpstra, V & Sarathy, R 2001, International Marketing, 8th edn, Dryden Press, Chicago IL. The Economist 2009, Idea: The Experience Curve. The Economist, September 14, 2009, viewed from http://www.economist.com/node/14298944 Read More