Factors to Consider to Establish Operations in Emerging Markets - Coursework Example

By student’s name Course code+ name Professor’s name University name City, state Date of submission Introduction Population patterns and the Gross Domestic Product (GDP) growth rates for emerging markets speak for themselves. Countries viewed as emerging markets are projected to add approximately 1.4 billion people to their middle-come earners in the following decade (Cavusgil et al. 2013, p 78-80). Due to this, few businesses with global ambitions can afford to neglect emerging markets. Successful Multi-National Enterprises at a certain point faces the issue of growth and expansion into new markets or regions. The growth and or development often comes with added benefits such as increased profits once the company launches successfully in the new area. Several organizations have identified that expanding into new countries or markets is a major contributor to their overall income. Expanding into emerging markets can be done through local branches, merging, partnering, distribution, and franchising. Nevertheless, entering upcoming markets is not always a walk in the park for most companies. It’s a crucial stage in the companies’ life as it presents both risks and opportunities. Depending on conventional approaches to enter new markets is not enough (Kawai and Prasad 2013, p125-130). It is, therefore, prudent for businesses to conduct a proper Strength Weaknesses Opportunities and Threats (SWOT) analysis in the market or region they intend to enter to identify and analyze potential challenges. While the specifics will differ depending on country and industry, what follows are numerous major general considerations for emerging successfully in the new market. Mаin rеаsоns bеhind this strаtеgy Several factors can drive an MNE into venturing into a new market. An emerging market economy is a lucrative for any business looking to internationalize (Pacek and Thorniley 2007, p 46). This is an economy experiencing exponential growth and changes. A company can seek lucrative opportunities for both short, medium and long-term investment. The following factors are the major reason for the decision to globalize. i. Geographical factors The physical location of the emerging market can be a factor behind the decision to internationalize. The geographic location may require low transportation costs (shipping costs) making it a potential ground. The terrain of the land may also be favorable for physical distribution i.e. considerable physical distance. The availability of good local infrastructure such as road and rail network which makes shipping easy is also a drive to enter new regions. ii. Agglomeration factors Agglomeration factors are the benefits that a company gets by being situated near each other. An MNE will want to enter a new market if there exist supporting industries for the supply of components, parts, or raw materials it requires. Another agglomeration factor that may compel a company is if several enterprises of the same country were already conducting operations in the same region. The MNE will feel safer and home unlike if it was to operate alone in the new place. Similarly, a high number of companies in the same industry already operating there may drive a Multinational organization into moving into the area. iii. Efficiency-seeking factors Every business strives to achieve efficiency in its operations. Any factors that could lead to better performance are likely to be embraced or compel a company to move to a new market. Availability of labor is one key efficiency factor that can motivate a company to pursue business in a new market. Ready labor is an assurance of wide variety of human capital which is needed by the company to produce. Low labor costs will further compel the company to invest in the new region. Availability of cheap labor will mean lower operational costs for the business resulting in higher profits. High labor costs, on the other hand, will result in higher overhead costs subsequently eating into the profits of the company. Availability of low-cost raw materials is another efficiency factor businesses seek and the availability of such is likely to compel it to start operations in the area. iv. Knowledge-seeking factors The level of education in a region may make an MNE want to venture into a new market. Many people speaking a foreign language in an area is good knowledge factor motivator to enter that region. A high number of educated individuals is another motivator as this translates to qualified personnel required by the company to operate efficiently. Availability of local institutions of higher learning coupled with research centers are potential pull factors. These facilities guarantee continuous and dynamic ideas that will propel the business and help it cope with competition. v. Market-seeking factors Market factors suitable or favoring production can be a drive to venture into a new market. Economies of scale in a region may attract new entrance seeking to join it. Large economies of scale help a company to save a significantly on costs due to high production levels. If a new market possesses such a potential, it will be a potential motivator to an MNE seeking to enter the new market. Another market-seeking influence is consumers' demand. A high demand will be attractive for a business to enter a new market as it is assured of a readily available market for its products or services. Fivе kеy risks fасing а Multi-National Entreprise when dесiding whеthеr tо invеst in аn еmеrging mаrkеt. The MNE to be considered for this report is Glaxosmithkline (GSK) which is a global healthcare organization. It provides health benefits to consumers and patients. The organization has 3 businesses worldwide which researches, develops and manufactures pharmaceutical medicines, vaccines as well as healthcare products. Being an MNE, GSK is also exposed to various risks while intending to invest in emerging markets as discussed below i. Political risk Political risk is largely defined as the risk to company interests because of political instability or change. Political risk occurs in every nation across the world and differs in intensity from one country to another. The risk may occur rise from changes in policy by governments to alter controls placed on interest and exchange rates. (Ghosal 2013, p54). Furthermore, it may be caused by genuine government actions such as the control on outputs, activities, currencies, prices, and remittance restrictions. Political risk can also be because of factors outside government control such as terrorism, labor strikes, war, revolution, and extortion. The government of the host country can suddenly change laws and regulations which can negatively affect the Glaxosmithkilne’s operations. Laws regarding taxes and labor laws directly affects. The Indian Premier League (IPL) is a good emerging market. However, it has strong political affiliations. Several politicians sit on its board including government ministers, opposition leaders, and commissioners leading to a conflict of interest. There has also been a loss of the main documents resulting in a lack of transparency. If GSK would like to venture in to such a market, it must critically weigh its decision to do so. The change in regimes can also disadvantage an MNE as the new government can come up with unfavorable laws for business. The Ambassador car in India also faced political challenges that made it hard for the manufacturing form to venture into new markets. The manufacturers could not raise the cars' price without the approval of the government. Importing technology and components was also a problem, therefore, manufacturers had to do with the poorly produced components developed locally. No foreign completion was accepted until the early 1990s. This made the car to total loose out with zero export potential after over eight years of waiting. ii. Cross-cultural risk Taneja (2015, p 54) defines culture as the joint programming of the mind which differentiates the members of a group of people from another. It's difficult to understand set of beliefs, attitudes, norms of behavior, basic assumptions and values that are shared among a set of people and which influence the behavior of each member and their interpretation of the ‘meaning' of the behavior of other people (Taneja 2015, p 89). These values and beliefs guide the thinking of members and summarize normal behavior within the group. Values are the expectations that individuals belonging to a group have about how behave and how to they should behave. These values have a great impact on the peoples' behavior. They’re never expressed and are ingrained in the members making them slow to change. Quite often the values are taken for granted as the correct way to behave in the said society. Beliefs, on the other hand, is how people feels the world ought to be. Beliefs are often expressed by the members of the society. Beliefs may only be a feebly imminent as to how the members will conduct themselves. Individuals frequently do not behave as per beliefs due to factors such as religion and communication with subordinates (Tallman 2009, p 67). A corporations' culture involves its common traditions, values, customs, philosophies, and policies. The professional environment that emanates this influences the behavior and performance of the company. Every company has its own culture, and no two organizations share the same culture. The tradition of a company is a reflection of the values learned at the office and incorporated at the cognisant level. However, the culture may change depending on on who is in-charge of the company. The management of an organization hopes that by developing a corporate culture it can be able to predict the conduct of staff in routine situations. GSK’s decision to enter emerging markets faces the possible challenge of its staff integrating corporate and national culture. Per Tallman 2009, p 89, most instances, organizational culture doesn't restrain or erase the influence of national culture. Managers working for MNEs in a nation other than their own appeared to stress their cultural identity greatly. (Laurent, 1983). MNEs, therefore, need to suit their management practices to the national cultures in which they do business for them to attain better performance (Tallman 2009, p97). Culture is important for an MNE in several ways. To start with is the staffing process. It needs to determine whether the selection of staff is based on merit or how well connected one is. An MNE that insists on imposing the same headquarter regulations facing the risk of creating unwanted moral problems and inefficiencies among its employees in the other country. Expatriates and managers, therefore, need training on how to carefully handle cultural differences. Outside Hong Kong ladies in tailor shops can have a fit upstairs unlike those in the city. Non-verbal communication also differs in various countries. Expatriate challenges and failure risk This is the process of picking, training, nurturing, and rewarding employees in overseas markets. As the enterprises plan to venture into a new market, it will ultimately require employees at various levels. The business will also need to define its approaches to staffing. Furthermore, it must send expatriates to the new region to help in kick starting its operations. Human resources exist along with other kinds of resources such as technology and finances. The organization should, therefore, focus on creating employee commitment towards organizational culture and goals. For GSK, most the employee will be locals with only a small portion of expatriates. The enterprise, therefore, needs to consider both the home and host environment including industry, culture, institutions, and the competitive environment. The expatriate managers drive the essential tasks in an MNE's international strategy. They’re responsible for launching new ventures, building management expertise, transfer of skills and technology and make sure that the corporate culture is followed. More than a third of MNEs do not give any pre-departure training to expatriates before sending them to international assignments. Most go under-prepared with only a days' short program. Therefore, for GSK’s entry, it should adequately prepare its expatriates to launch in the new market successfully. The expat plus their family requires being informed and psychologically be prepared for the certain differences in the living conditions and culture. Moreover, they need language training, sensitivity training, and field experience to be able to perform efficiently. The cost of maintaining expatriates is also considerably high and needs to be factored in by the company. Expatriate failure can be costly both to the person and the organization. Japanese expatriates are less likely to fail followed by European then U.S expatriates (Zinkin 2010, p98). The challenges faced by expatriate managers are many - the risks are more than remaining home but so are the potential personal and financial rewards. An MNE, therefore, requires and effective expatriate strategies as the failure rates are increasing. iii. Economic risk Economic risks are the possibility that factors in the economy of the host country will inflate your costs and lower your sales. One type of exchange risk faced by global corporations is the exchange rate. For such companies, handling large sums of money in their transactions, the increase or decline of a currency can mean getting profits or loss on their accounts. Multinational companies may also face transactional risk if it sells its products to overseas markets. The changes in the exchange rate are certain to alter the relative prices of imports and exports which will again impact on the competitiveness of business. When creating financial statements for the whole group, the company may have to convert the assets and liabilities from the host country to the group account. Such transaction may lead to foreign exchange exposure. There may also be capital controls such that it's difficult for GSK to access funding. Hidden risk rotates around the fact that all businesses are subject to exchange rate risks, even when they don't do business with other organizations using different currencies. If GSK is to buy raw materials locally, it might be affected by unstable foreign exchange rates if the local company is also conducting business with other overseas companies. iv. Operation risk Operation risk is the potential of failures attached to the daily operations of business. Cutting down costs and improving quality are the two inter-related objectives of operations management. Research and development help achieve a competitive advantage as they make a corporation better equipped to act faster to alteration in the market demands. The greater the level investment level, the stronger the case for central manufacturing. Furthermore, economies of scale may need organizations to focus on productions in few locations. The infrastructure available in an area will also determine the operation costs. Inadequate facilities will result in increased costs (Strother 2012, p78). v. Competitive risk This is the risk that your competitors will have the upper hand over you that prevents you from attaining your organizational goals and objectives. For instance, competitors who have a basically affordable cost base or a better product compared to yours. It may be challenging if GSK would consider entering such markets if their products are relatively expensive and having the same quality or better quality than the local ones (Westney 2011, p76). Coupled with local brand loyalty, it would find it even harder to penetrate. Other foreign entrants offering the same products and services is also another factor to consider. A good example is the Tata Nano manufactured locally in India. The vehicle is so cheap making it affordable by the locals unlike other models. Introducing a new model may be challenging especially if the product is relatively costly. MNEs also face the risk of their products being imitated by local manufacturers. The chances are high that the imitations will be sold at relatively low price hence affecting the sale of the MNEs units. The multinational may also be poorly fit with the local environment. This may make it hard for it to fit and pick up operations that can gain profits. Conclusion As discussed in the essay, it’s clear that the drive for MNEs to enter new markets carries potential risks and benefits. The process of entering an emerging market faces several threats that may stall the operation of a company looking to globalize if not properly analysed. Factors such as political instability, cross-cultural risks, unfavourable laws by the government and competitive risks need to considered before entering a new market. However, opportunities such as favourable government policies on investment, availability of cheap labour or raw materials are some of the potential benefits for a multinational looking to expand. References Anon, Knowledge and capabilities in business management: the risks of tacit knowledge. Collective Knowledge Management, pp.1–26. Cavusgil, S.T., Ghauri, P.N. & Akcal, A.A., 2013. Doing business in emerging markets, London: SAGE Publications Inc. Ghosal, V., 2013. Business Strategy and Firm Reorganization: Role of Changing Environmental Standards, Sustainable Business Initiatives and Global Market Conditions. Business Strategy and the Environment, 24(2), pp.123–144. Kawai, M. & Prasad, E., 2013. New paradigms for financial regulation: emerging market perspectives, Tokyo: Asian Development Bank Institute. Pacek, N. & Thorniley, D., 2007. Emerging markets: lessons for business success and the outlook for different markets, London: Profile Books in association with the Economist. 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