Introduction
This paper will discuss the potential impact of crucial country variables on the success of organizing a travel business in Germany, such as the size of the market, the available resources, the regulations and procedures essential for establishing a business, and the potential risks a new business may encounter. Besides, it will discuss three potential strategies of entering the market: foreign direct investment, licensing, and joint venture, among which the best one will be rationally selected. Finally, the implementation plan of the chosen strategy will be discussed in detail.
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I: Market Success Analysis
Market size. The potential market in travel business sector in Germany is quite promising. The reasons for big number of tourists in Germany stem from the German culture – there are many different holidays, which Germans like to spend travelling. Specific numbers confirming the attractiveness of German travel market can be found in the following tables from the German National Tourist Board brochure “Incoming-Tourism Germany”1:
Table 1 Travel & Tourism Demand / Capital Investment (CI) in the travel & tourism economy in 2009
We can see that the travel and tourism demand in Germany of $438 bn is the biggest in Europe and fourth among the countries of the World. That is beneficial for our business, since sufficient number of clients can be expected. As for the capital investment in the travel and tourism economy, Germany is among the top-ten countries with $32 bn, which indicates that there should be a well-developed travel business infrastructure in Germany. On the one hand, it means that rather high level of competitiveness can be expected in this sector, but on the other hand, in case we consider any collaborative arrangement, there should be no difficulty in finding competent business partners in Germany.
Resources. The main resources required for the travel business are qualified employees and the accommodation capacity. There should be no problem with the accommodation capacity, because German National Tourist Board brochure “Incoming-Tourism Germany” indicates that there are about 52 thousands accommodations in Germany (as of 2008), among which there are about 13 thousands hotels, 8 thousands bed & breakfast hotels, 9 thousands inns, and 5 thousands guesthouses. So, there is a possibility of purchasing or leasing accommodation appropriate for our business in Germany.2
As for the labor market in area of travel and tourism in Germany – according to the Eurostat article “Tourism employment”, the number of the jobs in this sector is one of the highest in Europe (about 1.43 million). However, the share of part-time employed laborers is also rather high – 32% compared to the European average of 18%. Besides, the overall situation in the travel and tourism sector in Europe indicates that there is a tendency for a shorter average stay with the same employer than in other sectors of labor market. One more issue to consider by hiring staff in Germany is educational background of employees. As of 2007, only 9% of people employed in tourist accommodation in Germany have higher educational level, 64% have middle level, and 27% have lower level. This means that we should be utmost careful if we hire the staff for our business in Germany, and we should take efforts to decrease the possibility of high personnel turnover and low educational level of our employees.3
Regulations and procedures. It is a positive factor for our business that opening a business in Germany is relatively uncomplicated. In general, opening a business in Germany is similar to that in English-speaking countries. Besides, there are no special restrictions on establishing a business by non-German residents and on repatriation of profits, which should simplify our task in terms of legal formalization of our business.
As described in the article “Starting a Business in Germany” published on the AngloINFO Berlin Web-site, the possible forms of business structures in Germany include GmbH (Gessellschaft mit beschrankter Haftung), which is an equivalent to the limited liability company, with the minimal authorized capital of €25,000. Another form of business is AG (Aktiengesellschaft), which corresponds to a joint stock company or Public Limited Company. The minimal authorized capital is €50,000, and the minimal number of members is five. One more form is GbR (Gesellschaft bürgerlichen Rechts), which is very flexible form and can be run by either one person or by a contract of two or more persons. There is also OHG (Offene Handelsgesellschaft), a partnership where partners have unlimited liability. Finally, perhaps more relevant for us than other forms, there is also Zweigniederlassung (or subsidiary), which is a branch of a foreign company commercially registered in Germany. By entering the German market, one of these forms of business should be chosen.4
The required steps for registering business in Germany are to organize two sets of tax registration, for commercial tax, and for the local tax office, and to hire a notary who can register the business at the local court. The most significant taxes for companies in Germany include Turnover or input tax, Income tax, Trade tax, and Corporation tax. According to the article “Germany Income Taxes and Tax Laws” published on the Worldwide Tax Web-site, the effective tax rate for corporations (as of 2010), including trade tax and solidarity tax (tax to support less developed areas of Eastern Germany, which was applied after the unification of Germany) is about 30%-33% in Germany.5 Such a level of taxes is quite acceptable for our business, since it is less than in many other European countries. Very beneficial news for our business is that the rate of value-added-tax for hotel guest rooms changed from 19% to 7% in 2010.6 Besides, Germany and Russia have concluded a Double Taxation Prevention Treaty, which is why the tax on interest and royalties going from Germany to Russia are equal to 0%, but the tax on dividends is still 15%.7
Risks. The level of political risk in Germany is quite low – the political system is quite stable, with the conservative party having power. The authority of official power is high, the legal system is reliable and the ethical standards are quite high. The government is rather unlikely to expropriate businesses, so we should not expect dangers coming from this side.
The level of safety risk in Germany is not high. The potential safety risks include: damage to assets of the company, break-in, destruction, theft, vandalism, fire, lightning, explosions, aircraft crash, damage due to water, machinery damage and other types of damage. All these risks are typical not only of Germany, and can be mitigated with the help of insurance.8
Considering the level of capital investment in the travel and tourism economy and the number of accommodations in Germany, which were described earlier, it can be inferred that the competitive risk can be rather high in Germany, which can negatively affect our business. There are many competitors in the industry, and some kind of core competency should be used in order to decrease this kind of risk.
Another possible risk could be the image of Russia in Germany: there are some segments of people in Germany which have aggressive attitude towards everything that comes from Russia (due to the historical events – the antagonism of Russia and Germany in the Second World War). However, this risk is not very severe, because the general grass-roots sentiments are not that aggressive – many people in Germany consider Russia as a German partner, and quite a lot have a very positive image of Baikal Lake, the deepest lake in the world, as one of the major places of interest in Russia and Siberia in particular.
II: Market Entry Analysis
Foreign direct investment. As one of alternatives of international expansion our company can consider foreign direct investment with wholly owned operations in a way of buying wholly operational facilities ready to provide tourist accommodation in Germany. The advantages of foreign direct investment include the high level of control over the operations in all departments of our company, the feeling of unity and integrity among the personnel because departments belong to the same organization, the usage of our own managers who are committed to the objectives important specifically for our organization, no possibility of clash of interests with our partners, which can be rather detrimental to the well-being of the company.9
However, though there are enough advantages of foreign direct investment, this type of strategy may be not feasible for our company to implement. The first restriction is the requirement of sufficient initial investment into the project in order for it to function properly. The purchase of a fully functional facility in Germany may be a project which the company “Baikal Lighthouse” cannot afford to implement. Besides, if we have to create our client base as a new company in German tourist market, we will have to enter a highly competitive industry with lots of rivals, which can ruin our enterprise in the beginning if we do not have support from somebody inside of the country.
Licensing. One of the possible ways of international expansion is to use licensing. We can choose a specific travel agency in Germany and grant them an exclusive right to use our trademark “Baikal Lighthouse” along with the methods, programs, procedures and systems implemented in our business. The potential advantages of licensing are low costs and short start-up time, because we do not have to find an accommodation to use, find and hire employees, create a client base and establish and adjust the line of business – we can use already functioning system, which is especially convenient considering the rich tourist market in Germany.10
However, the profitability of such strategy may be unsatisfying, because, though our company possesses quite a sufficient amount of tacit knowledge expressing in the high level of corporate culture and integrity, well-tested techniques of serving our clients and highly educated personnel, along with strong client base in Irkutsk region, know-how to properly operate a hotel business, and other types of intangible assets, the recognizability of our brand in Germany may be open to question. Consequently, the price that we can put to our license may be rather low in case we find companies in Germany willing to operate under our license, because the credibility of our brand in Germany needs to be established first. Besides, taking into account that only the smaller part of employees in tourist accommodation services in Germany are highly skilled, the successful implementation of our license may be problematic, because the local managers may have not enough qualification in order to implement our know-how’s properly. Besides, the differences in culture and management approach may also serve as an obstacle for implementing this strategy.
Joint venture. Finally, our company can consider joint venture as an international expansion strategy. With the help of business collaboration with a German travel agency, our company is actually able to access the vast German tourist market without too much expenditure. By collaborating with a reputable German company having a strong positive image we reduce risk of negative attitude of German tourists towards Russia and utilize the already formed client base along with attracting new customers from Germany with offering an opportunity of special tours to the Baikal see. Besides, after establishing a strong contact with a German travel agency, we should be able to increase the client base in Irkutsk region by offering tours to places of interest in Germany. From the analysis of the market size we know that the tourist traffic both from Germany to Russia and from Russia to Germany is high, so there should be a lot of opportunities to make profits by offering tours in both directions.
The potential disadvantages of joint venture include that it takes time and efforts to build a strong cooperation with a foreign company. Besides, since the companies in joint venture are different entities, there can be a conflict of interests in some areas. Moreover, the differences in culture and management approach can be another source of misunderstanding between the companies. Finally, the level of contribution may be unequal, and consequently, the payoff for the companies may also differs significantly.11
Most of the disadvantages of joint venture can be avoided by the right choice of the partner and the sound organization of the collaboration. Moreover, joint venture is the only one of the three described strategies that provides an opportunity to get sufficient payoff without unaffordable initial investment, is more feasible than other ones, and provides a significant reduction in risks of the company. That is why it is considered to be the best strategy among the described ones. The details of a proper way to organize a joint venture with a German travel agency are described in the next section.
III: Market Entry Implementation Strategy
Implementation of joint venture strategy. One of the most important things which should be done from the beginning is to find a reputable partner with a successful history of operations located in a region with highest tourist traffic (such as Bavaria, for example), in order to get as much as possible from the collaboration strategy. If you create a joint venture with an unsuccessful company, it will only harm your operations and image. The choice of the right partner, on the other hand, can significantly improve the position of the company.
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Then we should formally legalize the relations with our partner, as was specified in Regulations and procedures section. Besides, it is very important to establish common objectives and vision on the details of the collaboration. In order for a joint venture to be successful, both partners should know why they are collaborating and what to expect from a partner. The main common objectives are to increase the client base by accessing a foreign market and to interchange experience and knowledge in particular business processes.
The next thing to do is to establish credibility in the eyes of the partner and to create a positive contact with the business partner. Our company has to show the opportunities offered by the joint venture to the best advantage by emphasizing the strengths of “Baikal Lighthouse” and opportunities of its environment: strong corporate culture, well-tried business processes in the field of tourist accommodation, a vast client base in Irkutsk region, and, of course, an opportunity to provide tourist accommodation along with guided tours in the vicinity of Baikal lake, which is one of the major tourist attractions in the Far East region of Russia.
Information technology and modern means of communication (Internet, video-conferencing) should significantly simplify this task; however, a face-to-face contact between the representatives of the companies on the later stages of the contact is highly desirable in order to consolidate the contact. Moreover, in case the cooperation goes well, an exchange of employees may be desirable in order to share know-how’s and broaden the company’s outlook. By selecting expatriates we should concentrate on the technically competent, adaptive, familiar with the German culture, and possessing leadership skills employees in order for the expatriation to be successful.
It is important to develop geocentric approach to the staffing after the collaboration is functioning properly. Though the development and maintaining of this approach may be tough and costly, the benefits of this approach are worth the effort. With the help of such approach we can better allocate our human resources: as long as a person is good at executing some business function, it does not matter which country (s)he is from. For example, if a German administrator is better than Russian, we should seek an opportunity to utilize his/her skills in our company. If a Russian cook will be more effective in Germany and will attract more clients, we should expatriate him in Germany, so that the overall profitability of the project increases.
One more important area to consider is marketing along with PR. In order to attract more tourists, some specific PR actions should be implemented, for example, we can utilize the popularity of a Hollywood blockbuster “Avatar”. Its director James Cameron spent his previous birthday on board of a submersible “Mir-1” in the depths of Lake Baikal, in search of inspiration for the sequel of “Avatar”. We can give more publicity to this news and offer tourists a very special tour with the immersion in the atmosphere of Pandora, the world of “Avatar”, since there is a special vessel with transparent bottom made for excursions in the underwater world of Baikal Lake. Such an advertisement can create a very positive effect on German tourists. In Russia we can create some specific advertisement of German special cuisines, like Bavarian beer or pretzels. Such an advertisement can be very successful in Russia.12
To conclude, we should take advantage of all the benefits and opportunities of creating a joint venture: increasing the market share, obtaining new know-how’s, minimizing the risks and eventually increasing earnings. All potential disadvantages of the joint venture should be mitigated with the help of proper planning and implementation processes.
Notes
German National Tourist Board, Incoming-Tourism Germany (Frankfurt am Main, 2009), 5, http://www.germany-tourism.de/pdf/DZT_Incoming_Brosch_09_en_web.pdf
Ibid., 10
Eurostat, “Tourism employment”, Statistics explained, http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Tourism_employment
Christian Regnery, “Starting a Business in Germany”, AngloINFO Berlin, http://berlin.angloinfo.com/countries/germany/business.asp
Worldwide-Tax, “Germany Income Taxes and Tax Laws”, The Complete WorldWide Tax & Finance Site, http://www.worldwide-tax.com/germany/germany_tax.asp
eTurboNews, “Germany will reduce taxes for hotels in 2010”, Global Travel Industry News, http://www.eturbonews.com/12414/germany-will-reduce-taxes-hotels-2010
PKF International Limited, Germany Tax Guide 2009, 6, http://www.pkf-fasselt.de/media/public/db/media/1/2009/08/4/germany.pdf
BMWi entrepreneur portal, “What company insurance policies do you need?”, Setting up a business, http://www.existenzgruender.de/englisch/self_employment/lead_your_company/company_insurance/index.php
John D. Daniels, Lee H. Radebaugh, Daniel P. Sullivan, International Business (Boston: Pearson, 2009), 522
Ibid., 531
Emery & Associates, “Advantages & Disadvantage of a Joint Venture”, articles, http://www.rpemery.com/articles/advantages_and_disadvantages_jv.htm
Steve Gutterman, “Director Cameron dives beneath Lake Baikal”, Reuters, http://www.reuters.com/article/idUSTRE67F1AT20100816
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