Internationalization of Business: Management Report

Introduction

Elecdyne is a SME in Japan Tokyo. The company was started in 1990, and has grown from having 5 employees to 100 employees. Its products include televisions, VCRs, and DVD players among others. The company uses technology licensed from Japanese and European multinationals. It is currently markets only in Japan, and its success is in price competition. This competition is currently affected due to the company’s need to pay for the licences, its high wage rates relative to China and Eastern Europe and the near impossibility of hiring graduates for research. Due to globalised business environment, the company is threatened in terms of technology change, innovation and the nature competition is changing.

This is a management report that analyzes the issues affecting the global business environment. In this analysis, the report identifies the key trends likely to affect Elecdyne over the next 5 years.

Global environment

Issues affecting the global business environment include the physical and societal factors such as the political, cultural, economic and geographic factors, and competitive factors such as the advantages in price innovation and marketing, comparative capabilities of competitors, country’s competitiveness and local taxes (Elgar 2003, p. 261).

There are issues of new laws, trade barriers, tax changes and other policies. The use of STEEP and PESTEL model helps businesses to distinguish these factors. There are the political factors that control goods wanted in a country, and controls the extent of subsiding of firms. Political factors also affect the workforce, infrastructure and the general health of people. Economic factors are also environmental factors facing the general businesses. These include charges of taxation, interest rates, inflation and growth of the economy (Battelle 2010, online).

Social factors are also environmental factors in businesses. The aging population in UK has for example increased firm’s costs due to pension payments. Technological factors affect how new products come in the markets. Today there is online trading, which has been made available through a change in technology. Environmental factors also affect the business environment generally. These include climate and weather changes. For example, temperature change has an impact on many businesses such as tourism and farming.

Legal factors affect the legal environments where businesses operate. Legal changes affect business behavior. Recently, business‘s actions have been affected by legislations such as those involving disability discriminations, age discrimination and minimum wages among others.

This therefore means that businesses should consider international trade, taxation policies and the euro politically, interest rates, national income stock markets, exchange rates and unemployment economically, aging population, income distribution and attitude to work socially, innovation and development of new products technologically, environmental issues and global warming environmentally and things like employment law and competition law legally (Elgar 2003, p. 261).

Elecdyne faces the general threats created by an increasingly globalised business environment, particularly in terms of technological change, innovation, and the changing nature of competition such as the growing importance of locations, labour costs and value-adding chains. The situation of the company is that it was forced to reduce prices by 5% to compete with low wage based “Chinese” production of multinationals (Further price cuts likely). The issue of competition on businesses is thus a great threat that hinders business from internationalization. Companies need to adopt an operation strategy that will add them a competitive advantage in the markets they operate in. The technological licenses are up for renewal, and license holders are asking for 20% increase. Additionally, the company has not been able to grow in sales for 2 years. This has resulted to no end of year bonus, which has made key staff to leave. As a result of the company’s failure to recruit new R&D graduates for 3 years, chief designer left for rival multinational. Due to globalization, there has been little time to generate a coherent strategy by Elecdyne due to the increasing pace of change in communication, production and product technology and innovation, as well as the increasing power of global multinationals.

In the 5-10 years to come, Elecdyne will be dealing with issues such as those related to new technologies, competition, global economic crisis and unemployment. Using STEEP analysis, the company will analyze the impact of the external environment on the company. During the analysis, the company will look at the social technical, economic and political factors which are thought to be the general issues that face businesses during internationalization. Using STEEP analysis, the company will see a clear picture of the environment so that everything is well looked at to plan strategically. The tool helps companies that use it to find out what the company should do to meet its strategic objectives.

STEEP Analysis

External factors Analysis
Social
  • Ageing population (among the customers there are less old people compared with young people),
  • The rate of women increases in business,
  • Anywhere and anytime people need to communicate through social networks (Twitter, Facebook, Vide).
Technological
  • Technology advances are continually in development: R& D is in expansion,
  • News circulate quickly on network,
  • Mobile phone is the primary way to access internet.
Economic
  • Global downturn,
  • Lots of competitors in this business,
  • Asia takes advantage of cheap labor rates,
  • Consumers want the best with an attractive price.
Environmental
  • Ecology is a growing concern for businesses,
  • Environmentally responsible initiatives.
Political
  • Intellectual properties,
  • Stricter legalisation about exchange product and environmental policy.

New production and market opportunities for Elecdyne are opening due to expansion of EU eastwards. There is increased technology that create new product that requires increased R&D spending to avoid slipping down supply chain. Additionally, the company should be aware of the threats from oil price increase, food shortages and credit shortage that may impact globalisation, but may also provide opportunities.

There are two factors that a company should consider when choosing countries where they can internationalize. These two factors are cost minimization and access to technological expertise. For example, in the case of Elecdyne, access to technological expertise will allow it to avoid reliance on large multinationals. Additionally, the company should choose to locate at large new markets to enjoy the opportunities available.

Specific business environment

For the company to internationalize, it needs to focus on specific information for the strategy to be effective. The company needs to identify markets which have bigger scope and potential than currently in Japan. Lower labour and production costs are required to lower overall costs and increase potential profitability. Finally they need to consider a market where technology is at the forefront of the industry in order to gain new innovative development. The company should analyse the competitive advantage a particular location will accord. Porters Diamond is a framework that is employed to analyse issues associated with internationalization of businesses, and this company should use it.

Factor Conditions

Japan Mexico China Germany
Population (Million) 127.078.679 112.336.538 1.339.713.000 81.471.834
The average wage per month 3121.49$ 85.56$ 548.58$ 2767.9$
Unemployment (2011) 4.9% 5.6% 4.3% 6.1%
GDP $ 5391 billion $ 1104 billion $ 5745 billion $ 3306 billion
GDP per CAPITA $33 885 $14 406 $7 544 $33 081
Inflation 0.2% 3.14% 6.1% 1.2%
Interest Rate 1.15% 4.86% 7.47% 2.74%
Inward FDI
( million)
11.939 USD 12.522 USD 95.000 USD 35.606 USD
World-class GPD 3rd 14th 2nd 4th
Labor cost per hour ($) 22.89$ 2.92$ Within China: 0.45$
Without China: 0.78$
27.69$
,R&D level (% of GPD) 3.3% 2.7% 1.4% 1.7%
Qualification level Very skilled unskilled unskilled Very skilled
Factor Conditions High tech, automobile, electronic, shipbuilding Oil, natural gas, tertiary Labor, manufacturing industry, low price Large domestique market, automotive industry, electrical engineering
Demand Conditions fragile Strong strong Very bad
Labor productivity annual growth rate 2010 3.2% 1.9% 10.5% 1%

(Indexmundi 2011, online: Oecd 2011, online).

Companies attempting to internationalize should first seek to know the position they are in through SWOT analysis. Given the position of the company currently, Elecdyne needs to choose a location very fast.

Religion is an important factor to consider. The very diverse religions in the world can affect businesses. There are different beliefs in different locations that give meaning and are related to supernatural. The effects brought by religion on business include holidays of countries, and differences in financing businesses.

Different countries have different manners in business that are acceptable and those termed as unacceptable. Language is another factor that should be considered when choosing the locations (Dennis 2006, online). It is through language that people communicate. Language helps in understanding things around. Work ethics in different locations should also be considered to realize how different the moral of work is. There are those countries that emphasize on the importance of work. It is important to know how the right between men and women differ. There are those countries like Saudi Arabia where men dominate. In such situations, women do not work, own bank accounts or any other property without first seeking for permission from their fathers or husbands. The different locations have different cultural values and attitudes that affect the execution of businesses (Geert Hofstede. Com 2011, online).

UK is considered to be individualistic compared to Japan. Workforce in Japan is best in team working, and has the advantage of sharing ideas as compared to the individual manner seen in UK. Japan work under rules and regulation while in UK, the workforce questions new situations. Geert Hofstedes model of cultural dimension is very important when looking at culture of the different countries. Work related values, norms and self description vary with countries.

Internationalization Perspectives

Elecdyne Company is able to compete on prices because of efficient cost management. However, the company relies on technology licenses, it has only enough capital for one overseas operation, has little money for R&D and has relatively high wages compared with its competitors. The company has overseas production sites in triad markets of Asia, North America and Europe. On the other had, it faces competition from low cost rivals and little time to adjust. It is due to this, that a good location should be chosen fast from the six main options the company is to consider. This part focuses on the relevant information for the three countries Elecdyne should consider internationalising to and compare with Japan using appropriate analytical frameworks.

Location choice

From the six countries that were placed as options for Elecdyne, the company has to narrow the choices to three by looking at their business related strengths and weaknesses, opportunities and threats. This should be done in relation to the current situation of the company to assess its needs to know which country suits them well. The three countries chosen from the six options are China, Mexico and UK.

If the company chooses China, it will enjoy the advantage of its relative nearness to supply chain and production, lowest wage location, plentiful labour supply, room to expand and large future market. However, choosing China would mean entering joint venture with local Chinese elecElecdynes company, and giving them production management technology. Elecdyne won’t be permitted to produce along coastal strip (near rivals’) in Shanghai. Have to set up 500 miles inland (region has poor road infrastructure and no history of dealing with Japanese companies). Additionally, it will take the company 5 years before local population is able to purchase enough product to justify production for market reasons.

Choosing Mexico will give Elecdyne the advantage of easy access to the USA. The site is only 30 miles from the border. Wage rates are 20% of those in Japan (though still double those in China), but the labour is plentiful. However, Elecdyne would be the only Japanese company in the area. In addition, other European and US elecElecdynes firms are well established, and offer high wages. If the company tries to match the wages with these paid in Mexico, its profitability would be put back by a year. There are also some legal problems of Elecdyne’s licenses. Again, there are different currencies in Mexico and the US (Foreign Affairs and International trade Canada News 2011, online).

If Elecdyne chooses UK, it will enjoy free access to large and rich EU markets. There are also several low cost production sites offered while local development agencies such as the Welsh Development Agency are keen to assist with grants for building, equipment and training. The UK has a large number of University research institutions prepared to allow low-cost use of facilities and expertise. There are also large number of Japanese firms already set up in UK, offering schools etc. plus many golf courses. However, UK has the highest cost of production option where wages are 70% those of Japan. The EU markets are fragmented by language and culture. Additionally, Elecdyne will require highly skilled marketers to maximise opportunity. UK is not part of EU currency.

Strategy, structure and rivalry

Country Germany Mexico China
Market strategy The use of e-commerce in carrying out business activities. Evidently, amazon.com/EU has been a major gateway, offering SME’s and MNE’s in Germany, with the fastest and most cost-effective means of business transaction. The Mexican economy has been booming, ever since it transformed itself from an oil dependant nation to a more diversified economy in automobile &advanced manufacturing production, electrical appliances as well as information and communication technologies Chinese cheap cost of production and vast labour have made it of the most industrialised countries in the world and a “member of the international community and driver of economic growth” people’s daily mail (2009).However, Elecdyne can consider sourcing into China, in order to cut cost and maximise production. Also China has turned its focus on creating and maintaining customer relationship in order to sustain profitable growth which is vital for Elecdyne to take into consideration (Friedman 2011, online).
Market structure The German electronic market is structured into different segments, ranging from large electronic products like washing machines dishwashers, stoves; to small electric equipments like toasters, coffee machines, hairdryers, to music CD’s, film DVD’S, computer hardware’s and software’s; as well as consumer electronic sets like TV sets, Hi-fi systems, game pads e.t.c Due to the presence of North America Free Trade Area (NAFTA), Mexico seems to be enjoying FDI from a lot of Countries within these areas. Most of the electronic manufacturing companies are located in the Northern part of Mexico; companies include Canadian Celestica, Flextronics, Jabil Circuit and Sanmina SCI. Making it the second largest supplier of consumer electronics to the United States, as well as a revenue of $71.4bn as of 2010 The structure of market is heavily influenced by FDI’s Companies operating in China. However, a segment of Chinese markets are internet based since its consumers are active users of internet, this means Elecdyne could potentially make more profit, if sales increase.
Rivalry in the electronic market Stiff competition between giant electronic retailers such as Metro AG, Experts, and Electronic partner (EP), growing trends in internet retailing and home shopping (Euromonitor International 2010, online) There hasn’t been much competition between local industries, due to the presence of FDI. There is an intense rivalry between the Asian companies of similar range of products like the Chinese Corporation (Chimei Company’s press release 2008, online)

Choice of method

Countries China Germany Mexico
Strengths of the country Multimedia market increased of 30% in 2009. Furthermore, China has low cost labor. Germany is the bigger European market of multimedia. Entry in the European market thanks to its geographic situation. Mexico has low cost labor. Multimedia market is very dynamic
Scope and growth rate Increased of 30% in 2009 More than 50% of production of electronic constitutive are exported, in majority in EU countries. Market estimated at $11 milliard in 2007.
Growth rate is average of 10% in years

Products. Related and supported Industries

Japan Mexico China Germany
Packaging and manufacturing industry Manufacturing and distribution one of Japan ‘s main industry (Lah 2011, online). Mexico’s main export commodity is manufacturing Have raw materials to support manufacturing and partners with Japan for electrical industry. Developing and specializes in manufacturing of electrical products. Employ over 25 million for manufacturing and R&D.

Conclusion

Elecdyne has six locations to choose from. These locations are China, India, Mexico, Canada, UK and Poland. These six options differ in terms of culture and their ability to fulfil the needs of Elecdyne. The company, therefore, needs to analyse the differences created by international cultures in the six options to get a good strategy for internationalization.

Each of the three options serves as the best alternatives for Elecdyne. However, the options differ in terms of risk, cost, market, access to technology and environment as seen. It is now upon Elecdyne to decide which of them the most important are.

References

Battelle. (2010) R&D Magazine report shows emerging economies drive global research and development growth. Battelle R&D Magazine. Web.

Chimei Company’s press release. (2008) Chimei moves into the Chinese Market. Web.

Dennis, O. (2006) Language and Thought Process. Web.

Elgar, E. (2003) Learning in the Internationalization Process of Firms. Nd. Luostarinen.

Euromonitor International. (2010) Consumer electronics in Germany. Web.

Foreign Affairs and International trade Canada News. (2011) “Mexico” a global commerce strategy priority market: Seizing global advantage. Web.

Friedman, V. (2011) Marketing strategies for profitable growth: China. Web.

Geert Hofstede. Com. (2011) Geert Hofstede Cultural Dimensions. Web.

indexmundi. (2011) France Unemployment rate. Web.

Lah, K. (2011) Japanese electronics companies’ records large lose: CNN news. Web.

Oecd. (2011) Financial Indicators (MEI). Web.