Motives, Triggers And Barriers To Internationalization

Motives, Triggers And Barriers To Internationalization In general, internationalization occurs when the company expand its business activities into foreign markets. There might be several reasons for this. Of course, the most frequent reason is to expand profits, but this is not the only one. The motives and triggers for internationalization are a key concept for firms that are planning to enter the global market since both concepts will shape the internationalization strategy or path (Äijà ¶ et al) and main characteristics of this process. Table 2 and Table 3 present the main motives and triggers. If the main reason to start exporting is to increase profits and growth, the potential new markets will be those where the competition is less fierce and margins can be set on a higher level. If the goal is to reduce costs by expanding the economies of scale, the target countries might be anyone, independent of the profit level that the company can achieve there as long as there are positive. If the fierce competition in the local market is the driver to star exporting, then the foreign market will be determined as a defensive strategy mainly by forces external to the firm. Another crucial concept is the barriers hindering the export initiation. If any one of this factors or a combination of them is available in the firms context, it may hold back the internationalization of the firm for a long period or even forever. According to Hollensen (2008), the critical factors hindering internationalization initiation are mainly internal. Table 4 summarizes these barriers. In the Day Chocolate case, and based on the general information analysed and on the company history, it will be assumed that the primary motive to start the internationalization process is to increase profits and to grow in revenue. In addition, some foreign market opportunities could be considered as a motive. On the other hand, Competitive Pressure as a reactive motive could also have been stated, but it does not seem the main one according to the information analysed. The Day Chocolate is a small company and usually the firms that react to competitive pressures are larger than they are. Furthermore, Days revenue and market share are increasing according to companies figures, so the competitive pressure is not really a problem yet. The rest of the motives in Table 2 were discarded after a careful examination. The main trigger found in the The Day Chocolate case can be the Perceptive management. The company management is highly professional, includes people with many different backgrounds and the fact that the headquarters are in London -a well known international financial and trade centre- provides another good reason to support this interpretation. The second trigger might be the Importing as inward internationalization. Although the products and the headquarters are I the United Kingdom, the production facilities are located in Germany and the final product is exported from there to the U.K., according to the BBC[19]. The knowledge accumulated by importing the product from one European country to England can be used to make easy the export process to any other European nation. In order to be able to answer the question regarding to which country they should go (export or invest in) it is assumed that no barriers hindering the export initiation exists or that if they exist, they are preventable at an affordable cost. It can also be assumed that these barriers will not stop the internationalization of the firm but rather slow the velocity at which the company expands abroad. 2.5.2. Strategic approach to internationalization Once it has become clear that the firm can, needs or wants to export or expand their operations abroad, there is a need of knowing how and where to go. In order to answer these questions it is necessary to have a framework to guide the analysis. For The Day Chocolate case the guidebook presented in Internationalization Handbook by Äijà ¶ (Äijà ¶ et al. 2005) was the most appropriated. This structure is presented in Figure 5. According to Äijà ¶ the first part (Part I) in Figure 5 is the selection of the appropriate Internationalization Path. In his book, he presents three typical pathways that the internationalization process of a software firm may take, but his steps and conclusions can also be expand to any firm in the confectionery market like Days chocolate. This area under discussion is also the same as the one that Hollensen refers as Internationalization theories or models in the third chapter of his book Essentials of Global Marketing. For the purpose of this work, the 3 pathways presented by Äijà ¶ can also be increase with the many other presented by Hollensen. Among many models, paths or theories, the most well known are the one presented in Table 5. Based on Days corporate webpage statistics and from private sector publications[20], like Tranchell Doherty, it can be assumed that the company started it internationalization process by choosing an Organic growth path. The timeline on the firms webpage confirms that Devines management decided to begin their operations abroad in markets that are very close in location but also in culture and institutions like the United States and that the internationalization process has been taking place in small but incremental steps. The size of the company and the market where it operates also support this view. In contrast with what happens with large companies, where the internationalization process happens in a relatively continuous and incremental fashion, for SMEs (like The Day Chocolate) in general this process is made in small incremental steps. According to Hollensen, usually for SMEs the internationalization process is relatively discrete and every project is distinct and individual. The fact that the company operates in the confectionery industry and not in the IT sector, among other facts, is also a good reason for not considering this firm chocolate as a born global company. Freeman (2002) also states that for Small and Medium Enterprises managers tend to gather and look for relevant knowledge and information before becoming internationalization ready, which is consistent with Devines history and with the Uppsala model[21]. In 2007, the company took the next step in its internationalization process by setting a foot in the United States market by opening offices there. According to Johanson, and Wiedersheim-Paul (1975) that would have constituted the third stage. 2.5.3. The country choice Once the company has determined the path for internalization, its management needs to start the potential markets selection process (Part II in figure x.1). To address this problem, the screening process detailed in Rugman and Collinson (1995) will be used. 2.5.3.1. First screening: determining what product to offer to the world market This first screening is crucial in determining the potential of the companys goods in markets other than the local. This task can be carried on successfully by using a wide number of market research tools. International trade statistics inspection, competitors financial information analysis and research papers or databases that are offered by international multilateral organizations like FAO, the World Bank and the IMF could be valuable tools as well. In general, chocolate confectionery is offered in all almost the countries of the world. In this sense, initially there are a large number of potential countries where to choose from. However, in this case, the company is selling a very specific product (high quality + socially friendly chocolate) that limits the scope of this first screening. One drawback when dealing with this kind of specific and one-in-a-kind characterized goods is the lack of information or the excessive cost of getting it. A first measure to identify the potential foreign markets for The Day Chocolate would be analysing the world trade evolution of Fair-Trade products. That might help the firms management in recognizing the most active markets for this kind of products. As it is shown in Table 6 and according to the Fairtrade Labelling Organizations (FLO) in 2009 they were many countries showing a dynamic market for this kind of products. Among them, it is necessary to highlight Canada, Finland, Australia and New Zealand where the surge in the transactions was higher that 65% in the first case and about 60% in the other tree cases. Other nations with a remarkable performance were Spain, the Netherlands, Belgium, Germany, Ireland and Sweden. Although the U.K. and the United States presented a performance below the average growth rate of 15%, it is necessary to state that they are still by far the most important markets in volume for organic and fair-traded goods. Regarding the specific case of this companys main product, a NGO -TransFair USA- declare that during 2008 the imports of fair-trade certified cocoa into the U.S. rose at rates of more than 50%.[22] Finally, the genuine potential of every market will be ultimately determined by the interaction with other factors such as socio cultural forces and economic conditions. 2.5.3.2. Second screening: Macroeconomic and financial conditions The last World Economic Outlook report from the International monetary Fund (IMF)[23] clearly shows what to expect for the upcoming years. The developed countries GDP will grow on average 2,5% in 2011, still trying to recover from 2007s financial crisis. The U.S., Germany, and the U.K, together with some developed Asian countries such as South Korea will be presenting above average growth rates. However, some countries like Spain, Italy and France will show a growth rate between 0% and 1%. On the other hand, developing nations are expected to growth on average 6,5%, with Developing Asia and Latin America leading among these regions. From a macroeconomic point of view, the next years are going to be very good ones for most of the developing countries and also for some developed nations. For the purpose of this document, the countries will be segmented in four categories, considering that The Day Chocolate should focus in the short run on those that are not experiencing a recession. Table 7 contains this information. However, the product that they are offering is not a cheap one. It is a premium product and usually the prices are above the average. In this context, the income levels of the consumers are also an important factor to be considered. This is what Rugman Collinson (1995) called the Market intensity. Figure 6 shows the relation between the per capita income level for all developed countries and the expected GDP growth for 2011. As it is shown, there are 1 group that is more desirable for the company. The second quadrant comprises all countries showing both very high income level and high expected level of economic activity. However, the companys management might find also attractive potential markets in countries that do not have a very high level of per capita income, but whichs economies are growing very fast (Quadrant 4). 2.5.3.3. Third screening: Political and Legal forces This step covers the examination of the political and legal forces in every potential market. There might be trade barriers that obstruct the export process or the lack of solid institutions can represent a serious risk in the form of the future losses. One way to detect this serious problems is by addressing to the World Economic Forums (WEF) Global Competitiveness Index (GCI)[24]. This index includes a weighted average of several different components, each one of them measuring a diverse feature of the competitiveness. Those components are grouped into 12 categories or pillars. The first one of these pillars is Institutions. The GCI is calculated for 140 countries and the results are available free of charge. Table 8 presents the most important variables and their weight within the first pillar: Institutions. Table 9 provides some of the results obtained by the WEFs researchers for the 2010/11 index[25]. There it can be seen that the countries with the most stable or trustworthy are in general also those with a higher level of economic development. 2.5.3.4. Forth screening: socio-cultural forces A multinational corporation or a company desiring to become one should examine the main social and cultural disparities between the potential market and the home country. The concepts of cultural distance and psychological distance as presented in Hollensen (2008) have the potential of disturbing the normal flow between the foreign market and the company. Language, religion, work habits, ethnicity, age and many other socio-cultural factors may influence the decision regarding where to locate the operations. Maps 1 and 2 illustrate this theory by presenting the world distribution of the main religions and of the English speaking nations. For The Day Chocolate to avoid problems generated by cultural distance it will be recommended to establish operations or to export to anglo-saxon countries, like former British colonies or commonthwealth nations. Other european nations, specially those from German and Nordic origins, might be suitable in this first stage of internationalization. In a future stage, and after reducing these distances by means of the learning process, the firm might also attempt to gain a foot in more culturally distant markets. Focus groups activities and consumer surveys can help the firm in determining the main differences and similarities between the foreign market and the headquarters values and culture. 2.5.3.5. Fifth screening: Competitive enviroment This last stage of the analysis focuses on the competitive forces. Confronted with comparable and equally desirable potential markets, the firms tend to internationalize to those where the competition is less ferocious. The lack of competition can provide the company with some degree of monopolistic power that might have the power to increase the earnings. In the case analyzed, there were detected many new actors entering into the market in the last years, also some big players in the industry like Nestle and Cadbury are making efforts to tap this fast growing segment[26]. Despite these facts, competition is still not a barrier in most of the national markets analysed. Special attention should be paid to Germany, Switzerland and Austria, where several small and medium local producers have a long lasting tradition manufacturing chocolate products of world recognized quality[27]. 2.5.3.6. Final selection According to The Day Chocolates website, the firm currently operates in 11 markets. In the U.K.[28] and in the United States, the company has direct control over its business. In the rest of the countries, they rely on other companies, which are in charge of the distribution channels (Canada, Norway, Sweden, Netherlands, Denmark, Slovakia, Czech Republic and Japan). Trough the screening process and its five stages many countries were considered as potential new markets: Finland, Australia, New Zealand, Belgium, South Korea, Germany, Switzerland and Romania. Germany and Switzerland were discarded mainly because of the competitive environment and in second place because some possible cultural distance. South Korea was finally not considered fundamentally because the huge cultural distance and also because the physical distance. Due to the market size and growth projections, the chocolate per capita consumption[29], the similarities in the socio-cultural environments, the reliable legal and political framework, the expected friendly competitive context this document concludes that The Day Chocolates management should make an effort to analyse in more detail the potential of the following new markets: Australia, Finland, Belgium and New Zealand.