The first-stage research that companies do about a target country and its market are not enough to guarantee success or even prevent disaster. Errors tend to repeat themselves because companies do not complete their research with an evaluation of the problems involved in going abroad, according to Alvaro Cuervo-Cazurra, professor at the University of Minnesota. He calls these problems “the competitive disadvantages” that the subsidiary faces when dealing with local competitors. Other studies have called this factor “the cost of operating in a foreign market” or “the handicap of being foreign.”
In his study, Cuervo proposes several recipes for overcoming these obstacles and assuring success. His study, “The Difficulties Involved in Internationalizing Enterprises” was published recently in Universia Business Review.
To start off, the professor distinguishes various kinds of potential difficulties according to the scarcity or difficulty of transferring the parent company’s resources.
The Difficulty of Transferring Company Resources
When moving into a foreign market, companies contribute their own resources to the subsidiary, largely in the form of the personnel, technology and capital required to operate in abroad. However, these resources – which function as an umbilical cord with the home office – can create three types of problems:
· Difficulty transferring resources abroad. The first problem emerges when the resources are transferred. Occasionally, as Cuervo explains, these resources cannot be physically relocated, as in the case of production plants. Or, they may be hard to communicate and transmit, as in the case of technology and knowledge. The situation becomes even more complicated when different languages are spoken abroad or different cultures are involved. When Spanish companies expanded in Latin America, they side-stepped the language barrier. Now, however, with their energetic entry into Europe, this barrier will be an important factor to take into account.
Cultural differences are even more difficult to overcome because, as Cuervo explains, communication depends on individuals who often lack the time and motivation to transfer corporate culture in all its complexity. Moreover, the foreign subsidiary may not be interested in listening to the recommendations of the head office. Or, there may be a lack of understanding between the manager responsible for transmitting it, and the people who receive it. These sorts of frictions have an impact in every corner of the company “as well on the various points of view about how to organize production and provide customer service,” notes Cuervo.
To overcome such obstacles, Cuervo recommends an exchange of personnel between the home office and the subsidiary, as well as the codification of the best practices and knowledge in company headquarters, so that the subsidiary can replicate them. One of the most common errors of Spanish companies when they entered Latin America was to send groups of expatriates, rather than hold onto key executive posts, and have them team up with local people from the country. This option, which is becoming more common in recent years, requires not only explaining “what to do, and how to do it; but also why it should be done in a specific way, and not another way,” Cuervo explains.
· The difficulty of transferring advantages that are tied to resources. Having overcome the pitfall of transferring knowledge and resources to foreign subsidiaries, the company can discover that the competitive advantage it was counting on at home has disappeared abroad. This can happen, for example, if the company’s image is not well known in the new country. Or, it can happen if the technology that the company developed at home can be easily copied by foreign competition because of the lack of intellectual property protection.
In Cuervo’s view, there are only a few ways to tackle such a case. Companies should change the way they operate abroad. They can look for “a different segment of the population from their valuable segment” at home. Or, they can abandon the foreign market without getting a return on their investment, while nevertheless trying to obtain natural resources or labor in that market that they lack at home. “If that happens, their internationalization process would be justified,” says Cuervo.
· At times, transferring resources abroad leads to disadvantages. When this happens, managers are surprised because the same resources were not creating problems in their country of origin. Nevertheless, unexpected things can happen abroad. A classic example is the clash between the labor regulations and way manufacturing is organized in a foreign country; it can create workforce discontent and low productivity. To avoid this scenario, Cuervo recommends that companies evaluate their business practices and their ties to their business environment. Then can they decide if their practices are appropriate for the new country, or if they need to adapt them.
A special case involves subsidiaries that suffer discrimination from populist or nationalist regimes, and are excluded from public sector contracts and government subsidies. When a company suffers from discrimination, Cuervo recommends that they look for a lobbyist who can help by raising awareness of the benefits that company brings to the country.
On occasion, local consumers may also be discriminating against the company because of nationalistic goals, or the ill repute of the company’s country of origin. During Argentina’s economic crisis, one segment of the population attacked foreign companies, especially Spanish firms, accusing them of making exorbitant profits. Rebuilding consumer confidence is now one of the most important challenges for foreign companies in Argentina. To achieve that goal and prevent similar situations, Cuervo suggests that companies demonstrate that the benefits they bring have nothing to do with their country of origin. Companies have to get involved in local society, so that people see that their subsidiary is not a foreign company, but a local company collaborating on the economic development of their country. To strengthen this message, Cuervo suggests changing the image of their products, using local brands and those that have a local image or even using regional trademarks, such as ‘Made in the European Union.’
Difficulties that stem from a lack of resources
“Internationalization, as well as vertical expansion and diversification, require resources that complement those resources that are transferred from existing operations,” notes Cuervo in his study. He emphasizes that the shortage of such resources “leads to difficulties in internationalization.” There can be three types of shortages, depending on whether the company intends to behave like a multinational, compete in a new industry or operate in a new institutional framework.
· Being multinational. You have to be prepared for the challenges of being a multinational, such as establishing a strategy in line with the goals of the company. When that doesn’t happen, managers can lose control of events. Generally speaking, “this problem usually occurs only at the start of the internationalization process.”
To address this problem, Cuervo proposes setting up management teams that are especially prepared for the challenge of opening new markets. Companies also need to have the right kinds of technology and corporate structure for this adventure. One alternative, he says, is “to adopt modular systems that permit (the company) to add coordination capability each time that the company increases its international presence.”
· Compete in a new industry. When a company enters a foreign market, it may need extra resources in order to adapt to a different way of competition and customer service. Cuervo suggests that companies invest in new resources that permit them to deal with such shortages. For example, companies can establish a production plant or develop a network of sales agents. An alternative to investing in the development of these resources is to buy a share of the new market. This option has an advantage; it is cheaper and you can compete more quickly. However, Cuervo warns that it can be hard to integrate a new acquisition. Takeovers can also come at a high cost if a company that is looking to acquire one sort of resource winds up selling off other assets that it doesn’t really want, at a later date. Another option is to establish local alliances. The danger here is that a local partner can exploit your competitive advantage and become a new competitor.
· Operate in a new institutional framework. Whatever the industrial sector, arriving in a new country means acting within a different institutional framework, with different behavioral patterns and political institutions, and with religious norms that may be unfamiliar. Often, the newly arrived company lacks the resources to adapt. Making the adjustment is not easy. Cuervo recommends hiring local managers who understand local institutions; you may want to have that person spend some time at your company headquarters, becoming familiar with the organization. Another alternative is to use specialized consultants, such as legal teams, to smooth the adjustment to a new institutional framework.
Finally, Cuervo suggests that companies ask themselves the following questions before embarking on any international adventure:
· What resources are we going to use when we compete in a foreign country, and how are we going to transfer them?
· Can we transfer the advantage of our resources to the foreign country?
· What disadvantages can our resources generate when we relocate them to the foreign country?
· What do local consumers in the foreign company think of our country of origin and our government?
· Do we have the trained managers and organization that it takes to deal effectively with the increase in exports that will result?
· What resources do we lack in order to compete with local companies in the foreign market?
· What resources do we lack in order to operate effectively within the new institutional framework in the foreign country?
Cuervo suggests that when a manager sees that his company faces one of these problems, “he can use specific solutions to address the origins of the problem. This will enable his or her company to achieve success in its international strategy and enjoy the benefits that internationalization promises.”