1.1 Statement of the problem
This paper focuses on two main areas. Firstly, it analyses the impact of ‘German identity’ on doing business in Western Australia. The second major focus is the connection between business and culture, arguing that culture has a major impact on business and strategy. German culture, as perceived by both literature and managers in German companies in Australia, is highlighted throughout the paper.
A questionnaire was compiled and sent to companies with a German identity in Australia. Respondents range from subsidiary companies of German parent corporations, strategic alliances or joint ventures with German participation or simply Australian-owned companies distributing German made or identity products. The research does not only consider German business presence in Western Australia, but also the German identity and its influence on Australian perceptions.
German companies are among the most active in the world with regard to international expansion. All of the thirty most important German public companies, measured by means of market capitalization, have operations outside Germany. Even some of the German utility companies are to a small degree active in foreign markets (Dorrenbacher 2000), although the business model of utility companies seldom suggests international expansion. German companies are amongst the best-known in the world, with organisations such as DaimlerChrysler, Volkswagen or Siemens being familiar names in nearly all parts of the world.
The relevancy of analysing the German business presence in Western Australia arises partly from an organisation called the West Australian-German Business Association Inc. (WAGBA). WAGBA resolves common problems and fosters cooperation with the goal of mutual success, binding together German companies that are present in Western Australia. The organisation has been founded in 1985 and today features prominent German companies such as Siemens, Krupp, Bayer, and Schenker. In addition, WAGBA also accommodates numerous small businesses that have been founded by German entrepreneurs in Western Australia or that focus primarily on doing business with Germany (WAGBA 2001).
A point of particular relevance is ‘In Unison’, being an event organised by WAGBA, aiming at ensuring heightened standing for all German businesses in Western Australia. The main objective of the event is to share Western Australian-German relations with the community, searching for active participation and support of companies which rely on bilateral business. ‘In Unison’ is described as being the greatest exposure of German-Western Australian ties ever staged in Perth and is due to take place in September 2002. A secondary objective of the festival is to also highlight cultural aspects. The organisers claim ‘In Unison’ to be a festival show-casing the benefits of different cultures by presenting some typical German cultural features (WAGBA 2002).
‘In Unison’ aims at improving relations between Germany and Western Australia and the festival has been considered one of the main reasons why the analysis of German companies in Western Australia and German cultural identity is deemed relevant for this paper.
Another piece of information highlighting the relevance of the topic is a recent publication by the Australian government stressing the growth potential of Western Australia as a market. The expected strong performance of Western Australia “reflects the rapid growth of the state economy as a whole and the state’s favourable mix of industries” (Bode 2002, p. 26). This expected future growth and the potential for German companies to exploit market opportunities are analysed throughout the thesis.
Further reasons underscoring the relevance of the problem include personal interest by the author and the lack of former studies in the chosen field of study.
1.3 Method of research
The method of research used for this thesis include theoretical and empirical aspects.
The theoretical part of the research is based on a study of literature and includes books, journals, papers and other printed material and data on subjects relevant to the study. In addition, electronic databases have been used to identify publications relevant to the issues discussed. The information gathered during the study of literature consists of publications from a wide range of authors, including scholars and managers, as well as publications by international organisations such as the World Bank and the OECD. Relevant information has been employed to serve as a foundation for the questionnaire.
The empirical part of the thesis consists of the collection of primary data by means of a questionnaire and the statistical interpretation thereof. As a method of data collection, a 5 point Likert scale is used. The responses to the questionnaire were analysed by means of statistical methods, specifically frequency analysis. The response data to the questionnaire was transformed in results giving the frequency and percentage of the respondents for each question. The purpose of frequency analysis is to obtain a count of the number of responses associated with the different values of the relevant issue. The composition of the questionnaire is explained at the beginning of Chapter 5, as particular referrals to the theoretical part are deemed necessary to shed light on the questionnaire’s structure and content.
1.4 Demarcation of the study field
The predominant focus of the study is to assess companies with German heritage or a German identity in whatever form. Relevant companies have been identified from membership lists of the German-Australian Chamber of Industry and Commerce and the Western Australian German Business Association (WAGBA). Solely owned companies with some degree of German identity have also been taken into consideration.
A further focus concerns the geographic region of Western Australia and strategies of German companies operating in Western Australia. Although some comparative references to German companies operating in other Australian states are included, this does not represent the core of the study.
From a time perspective, the study covers the timeframe from the beginning of April 2002 until the end of June 2002 for the collection of data. The literature search related to German identity and German business presence in Western Australia is predominantly focused on the time period from 1992 until 2002.
1.5 Composition of the thesis
The thesis consists of two main areas: the first area is a theoretical framework which provides the background necessary for the analysis, laying the foundation for the subsequent part of the empirical research.
The theory analyses the underlying phenomenon of globalisation and its implications on business strategies and approaches. Following this, the strategic planning approach of companies, with particular reference to internationalisation strategies, is highlighted. Chapter 2 concludes with an assessment of how culture impacts on business strategies and approaches.
Chapter 3 presents the German context, i.e. German national identity, cultural traits typically attributed to Germans and management styles and principles as perceived by foreigners are described. After this, the role of ‘Made in Germany’ is analysed and special reference is made to the Australian perception of products which are made in Germany or connected to a German identity. An assessment of German companies in the international arena concludes Chapter 3, highlighting the active expansion process of German organisations in the course of globalisation.
Chapter 4 presents the combination of issues discussed in prior sections by assessing the attractiveness of Western Australia as a market to foreign investors, particularly German investor companies. The Chapter goes on to analyse the current German business presence in Western Australia, emphasizing that several German companies have opted not to invest in Western Australia itself, but rather invest in Eastern cities in order to serve Western Australia from their bases in Melbourne or Sydney.
Chapter 5 represents the empirical research. For the purpose of this study, a questionnaire was compiled and sent to companies with a German identity in Australia. The questions asked in the questionnaire relate directly to the theoretical framework provided in Chapters 2 to 4. The empirical research is structured as follows: Section 5.1 explains the composition of the questionnaire and the method of research employed in this thesis. The following sections present the empirical findings of the three main parts of the empirical analysis, i.e. a classification of the responding companies (5.2), these companies’ involvement in Western Australia (5.3), and finally the impact of German identity on business strategy and perceptions of German culture (5.4).
Following the empirical analysis, Chapter 6 comprises a summary of the findings and a conclusion.
2. Globalisation and internationalisation strategies
The international business environment has undergone some salient changes in recent years. The way companies do business today has altered to a rather dramatic extent, compared to methods used by corporations in earlier decades.
The following Chapter will examine these changes that have occurred in past decades, starting with an attempt to define globalisation, pointing out driving forces of globalisation, and which consequences this phenomenon has had with respect to the way that business is conducted today (2.1). Subsequently, point 2.2 analyses which implications globalisation has for the business environment of companies, followed by a section on motivations for companies to globalise (2.2.2). Point 2.2.3 examines the distinction between global and multinational competition.
Section 2.3 analyses the strategic planning approach of companies in depth, with particular regard to internationalisation and globalisation strategies. The Chapter concludes with an assessment of the relationship between strategy and the influence of culture (2.4).
The following sections examine the phenomenon of globalisation. Firstly, the international business environment is described (2.1.1), before attempting to define globalisation in section 2.1.2. Section 2.1.3 outlines which are the driving forces behind globalisation; subsequently, consequences of globalisation are presented in section 2.1.4.
2.1.1 The international business environment
As mentioned in the introduction to this Chapter, the international business environment has altered in recent decades and the way to conduct business today is different to methods used by companies some years ago. In his article dated 1998, Dunning points out three features that have particularly changed the world economy:
The first is the emergence of intellectual capital as the key wealth creating asset in most industrial economies. This is indicated by annual capital expenditure on information technology in most developed economies exceeding expenditure on product technology. Another indicator of the rising significance of non-material assets as creators or facilitators of wealth is the growth of services, and particularly those which are knowledge or information intensive. According to World Bank figures of 1997, services accounted for 63 percent of the world's gross national product in 1996, compared to 53 percent in 1980 and 45 percent in 1965 (Dunning 1998).
The second feature of the contemporary global economy is the emergence of what may be termed "alliance" capitalism. The distinctive feature of alliance capitalism is the growing extent to which, in order to achieve their respective objectives, the main stakeholders in the value-creating process are forced to collaborate more actively and purposefully with each other (Kang & Sakai 2000). Such collaboration includes the conclusion of close and continuing intrafirm relationships between suppliers and customers and among competitors. The theory of a growing importance of alliances is underscored by Thomas, Pollock & Gorman (1999), who suggest that it is unlikely that a single firm will possess all the resources to compete for the future and argue that coalitions and alliances with other organisations will become an increasingly important component of effective competition.
The third and, according to Dunning, most transparent feature is the phenomenon of increasing globalisation of economic activity, made possible by advances in transport and communications technologies and the reduction in trade and investment barriers throughout the world. Zahra and O’Neill (1998) support the transparency of globalisation by remarking that issues of globalisation are publicly visible. The business press reports daily about problems and opportunities in different countries and industries, implying an increasingly demanding and unforgiving competitive environment. Today’s managers and firms have to be aware of changing patterns of global competition, driving forces behind these changes, and implications for companies' operations and possibly even survival.
The process of globalisation does not extend to all countries in the world. Many developing countries and countries with protectionist regimes do not share in the technological and economic reforms associated with globalisation and do not form parts of the globalisation process (Levitt 1983).
2.1.2 Defining globalisation
Although Cavusgil (2001) describes globalisation as one of the most fascinating developments of the 20th century, there does not appear to be a precise, widely-agreed definition of globalisation. The breadth of meanings attached to it seems to be increasing over time, assuming cultural, political and other dimensions in addition to its economic nature. Descriptions and attempts at defining globalisation include the following:
- The World Bank (2000) defines economic globalisation by referring to the observation that “in recent years, a rising share of economic activity in the world seems to be taking place between people who live in different countries, rather than in the same country”.
- Ger (1999, p. 66) proposes the following definition: “Globalisation consists of an ever-increasing number of worldwide chains of economic, social, cultural, and political activity as well as the intensification of levels of interaction between societies. Global flows of people, money, technology and information, media images, and ideologies are diverse and complex”.
- Globalisation is about an increasingly interconnected and interdependent world; it is about international trade, investment, and finance that have been growing far faster than national incomes. Globalisation also includes technologies that have already transformed known abilities to communicate in ways that would have been unimaginable a few years ago. It encompasses the global environment, communicable diseases, crime, violence, and terrorism. From a labour perspective globalisation refers to new opportunities for workers in all countries to develop their potential and to support their families through jobs created by greater economic integration. At the same time it is about international financial crises, about workers in developed countries who fear losing their jobs to lower-cost countries with limited labour rights. In developing countries it influences labour that worries about decisions made in faraway head offices of international corporations that affect their lives (Wolfensohn 2001).
- Globalisation denotes a process of denationalization. The key feature underlying the concept of globalisation is the erosion and irrelevance of national boundaries in markets which can truly be described as global (Walker & Fox 1997).
- Globalisation stands for “greater global economic integration via trade, capital and technology flows, but also for growing competition from low-wage countries and for labour outsourcing via foreign direct investment” (Trabold 2001). Globalisation is a rather controversial topic as it is also seen as a cause of rising unemployment and thus as a threat to democracy and prosperity in Western countries.
- According to Cavusgil (2001), globalisation of markets involves the “growing interdependency among the economies of the world; multinational nature of sourcing, manufacturing, trading, and investment activities; increasing frequency of cross-border transactions and financing; and heightened intensity of competition among a larger number of players.”
- Finally, Ohmae draws the comparison between geographical and economic issues by pointing out that “on a political map, the boundaries between countries are as clear as ever. But on a competitive map, a map showing the real flows of financial and industrial activity, those boundaries have largely disappeared” (Ohmae 1989, p. 153).
Questions arising from the variety of definitions include the following: what are the driving forces behind these changes and what will be the consequences and implications for companies used to operating within their domestic geographical boundaries. These questions are addressed in the following sections.
2.1.3 Driving forces of globalisation
After having considered the phenomenon of globalisation in the previous section, the following paragraphs highlight some of the forces that have caused globalisation to occur in the past and that still promote globalisation today.
The events listed in the following section have opened markets and economies and facilitated the process of globalisation and integration. The forces that have contributed to globalisation are manifold, and they include:
- Technological aspects
- Political imperatives
- Global financial markets
- Expansion of multinational companies
- New entrants to the world economy.
These aspects are explained in more detail in the following sections.
- The availability and use of improved technology
There is a close link between technological progress and globalisation. On the one hand, the higher competitive pressure on global markets forces enterprises to apply recent scientific findings more rapidly. On the other hand, technological progress generates conditions for further globalisation, for example through more efficient communication networks, facilitating global capital and goods flows (Trabold 2001).
Technological drivers comprise cumulative developments in information technology (IT), telecommunications, the convergence or fusion of IT and telecommunications, end-user demand for the integration of IT and telecommunications, and the impact of these factors on organisational structures and strategies (Walker & Fox 1997). Technology is described as a powerful drive towards a converging commonality, a force that “has proletarianized communication, transport, and travel” (Levitt 1983, p. 92). Better and cheaper communication and transport lead to increased competition in even small local market segments that were protected from distant, global competitors and now feel the pressure of their presence.
Enright & Roberts (2001) argue that enhanced communication networks allow commerce to take place with trading partners around the world 24 hours a day, seven days a week. Knowledge and ideas are rapidly diffused throughout the world and incorporated into competitors' products. Products today may be designed in one country, fabricated in a second, assembled in a third, and sold throughout the world. A competitive threat can come just as easily from a company on another continent as it can from a local company.
The compression of distance and time intensifies competition by presenting new business opportunities to competitors through access to world markets and by enabling the rapid learning of competitors' strategies. Relatively new to the factor technology in this context is the rise of electronic communities and commerce alternatives over the internet. The internet enables commerce without the need to be actually present at the customer’s destination, thereby fuelling globalisation (Thompson & Strickland 2001).
- New political imperatives (tariffs, trade barriers, privatization, and deregulation) The liberalization/deregulation movement in most OECD countries has removed many of the capital and foreign exchange controls and barriers which existed as an impediment to a globally integrated economy (Cavusgil 2001). Coupled with the removal of many protectionist trade restrictions, the free flow of capital across national borders has been enhanced. As a result, liberalization and deregulation can be labelled as catalysts for free-flow of goods and capital across national borders (Rodrik 1997). This, in combination with efforts by organisations such as the World Trade Organisation (WTO) to further reduce tariffs and quotas and establish rules of procedure governing international trade, has led to an increasing irrelevance of geographical boundaries in today’s markets, one of the most transparent signs of globalisation.
- The expansion of global finance and financial markets
Globalisation has decreased the importance of national boundaries in the raising of capital. Financing for new projects is no longer restricted by regulatory barriers and their associated compliance costs to domestic institutions (Walker & Fox 1997). For example, U.S. companies can raise capital in Europe through a Eurobond issue, while Australian companies raise debt capital in the United States.
- The active expansion of multinational firms
According to Levitt (1983), one of the main forces for globalisation is the emergence of global markets. He argues that people from isolated places and impoverished backgrounds have been made eager for modernity’s allurements by technology that has facilitated the spread of products and services around the globe. In addition, there are strong indicators that a convergence of lifestyles, consumer preferences, and media habits is underway (Cavusgil 2001). Segments of consumers exhibit remarkable similarities across national markets, leading to a homogenization of markets that is facilitated by increasing standards of living, transnational media, and stepped up multinational company activity. This homogeneity makes national markets more accessible to international competitors (Leontiades 1985).
As a result, global markets for standardized products on a previously unimagined scale have emerged and offer new opportunities to companies. Companies can benefit from economies of scale in production, distribution, marketing, and management, transforming a global expansion into an attractive alternative to continue operating only in the domestic market. The decision by an increasing number of corporations to expand abroad has again fuelled competitors’ reactions and thus globalisation as such.
- New entrants to the world economy
Industrialization and spreading economic development was at one time confined almost exclusively to Western Europe and North America. In recent years, this has spread to include a host of additional countries, creating in its wake new opportunities through additional markets and new threats through additional competitors. An area greatly affected by these developments is the central and eastern European bloc, where Communism proved unworkable and finally collapsed in the 1990s. This region offers investors a new market of 450 million consumers and a so far unexplored low-cost manufacturing opportunity due to low wage rates (Deresky 2000). Also, the entry of China as member of the World Trade Organisation is a sign of a changed relationship to the world economy. Although China used to impose high tariffs on imported products, its membership of the WTO in 2001 implies adherence to WTO principles and thus lower tariffs and quotas. This, in turn, is expected to transform China into an attractive marketplace for foreign companies.
Globalisation and its increased diversity and nature have general consequences but also specific impacts for companies. These will be referred to in the following section.
2.1.4 Consequences of globalisation
Transactions that gain a global character have a drastic impact on company performance and industry structure. Global linkages may shorten product life cycles, create intense price pressures, displace manufacturing, outdate technology or design, or simply cause sales and profitability declines. At the same time, global exchange may lead to new growth opportunities, new sources of know-how and production inputs, new product ideas, or partnerships which cause synergy and new sources of competitive advantage. As a result, entire markets and industries, if unprepared, can be lost to competitors due to the consequences of global competition (Walker & Fox 1997). It is imperative for companies to understand the consequences of the increasingly global nature of market transactions. Globalisation threatens players that confine themselves to a narrow set of opportunities and rewards those that can envision and operate in a larger space.
Globalisation also has an impact on the environment that companies operate in. Whereas managers in the past were able to focus primarily on factors in the domestic environment, such as organisational configuration and culture, in determining their competitive stance, technological advances in transportation and communications, coupled with the steady erosion of government imposed tariffs and trade barriers, have broadened the scope of most companies' competitive environments (Thomas, Pollock & Gorman 1999).
In addition, competition for customers and markets has intensified significantly as a result of globalisation. Whereas only a handful of multinational companies dominated international trade a couple of decades ago, today companies from all parts of the world are participating in worldwide business. Companies from practically every nation are competing for positions in various industries (Enright & Roberts 2001). Companies have to be prepared for threats from various locations on the globe and guard their business against potential competitors. An example of changed patterns of competition is the following quote by the then CEO of Daimler Benz, Edzard Reuter, when he argued that “competition in our traditional market segment has increased dramatically. We have to face worldwide competition from people working on different cost assumptions and in different situations” (Menke-Gluckert 1993, p. 8).
Also, the fact that technology spreads freely and rapidly between markets and players means that technological leadership does not provide a monopolistic advantage for very long. Companies must capitalize on their discoveries quickly before others match them (Walker & Fox 1997), which is underlined by Bartlett and Ghoshal (2000) who describe today’s global marketplace as information based and knowledge intensive. All aforementioned aspects have altered the global business environment and have certain implications for companies which will be described below.
2.2 Globalisation and the business environment
After having pointed out the driving forces of globalisation and the consequences for the international business environment in the previous section, the following section analyses the implications of globalisation for companies, i.e. how does the altered business environment impact on business strategies and approaches. Subsequently, motivations for companies to globalise are highlighted in point 2.2.2, concluding this Chapter with the distinction between multinational and global competitors (2.2.3).
2.2.1 Implications of globalisation for companies
Globalisation impacts on the business environment of companies. It has altered the way of doing business and has changed the criteria that guarantee success by changing the patterns of competition. The implications of globalisation for companies include:
- The need for continual learning and proactive behaviour
- The need to manage change
- The need to form alliances
- The need to act as an ‘insider’ in each market
- The need to understand and respect local cultures
- The need to coordinate
- The need to integrate
- The need to exploit global economies of scale
- The need to determine optimal locations for activities and resources.
Each of these aspects is elaborated in the following sections.
- The need for continual learning and proactive behaviour
Cavusgil (2001) argues that enterprises that learn to operate in today’s more complex, uncertain environment are more likely to succeed. In order to compete successfully on the global stage, companies have to develop a culture of continual cross-border learning. Successful companies enjoy profits from overseas operations because they “learned how to learn form the constant flow of new demands, opportunities, and challenges that international competition brings” (Bartlett & Ghoshal 2000, p. 135). This means that the competitive challenge for managers in a globalised environment consists of developing processes for identifying global competitors, and adapting to the increasing complexity and rapid rate of change.
A basic requirement for success is a company’s ability to exploit unprecented opportunities provided by uncertainties. Thomas, Pollock and Gorman (1999) argue that these opportunities only arise for firms with well developed visions used to shape markets and to define characteristics and resources that can lead to sustained competitive advantages. In addition to the requirement of learning and adapting to new business environments, it is suggested that “rather than behaving reactively and trying to figure out how to compete within the structure of existing industries and product markets, those firms that will be most successful in the future compete for the opportunity to define the structure of industries that do not yet exist” (Thomas, Pollock & Gorman, 1999, p. 77).
- The need to manage change
Managing globalisation means managing change and handling a variety of human issues connected with local settings. Defining global strategy is a high-level corporate function that can be exercised for the whole corporation with a single plan. Operationalizing the strategy means managing multiple changes in multiple places. Considering its strategic importance and global significance, successful integration is about dealing with people and managing resistance to change (Kanter & Dretler 1998).
It is important to remember that global strategies are not activities that are divided from other activities in the firm. A company’s reaction to globalisation is a part of or a consequence of a firm's overall strategy (Andersson 2000) and needs to be brought in line with overall objectives and strategical moves. Managing change should take place with managers at the top level keeping in mind that ‘global’ connotes holistic, integrated activity. Global strategy involves thinking in an integrated way about all aspects of business, assessing every product or service from the perspective of both domestic and international market standards (Kanter & Dretler 1998). The important point is that the holistic dimension is necessary for creating a successful global strategy that manages change successfully.
- The need to form alliances
A fundamental implication of globalisation of markets is the need to establish productive partnerships with other organisations at home and abroad. The costs, complexities, and risks associated with business ventures drive companies toward collaboration with partners, including overseas distributors, agents, contract manufacturers, trading companies, freight forwarders, or competitors. Partnerships are established to seek synergy in value-adding activities, including manufacturing, research and development, and marketing. This need for collaboration and cooperation has also been termed “alliance capitalism” (Dunning 1998).
While free markets imply competition among firms, there are sound reasons for companies to collaborate and cooperate. Collaboration can be observed in the increase of transnational corporate strategic alliances and mergers (Kang & Sakai 2000). Motivations to cooperate include high risks and costs associated with international business ventures. By pooling resources, companies can create synergistic alliances for research and development, design, manufacturing, or marketing.
Companies from often distant parts of the world form strategic alliances to accomplish specific goals, such as development of new technology, cross-licensing, or joint marketing (Cavusgil 2001). Successful international companies thrive on the basis of networks of collaborators. Relationships established with foreign agents, distributors, or support service providers add strength to international operations, creating globe-spanning networks that are able to mobilize resources, and pursue opportunities more effectively than even giant firms unaffiliated with such networks (Ger 1999).
- The need to act as an ‘insider’ in each market
An implication of presence in multiple countries is that companies must respond to the heterogeneity of these markets (Gupta & Govindarajan 2001). Differences in language, culture, income levels, customer preferences, and distribution systems are only some of the factors to be considered. In the case of apparently standard products, at least some degree of local adaptation is often necessary, or at least advisable.
Kanter and Dretler (1998) argue that the more global the scope of business operations, the greater the need to make local connections in order to gain good will from customers, employees, and local governments. Companies must become insiders in all their markets in order to be globally effective; this is reflected in the approach of Asea Brown Boveri who prefer to refer to their operations as multilocal rather than global, as a company with many homes (Nachum 2001).
In attempting to become an insider in each market, Ohmae advocates that “companies exploit opportunities to redefine domestic games to their own advantage” (Ohmae 1989, p. 158). Global success rests on the ability to listen and learn in locations far from the home base.
Companies failing to establish a strong insider position tend to misunderstand the local political, legal, or social environment, which still exhibit significant variations from country to country. Ultimately, success depends on a company’s ability to develop knowledge of country-to-country differences (Cavusgil 2001).
- The need to understand and respect local cultures
Globalisation of markets causes the individual firm to understand and operate within a more complex political, legal-regulatory, and cultural framework. While transactions are fundamentally the same, the context is quite different and often overwhelming for managers. To operate successfully in less familiar environments, managers must develop sufficient understanding of the government sector, regulatory frameworks, and the cultural idiosyncrasies of the markets where they wish to do business (Walker & Fox 1997).
An implication of globalisation is the need to tailor global processes to local cultures. Recognizing that different cultures require different rules of conduct and administrative procedures, global companies are enabled to solidify their presence around the globe. Sensitivity to local considerations improves the chances for global success, as Kanter and Dretler (1998) point out.
- The need to coordinate
Another component in crafting and implementing global strategy and thereby reacting to changes globalisation has created is to develop and maintain smooth, seamless coordination across locations. A company needs to foster the transfer of knowledge and skills across locations. Whereas not all locally created knowledge may be relevant outside the local environment, other types may be relevant across multiple countries. If this knowledge is leveraged effectively, it can yield strategic benefits to the global enterprise, ranging from faster product and process innovation to lower cost of innovation and reduced risk of competitive pre-emption. The pursuit of seamless coordination along these dimensions requires creating eagerness among managers whose cooperation is essential, and setting up mechanisms that will put the desired cooperation into practice (Gupta & Govindarajan 2001).
Vital in the context of coordination in a global company is the capacity of information systems. In a dynamic environment, though, personal relationships are also important. Zahra and O’Neill (1998) argue that electronically facilitated relationships may not provide the enduring bonds necessary for managers to resolve conflict or manage ambiguity. It is proposed that a balance between technological touch and personal touch is to be sought in order to ensure coordination across affiliates.
- The need to integrate
As companies become more global, the interests of the multinational group as a whole need to be reconciled with the individual interests of each affiliate corporation. In other words, there is a need to integrate or harmonise the decision-making process across affiliates, demanding improved communications both in capacity and sophistication (Walker & Fox 1997).
Kanter and Dretler (1998) state that the key to success in the global economy is for companies to behave in a more integrated fashion in order to “tap the collaborative advantage that comes from being able to use all resources and being able to work across boundaries” (Kanter & Dretler 1998, p. 66). Success requires becoming knowledgeable about local needs, skilful at managing local changes, and expertise at developing cross-country relationships. However, one of the most important aspects in the context of integration is the need for flexibility: a company’s organisational structure must not be permanent but rather has to be modified in order to suit changes both within a company and its external environment (Wild, Wild & Han 2000).
An important facet of integration and the aforementioned need for cooperation in the international company is the demand that managers have an insight into the extent to which aspects such as organisational structure, leadership styles, motivations patterns, and training and development models are culturally relative and need to be considered when crossing borders. The focus in this process lies on a manager’s ability to recognise one’s own culture and where it may differ from that of people in foreign countries where the company is doing business (Fletcher & Brown 1999).
Hofstede (1997) argues that this cultural awareness is one of the most relevant implications of globalisation and section 2.4 will analyse culture and its impact on internationalisation strategy in depth.
- The need to exploit global economies of scale
Walker and Fox (1997) advocate that transnational corporations attempt to exploit global opportunities in order to maximize global economies of scale and scope. According to Gupta and Govindarajan (2001), building global presence automatically expands a company’s scale of operations, enabling larger revenues and an enlarged asset base. Larger scale operations alone do not create competitive advantage; in order to convert scale into economies of scale, a company will have to undertake relevant actions to earn the benefits that economies of scale can offer. For example success in a globalised world requires a search for sales opportunities in similar segments across the globe in order to achieve the economies of scale necessary to compete (Levitt 1983).
Benefits a company can enjoy in achieving economies of scale include the possibility to spread fixed costs over larger volume; pooling global purchasing power over suppliers; and creating critical mass (Cavusgil 2001).
- The need to locate optimal locations for activities and resources
In performing the various activities along its value chain, every firm has to make a number of crucial decisions, including where the activity will take place. Optimizing the location for every activity in the value chain can yield one or more of three strategic benefits: performance enhancement, cost reduction, and risk reduction (Gupta & Govindarajan 2001).
Performance enhancement is related to the fact that location decisions can affect the quality with which any activity is performed in terms of availability of needed talent, speed of learning, and the quality of external and internal coordination. Cost reduction refers to making use of contract manufacturing in countries with relatively low wages. Location decisions can affect cost structures in terms of local manpower and other resources, transportation and logistics, as well as government incentives and local tax structures. Risk reduction refers to ways to manage risks such as currency risk. If companies spread the high cost elements of their manufacturing operations across a few select and carefully chosen locations around the world, their individual risk can be minimized. In addition, location decisions can affect the risk profile of the firm with respect to currency, economic, and political risks (Trabold 2001).
Globalisation has a number of implications for companies and creates a number of imperatives that companies competing in today’s global marketplace must obey. These needs, following the globalisation of markets, include the need of continual learning, the need to manage change, the formation of alliances, the need to act as an ‘insider’ in each overseas market, an understanding of local cultures, coordination and integration among overseas activities, the need to exploit global economies of scale, and optimal decisions concerning the location of activities and company resources.
The next section examines motivations for companies to globalize and distinguishes between multinational and global competitors. Following the analysis of these points, the internationalisation strategy is analysed by considering the strategic planning process and its functioning.
2.2.2 Motivations for companies to globalise
The active expansion of multinational firms has been identified as one of the driving forces of globalisation in point 2.1.3. The following section determines the reasons why companies opt to expand internationally. Fletcher and Brown (1999) argue that the single most important motivation for companies to globalize is the threat of decreased competitiveness. Apart from this factor, further motivations to expand internationally include the following:
- Access to new customers
- Cost reductions and enhancement of the firm’s competitiveness
- Exploitation of core competencies
- Spreading business risk
- Access to resources
- Circumventing trade barriers.
Each of the aforementioned motivations to globalise is described in depth in the following sections.
- Access to new customers and markets
Expanding into overseas markets offers potential for increased revenues, profits, and long-term growth and becomes an attractive option when a company’s domestic market is mature (Thompson & Strickland 2001). Also, a mature product or service with restricted growth in the domestic market often enjoys a bright outlook in foreign markets where the product is at an earlier stage of its life cycle.
- Lower costs and enhancement of the firm’s competitiveness
Some companies opt to expand outside their domestic market because the sales volume achieved in their home markets is not sufficient to fully capture manufacturing economies of scale. Economies of scale can be achieved when higher levels of output spread fixed costs over more units, thereby lowering the per-unit cost of a product (Deresky 2000). In addition, cost savings can be reached by shifting production overseas by exploiting lower operational costs in regions other than the domestic market. As a result, international expansion can provide companies with a better cost structure and improve a company’s competitiveness.
- Exploitation of core competencies
Companies with competitively valuable competencies might be able to leverage these organisation-unique capabilities into a position of competitive advantage in foreign markets. Firms can exploit these specific features and transfer the competency into foreign markets, representing a further motivation to globalize (Levitt 1983). In addition, a company might discover foreign markets that present higher profit opportunities than the domestic market, thus a leverage of competitive advantages in these promising markets is a logical consequence.
- Spreading business risk across a wider market base
By operating in a number of different foreign countries, a firm reduces its dependence on its domestic market. As a consequence, business risk is reduced as a downturn in the company’s domestic market may be sustained by buoyant developments in the company’s overseas markets (Thompson & Strickland 2001).
- Resource access
Resource access is a further factor that might entice companies to start operations overseas. The availability of raw materials and other resources offers greater control over inputs, lower transportation costs, and an increased level of flexibility (Cavusgil 2001). The aspect of better access to resources is more relevant in some industries than in others.
Governments in several countries seek new foreign investment of capital, technology, and know-how. These governments offer incentives – such as tax holidays, interest-free loans and subsidies – to multinational companies interested in investing in that particular country. Incentives might make a country more attractive and the exploitation of incentives offered can be a motivation for companies to globalize (Fletcher & Brown 1999).
- Circumventing trade barriers
Barriers to trade include quotas, tariffs, and other restrictive trade practices such as licensing requirements that make trading to specific countries expensive and impractical (Ger 1999). In order to avoid these barriers to trade, some companies switch from trading to gaining a foothold in a country, for instance by means of overseas manufacturing. These companies are shielded against trade barriers and abolish the risk of new barriers in the future.
The above list has provided a select number of motivations for companies to globalize. Section 4.1 will refer back to this list by outlining the specific aspects that make Western Australia an attractive market to foreign investors, i.e. what motivation could motivate foreign, in particular German companies, to invest in Western Australia.
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- Fachhochschule Aachen – Wirtschaft