Internationalization consists of standardized products or service through globally standardized marketing and production processes that target standardized customer needs. Internationalisation can be described as “the process of increasing involvement in international operations” (Welch & Luostarinen, 1988: 36).
Another definition proposed by Calof and Beamish (1995: 116) denotes internationalization as “the process of adapting firms’ operations (strategy, structure, resources, etc) to international environments”. Kutschker and Bäurle (1997) as both definitions have crucial fact internationalisation needs an overall support from the organisation as it is changing the environment to expand in various manners the process mostly consists of macro factors to evolve.
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3. The Uppsala Approach in detail
The Uppsala approach was an outcome of Swedish researchers (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977) which focused their interest on the internationalization process. Studying the internationalization of Swedish manufacturing firms, they developed a model of the firm’s choice of market and form of entry when going abroad. Their work was influenced by Aharoni’s seminal (1966) study. (Svend and Hollensen2004)
It is seen that companies begin their operations in abroad in fairly nearby market and gradually penetrated distant market. Companies should entry in new market with the export agents and sales subsidiaries. The approach specifies direct relation between market knowledge and market commitment is postulated, as knowledge can be gathered with effective use of human resources. Consequently, the better knowledge about a market can be derived, the more valuable are the resources and the stronger the market position of the firm. Uppsala approach requires general knowledge and market specific knowledge, where as market specific knowledge can be derived from practical experiences by entering the new market. However the approach stress on experimental learning as it cannot be acquired by objective knowledge (e.g., through marketing researches or reports) and must be gained mainly through direct experience. As the approach deals with experimental learning the human resource should be managed in proper manner.
It has distinguished between four different modes of entering an international market, where the successive stages represent higher degrees of international involvement market commitment.
They as follow
Stage 1: No regular export activities (sporadic export).
Stage 2: Export via independent representatives (export modes).
Stage 3: Establishment of a foreign sales subsidiary.
Stage 4: Foreign production manufacturing units
These four stages deal with as no regular export activities in new market and knowing the market by experimental learning which helps in utilization of resources in effective ways. Exporting through independent agent can be suitable way of entering in new market as most of the firms prefer the way of entry.
Consequently, the threats and opportunities in a new market will be discovered primarily by those people who are working there. Experience generates business opportunities and constitutes a driving force in the internationalization process (Johanson and Vahlne, 1990: 33).
The model is founded on four core concepts: Market knowledge, market commitment, commitment decisions and current activities. Market knowledge and market commitment at a certain point in time are assumed to affect the commitment decisions and how the activities are carried out in the subsequent period, which in its turn will influence market knowledge and market commitment at later stages. On the basis of these four concepts, and by making the assumption of instrumentalism, the model predicts that the basic pattern of firms’ internationalization is to start and continue to invest in just one or in a few neighbouring countries, rather than to invest in several countries simultaneously and That the investments in a specific country are carried out cautiously, sequentially and concurrently with the learning of the firm’s people operating in that market. Firms are supposed to enter new markets with successively greater psychic distance and the market investments develop according to the so called establishment chain. Mats Forsgren. (2000.p5)
This model deals with entering new market which is nearby or investing in single country rather than making a mess. It has leapfrogging tendency which allows entering in distant market. It shows companies can learn from their past experiences and practical knowledge. In these cases, competitive forces and factors override psychic distance as the principal explanatory factor for the firm’s process of internationalization. Furthermore, if knowledge of transactions can be transferred from one country to another, firms with extensive international experience are likely to perceive the psychic distance to a new country as shorter than firms with little international experience it can affect the smaller firms in case of psychic distances. The approach requires long term involvement in market to gain knowledge. The approach can be cost efficient to apply at initial stage but can take long time evolve the production barriers.
The approach underlies crucial importance people interest involved in the process. By sales subsidiaries it can be easy to find problems and opportunities in the market.
3.1 Advantages
It deals with indirect exporting of product with help of external export agents or merchants. Low cost entry method which helps using capital in other factors quickest way of entering the new markets. Establishing foreign sales subsidiaries can help increase sales, potential customer base in market and creates market awareness about the product which identifies customer tastes and cultural factors which may change as per new market. By using foreign manufacturing unit labour cost and cost of production can be minimized.
Drawbacks
Occasional exporting of goods can divert customers’ interest. Lack of knowledge in initial phase as the exporting is done by agents or exporting merchants. Inter-organizational learning in a business network implies that deep and long-lasting business relationships facilitate the assimilation of tacit knowledge from the different factors in the market. Human resources’ development programmes should be to gather knowledge about market. The Uppsala Model implies that different groups at the operational level have a profound influence on the internationalization process. It is a relatively extreme “bottom-up” perspective, where the “bottom” plays the leading part and the headquarters play walk-on parts. It is not ease to apply for small firms in case of psychic distance.
4. Macro environmental forces and impact on an organisation’s internationalisation decision-making process.
Partnerships
As Partnerships and Alliances are increasing as companies realize it is not always desirable to manage all stages. These may mislead when the organisation wants go solo in the market as culture integration, domestic or international, are mentioned as the biggest challenges for alliances.
Distribution channels
The distribution channels may affect as carrying products to various place where there is lack roadways or long distance it may cost more than estimation cost of distribution of material to market.
Technological
Technology continues to exert the biggest current and future impact on organizations. At the same time the Internet and intranets are changing the way employees interact with customers and each other. It needs innovation in the technology and manufacturing process, the services should be customer friendly, fast reaction, and acceptance of change.
Competitors
They may create obstacles in entering the market and provide misleading information’s about market to stop new firms and may create monopoly for some products.
Public pressure groups
These factors directly affect or impact the organization and they influence the managerial decision, the organizational goals, structure and targeted groups of customers. Competing Political, sustainability of the Physical Environment, Advances in Science and Technology
Cultural
As per the new market it is hard cope up with diverse cultural factors involved, Cultural, and Religious Ideologies. Regional, cultural groups may involve in restricting the foreign companies to enter in the market to nationalise the trade.
Suppliers
Suppliers of raw material and various inventories for production as it may impact on cost of production and it may change from market to market factors change.
5. Example related to Internationalisation
Various industries in automobile have approached this kind of strategy in strong global competition. Such as SKODA, VOLKSWAGEN, VOLVO, GENERAL MOTORS, and Productivity within the industry has risen over the years, and consumers are offered increasingly better products at lower prices. More and more manufacturers are establishing plants in countries where production costs are considerably lower and also purchasing more components there. In time, production costs for the major producers will essentially be at the same level.
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5.1 Strategies
Most of these companies have first started with exporting the products and then after studying market started their production in developing nations. The Volkswagen Group safeguards its future through local production operations with integrated growth in markets such as China, India and Russia. Worldwide, the Volkswagen Group has 61 production facilities in 21 countries. General motors’ and Skoda have their production houses in developing nations where the cost of production is less as compared to exporting the products. In case of VOLVO about 95% of the company’s production capacity is located in Sweden, Belgium, Brazil and the USA. But the company is moving towards low cost of production countries such as China, India and about 22% of their production is from Brazil. Continuing to cut costs and drive out complexity in all aspects of operations.
5.2 More efficient purchasing
Purchasing is another area where we have implemented changes in order to improve our cost position; mainly through better coordination at the global level they have also intensified our cooperation with suppliers in order to cut the costs of components. [But] there is a good deal still to be done. Among other things, we are increasing the share of purchases from low-cost countries.
5.3 Moving production to low-cost countries
There has been change in the business model for units that could be considered as non-core operations or in which profitability was too low. [For example], instead of continuing production in the US and EUROPEN nations, which was less and in some cases non profitable, they have started to out-source their products from the manufacturers in China and Brazil and India. Maintaining competitive production in the changing the business models. It is also important to continue relocating production from high-cost to low-cost countries. Most of companies’ goals are too achieved by 2012.
Sources: Companies website: www.volvo.com/trucks,www.gm.com www.volkswagen.com/annualreport, www.new.skoda-auto.com
6. The Process of Internationalisation
Internationalisation fundamentally alters the price-setting strategies of domestic economic agents. This is true for agents operating in product markets, factor markets and financial markets. At a micro level, internationalisation directly alters pricing behaviour by deepening product and factor markets. More potential buyers and sellers imply greater competition and a reduction in excess returns. At a macro level, internationalisation also has the potential to change the incentives faced by public policy makers (David Gruen and Geoffrey Shuetrim 1994.P.312)
From the above definition it can be derived that trade between two or more nation where there is potential buyers and sellers of good in which the pricing behaviours may alter from product and various factors involved in market which directly or indirectly benefits consumers .The factors involved in these process may vary from place to place but to enter new market knowledge is essential. It can be complex as policy and regulations change as per the market. It can make potential market for customers. There are various trade unions to promote international trade such as WTO World Trade Organisation, EU European union , ASEAN Association of South-East Asian Nations, NAFTA North American Free Trade Agreement ,AFTA ASEAN Free Trade Area, COMESA Common Market for Eastern and Southern Africa. They encourage the trade within the members union.
7. Main challenges in Internationalisation
The informal trade barriers for internationalisation are such as lack of information on business opportunities and weak contract enforcement.
The Financial burden such as exchange rate risk, political risk and credit risk as they may change as per the market secure local trade.
Foreign regulatory environment can change the norms of trade for the industries.
The lack of domestic support structure in way of financial support, advice by responsible people can make a change.
Cultural and linguistic barriers cannot be changed as we have seen in case of various fast food companies e.g.: K.F.C in India and Japan.
The geographic distance between nations can make impact on their trade system.
There must be two way communications among countries members which are involved in the system.
As the market changes there has to be innovation in the product which suits to the market.
Absence of specialised labour in work force can be challenging impact on organisation in internationalisation of market.
There has to promotion of networks to gather information about new market.
The border zones and cross-border cooperation in various nations the cross-border situation is critical most of the times these may impact on system.
8. CONLIUSION
This report is made to analysis the internationalisation is widely seen to be the dominant tendency of our time and it is very complex process and not easy to apply in practical. There various macro aspects have affect the decision making process of organisation. These factors can be taken under control by the firms. According to the report it is specified that after using the processes there can proper utilization of resources the organisation can minimize the cost of production. The internationalisation is challenging process with changing markets and foreign regulatory environments. Moving production to low-cost countries is effective factor in internationalisation as it can be efficient utilization of investment in new market. There are various organisations which help in the process as WTO, EU, and ASEAN.
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