Saturday, 2 September 2017

Why and How companies Internationalize

Internationalization - Why companies Internationalize? How Companies Internationalize? - Reviewing various Literatures.

Introduction
Growth is the significant factor for any business, some organizations focus on the growth to create competitive advantage and some to become the market leader. The constant urge to grow helps business perform better. Businesses grow by throwing new products (innovation) or else by enticing new customers (internationalization, Consolidation) or by using a mixed strategy. 

The world economy is internationalizing with the countries opening boundaries for trading which reduces the trade barriers, moreover e-commerce is reducing the geographical distance drastically. Such environment sets a perfect platform for the retailer to explore out of their domestic boundaries to pursue growth. “International Retailing is no longer simply an option: it has become necessity”(Alexander, 1990).  However the stimulus of internationalization is still more general as illustrated below.  

Before internationalization activity become a necessary strategy for growth, The flow of ideas and information brought international influence to trading formats (Kacker, 1985). Complex networks of international alliance broaden the spread of know-how/ideas, offering buying advantages for the each party opened up the international sourcing gate. Sourcing of products internationally is a well-established activity which helps retailers to create competitive advantage by sourcing the products in low cost. These are the general faces of retail internationalization.

The purpose of this article is to explore retailers various dimension of  internationalization and  key drivers of internationalization, which in return service readers/researchers/ retail enthusiasts to develop a Internationalization strategy. 

Reviewing Retail Internationalization Theory 

International Business is commerce or trade that is carried on by a company beyond its domestic borders (McGoldrick and Davies, 1995). A strategy is the practice or plan that integrates an organization's major goals, policies and action sequences into a cohesive whole.(Thompson, Strickland, and Gamble, 2010). International business strategy is a cross border trade often it is considered as business conducted between companies in different countries. Like most industry based studies of internationalization, the common pattern for the author to explore the various dimensions of internationalization before going into key motives and strategies.

1.       Dimension of internationalization
Often every academic paper/ literatures describe internationalization into various stages, in reality, not many retailers/companies go through every stage of internationalization. With that thought we will review numerous studies books to understand the various dimensions of internationalization.

1.1 The geographical dimension
Not surprisingly, the studies on the geographical dimension of retail internationalization emphasizes either inward or outward investment (Jan Johanson, 1999)  from a defined market, many examples can be found by studies monitoring specific geographic flows. The following matrix is the outcome of various literatures exploring internationalization in geographical dimension:

Studies
Authors
Explanation
Company Based Studies
(Laulajainen, 1993)
(Laulajainen, 1991)
(Treadgold, 1991)

In this study author's analysis and explains how retailers (Ikea, H&M, Laura Ashely and Toys R Us) internationalize. Uses the company data follows their internationalization process and concludes retailer internationalize geographically. The treadgold purpose of study was not addressed to find the internationalization pattern of the company, but the author explores how company internationalized.
Internationalization Patterns
(Jan Johanson, 1999)
(Davies and Jones, 1993)
Jan Johanson “The Mechanism of Internationalization” author reflects an advantage for retailers expanding close to the domestic boundaries. Whereas Davies  reviews various literature and compares it with international activity of departmental store, finally concludes that retailers will initially internationalize to the market similar to home country.

The one common theme in all this literature is that authors are all tracking companies outward and inward flows of investment to explain retail internationalization. 
1.2 The Time Dimension
A supplementary factor which may contribute to the understanding of retail internationalization is the time dimension. The speed of action, i.e. the time dimension, emerges indirectly from the generally accepted idea that a saturating home market is an important trigger for internationalization. (Laulajainen, 1993) stated that the age of the retailer should positively correlate with retailer’ degree of internationalization which exactly supports our earlier statement. One literature which introduce a direct factor of time dimension is (Treadgold, 1990/91). Which argues that retailers, travel through the learning curve over time as they move through stages termed “reluctance, caution and ambition”. The time based viewpoint might however add an argument as changes in geographical direction, entry method and management behaviour may provide clues to factors influencing the process. 

2.       Key driving forces of Internationalisation

The two most common answers pops immediately when rationalizing the driving forces for internationalization are “SATURATION of home market and Identifying NICHE in forgiven Market”. These factors where emphasised by (White, 1984) in his paper “Multi-national- A slow advance?” but current retail internationalization will not fit only  into these factors. Hence we will explore various studies and pen our interpretation based on present retailing scenario.
The Reason for internationalization is given various names by different authors in various studies as follows:

Authors
Terms used
(Williams, 1992) and (Alexander, 1990)
“Motives”  
(Winch, 2006)
“Drivers”
(Vida, 2000)
“antecedents”
Hollander, S.C (1970) was one of the pioneers to identify the motives of retail internationalization and it slowly followed by the other authors. The Motives for retail internationalization was classified into “push and pull” motives by (Kacker, 1985) (Alexander, 1990) and (Treadgold, 1990/91). Such classification is fundamental to an interpretation which sees internationalization as reactive approach or proactive approach where reactive approach is a descendant of push factor likewise proactive is of pull motives factor. Based on the studies lets analysis various push and pull factors.

Push Factors
Pull Factors
Unstable Political Structure
Stable Political Structure
Unstable Economy
Stable Economy
Mature Domestic Market
Underdeveloped Domestic Market
Format Saturation
Niche Market
Small Domestic Market
Large Market
Negative Social Environment e.g. Low Population/ High Migration
Positive Social Conditions e.g.the rise of the middle class
Poor economy falling currency
Favourable Exchange Rates / Stable Currency rates
Source: (Kacker, 1985) (Alexander, 1990) and (Treadgold, 1990/91)
However (Williams, 1992) has found “‘push and pull’…. active-Passive and proactive-reactive dichotomies” unsatisfactory. He prefers to use four motivational dimensions which are as follows but all his four motivational dimensions resemble the push or pull factors.
·         Proactive and growth oriented :- which is similar to the proactive motives in other studies
·         Limited domestic growth opportunities :- again this resembles the reactive or push factors
·         Internationally appealing/ innovative retail offer:- which is similar to the proactive motives in other studies
·         Passive Motives:- this resembles the reactive or push factors

 2.1 My Interpretation on Motives of Internationalization  

Reactive International Expansion
Proactive International Expansion
Firstly there are not many literature's explain about reactive international expansion. Reactive internationalization is nothing but reluctant internationalization in other words retailers are not willing to cross border but the domestic market turbulence forces them to expand. The key question here is what if the domestic market turbulence is encountered will their major focus shift back to domestic market?
This is a contrast approach to reactive international expansion. Every literature states that proactive approach is the identification of opportunities abroad before the push from home market, but none of literature explaining the difference between proactive retailer vs born global retailer. Internationalization expansion motives for proactive retailer are different from born global retailer.

In present scenario, internationalization of business is turning to be a necessary task. We can rationalize gaining competitive advantage as the primary reason/ driving force for a retailer to internationalize over push or pull factor. The constant urge to stay on top of the game encourages retailer to explore beyond the boundaries.

Gone are those days where retailers were bound to political or other environmental factors to commence a trade. We cannot still evaluate the motivation of internationalization on conventional push-reactive and pull-proactive approach. Frankly, fascinating technology, faster communication and ease of transportation with which retailers are able to build the presence without crossing borders. This will be a significant stimulus for a retailer to internationalize.

3.    Key Strategies competing internationally

3.1 Strategic Alliance and Joint ventures 
Strategic alliances of one sort or another have been a common feature in manufacturing industry for many years (Nielsen, 1988). Cross broader alliance is popular and viable vehicles for companies to edge their way into the markets of foreign countries. Significant parts of retail literature have examined the international nature for example (Treadgold, 1990/91), (Laulajainen, 1993) and (Williams, 1992). This body of literature has mainly studied cross broader movements and international motives rather than the mechanisms involved in an international retailer activity. Below matrix signifies various alliance types from various authors.

Authors
Type Alliance
Explanation (Paraphrased)
Advantage (Interpretation)
(Bucklin and Sengupta, 1993)
Co- marketing alliance
Co-Marketing alliance is a form of working partnerships. Author suggested that these types of alliance are “contractual relationships” between firms. Their products/services are dependent on other firm.
For e.g. T.K Maxx & FleishmanHillard
Gains effectiveness by reducing managerial imbalance. Careful project selection and better matching of potential partners also help to enhance alliance effectiveness
(Boersma, Buckley, and Ghauri, 2003)
Joint Ventures
The Joint venture is defined as “business agreements where two or more owners create a separate entity “ for e.g. Arvind & CK India
A Company can share the capital and resources to gain the competitive advantage.

The main key interpretation in the strategic alliance essay is there are not many literature's on the buying club strategies, whereas more literatures are focused on the co-marketing alliance and joint ventures. The buying club is basically a buying organisation which exists for the benefit of their members. In other words they are buying agent’s source and buy garments/products on behalf of the company their main role is to maximise the purchasing power. For e.g. Li & Fung

3.2 Licensing strategies
Licensing is the most easy way for the firm with know-how knowledge or unique patented product has neither the internal organisational capability nor the resources to enter the foreign market. (Luo, 2000) explains the idea of “cross-licensing” across the boundaries. In-addition Licensing has the key advantage of avoiding the risk of committing resources to the country markets that are unfamiliar, politically & economically unstable or risky.

3.3 Merger and acquisition
This approach is more suitable for the aggressive retailers who don’t trust on organic growth. Author (Gattiker, 2007) explains Merger and Acquisition as the risky mode of internationalization, further he explains key elements and consideration during internationalizing through M&A which includes benefits of retaining the identity of subsidiary firm . In that article author explains the idea of “Partial acquisition” where retailer acquiring minority equity stake in another firm to achieve strategic leverage.

Conclusion 

To put in nutshell, Motive of internationalization can be push method (reactive) or pull method (proactive) and it is caused as depicted below in images (own sources- made it for better understanding). These cause will play major role in deciding  retailers internationalization strategy .  A million dollor for further research do retailer flow/use only either of these ( Licensing strategies, Merger and acquisition, and Strategic Alliance and Joint ventures ) strategies or do they use any other strategy in these desperate times?



Reference