Introduction
The purpose of this paper is to provide a detailed expansion plan for a leading shipping company. The company was founded over forty years ago in Saudi Arabia where its headquarters are located. Its core business activity is to provide a wide range of shipping services, which include warehousing, contract logistics, distribution, and freight forwarding. In the last three decades, the company grew organically by joining various markets in the Gulf Cooperation Council (GCC) and other Arab countries. Having established a strong presence in the Middle East, the company intends to take advantage of growth opportunities in the rest of the world.
Rapid economic growth in emerging markets is promoting trade between the developed and developing countries. This has resulted into increased demand for shipping services at the global level. The company intends to take advantage of this opportunity by joining the global market. The objectives of the company’s global strategy are to expand its market share, to increase revenue, and to build a strong global brand.
Strategy for Going Global
The company’s strategy for going global is to focus on emerging markets in the short-term and to join developed markets in the medium and long-term. This strategy is justified by the following factors. First, emerging markets have high demand for shipping services due to their rapid industrialization and trade with the rest of the world. Second, the shipping industry in the emerging markets is still at its growth stage. This means that new entrants have the opportunity to penetrate the market easily (Czinkota & Ronkainen, 2012). Finally, emerging markets have little barriers to entry since their governments have focused on economic liberalization to attract foreign direct investments. The developed market, on the other hand, is characterized by high competition. However, the large size of the market justifies entry.
Therefore, the company will begin its expansion by joining Asian markets. Specifically, it will join China, India, and South Korea. These countries have well established infrastructure for shipping activities such as seaports and effective regulatory framework that support growth in the industry. The company will also join Southeast Asian markets, which include Singapore, Thailand, Malaysia, and Philippines. In Africa, the company will operate in South Africa, Kenya, Tanzania, Nigeria, Egypt, and Morocco. In South America, the markets that will be served include Brazil, Argentina, and Chile. After saturating the emerging markets, the company will join North America, as well as, European countries such as the UK, France, Germany, Italy, and the Netherlands.
The company will also expand through e-commerce. This will involve establishing business-to-business e-commerce platforms to serve customers in various parts of the world. For instance, the company will provide transportation services to companies that sell their products through online sales platforms.
International Strategy and Organization
The company’s international strategy is to operate as a multinational corporation with subsidiaries in the markets identified in the foregoing paragraphs. The subsidiaries will operate as independent companies in their markets. This means that there will be minimal coordination from the headquarters. This strategy has the following advantages to the company. First, it will enable the subsidiaries to respond effectively to the needs of local markets. Specifically, the subsidiaries will be able to adapt their services to suit the needs of their customers. The resulting improvement in customer satisfaction will enable the company to overcome competition (Drummond, Ensor, & Ashford, 2010).
Second, the subsidiaries will be able to develop and execute effective competitive moves if they are allowed to operate independently. Given the unique social, economic, and political challenges in various markets, success in the global market can only be achieved by allowing subsidiaries to develop strategies that address the dynamics of their markets (Czinkota & Ronkainen, 2012).
The holding company organizational structure will be adopted to manage the subsidiaries. In this regard, the subsidiaries will be considered as divisions of the parent/ holding company. This organizational structure will promote accountability among the subsidiaries. It will also facilitate rapid expansion through mergers and acquisitions.
International Opportunities
E-commerce Rationale
E-commerce presents the following opportunities for market expansion. To begin with, it will enable the company to gain instant access to the global market. By using an online platform such as a sales website, customers from all parts of the world will easily purchase the company’s services. Thus, e-commerce will reduce the time required to join various markets. Second, e-commerce reduces the cost of expansion (Dominici, 2009).
Establishing an e-commerce system is much cheaper than having physical offices in various markets to serve customers. The resulting cost savings will enable the company to finance important business processes such as product development and marketing. Finally, e-commerce is convenient to customers since they do not have to visit the company’s offices to access various services. This will improve sales in various markets.
E-commerce Critique
In the shipping industry, certain services cannot be purchased through e-commerce (Dominici, 2009). For instance, a multimillion shipping contract that will last for several years cannot be negotiated among parties that are not known to each other. Thus, the company has to establish offices where its sales representatives will answer customers’ questions and convince them to purchase its services. In the distribution segment of the business, e-commerce can limit sales due to security reasons. Online sales are associated with high cases of fraud where customers pay for goods or services that are never delivered. As a result, customers will be reluctant to use the company’s e-commerce system if they do not trust its services.
Recommendations
E-commerce should be used to deliver services that customers can easily purchase online. These include distribution of merchandise on behalf of customers, as well as, freight clearing and forwarding. The company should establish offices in various markets to sell services that cannot be purchased online. In addition, it should improve the effectiveness of its e-commerce sales platform by ensuring security (Dominici, 2009). Access to customers’ information should be restricted. Moreover, a complaints management system should be established to address customers’ concerns. As customers’ trust in the system improves, they will be motivated to use it to purchase the company’s services.
Market Entry Modes
The company will use two market entry modes namely, joint ventures and foreign direct investments. A joint venture refers to “an enterprise where two or more investors share ownership and control over property rights and operations” (Czinkota & Ronkainen, 2012, p. 85). This means that the company will collaborate with established firms in the overseas markets to run its operations. The use of this entry mode is justified by the following factors. To begin with, a joint venture partnership will enable the company to share risks with its partners in overseas markets. The partnership will facilitate quick penetration of the market (Grewel & Levy, 2011).
In particular, it will enable the company to serve the customers of its partners. It will also benefit from the in-depth knowledge that its partners have about various markets. The knowledge will improve the company’s ability to develop and execute effective marketing strategies for the overseas markets. A joint venture will facilitate sharing of resources, which will create financial synergies and economies of scale in provision of shipping services.
The company in collaboration with its partners will manage the joint ventures. The focus of the management will be to identify and address the challenges that are likely to cause failure of the joint ventures. The challenges that will be addressed include cultural differences, communication barriers, and differences in business models/ strategies.
Foreign direct investment involves “direct ownership of facilities in overseas markets” (Czinkota & Ronkainen, 2012, p. 120). In this case, the company will join new markets through mergers and acquisitions. Mergers will be appropriate in the emerging markets in South America and Asia where local firms are interested in consolidation to improve their strength in the global market. Acquisitions, on the other hand, will be appropriate in the African market, which is characterized by small firms that lack the financial strength to compete at the global level. Mergers and acquisitions will enable the company to have adequate control over its operations in overseas markets.
They will also provide the company with the opportunity to understand foreign markets, as well as, to develop relationships directly with its customers. The company will manage its operations by developing the corporate strategy that will guide the activities of its overseas subsidiaries.
Product Development and Marketing
The company’s product development strategy will be based on adaptation. In particular, the company will focus on providing tailor-made shipping solutions to its major customers in various markets. Undoubtedly, customers in various countries have different shipping needs. Thus, standardized shipping services are not likely to address the needs of all customers in the global market. Differences in availability of infrastructure also call for product adaptation (Grewel & Levy, 2011). For example, poor road network in African countries will limit the company’s ability to provide multimodal transportation services, which it offers in the GCC countries. Product adaptation will also help in overcoming competition. It will be important to take into account the features of the services offered by competitors in various markets in order to develop an innovative product. Thus, the company will adapt its services to address the needs that have not been satisfied in various markets.
The marketing strategy will also be adapted to ensure success in overseas markets. Specifically, adaptation will enable the company to overcome social, cultural, and economic challenges in various markets (Grewel & Levy, 2011). For instance, advertising will be done in local languages to overcome language barriers. The subsidiaries will be allowed to develop and execute their own marketing strategies. For instance, dynamic pricing will be adopted to enable each subsidiary to set prices that will improve its competitiveness.
Managing International Operations
The company has strategically chosen to achieve competitive advantages in the global market by pursuing a cost leadership strategy and being responsive to local needs. The cost leadership strategy involves delivering the desired value proposition to customers at a low cost (Grewel & Levy, 2011). The rationale of pursuing this strategy is that it enables the company to provide affordable shipping services to its customers, which in turn increases its sales. However, implementing the strategy is often difficult due to the diverse needs of customers in each market. Therefore, the company will adopt a transnational operations management strategy.
The transnational strategy leads to achievement of “economies of scale, learning, and responsiveness by recognizing that core competence does not reside in just the home country but can exist anywhere in the organization” (Grewel & Levy, 2011, p. 87). This means that the company’s operations will be neither fully centralized at the headquarters nor wholly decentralized to the subsidiaries.
The company and its subsidiaries will share resources and ideas to improve efficiency while maintaining high service quality. Non-core business activities such as accounting and IT will be handled by the headquarters. In addition, low-skilled jobs will be shifted to subsidiaries that operate in markets where labor costs are low. The objective of this strategy is to enable the company to achieve a cost advantage in all markets. The subsidiaries, on the other hand, will focus on marketing, product development, and provision of services. Shifting these functions to the subsidiaries will enable the company to address the needs of each market effectively.
Hiring and Managing Employees
A polycentric staffing policy will be used to hire the employees who will be working in the subsidiaries. This strategy involves “employing and promoting the citizens of the host countries where the subsidiaries will be based” (Czinkota & Ronkainen, 2012, p. 112). The subsidiaries’ management teams will consist of the nationals of the host countries and expats from Saudi Arabia. The polycentric policy is justified by the fact that the nationals of the host countries have adequate knowledge of the local markets. They are also less expensive since they will not require costly support services such as relocation and child education allowance. The locals are likely to be productive right away because they are familiar with their national cultures. However, locals may not understand the company’s organizational culture (Grewel & Levy, 2011).
This challenge will be addressed through orientation programs that will focus on educating new hires about the company’s culture and shared values. In some countries, finding the best talent might be difficult due to low educational achievement. Thus, the company will have to implement effective staff development and training programs to improve the skills and knowledge of its employees.
Employees will be hired based on their technical ability, managerial skills, cultural tolerance, and adaptability. This will ensure that the company hires only the best employees. Remuneration will be based on local compensation standards. However, expats will be entitled to additional benefits such as foreign service allowance, housing allowance, and cost of living allowance. These benefits are expected to motivate expats to improve their productivity. Performance appraisals will be done at the subsidiary level by the line managers. Accordingly, the management of the subsidiaries will make promotion decisions.
Cross Cultural Issues
Several cross-cultural factors will affect the operation of the business in the global market. To begin with, differences in national cultures will affect its performance. Empirical studies indicate that national cultures influence the way employees think, work, and interact with each other. National cultures also influence organizational culture (Czinkota & Ronkainen, 2012). This means that the performance of the company is likely to be affected negatively by national cultures that discourage productivity. For instance, promoting teamwork in Asian countries will be easy since national cultures in the region promote collectivism. By contrast, the European culture promotes individualism. This will make it difficult to pursue group objectives.
Difference in communication styles is another cultural issue that will affect the performance of the company. Most Asian and African cultures promote indirect communication styles where people look for implied meanings. By contrast, western cultures promote direct communication where messages are interpreted literally. The existence of different communication styles is likely to cause misunderstandings among employees. Power distance is also likely to have negative effects on the company. For instance, employees from low power distance countries are likely to resist a top-down leadership style.
In order to avoid the aforementioned challenges, the company will conduct cultural due diligence before entering a joint venture partnership or signing a merger and acquisition deal (Grewel & Levy, 2011). The objective of the cultural due diligence will be to ensure compatibility between the culture of the company and those of its partners in overseas markets. Cross-cultural communication will be promoted by creating cultural awareness and encouraging employees to tolerate the cultures of their colleagues.
Political, Law, and Business Ethics
Regulation is the most important political factor that will influence the company’s performance. Various countries have different rules and regulations that influence the performance of shipping companies. Thus, the company is likely to be fined or to lose its license if fails to comply with regulations in various markets.
Corporate law will influence the company’s ability to join international markets. The company will not be able to join markets where joint ventures, mergers, and acquisitions are restricted by law. In addition, the company will have to adopt the accounting and reporting standards that are required in each market.
The company has to engage in ethical behaviors in order to avoid resistance in overseas markets (Czinkota & Ronkainen, 2012). The unethical business activities that are likely to cause resistance include pollution of the environment, preventing competition, and providing substandard services. The company will endeavor to maintain high ethical standards in overseas markets. This will include complying with all regulatory requirements, providing high quality services, protecting the environment, and addressing the needs of local communities.
Economics and Emerging Markets
The economic factors that will affect the company in various markets include GDP growth and exchange rate fluctuations (Grewel & Levy, 2011). Economic activities are likely to be low when GDP growth is declining and vice versa. This means that the demand for shipping services will depend on the level of economic growth. Exchange rate fluctuations will affect the value of the revenue obtain from overseas markets. Saudi Arabia’s currency is pegged on the US dollar. Thus, the value of the revenue obtained from overseas will reduce if the dollar appreciates.
Although emerging markets have a high growth potential, their performance will be determined by economic growth in the developed world. This perspective is based on the fact that economic growth in most emerging markets is driven by exports to developed countries. Thus, poor economic growth in developed countries will reduce demand for shipping services in emerging markets. As a result, the company’s revenues will decline.
International Trade
International trade in manufactured goods is one of the major factors that drive growth in the shipping industry. Manufacturing involves transportation of finished goods and raw materials from one continent to another. For instance, iron is often shipped from Brazil and Australia to China where it is used to manufacture steel. Generally, an increase in international trade in raw materials and finished goods will improve the demand for shipping activities and vice versa.
International trade policies have direct effects on the shipping industry. Economic liberalization policies such as removal of import quotas and reduction of import tariffs promote international trade. This leads to high demand for shipping activities as multinational companies focus on exporting their products to overseas markets.
Business-Government Trade Relations
The trade relationships between the government and the private sector (businesses) that are likely to affect the performance of the company include the following. To begin with, the infrastructure development policies that have been adopted by governments in various countries will influence the company’s performance. The shipping industry heavily depends on infrastructure such a seaports, road network, and cargo clearance facilities. Development of these facilities is usually done by the government. This means that the company is likely to succeed in countries whose governments focus on developing effective shipping infrastructure. For instance, availability of adequate seaport facilities will reduce the time required to deliver cargo. As a result, the company will be able to improve its revenues by serving more customers.
Support to local firms is another factor that will influence the competitiveness of the company. In countries such as China and India, local firms enjoy support from the government in terms of subsidies and favorable tax rates (Tsekouras & Poulis, 2011). These strategies enable local firms to be more competitive than their foreign counterparts. For instance, low tax rates will enable local firms to use a large proportion of their profits to expand their operations. As a result, the company will be forced to engage in expensive marketing activities in order to retain its market share.
Foreign Direct Investment
Empirical studies indicate that foreign direct investment (FDI) promotes international trade (Rosetta & Aziz, 2011, pp. 400-411). In the host country, FDI leads to an increase in imports in the short-run and exports in the long-run. In the last two decades, FDI flows to developing countries increased significantly due to their low-cost advantage. Specifically, producers in the developed countries are increasingly shifting their production plants to developing countries where labor and energy costs are relatively low. This strategy explains the rapid increase in trade between developing and the developed countries.
The shipping industry continues to be the main beneficiary of the international trade activities that occur due to FDI. Nearly 90% of the goods that are sold in the global market are transported by the shipping industry (Tsekouras & Poulis, 2011). This means that revenue in the shipping industry is expected to grow as FDI increase in both developing and emerging markets. In the medium term, FDI is expected to increase in African countries as multinational companies that specialize in extraction of commodities such as oil and minerals expand their operations in the region. Similarly, FDI is expected to increase in China and India where the ever-expanding middle class continues to attract multinational corporations that are interested in increasing their share of the global market. In this regard, the company expects to achieve high revenue and profits in Africa, China, and India.
References
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Rosetta, M., & Aziz, A. (2011). Ease of doing business and FDI inflow to Sub-Saharan Africa and Asian countries. International Journal of Cross Cultural Management, 18(4), 400-411. Web.
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