How Businesses Can Use Different Internationalisation Strategies - Essay Example

Business internationalization strategies to maximize their potential rewards and minimize the risks Name Subject Instructor Institution Date Table of Contents Table of Contents 2 1 Introduction 3 1.1Advantages of implementing strategies 5 Customer Retention throughout the world 5 Lack of effective strategies can be one of the quickest way through which organization can lose customers. A program strategy that, follows up on customer’s needs and, keep in touch with the users of organization products, is essential in ensuring customers retention. Strategies ensure that, the sales people get in contact with the customers at least twice a month to find new way of helping the customers with the product. If by any means the customer expresses a problem, strategies are used to reduce customer stress ensuring that organization customers are retained. 5 Resources 5 2 Analysis of potential rewards and risks 6 2.1 Global standardization strategy 6 2.2Localization Strategy 7 2.3Transnational Strategy 7 2.4 International Strategy 8 3 Entry Modes that a company can use as part of strategy 9 3.1 Exporting 10 3.2Turnkey Projects 11 3.3 Licensing 12 3.4 Franchising 14 3.5Joint Ventures 15 3.6Wholly Owned Subsidiaries 15 4 Conclusions 16 Business internationalization strategies 1 Introduction A Strategy is a plan of action designed to achieve a specific goal. Moreover, a strategy may also be distinct from different tactics concerned with how engagement is conducted as noted by Chung and Zhenni (2007, p. 42). A Strategy is mainly concerned with the way in which different engagements are linked. Indubitably, lack of a strategy may lead to loss of focus in most organizations. In the modern world, a particular strategy tends to traverse various traditional fields, to economics, business, game theory and other fields. Additionally, a business strategy describes the engagement the business which, intends to use it in order to succeed in its chosen market against its competitors as asserted by Mueckenberger and Sarah (2010, p. 235). In the current business world, the success of a firm would depend on how it manages its risks through proper strategies. The precedent demise of well established financial institutions depends on how they managed risks. It represents the best efforts the management can make in securing and defining the business future. Business strategy must give clear answer to; The business scope to which strategy applies. The current and future requirements of potential and existing customers in the business. The distinctive uniqueness or capabilities that will give the business competitive advantage in meeting current and future needs. On the other hand, internationalization is a process by which, different firms gradually increase their involvement internationally as stated by Roy and Olivier (2008, p.157). Internationalization has been described as dynamic concept that, increases involvement in the international operations by using both inward and outward sides. It can also be said to be a process by which, different firms increase their direct and indirect influence on the awareness in the international transactions by establishing and conducting business with other countries. Inherently, international businesses may use a variety of strategies for the long term health of their organizations. Strategies provide a big picture that shows how different activities are coordinated in order to achieve the desired result. Through strategies, the overall directions of an organization are set. International business use strategies to define the approach and the tactics that would be adopted in ensuring that, the organization runs successful and remains competitive. Strategies are globalization drivers as; they are used to assess dual pressure, standardization and global efficiency. 1.1Advantages of implementing strategies Customer Retention throughout the world Lack of effective strategies can be one of the quickest way through which organization can lose customers. A program strategy that, follows up on customer’s needs and, keep in touch with the users of organization products, is essential in ensuring customers retention. Strategies ensure that, the sales people get in contact with the customers at least twice a month to find new way of helping the customers with the product. If by any means the customer expresses a problem, strategies are used to reduce customer stress ensuring that organization customers are retained. Resources Good strategies assure an organization that, their resources are used efficiently. Some of these resources include; personnel, customer base, goodwill, organization patent, logistic resources and manufacturing process. Strategies ensure utilization of organization resources giving an organization competitive advantage over other competitors, give proprietary advancing technology control over the industry and, developing new products capable of maintaining and increasing organization market share. Organization Expansion Hegge (2002) states that, strategies have the ability of exploring business opportunity outside the standard business practice that helps to inspire business expansion. This done by, promoting vigorous engineering and marketing research within business strategies. This mainly focuses on new companies frontier and helping in opening up new ideas for the organization that are related to current business practices. Strategies thus, ensure that the company expands in order to maintain competitive advantage. Forces Objective Assessment Strategies provide discipline enabling senior management to think about the organization future. Without this, an organization can be solely consumed with continuance with its tasks without considering the bigger picture. Provides Framework for Decision-Making Strategies are important in providing a framework within which organization staffs are able to make daily operational decisions understanding that, all decisions are meant to move the organization in the same direction. It is impractical for the board of directors to know all decisions made by the executive directors and, it is unrealistic that the executive directors will know all the decisions made by the staffs. Thus, strategy provides a future vision, sets objectives, confirms the value and threat posed to the organization, clarifies opportunities and threats, mitigate weakness, and determine methods of leveraging strength. As such, strategies are used to set boundaries and framework within which organization decisions are made. Essentially, the cumulative effect of decision made could have significant effect on the organization success. By providing a framework within which decision are made, helps the board and the staff to better focus their efforts on methods that will ensure success of the organization. 2 Analysis of potential rewards and risks 2.1 Global standardization strategy This strategy focuses on increasing profitability and organization growth. This is done by reaping cost reductions from economies of scale, location economies, and the learning effects. This strategy goal aims at ensuring low cost strategy is pursued on a global scale. It makes sense when there exist strong pressure demand for local responsiveness and cost reductions are minimal. 2.2Localization Strategy This strategy focuses on ensuring that organization profit is increased by customizing the organization’s goods and services by, providing a good match to preference and tastes in diverse national markets. When there are considerable differences across different nations regarding to the consumer preferences and taste, localization is the most appropriate strategy. It can also be applied where the organization cost pressure is not too much. Localization strategies are used when local tastes differ dramatically and when fewer competitors exist in the market. 2.3Transnational Strategy Translational strategy tries to achieve low cost through economies of scale, location economies, and learning effects. It differentiates the product offered across international markets to ensure that, the local difference is accounted (Hill and Hernández-Requejo 2011). Translational strategy foster multidirectional skill flow between subsidiaries in the organization’s international network operations. This strategy is advantageous in that it allow multidirectional transfer of skills and competence, leveraging subsidy skills by redesigning products in order to use similar component and to produce them in the same location. Translational strategy use assembly plants to assemble market specific final product in key markets. The strategy is mainly used when customization and reduction pressure are high and when managers need to balance divergent pressures. 2.4 International Strategy This strategy involves taking the products, which are first produced to be used in the domestic market, and selling them in the international market with minimal local customization. It is used when cost pressure and local responsiveness pressure are low. This strategy is advantageous in that it allow taking products from local country with low customization and ensuring that these products are sold in other markets. This is done through centralize product development functions, tending to establish marketing and manufacturing function in every country or the region in which the organization carry out its business. This strategy is used when cost pressures are low, when the needed local responsiveness is low and when there are fewer competitors. Disadvantages of Strategy Disadvantage of international strategy is that it may not be viable for a long term. In order to survive, organizations must shift to transnational or global standardization strategy in advance of their competitors. Similarly, though Localization strategy gives an organization competitive advantage, if the organization faces aggressive competitor the firm is forced to reduce its organization cost structure. It may thus, do this by shifting towards a translational strategy. Essentially, transnational strategy focuses on location attainment and the experience curve economies, global learning and local responsiveness, the firm may look at matrix structure where managers from product areas make decision intended to benefit the organization. To implement this, firms must ensure availability of a control system to allow the organization to work through a global dispersed value. The likelihood of this being more culturally driven than being output driven is more. Another disadvantage of strategy is that, they can give competitors a low cost route to market and new technology. Unless, the firm is very careful, it can find itself giving away more than what it is receiving. Another criticism of strategy is that, it needs organization to anticipate the future to develop plans. Predicting the future is a very hard undertaking, the belief being on the future not unfolding and possibility of invalidating the approach taken. Strategies may prove expensive in the end as, most organizations would not be able to hire an external consultant to assist in strategy development (Hegge 2002). Regardless, implementation of strategy must be consistent with organization needs, and appropriate controls must be implemented to allow cost discussion to be undertaken before implementation of strategy. The inability of choosing the opportunities presented in the organization, may seem frustrating at times (Hill and Hernández-Requejo 2011). Moreover, some strategy may be excessively formal, leading to a show of lack of creativity and innovation stifling the ability of an organization in developing creative strategies. 3 Entry Modes that a company can use as part of strategy If an organization decides to enter in a foreign market, the question arises on the best mode to be applied in its entrance. Organization can use a total of six different modes to enter in a foreign market; turnkey projects, exporting, franchising, licensing, joint ventures with host country organizations and by setting up wholly-owned subsidiaries. Each mode has its rewards and risks. Organization managers must be very careful when deciding the best method to use. 3.1 Exporting Many organizations may start their international expansion as exporters and later switching to another mode. Advantages Exporting entry method has two main advantages. Firstly, exporting avoids often substantial cost in establishing organizational operational in a host country. Secondly, it may help an organization to achieve experience curve and the location economies by ensuring that products are manufactured in a centralized location and that they are exported to other national markets. By this method, organization can dominate the global market. Disadvantages Exporting is associated with a number of drawbacks. Exporting from organization home base is not an appropriate way if there are other lower cost locations of manufacturing goods abroad. Thus, for organization that pursues global or transnational strategies, it is preferable to manufacture their product where, the factor of condition mix is favorable from different value creation perspective. This will also enable the organization to export the product to the rest part of the world from that distinct location. This argument is not so much against exporting as exporting from the organization home country. Many organizations have moved some manufacturing of their product to the foreign country, due to availability of country’s low cost and high skilled labor. This organization then export from this foreign country including their home countries. Another drawback to exporting, is the high transportation cost making it uneconomical and particularly for bulk products. To get around, firms must engage in production of bulk product regionally. This enables the organization to take advantage of economies of scale and at the same time ensure that transportation costs are minimized. For instance, many chemical manufacturing organizations manufacture their product regionally to serve several countries using one facility. Consequently, tariff barriers are also faced by organizations, making exporting uneconomical. Threat of tariff barriers coming from the host country can be very risky. This has made some companies like Japanese autos setting up their manufacturing plants in U.S. Fourthly, drawback arises when an organization delegates its marketing to a local agent. These cases are most common for new firms, which begin exporting. Agents market products of different competing firms and therefore there is divided loyalty. The agent may not be as efficient as the company may if the company managed its marketing by itself. An organization can overcome this by setting up wholly owned subsidiary to handle local marketing. 3.2Turnkey Projects Different firms that specialize in construction, design, and start-up of the turnkey plants are very common in some industries. In this project, the contractors handle every detail for foreign client including training of the operating personnel as noted by Alsakini (2004, p.77). These projects are common in petroleum refining, chemical, pharmaceutical, and in metal refining industries. This industries use expensive and complex production technologies in their production process. Advantages Knowledge in running and assembling technologically complex process is a valuable asset. Turnkey project earn great returns from the asset. Disadvantages The main drawbacks associated with turnkey strategy are; Firstly, an organization that enters into a deal involving turnkey project has no long-term interest in a foreign country. This may later prove disadvantageous if the country in question proves to be a big market for exported output process. A way of getting around this is by ensuring that, the minority equity interest is taken in different operations. Secondly, an organization entering into a turnkey project with different foreign enterprises may in one way create competitors. For instance, western firms that were involved in oil refining technology deal with firm in Saudi Arabia and other Gulf States find themselves competing in the world oil market with these firms. Thirdly, if an organization process technology has competitive advantage, then by selling this technology using turnkey project is the same as selling competitive advantage to organization potential or actual competitors. 3.3 Licensing Licensing agreement is basically an arrangement where a licensor give another person or entity rights to intangible property for a specified period. When this is done, the licensor receives a royalty, which is fee from the licensee. An intangible property may include inventions, formulas, patent, processes, copyright, design, and trademarks. Advantages In typical international licensing deal, licensee puts most of the capital required to ensure that, the overseas operation continues. The primary advantage of licensing is thus, the firm does not need to bear risks associated with foreign market opening and the development cost. Licensing is a very attractive method if the organization does not have enough capital to start overseas operations. Moreover, licensing is attractive when an organization is not willing to commit its substantial financial resources to politically volatile or unfamiliar foreign market (Hill and Hernández-Requejo 2011). Using licensing when organization wish to engage in foreign marketing but prohibited in doing so by different barriers in investment is very common in the international market. Example of this was the formation of Fuji-Xerox joint venture. Disadvantages Drawbacks to licensing includes; Firstly, licensing does not give organization tight control over the manufacturing process, marketing and the strategy required in realizing location economies and experience curve (as must be done by the transnational and global organizations). Licensing entails licensee carrying out their own production operations. This limit the ability of an organization to realize location economies and experience curve when products are manufactured in centralized location. If these economies are taken to be of significant, licensing may not prove to be the best way of expanding overseas market. Secondly, the competition in international market may call for organization coordinating strategic moves throughout the country by using the profits that are earned in one country so as support competitive attack in another country. A third problem associated with licensing, is risk associated with technological knowhow in licensing within the foreign companies. Technological knowledge is a common base of multinational firm having a competitive advantage. Many firms maintain control over their technological knowledge, and by licensing this may be lost. 3.4 Franchising Franchising is similar to the licensing but, the difference is that, franchising involves longer commitment terms than licensing (Hegge 2002). Franchising is a specialized method of licensing where the franchiser sells the intangible property to a franchisee. The franchiser insists that, strict rules on conducting business must be followed by the franchisee. The franchiser also assists the franchisee in running the business or an organization on an ongoing basis. Advantages Franchising mode is similar to those used in licensing. An organization is relieved from many cost and risks associated with opening a foreign market. Franchiser assumes those risks and costs creating a good incentive to enable the franchisee build profitable operation as fast as possible. Franchising, thus, enable an organization to build a global presence very fast and at a relatively low risk and cost. Disadvantages Franchising may inhibit ability of an organization to take profits from one country to help in supporting competitive attacks in another. There may difficulty in controlling the quality of goods and services produced by one organization located in different countries. This can be controlled by setting up subsidiaries in every country occupied by the organization. 3.5Joint Ventures Joint venture is associated with establishing jointly owned firms as stated by Roy and Olivier (2008, p.164). Establishing a joint firm with a foreign organization is a popular mode that can be used to enter foreign market. Advantages Joint ventures benefits from the local partner's knowledge on the culture, language, competitive condition, business system, and political system of the country in question. Second, if development costs and risks in opening an organization in a foreign market are very high, sharing this cost these costs with a local partner is a significant gain on a company. Disadvantages As with licensing, an organization that enters in a joint venture may risk giving it partner control over its technology. However, partnering organization can create joint venture agreements in a way that risk would be minimized. This can be done by holding majority ownership in a venture. 3.6Wholly Owned Subsidiaries In these subsidiaries, the firm is the owner of all the company stock. A wholly owned subsidiary can be established in a foreign market using two ways. It either can acquire an established firm or can set up new operation Advantages When the base of an organization competitive advantage is on technological competence, wholly owned subsidiary are often preferred in entry to a foreign market. This is because minimizes the risk associated with losing control over organization competence. Secondly, this firm give an Disadvantages To establish a wholly owned subsidiary entails lots of money. Firms that aspire to do this must consider the cost and risks associated with setting up overseas operations. 4 Conclusions This paper has covered different strategy and the reason to why international businesses may use variety of strategies. The paper has analyzed the potential rewards and risks associated strategies such as global standardization strategy, transnational strategy, international strategy and localization strategy. Different entry modes that companies can use as part of whatever strategy they choose, for example; exporting, turnkey projects, licensing, franchising, joint ventures and wholly-owned subsidiaries has also been covered. An organization can use a particular strategy to attain the organization goals, which may be to increase profitability and profit growth. Strategy allows and facilitates entry into international market. It also allows different firms to share cost and associated risk in new product and processes development. They bring together complementary assets and skills that could not be easily being developed if one firm is working on its own. Some strategies inhibit the ability of an organization to change and adapt. Organization well aligned with its strategy is meant to address the board, the structure, the staff, performance, and the reward system. This is essential in ensuring that the organization is moving in the correct direction, but can significantly inhibit the ability of an organization to adapt. When a firm wants to enter into a foreign market economy, it can choose the appropriate entry mode for a particular market. Organization can choose between a total of six different modes to enter in a foreign market. These methods include turnkey projects, exporting, franchising, licensing, and joint ventures with host country organizations and by setting up wholly owned subsidiaries. Each mode has its rewards and risks and thus the decision of the entry mode strategy is very critical in market expansion. The entry method can influence the organization performance in the long run and thus, the organization should take much care. Associated mangers must analyze these modes to determine the most suitable one. Factors that influence decision can be different in each case due to the varying situations and influences in different countries References Alsakini, W., 2004. "Proactive Schedule management of industrial turnkey projects in developing countries." International journal of project management 22.1 pp. 75-85. Chung, H. and Zhenni, W., 2007. "Analysis of marketing standardization strategies." Journal of global marketing 20(1), pp.39-59. Hegge, B., 2002. SMEs and European integration: Internationalisation strategies. London: Routledge. Hill, L. and Hernández-Requejo, W., 2011. Global business today .New York: McGraw Hill Mueckenberger, U. and Sarah, J., 2010. "Transnational norm-building networks and the legitimacy of corporate social responsibility standards." Journal of business ethics. 97(2), pp. 223-239. Roy, F. and Olivier, T., 2008. "The Impact of Internationalisation on the Competitive Strategies of SMEs." International Journal of Entrepreneurship and Small Business 5(2), p.157. Read More