International Business Management
Review of International Strategy at Metricum
Overview of the Metricum Company
Metricum is an SME manufacturer of materials handling equipment and intelligent handling systems. It has been based in the east of England for the last 28 years and has been catering to clients in several parts of the world. The company exports equipment to 40 countries around the world and has manufacturing facilities in Sweden and China in addition to the United Kingdom. Metricum has vertically integrated up the value chain by acquiring a key supplier in Romania. The Romanian subsidiary has great room for expansion. The company has expanded internationally through joint ventures and acquisitions. Manufacturing operations have been decentralized on the basis of local expertise. Standardized products are manufactured in China, which makes up 25% of total production. Innovative products are made in Sweden while a scaled-down labour force in the United Kingdom focuses on customized bespoke manufacturing. The challenge would for it to retain the flexibility of its small size with the economies of scale brought by expansion (Bannock 2005, p. 47).
Strategic Objective of the Metricum Company
The Metricum Company is aiming to expand its operations at the Romania facility and use it as a base for expanding in the eastern European region. The eastern European economies have been emerging from a period of transition from centralized economies to a market economy system. Some have made radical changes like the ‘Big Bang’ price liberalizations whereas others have made a guarded transition (Jeffries 2002, p. 385). This opening of the markets presents a potential growth opportunity for Metricum to grow beyond its traditional markets. The Romanian facility is currently operating at 20% capacity. The opening up of neighboring markets will help Metricum to achieve economies of scale through increased output levels and establish a firm presence in a growing region. The company does not possess the strategy to undertake an analysis of the investment opportunity and evaluate its feasibility. This report presents the outline of a strategy Metricum can use to assess the international business opportunity.
STRATEGIC CHALLENGES TO INTERNATIONAL MARKETING AT METRICUM
The Challenges of Political Orientation
One of the most significant challenges to international business for Metricum will be political challenges. Historically, East Europe has been under communist rule for decades. After the collapse of the Soviet Union the countries have opened up their economies to capitalist ideals. In addition, they have been increasingly trying to integrate their political systems with that of the European Union and the international community. The central banks, especially in countries like Hungary, have played an important role in this financial integration (Jarai 2004, p. 31). Metricum is based in the United Kingdom and has experience of working in Sweden. The two are politically similar because both are constitutional monarchies. However, the case of Romania and Ukraine is different because they are relatively new to a presidential form of democracy and the institutions are not very well-established. A political elite from the Soviet era has also been active (Zon 2000, p. 23). Politically, the country has tried to maintain a balance of influence between its immediate neighbor Russia and the United States. There is the risk of political instability in the region as was observed in the colored revolutions during the early years of the twenty-first century (Copsey 2010, p. 30). Whether a rightist or leftist government is in power will have a direct impact on the attractiveness of the investment opportunity. With regard to legal aspects, Ukraine has a number of regulations that would affect foreign direct investment efforts by Metricum. These include the Foreign Investment Law, The Competition Law, and the Law on Protection from unfair Competition. The Tax Law offers some initiatives for foreign investors. Registering as a foreign investor also makes it easier to transfer remittances and dividends abroad (PWC, 2011). Metricum will have to weigh in all these factors by analyzing the political history of the region and its shifting alliances across Europe and the international community. Factors like political risk, political ideologies, government policies towards investment and business should be analyzed to make an informed decision about expanding in the region Vaghefi et al. 1991, p. 197).
The Challenges of Technology
Technology transfer is a strategic issue in international business (Good 1991, p. 37). Metricum is in the business of manufacturing materials handling equipment. It is a technologically-intensive industry and depends on the sophistication of the technology being used. The usage rate of the technology and its diffusion in the industry are important factors in considering whether the industry can sustain the technology efficiently. If the company wants to expand into Ukraine, the heavy equipment industry there is highly well-developed and is one of the largest industries of the country. The level of technology is also at par with manufacturers in other countries in Europe. In order to make the best of this opportunity, Metricum needs information on the major equipment manufacturers and the degree to which the manufacturing process is automated and technology-intensive. It also needs information on the availability of electricity and the condition of transport and the infrastructure.
The Challenge of Globalization and Economic Uncertainty
Globalization is a significant challenge that Metricum needs to analyze, especially in the light of the global economic recession and the European debt crisis. Globalization has been termed as both a curse and a good because of the increased interdependence of economies (Stonehouse et al. 2004, p. 8). Metricum is aiming at increasing the globalization of its industry and markets. It wants to establish manufacturing bases in the region and sell to customers in that part of the world. Such a strategic objective requires that the economies of the two regions will become interdependent so that any negative impact on one will have an effect on the other. The east European countries have relied on support from the major powers of the European Union through the European Commission and its development programs. This in addition to national stimulus packages has led to a speedy recovery from the global financial crisis and sustained consumer demand. However, after the Euro debt crisis, it has become uncertain whether the European Union will continue to support development programs. The governments will also have to curtail subsidies to continue receiving support from the IMF and the World Bank. This may adversely affect demand in the east European countries. Ukraine joined the WTO in 2008 and has been growing its exports since. The GDP was reduced by 15% in 2008 following the financial crisis but since then the economy has been growing at a steady rate of around 4%. In 2011, the European Bank for Reconstruction and Development estimated growth of 1.7% for the region (Ewing, 2011).
The Challenge of Cultural Adaptation
Cultural adaptation is a major strategic challenge for Metricum. The company has manufacturing facilities in the United Kingdom and Sweden which are marked by individualistic cultures and low power distances (Murray et al. 2006, p. 101). Eastern European countries like Ukraine and Romania are more collectivistic and have high power distances between managers and subordinates. The national culture is marked by the influence of communism and subordination to authority. Informal relationships and obligations take precedence over formal rules enforced in the United Kingdom. Employees are also more flexible compared with their western European peers (Saunders et al. 2010, p. 216). Bribery is also a major issue in Ukraine, as well as corruption in the form of corporate raids (Goehring 2008, p. 613).
Metricum can improve its international business strategy by analyzing the national, industry, organizational and individual cultural variables in the target country. The greater the cultural similarity in terms of attitudes towards work, time, specific and diffuse relationships, the easier it will be for Metricum to integrate its operations in Ukraine into its existing value chain.
MARKET OPPORTUNITIES IN EASTERN EUROPE
Eastern Europe is a growing economic region of the world and has weathered the economic crisis relatively well because of limited integration with the international financial markets. Recovery from the crisis has been swift and there is greater room for increased cooperation among the countries of the region. The region includes Russia, Romania, Ukraine, Belarus, Hungary, Bulgaria and Turkey among the larger economies. Metricum already has a foothold in Romania through a wholly-owned subsidiary but the plant is operating at 20% capacity only. There is an opportunity for maximizing output by catering to the regional markets of Eastern Europe. Metricum intends to target Ukraine as the first step of its expansion in the region.
Ukraine is the second largest country in Europe after Russia (Murphy et al. 2008, p. 196) and has an estimated population of 45.8 million people (CIA, 2012), one of the largest in the region. The rate of urbanization is also high at 70% (CIA, 2012), which means there is a great potential for construction and heavy machinery industry. Russia and Turkey are two large economies in the region and are situated close to Ukraine. During Soviet rule, Ukraine was an important centre of aerospace and industrial manufacturing. Therefore, it has a flourishing industrial manufacturing industry. The technological expertise of its heavy machinery manufacturers has led to increased exports in recent years. In 2010, Ukraine exported more than $2.5 billion worth of machinery and heavy equipment, mostly to Italy, Poland and Russia (Doing Business, 2012).
The transport infrastructure is one of the best in the region. The country has a road network measuring 170,000 km and a rail network measuring 22,000 km. Ten ports along the Black Sea and five airports make it an efficient place for the transport of goods between Europe and Asia. It also points to a strong local market for materials handling equipment. Energy prices in the Ukraine are also lower as compared to prices in other parts of the European Union, meaning that it is a cost-effective place for technology-intensive manufacturing (Doing Business, 2012).
Because of the growing economic power of Russia and Turkey in the region, the overall performance of Eastern Europe is expected to increase. By being relatively less integrated with the international financial system their economies have displayed greater resilience and recovery after the financial crisis. Greater cooperation and trade with Russia and Turkey will result in increased income levels throughout the region and increased demand for manufactured goods. This would translate into increased industrial activity and greater demand for materials handling equipment. The country is also a gateway between Russia, Asia and Western Europe. Therefore, establishing itself in Ukraine at the initial stage of its expansion strategy will bring Metricum into close proximity of three significant markets of the world.
Metricum needs to obtain specific information about the market conditions of the Eastern European region. The region has a strong agricultural and industrial base, a sizeable population, an extensive network of roads and railways, trading routes over land, sea and air, and a strategic location at the junction of important trading routes. The economy has been performing well in recent years and the rate of technology development is encouraging. In Ukraine, there is a well-established industrial base for manufacturing heavy mechanical equipment making it easier for Metricum to set up a manufacturing base there. Energy prices are low and this can result in a lower cost of production. The influence of communism can be seen in extensive bureaucratic procedures that often place governmental bodies and businesses in a situation of give and take. Business norms are shaped by a relaxed approach towards work and life.
MARKET POTENTIAL FOR METRICUM IN EASTERN EUROPE
The Ukraine market is a high potential market for Metricum to expand in Eastern Europe. It is one of the largest economies in the region and is strategically located between two of the biggest economies of Eastern Europe, Russia and Turkey. There is a large urban population in the country and 68% of the population is between 15-64 years of age (Doing Business, 2012). This is the population that has the highest purchasing power and plans for future investments in housing and automobiles. The unique demographic also means that there is a greater demand for consumer and industrial goods, as well as infrastructure and capital equipment.
The GDP per capita in 2009 was $2,482 which indicates strong purchasing power and a high demand for consumer goods (Doing Business, 2012). There is a sizeable middle class in the country and has a greater portion of its income for spending. Minimum rents in the capital Kiev are around USD 300-400 per month (Doing Business, 2012). The demand for passenger cars is among the highest in Europe. It is estimated that Ukraine possesses 5% of the world’s natural resources. This means that economic activity in these two areas will create a strong demand for industrial equipment and heavy machinery produced by Metricum.
IMPACT OF COMPETITORS ON METRICUM’s STRATEGY
Metricum will likely find tough competition in Ukraine from local manufacturers because the country has inherited a strong manufacturing base in heavy machinery from its Soviet era. Local companies manufacture high-end sophisticated heavy machinery and exports of heavy machinery constitute one of the largest export groups. In addition to local manufacturers, international manufacturers like Volvo also have a strong presence in the industry (Volvo CE, 2012). Even in Romania where Metricum purchased a local supplier of parts to become vertically integrated in its value chain, there are several dominant players in the heavy machinery industry. Some of the notable manufacturers are Katech SRL (Echipamente, 2012), S.C. Fami Electronics (Hello Trade, 2012) and RXM Trading (Mascus, 2012). Financial figures for these companies could not be obtained because of the unavailability of the corporate websites in the English language.
However, Metricum needs to understand the economic impact of competitor activities on its operations. Business and government in Eastern Europe share a special relationship. Favors and informal dependencies are common which may be a challenge for Metricum to cope with. Competitors may try to create administrative and bureaucratic hassles for the company trying to establish its presence. Local suppliers may also be less keen on establishing relationships with a new company at the cost of antagonizing existing relationships. Metricum needs to develop a targeting and positioning strategy for itself in the industry so that it may concentrate its resources on overcoming competition from relevant quarters instead of going for a shotgun approach or with no preparation at all. Whether the industry is monopolistic or oligopolistic will determine the number and size of barriers to entry such as technology, startup costs and regulation that need to be investigated by Metricum to analyze its international business opportunities.
MARKET ENTRY STRATEGY
The market entry strategy guides the company in how to enter the new market in an efficient way. International business involves a lot of uncertainty because new competitors, customers and regulatory bodies are encountered by the foreign company. Despite extensive research, the direct contact with the actual environment may differ from what had been projected earlier. In addition, significant investment in material, financial and human resource is made when expanding internationally. Therefore, in order to protect the investment, a sound market entry strategy should be devised to increase the chances for success in the new market. The following strategies are open to Metricum for its expansion in Eastern Europe.
Exporting to Eastern Europe
Exporting is the safest market entry strategy for Metricum in the given scenario. Exporting is the simplest form of international business in which a company simply sells its manufactured output in foreign markets (Luo 1999, p. 44). There is little need to integrate operations in the foreign markets with the home country at the strategic level. Products may be customized to local needs depending on the level of technology at the disposal of the exporting company. A representative office in the foreign country may suffice as the only physical presence necessary in the host country. There is also little need for sending employees or managers abroad as local staff well-versed in the dynamics of the local industry and the needs of customers can be hired from the host country. In case the venture proves to be less successful than planned, the company can easily exit from the market without having to wind up extensive operations and face low morale among employees who have to be called back. However, it is necessary to hire an effective export intermediary (Lymbersky 2008, p. 75) well-versed with local trade laws, business culture and the economic environment.
Joint Venture in Eastern Europe
A second strategic alternative available to Metricum is to engage in a joint venture with a local manufacturer in Eastern Europe. This may prove to be an efficient way of spreading risks and catering effectively to the local environment (Contractor & Lorange 2002, p. 111). The success of this strategy has been experienced by Metricum with its Chinese partner. After a period of competition, the two entered into a partnership and as a result, 25% of Metricum’s manufacturing is now done in China. The benefit of this has been in that the company has been able to save manufacturing costs because of the lower wage levels in China compared with the wage levels in the United Kingdom or Sweden. As a result, the labour force in the United Kingdom has been trimmed down from 65 to 24 employees, resulting in greater savings for the company along with expanded markets through cooperation with the Chinese firm.
At the same time, the global integration of its value chain has enabled the company to allocate its human resource more effectively. The employees at the Sweden and United Kingdom facilities can now concentrate on developing innovative and custom-made products while the Chinese partner can make use of its manufacturing efficiency to produce standardized items. The Eastern Europe market is quite competitive. In particular, Ukraine has a in heavy machinery and there is likely to be tough resistance from the local manufacturers like Donetskigrmash, Motor Sich, Yasinovatskiy (Oxford Business Group 2008, p. 120). By entering into a joint venture with a local manufacturer, Metricum will save the time and resources to be spent in adapting to new economic, regulatory and competitive environments. Fewer staff will need to be sent abroad and those that are will be trained and guided by the employees of the joint venture partner firm.
At the same time, there is a risk of product and process details being shared with the local joint venture partner. The local partner may require that the technology be shared with it as part of the joint venture agreement. Once the local partner has become well-versed with the technology, it may decide to manufacture the product on its own and become a competitor of Metricum. This would put Metricum in a competitively disadvantageous position because the new competitor would possess knowledge about the competitive strengths and weaknesses of Metricum. Therefore, Metricum needs to weigh the advantages and disadvantages of the joint venture strategy in the light of its broader strategic goals for expanding in Eastern Europe.
A Wholly Owned Subsidiary in Eastern Europe
One way in which Metricum can avoid the risk of its proprietary knowledge and core competency being made known to a potential competitor is by establishing a wholly owned subsidiary in Eastern Europe. Metricum has already gained experience of such an arrangement in the region since its acquisition of the firm in Romania. However, that firm is a supplier firm and not a manufacturing firm. Metricum could find a wholly owned manufacturing subsidiary by buying out a local manufacturer through a similar acquisition (Hitt et al. 2010, p. 234). This would give the company complete control over its operations and the use of its proprietary information (Hill & Jones 2009, p. 270).
In the knowledge economy the most important thing for Metricum is to safeguard its strategic assets, i.e. its core competencies and strengths. Through a wholly owned subsidiary, Metricum will be able to send its own employees to work in the foreign subsidiary and manufacture products for the eastern European region. There are significant costs with this strategy too. Metricum will have to ensure that its employees possess the relevant knowledge and insight about the local environment including the business culture, attitudes, tastes and preferences of the consumers, role of governments and regulatory authorities, competitor tactics, expectations of suppliers and the special rules applicable to foreign investors and foreign firms. Currently, it does not seem that the employees of Metricum possess the knowledge or the flexibility to undertake such an assignment. In addition, a wholly owned subsidiary would require a greater investment of financial resources that the Board may not be willing to invest. The management needs to ponder over how much it can invest financially and in terms of human resource.
A Greenfield Venture in Eastern Europe
A greenfield venture is one that involves a company setting up a manufacturing facility in a foreign country from scratch (Daft & Lane 2009, p. 100). If Metricum were to adopt such a strategy, it would be establishing its own manufacturing base in Ukraine instead of partnering with a local firm. This would give it the greatest control of its strategy but would also require it to be extremely fluent with the local environment, something it has been sated earlier that the company does not possess. It would also require the greatest level of financial investment compared to other strategic options such as exporting or joint venture. Competitor activity would also be vigorous because Metricum would be seen as an alien company in the environment. Hostile competitive activity might be expected as a result. It should also be kept in mind that the employees will have to develop communication and networking skills with the local consumers and suppliers. They will also need to be trained in the culture of the new market through company sponsored training and acculturation programs so that they do not experience culture shock and disillusionment (Williams 2006, p. 262). The company should then be prepared to invest significantly in training its human resource for exploiting the greenfield opportunity.
HUMAN RESOURCE IMPERATIVES FOR METRICUM
The quality of human resource is a competitive strength and a source of core competence for any firm. This makes the firm resistant to competitive action because of its unique competitive advantage through the knowledge and skills of its employees. This becomes even more important when a firm tries to expand in foreign markets because the skills of its employees can differentiate it and position it at a strategic advantage (Briscoe et al. 2008, p. 74).
Metricum needs to develop its human resource towards cultural sensitivity and flexibility. The current management team possesses little strategic orientation towards international business management which goes against the chances of the company for success in international business. The cultures of the United Kingdom and Eastern Europe are very different in terms of individual and national cultural variables. The political, economic and competitive environment is also unique and Metricum’s employees will need to be trained to operate effectively in such an environment. For instance, they may need to be trained in making a distinction between bribes and facilitation payments. Probably, Metricum may need to devise a policy on anti-bribery and approve employees of it. Cultural norms and customs of the host country will have to be familiarized to the employees to be relocated. Managers and leaders will need to be trained in being sensitive to the work attitudes and motivations of local employees so that appropriate incentives and rewards can be provided (Briscoe et al. 2008, p. 74). Eastern Europe values collectivism and authoritarianism; relationships are diffuse compared with the United Kingdom. Attitudes about time and personal responsibility are casual.
GLOBAL STRATEGY imperatives for metricum
Metricum may choose from truly global strategy, a multidomestic strategy, a multinational strategy, or a regional strategy (Peng 2008, p. 296). The choice of strategy will depend on how far the markets to which Metricum intends to cater are similar and the degree of efficiency.
If Metricum pursues a global strategy, it will manufacture similar products for all its customers who presumably would have similar requirements (Peng 2008, p. 296). Currently this is not the case since the company produces a number of bespoke products as well in addition to the standardized products manufactured by its Chinese partner firm. It is expected that the needs for customers will be varied as the economy moves towards mass customization, making it necessary to produce differentiated products for smaller segments of customers. Ina multidomestic strategy, the company would have to develop unique products and marketing campaigns for each of the markets it operates in. this would mean a different range of products and promotional campaigns for Ukraine, a separate one for Romania, another one for Moldova and so on. The third option is that of a multinational or regional strategy in which products are made to suit the needs of markets within a region that share similar needs and preferences (Peng 2008, p. 297). The company can make use of production technologies and economies of scope to manufacture differentiated products and customize them according to the needs of individual customers. Because of cultural similarities across the region, a unified promotional campaign can be launched to enhance efficiencies at every level of the marketing effort.
With regard to the global strategy, it is recommended that Metricum adopt a multinational strategy for its expansion program in the Eastern European region. The countries of the region are interlinked economically and culturally. Through integration with the European Union it is expected that the markets will become further consolidated. The Supplier firm in Romania and the proposed manufacturing facility in Ukraine will enable transnational integration of the value chain and place Metricum at a competitive advantage with regard to local manufacturers. In order to enter the market, it is recommended that a joint venture strategy be adopted as in the case of China because the local manufacturers are well-entrenched and may put up hostile resistance. The human resource of Metricum is not well-equipped with intercultural business practices to be engaged independently in a regional expansion program. Therefore, the local joint venture partner will prove helpful in acquainting the employees and manager with the local business culture and environmental challenges.
The information presented in this proposal aimed at guiding the senior management at Metricum in pursuing an international expansion program in Eastern Europe. The company needed information that would enable it to identify the areas that need to be assessed and evaluated in order to determine the attractiveness and feasibility of entering the foreign market. Relevant information on key environmental factors, the competitive environment and local culture was provided to provide initial direction to the company’s senior management. Strategic issues regarding how to enter the foreign market and what kind of strategy to adopt with regard to strategic management of international business operations were also discussed along with human resource implications for each alternative.
Bannock, G., 2005, The Economics and Management of Small Business: An International Perspective. New York. Routledge Briscoe, D.R., Schuler, R.S., & Claus, L., 2008, International Human Resource Management. Taylor & Francis
CIA, 2012. The World Factbook: Ukraine. Available at: < https://www.cia.gov/library/publications/the-world-factbook/geos/up.html> [Accessed 20 April 2012].
Contractor, F.J., & Lorange, P., 2002, Cooperative Strategies in International Business. Rutgers University
Copsey, N., 2010. Ukraine. In D.O. Beachain, ed. 2010. The Colour Revolutions in the Former Soviet Republics: Successes and Failures. Taylor & Francis, p. 30.
Daft, R.L., & Lane, P., 2009, Management. Cengage Learning
Doing Business, 2012. Ease of Doing Business in Ukraine. Available at: < http://www.doingbusiness.org/data/exploreeconomies/ukraine/> [Accessed 20 April 2012].
Echipamente, 2012. Echipamente. Available at: < http://www.echipamente-scule.ro / > [Accessed 20 April 2012].
Ewing, J., 2011. Euro Crisis Weighing on East European Growth. The New York Times, [Online] 17 October 2011. Available at: < http://www.nytimes.com/2011/10/18/business/global/euro-crisis-weighing-on-east-european-growth.html> [Accessed 20 April 2012].
Goehring, J., 2008, Nations in Transit 2008. University Press of America
Good, A., 1991. The Changing Nature of United States Government Policy on the Transfer of Strategic Technology: An Overview. In: T. Agmon, & M.A.V. Glinow, eds. 1991. Technology Transfer in International Business. New York. Oxford University Press, p. 37.
Hello Trade, 2012. Company Profile. Available at: < http://www.hellotrade..html> [Accessed 20 April 2012].
Hill, C., & Jones, G., 2009, Strategic Management Theory: An Integrated Approach. Cengage Learning
Hitt, M.A., Ireland, R.D., & Hoskisson, R.E., 2010, Strategic Management: Competitiveness and Globalization Concepts. Cengage Learning
Jarai, Z., 2004. The Hungarian Experience. In: M. Balling, F. Lierman, & A. Mulineux, eds. 2004. Financial Markets in Central and Eastern Europe: Stability and Efficiency. New York. Routledge, p. 31.
Jeffries, I., 2002, Eastern Europe at the Turn of the Twenty-First Century. London. Routledge Luo, Y., 1999, Entry and Cooperative Strategies in International Business Expansion. Westport CT. Quorum Books
Lymbersky, C., 2008, Market Entry Strategies. Management Laboratory Press
Mascus, 2012. RXM Trading. Available at: < http://www.mascus.,companycard.html> [Accessed 20 April 2012].
Murphy, A.B., Jordan-Bychkov, J., & Jordan, B.B., 2008, The European Culture Area: A Systematic Geography. Rowman & Littlefield
Murray, P., Poole, D., & Jones, G., 2006, Contemporary issues in Management and Organisational Behaviour. Cengage Learning Australia
Oxford Business Group, 2008, The Report: Ukraine 2008. Oxford Business Group
Peng, M.W., 2008, Global Strategy. Cengage Learning
PWC, 2011. Doing Business and Investing in Ukraine [pdf] Available at: < http://www.pwc.com/ua/en/survey/assets/doing_business_in_ukraine_2011.pdf> [Accessed 20 April 2012].
Saunders, M., Skinner, D, & Lewicki, R.J., 2010, Organizational Trust: A Cultural Perspective. Cambridge University Press
Stonehouse, G., Campbell, D., Hamill, J., & Purdie, T., 2004, Global and Transnational Business: Strategy and Management. New York. John Wiley and Sons.
Vaghefi, M.R., Paulson, S.K., & Tomlinson, W.H., 1991, International Business: Theory and Practice. Taylor & Francis
Volvo, 2012. Volvo Construction Equipment Ukraine. Available at: < http://www.volvoce.com/dealers/en-au/ukraine/AboutUs/pages/about_volvo_ukaraine.aspx> [Accessed 20 April 2012].
Williams, C., 2006, Management. Cengage Learning
Zon, H.V., 2000, The Political Economy of Independent Ukraine. New York. St. Martin’s Press