Some may argue that institutions play much role on businesses making international capacity decisions however like all opinions there's always another side to it. With research and investigations we can weigh the impact of institutions in these decisions and discover the other factors that could affect a company's decision to globally expand. In such a report I've found that institutions do affect these company decisions however formal and informal institutions affect them in different ways. Thus I have investigated some advice for organizations to use as they may get into some institutional stumbling blocks.
Introduction
When trying to globally expand, businesses have to consider many problems or factors that could affect whether they are successful in doing this or not. Formal and informal institutions both make a difference the entry of a firm however a companies position on the market can also do this. Analysing a firm's strengths, weaknesses, opportunities ad threats (SWOT Analysis) I'll endeavour to explore how these factors alongside competitive advantages and institutional inputs are likely involved on interational capacity decisions.
Methodology
Methods used to handle this research:
Journal articles
Diagrams
Journal Articles
I used journal articles because they are a very useful way to getting examples to back up my views of this report discussion. That is useful because theories are accompanied by real case examples which is useful to the reader because they are able to put theory into practice.
Diagrams
Theses are my useful way of explaining how some of the theory links. For example, SWOT analysis; rather than it being four meanings, by using diagram, they become four meanings that interlink with each other.
Findings/Discussion
4. 1 Institutions
Every country has lots of institutions which influence the choices that organizations make in international capacity decision making. Mike W. Peng defines institutions as humanly devised constraints that structure human interaction (Peng, 2009). Their ultimate role is to reduce uncertainty plus they do that through arms length transactions, institutional transactions and relational contracting. They come in two categories, formal and informal. Formal institutions are laws, regulations and rules and informal institutions are norms, culture and ethics or quite simply the guidelines of the game. So for example, the Chinese law disallowing foreign companies to create books on their own (Peng 2009). However, the informal 'rules of the game' are sometimes that a foreign company can pay a Chinese company to have it under their published name or that they will because of this of this receive a proportion of the profit the book makes.
However I assume that culture is not a factor strong enough to affect business performance. The journal of international business studies declare that "regression results failed to provide statistical relationships between cultural distance and entry mode choice, international diversification and Multinational Enterprise performance" (Journal of International Business Studies, 2005). So out of this research we can see that although institutions make a difference a businesses international capacity decisions, in particularly informal institutions do not always have a practical impact if any impact whatsoever.
Porter's Diamond Model
This research had me wondering why some countries such as China and Japan dominate industries in different countries whilst various other countries struggle to do so. In my investigation of this matter I ran across Porter's Diamond which was founded in 1990 when he wanted to find out why some nations accomplish that well in reaching international success for example Japan in the automobile industry (Shimokawa, 2010). Neither the idea of comparative advantage or the Heckscher Ohlin theory can properly explain this thus Porter came up with his diamond theory. His research landed him to the theory that suggests that there are nations have four broad attributes that 'shape the environment in which local firms compete' (Hill, 2013). These four attributes are illustrated in the diagram below.
(businessmate. org accessed on 20/11/2012)
4. 2. 1 Factor conditions-
We must note the difference between basic and advanced factors. Advanced factors give us a competitve advantage because they are a product of investment by governments, companies and people. A nations advanced factors can be upgraded by government investments of enhancing the entire skill and understanding of the population through methods such as investing in advanced schooling (Hill, 2013). An example is Japan's large number of engineers that have importantly contributed to the success in a lot of their manufacturing industries http://europa. eu/rapid/press-release_MEMO-12-204_en. htm).
4. 2. 2 Firm Strategy, Structure and Rivalry-
His research continues on to stating that management ideologies characterise nations and this determines whether they have the ability to create a competitive advantage nationally. Japan and Germany have many engineers in top management with their firms which has contributed to the improvements made on manufacturing processes and production designs. He continued with a constrast of america many financial experienced people at the top end of management in their businesses which has resulted in neglection in the improvement of manufacturing processes and product design (Hill, 2013).
4. 2. 3 Demand Conditions-
Demand is a huge element in the success of a firm's international capacity success which is made a point in Porter's diamond. Porter notes that nation whos individuals are not demanding is nation where in fact the organizations fail in gaining competitive advantage. By consumers being demanding, organizations are urged to increase their standards or quality and service leading to a rise in innovation. This permits these to broaden their marketplace globally and become a genuine competitior on the market (http://www. fundinguniverse. com/company-histories/nokia-corporation-history/).
4. 2. 4 Related and Supporting Industries
Lastly, Porter notes that the existence of suppliers and related industry is important in the accomplishment of experiencing a national advantage. Insurance agencies a firm for instance in the United States on the market of semiconductors brings a technological advantage to the firm in the industry of personal computers and other tecnically advanced products (Hill, 2013). Rather than the personal computer organizations needing to develop their own technology, they may use that which was developed or used by the industry of semiconductors.
Competitive Advantage
Expanding on Porter's Diamond theory, my fndings directed me to the idea of competitive advantage and some examples to go along with it. The firms that came in your thoughts when analysing competitive advantage were KFC, Apple and Primark therefore i sought to investigate these businesses.
All organizations seek to truly have a competitive advantage on the other firms on the market by 'offering consumers greater value, either through lower prices or by providing more benefits that justify higher prices' (Kotler et al, 2008). A number of examples are the following: KFC has a competitive advantage over other suppliers of fried chicken as they have got a unique taste to their chicken which no person can copy (Abhinav Sharma' Blog), thus providing more benefits in justification with their higher prices. Whereas, if one were to buy chicken from a normal chicken and chip shop, they are very more likely to taste the same or similar one to the other. Apple, specifically the iPhone 5 has a competitive advantage against other cellular phone producers for example Samsung since it has a distinctive software exclusive to the telephone 5 and other Apple products. It includes the buyer more in the form of an update of 'Siri' the mobile's robot, its replicate of Google maps, accessibility- which makes it user friendly to a wider audience of people including those with disabilities and a great many other updated and new features (www. apple. com). Primark has a competitive advantage against other companies in the clothing industry because they sell clothes at a lesser price but nonetheless up-to-date with the latest fashion trends. The last example is the Global Strategy textbook published by Cengage Learning. That they had a huge competitive advantage against other global strategic textbooks. This is that they were the only real textbook to be successfully translated into Chinese languages as they had really the only translator who was simply successfully in a position to do this.
SWOT Analysis
SWOT analysis allows for firms to assess the strengths, weaknesses, opportunities and threats of their product or band of products. It is 'a distillation of the findings of the inner and external audits which draws focus on the critical organizational strengths, weaknesses, opportunities and threats facing the company' (Kotler et al, 2008). Strengths and Weaknesses are seen as a Resource based view meaning it counts for internal matters in the firm. Whilst Opportunities and Threats are Industry based views thus they count for external matters i. e. competition beyond your firm.
Strengths (S)
· A distinctive competence?
· Well considered by stake holders ?
· An acknowlegded academic leader?
· Well conceived operational strategies?
· Location advantages?
· Insulated from competitive pressures?
Weaknesses (W)
· No clear strategic direction
· Obsolete facilities?
· Weak Image?
· Falling beind in R&D?
· Competitive disadvantages?
· Vulnerable to competitive pressure?
Opportunities (O)
· Faster market growth?
· Vertical integration?
· Serve additional customer groups?
· Enter new market or segments?
· Add complementary courses or services?
Threats (T)
· Likely entry of new competitiors?
· Adverse government policies?
· Adverse demographic changes?
· Vulnerability to recession and business cycles?
The above table lists a few examples of strengths, weaknesses, opportunities and threats from the Managerial Auditing Journal (Managerial Auditing Journal, Volume 15, issue 8).
6. 1 SWOT Analysis of Wal-Mart
Strengths
Wal-Mart is a well known supermarket because they're the world's greatest retailer and has already established much success in capacity building (Walmart 2012 Annual Report). They may have expanded into many different countries but out of all of these, the United States has the greatest proportion of Wal-Mart stores (money. cnn. com). Their competitive advantages and equally their strengths, are that they reap the benefits of selling their produce at low prices, they may have highly efficient procedures and logistics and information systems.
Opportunities
Mexico did not have large food stores where consumers can go and buy the majority of their groceries from, therefore they were buying from multiple small shops (Hill, 2013). This was viewed as an opportunity to Wal-Mart in the Mexican industry, so they attempt to expand into Mexico using their large shops. Getting the resources and economies of scale to have the ability to sell goods at such cheap prices is a major opportunity that Wal-Mart took good thing about when going to enter different countries. The lower class citizens of Mexico could have been more appealed to buying from Wal-Mart due to the fact it is cheaper than their usually shopping choices. However, the low class do not constitute nearly all citizens rather than most of them would be more likely to automatically change where and how they shop due to entry of Wal-Mart in to the industry.
Weaknesses
However on expanding into Mexico some of their weaknesses were uncovered because of the culture of the Mexican people. When they started trading in america they had a issue of not having the ability to adjust to the American way of shopping which was buying from small shops rather than this big supermarket. Nevertheless, from 1950, these were in a position to overcome this issue by steadily changing the culture into buying from Wal-Mart's supermarkets (Hill, 2013). The Mexican culture is very similar; people do not tend to buy in bulk, rather they have their select shops from which they purchase certain goods. For instance they preferred to buy fresh produce such as meat from local shops. Because of this, Wal-Mart's way of shopping didn't suit the culture and unlike the truth in America, they were unable to change their shopping culture. Which means this was in-turn their weakness; they cannot adjust to all shopping cultures (Hill, 2013). Another weakness was the location of the Wal-Mart stores. Due to the shopping culture, people aren't used to travelling far to travel food shopping so where the Wal-Mart stores were located were not convenient for those domestic shoppers.
Threats
Surprisingly, the threats imposed on Wal-Mart were from the tiny businesses that people were buying their selected few goods from. They were a huge threat as a result of informal institution of culture which was a strong part of the Mexican people. Regardless of Wal-Mart being a huge and incredibly successful business, they were blocked by culture from successfully entering and accomplishing global expansion into Mexico. The smaller firms had the good thing about having customer loyalty from the Mexican people for years which is not at all something a new and very culturally different business could come a steal.
6. 2 SWOT Analysis of Japanese Pharmaceutical Firms
Strengths
Japanese has a big base of pharmaceutical companies with over fifteen firms. Among their most popular businesses is Takeda which is currently ranked as the top over Pfizer. Since they are simply so successful, they had a rise of sales by 2. 7% between 2008 and 2012 and they spent on average 326. 04 vast amounts of yen per annum between 2008 and 2012 (www. takeda. com). Around the world they may have affiliates in 71 countries and employ over 30, 000 staff (ww. takeda. co. uk). It really is obvious to see that growth and international expansion must not be much of a challenge for Takeda!
Weaknesses
Despite this huge benefit of having this majorly advantageous pharmaceutical company in their ownership, the companies in Japan themselves are not world famous which is because of the formal institutions of regulations in Japan. The health care system in Japan just simply do not reward innovative new drugs (Peng, 2009). The way in which this happens blocks these companies from expansion, whether that be domestically or globally. The costs of drugs stated in Japan are negotiated with the Ministry of health, labour and welfare as soon as set, are forbidden to change by law and the only way they actually change is if indeed they fall. Because of the lack of income that these firms attain, they have less money to spend on research and development and on the grounds that they can not receive any extra credit for invention or innovation of new drugs, the incentive to take action is suprisingly low. Instead, Japan relies on licensing Western drugs making the country reliant on the western world (Peng 2009).
Opportunities
Western companies are actually starting to prefer selling their drugs independently in Japan with no help of any Japanese institutions. This could act as an opportunity for Japanese pharmaceutical companies enhance their research and development and increase their International Capacity. Furthermore, because of the success of Takeda, they are able to expand and have a large base in Japan. They are ranked as the second to the top Pharmaceutical company on the planet. To keep up this place they, must enhance their research and development; in '09 2009 they spent 296. 4 billion yen on R&D, 2010 was 288. 9 billion yen and 2011 was 281. 9 billion yen (www. takeda. com). This shows a reliable decrease, however this opportunity can give a ride to analyze and development helping Japanese Pharmaceutical businesses to expand and finally globally.
Threats
Pharmaceutical firms in Japan face threats from two main sources: the formal institutions in their country and competition from Pfizer-the world's largest Pharmaceutical Company (www. ihs. com). Firstly, if the government Minister of health, labour and Welfare do not visit a problem with Western pharmaceutical businesses selling on their own in Japan, the pathway for Japan firms is closed. It has been a norm that pharmaceutical companies in Japan aren't heavily significant so for the government to improve it abruptly could put pressure on these firms. For this reason, they would become more inclined to form a deal with the prevailing companies that sell their products.
Pfizer is an extremely strong company and with this comes serious competition for those in the same industry including Takeda. They operate in 180 countries round the world which is twice the amount of Takeda. For Japanese companies to ensure they have got a steady submit this industry in Japan, they'll need to get more into research and development in order to be strong leaders in Japan and on a worldwide scale.
6. 3 SWOT Analysis of IKEA
Strengths
IKEA has many strengths that has enabled them to be the worlds most successful retailer. They have got 301 stores globally in 41 countries (www. ikea. com). Because they are very popular and evidently impressive to customers, they have the advantage of large and wide scale customer loyalty. They may have normally 410 million shoppers annually. They are a number of explanations why customers are loyal to IKEA and these commence using their low prices. The benefit for economies of scale is the fact that companies are able to produce a large number of goods for a lesser price that organizations without economies of scale (Griffiths et al, 2011). Secondly, they practice good customer support skills which encourage customers to come back to their stores understanding that they will have a good shopping experience.
Weaknesses
As IKEA is a Swedish founded company therefore the Swedish culture is quite European. This forms a cultural problem when aiming to expand into other countries. IKEA encountered this problem when expanding into the USA in the first 1990's in the form of items not matching the American norm (Hill, 2013). For instance IKEA measured their beds in centimeters whereas Americans use the king, queen and twin size methods. Cups were too small Americans have a tendency to put a lot of ice in their drinks and sofas were not big enough. Getting into a different and very strongly cultured country makes it harder for new firms to succeed with the own culture. Therefore IKEA resulted in changing their way of doing things and making products to match with the American life-style (Hill, 2013). This has resulted in an increase in sales.
Opportunities
Seeing the success in the us, it resulted in IKEA now expanding their capacity to China. Like America, their store appeal greatly to the Chinese people in the way that it's organized like typical Chinese style apartments with a balcony section which adheres for the apartment designs. They also located their stores in high resided areas as it isn't a large popularity of Chinese citizens that own cars so it is important for the stores to be easy to get at for all. IKEA also saw the chance to appeal to middle income people who look for high quality items at a low price. So because of this they have got ordered their stores in a way that the customer must walk around the complete department to get to the exit or the tills whilst on the way seeing many items which may tempt them to acquire more than they originally intended on.
Threats
The major threat to IKEA would have been when they first expanded into say america. Companies more popular and trusted by the American people would have had the benefit over IKEA before they changed their strategy to fit to the culture. Besides that, other threats include, new entrants in to the industries that IKEA adhere to such as home ware: beds, wardrobes etc. For instance, Not long ago i purchased some wardrobes from IKEA as these were a corporation I trusted and had positive experiences with in the past. However, I was disappointed with the service and the grade of the products I purchased and therefore I returned the items and purchased from Homebase where I got much more satisfied. From this experience I can now say that Homebase is a strong competitor to IKEA with regards to homeware.
7. The UK Government
There are other ways where institutions influence a businesses international capacity decisions. The UK government for instance has many methods of doing so. These include the Employment Policy, Regional Policy, Inflation Policy, Education and Training Policy, Taxation Policy, International Policy and by establishing the 'rules of the game' (http://businesscasestudies. co. uk). The Employment Policy can help companies to find suitable employers to help expand their firm which coincides with the Education and Training Policy which will make potential employees knowledgeable and skilled for companies to employ. For organizations that desire to expand into the UK, the Inflation Policy helps them to have the ability to accomplish that with the risk of sudden high charges for instance if indeed they wanted to acquire a house to begin their international capacity building. The International Policy directly helps domestic businesses with International capacity building as it promotes trade and encourages selling of British goods abroad.
8. Conclusion
To conclude it is fair to say that this research supports my view that institutions can have a range of effects on organizations trying to exceed their capacity. These impacts can maintain positivity and negative. In the case of Wal-Mart and japan Pharmaceutical companies, it turned out to be negative but in the truth of IKEA, they used it with their advantage and indeed increase their international capacity. However my view also extends to the fact that it's not insitutions alone that affect a company's international capacity decisions but additionally it is their competitive advantages and position in the global market.
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