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Most Companies use internationalization as a strategy to increase their profits and the size of the company. The strategy not only gives them access to more customers but it also gives a competitive advantage. There are different theories that have been used to explain internationalization. Some of the theories are firm specific while others focus on the capitalist system. Depending on the form of internationalization a company chooses, there are different requirements that they should meet for it to be successful. The requirements are just meant to give a company advantages that enable it to compete with domestic companies. Each form of internationalization has its own advantages and drawbacks. The decision mostly is made by the board of directors or other executive members in the management.
Bidco Limited is an East African company that is known for its leading production of edible oils, soaps and detergents, baking powder and margarine. It has more than forty brands currently. The company has manufacturing units in Kenya, Uganda and Tanzania and, it contributes greatly to the growth of the East African economy. More than 100 million people enjoy their different products in over fifteen countries in Africa (Bidco, 2015).
Internationalization is often associated with large multinational companies, but any company can sell its products globally. It is an important step for a business to take especially in order to remain competitive (Biggs, 2013). Between a company and its competitors, the first to get into a market gains all the benefits that come with being there first. International expansion gives a company more customers and also access to a larger talent pool than before (Papageorgiou, 2013). Through expansion, a company can access more numbers of skilled workers, highly educated professionals, and unskilled laborers. Increase in potential customers’ numbers, results in a company getting higher profits. The company’s efficiency increases by increasing the profit margins, decreasing production costs and maintaining competitive prices in the home country (Johnson, 2012).
Internationalization is a strategy used by companies in order to increase their size, increase profits and market shares and become an industry leader. For most business firms, it is a major attribute of a strategy process that determines ongoing development and change in terms of scope, values, principles, nature of work and converging norms. Internationalization is a strategy process that makes the firms transnational. A transnational corporation has can control and coordinate operations in more than one country. In terms of global competition, it is important for a company to become transnational. The internationalization process focuses on the development of an individual company on integration, a gradual acquisition and application of knowledge concerning operations and foreign markets (Dicken, 2007).
Theories of Internationalization
The decision to internationalize is mainly to acquire profits. The origins of internationalization can be explained by the macroeconomics approach that focuses on the capitalist system and the microeconomics approach that is based on a firm-specific level. The macroeconomics approach explains the expansion of firms to foreign countries by the theory of new international division of labor (Cullen and Parboteeah, 2010, p.25). The microeconomics approach includes the Dunning’s eclectic theory and the theory of product life cycle. Most transnational companies behave according to the rules of capitalism. In terms of how they acquire profits and in increasing their market share or in increasing the firm’s size (Ajami, Cool, Khambata and Sharpe, 2006, p.15). The most important factor about internationalization is increasing profits. In today’s economy, companies have become more global and are not confining to the national level but across the world. The new international division of labor by Stephen Hynner explains the shift of industrial production from industrialized countries to developing countries. Most companies in developed countries are forced to search for alternative locations for cheap labor due to increasing wages in home countries. The concept tries to explain the validity of the internationalization process. However, it has drawbacks including being one-dimensional, and it overstates the extent to which production has been relocated to the global periphery (Dicken, 1992).
Micro level approach explains the internationalization decision as being firm specific. Decision-makers in an individual company focus on the decisions at capitalist system just like in macro-level approach. Based on Hymer’s pioneering study in 1960, domestic companies have a natural advantage over foreign companies since they understand the local market conditions and the business environment. For a foreign company to succeed in a new market, it should have specific assets that will overcome the advantage that domestic companies have. The specific assets may include access to raw materials, economies of scale, technological expertise and access to cheaper sources of finance. Such assets give a foreign company the ability to compete with domestic companies in their home country. A foreign company should have a set of principles that will overcome the advantages of a local company in its country of production (Nilsson and Dicken, 1996). For example, in this case for Bidco Limited to move into a new market such as South Africa or West Africa, it requires assets that will overcome the advantage of already existing similar companies. For instance, if it has a better-computerized production system, that will reduce its production costs giving it an advantage over the local companies.
Dunning Eclectic Paradigm
According to Dunning Eclectic Paradigm, the production of a firm in a foreign country depends on three conditions. The firm should have both tangible and intangible assets and skills so as to compete with local firms that already have the country’s knowledge and experience. It should also be profitable for the firm to produce in the host country instead of the home country and then to export. Also, making foreign direct investments should be more profitable as compared to leasing and licensing the skills. These conditions are known as OLI by Dunning, which are Ownership, Location and Internationalization respectively (Dulupcu and Demirel, 2008).
Ownership advantages or firm-specific advantages are assets that are internal to a company. Every company must have certain ownership advantages that are unique compared to those of competing companies (Dulupcu and Demirel, 2008). Ownership advantages can be achieved through income bearing properties and the governance of separate activities from one head firm. It can be achieved through patents, trademarks, trade secrets and economies of scale. The goal is to provide high revenues or lower costs that will reduce the cost of operations compared to its domestic competitors (Wattanasupachoke, 2002).
A company also requires location specific advantages in order to exploit its assets in the foreign country compared to its domestic country. Most companies consider the location advantages of different countries when determining its host country (Dulupcu and Demirel, 2008). Location advantages include high transportation costs, cheap labor, local image, proximity to customers and foreign government’s trade applications. They include economic, political and socio-cultural advantages that are important in the transnational production (Wattanasupachoke, 2002). For instance, for Bidco Limited to reach the South African countries, it would be important to have another production site in that region. Consequently, the company will have location advantage make it possible to compete with other domestic companies.
Internationalization advantages are from exploiting the firm’s advantages instead of selling or leasing them. Most companies choose internationalization where the market functions poorly. The uncertainty of the environment in terms of price, quality and availability of raw materials makes it likely for the firm to internalize its operations. Most companies overspend when it comes to research and development to acquire the necessary knowledge and technology for internationalization. A company exploits its technological advantage by setting up its production facilities to ensure satisfactory returns on investments without having to lease or sell technology to other foreign companies (Whitley, 1994). Having a production plant in the region would also give the company this advantage. That way, it would not have to lease its services, making it easier to internalize its operations.
Sequential theory of internationalization also known as the Uppsala model is the process in which a company enters the foreign market. A company moves into a foreign market in four stages. They are intermittent exports, exports using agents and through licensing, overseas sales by having knowledge agreements with local firms such as franchising and foreign direct investment in the foreign market (Johanson. and Vahlne, 2009, p.1420).
A firm is initially domestic in terms of its production and markets, and it looks for foreign markets when it reaches a saturation point in the domestic market to maintain growth and profits. In the early stage, the company uses the services of overseas sales agent who are not dependent on the exporting firm. The stage is setting up sales outlets that help it gain control over its foreign sales. It can be done by either acquiring a local firm or by setting up an entirely new company’s outlet. After acquiring profits and improving its performance, the company can now establish an entire production facilities; putting into consideration the favorable factors in a foreign market (Wall and Rees, 2004, p.40). For instance, in 2001 when Bidco moved to Tanzania, it first acquired Shivji and Sons Limited, which was a soap manufacturing plant. Through that acquisition, the company had entry to one of Africa’s fastest growing markets.
In a network perspective, the internationalization process is like developing new relationships or building existing ones in international markets. By doing so, the focus shifts from organizational to social. The series of networks are considered on three levels that are Macro, Intra-organizational and Inter-organizational. According to Network theory, the business environment is a set of diverse powers, interests, characteristics that advance on national and international business decisions. At the macro-level, a company breaks old relationships or adds new ones in order to enter new markets. Breaking into a market with stable relationships is difficult. At the inter-organization level, companies benefit each other in some relationships to in different markets. The companies may be competitors in one market, suppliers and customers to each other in another and collaborators in the other. When one company internationalizes, it draws others into international production. At the intra-organizational level, relations within the company influence the decision-making process. For example, if a transnational company has subsidiaries in other countries, decisions made at the subsidiary level increase the degree of international involvement by the parent company (Wall and Reese, 2004, p45).
Ways to Internationalize
Export Based Methods
Once a company has decided to internationalize, it can do so in various ways that are classified into three categories namely export based methods, non-equity methods, and equity methods. Bidco Limited can consider export methods of internationalization that is the most common way companies become international. It includes producing products in the domestic market and exporting a portion of the products to foreign markets. Export based methods of internationalizing can be divided into direct exporting and indirect exporting (Hassan, 2013, p.1).
Indirect exporting is when a company does not undertake any special international activity but instead operates through intermediaries. The intermediaries are used for physical distribution of goods and services in the foreign market. An export house buys products from its domestic firms and sells them on its account. A conforming house acts for foreign buyers by bringing sellers and buyers into direct contact, and it guarantees payments will be made by the end user or the exporter (Whitelock, 2002, p. 345). A buying house is more similar to a conforming house, but it actively seeks sellers to match the buyer’s particular needs. All these are ways Bidco Limited can internationalize. The main advantage of this approach is no additional costs have to be incurred, or expertise acquired so as to access foreign markets. The approach’s drawback is the existence of very little control over marketing issues, and there is no feedback for marketing or product development (Wall, Minocha and Rees, 2010, p.15).
Bidco Limited can also consider direct exporting where, in this case, the company will be directly involved in selling its products to the different foreign markets. The method requires a long-term commitment to a certain foreign market, and the company chooses its local agents and distributors that are specific to that market. The company is also able to monitor developments and competitions in the host market. The method also promotes interaction between end users and long term commitments such as after sale services to encourage repeated purchases.
Non-Equity Based Methods
Bidco Limited can also consider non-equity based methods of internationalization. It involves a company selling technology or doing business in the form of patents, contracts, copyrights, and trademarks. This form of internationalization can take different forms including franchising, licensing and other forms of contractual agreements.
Licensing is where a licensor grants a foreign party permission in the form of a contract to engage in activities that would be legally forbidden. The licensee buys the right to exploit products and technology from the licensor that is protected by intellectual property rights like trademarks, copyrights, or patents. The licensee’s local knowledge and distribution channels benefit the licensor and is also a strategy to lower the cost of internationalization because the foreign entrant makes no resource commitment (Friesner, 2014).
Franchising is also another form of internationalization where the franchisee buys the rights to undertake a business activity using the franchisor’s trademark or name rather than any patented technology. Most companies choose franchising as a way of internationalization because it establishes the company’s business in a short time and requires little direct investments and also creates a global image through standard marketing approach. The franchiser has a higher degree of control and can understand the local tastes and preferences in the foreign market. Management contracting is another form of internationalization besides licensing and franchising. In this case, a supplier in one country provides management functions to a client in another country. Contract based partnerships are also created between different nationalities so as to share the cost of an investment (Wall, Minocha and Rees, 2010, p.20).
A company can also consider equity-based methods for internationalization. When a company physically invests in another, it is denoted as Foreign Direct Investment (FDI). The method’s advantage is that the company has the greatest level of control over its proprietary information and technology. A company can use different ways of FDI. They include creating equity joint ventures, acquiring an existing firm, merging or establishing their foreign operation; also known as green-field investment (De Propris, 2009, p.4).
Acquiring an Existing Company
Acquisition of an existing company has more advantages than green-field investment. It gives a company immediate presence in the market that results in fast returns and ready access to knowledge of the local market. The problems associated with green-field investments such as legal and management issues are avoided.
Joint ventures involve creating a new identity where both initiating partners take active roles in strategizing and making decisions. The method helps in sharing technologies and lowering the costs of high risks in development projects. Joint ventures allow companies to gain economies of scale and scope by the value adding activities on a global basis. Joint ventures are especially common in high technology industries, and they take two forms either specialized joint ventures or shared value added joint ventures (Wall, Minocha and Rees, 2010, p.20).
There are various ways of internationalization and the ways that a company uses FDI to engage in transnational production make it completely global. Different theories of internationalization have different implications and benefits of a company being transnational. Dunning’s eclectic paradigm uses OLI stating that a company will have international production if all three conditions are present (Buckley and Casson, 2009, p. 1570).
For Bidco Limited to internationalize and increase it profits margins, it would have to select the form of internationalization that is best suitable for the company. Whichever form the company selects, it should meet the requirements so as to have successful production and marketing in the foreign market. For example, selecting the Dunning’s eclectic paradigm would require the company to meet the three conditions to have a competitive advantage over the domestic companies.
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