Companies around the world are seeking to expand overseas, driven by many different reasons whether to lower labor costs, technological innovation or the almighty dollar. No matter what the reason, without the proper knowledge and financial funding the company will fail. There have been numerous companies that have experienced this first hand. If they would have noticed the warning signs they may have been able to salvage the company.
Fast-food companies have been one of the fastest to globally expand. They also experience some of the hardest down falls. An often quoted example is the failure of Prague’s first Pizza Hut which closed down because too many ingredients had to be imported in for the one existing restaurant. The added expense for importing ingredients made operating expenses too high. Fortunately, most fast-food chains are large enough to overcome closure to a couple stores. But what would happen if an entire country was rejecting the company.
This is the problem that McDonald’s is facing.McDonald’s is one of most successful fast food chains with 29,000 stores in 119 countries and sales of 38.5 billion dollars.
But now, with growth slowing worldwide, McDonald’s will add just 1,400 new restaurants, the lowest numbers since 1994. International sales already represent 51% of the global sales. They arrived in Brazil in 1979; many of the franchisees had a strong business selling big macs. After many years of growth, from 175 restaurants in 1995 to 563 this year, Brazil is McDonald’s eighth most important market worldwide(Smith 1). Their sales in Brazil went from 620 million Reais in 1995 to 1.3 billion last year. Until recently, the company was still planning to double its current number of restaurants here by 2003.
Behind the lines of customers eager for a burger, the Brazilian franchisees are having a hard time financially. According to an estimate made by franchisees that are in judicial litigation against the fast food chain, around 80% of the 152 franchisees that own half of the stores in Brazil are having difficulty to make ends meet at the end of the month(McDonald’s 1). Some decided to sell their business.
Others decided to fight. The first main concern of the franchisees is the rapid growth of new stores. The expansion program that increased the fast food chain in the last two years is creating cannibalization among the stores. This means that there are more stores to share the profit with. To cannibalize the sales of existing owner operators by installing new company stores within the owner operators trading area is against the law in Brazil.
In early 1999, the value of the Real decreased which made profitability even more difficult. The proximity of the new stores is also a great concern. In 1994, in the Mooca district in the city of Sao Paulo there were only two McDonald’s within four kilometers from each other, now there are 15(McDonald’s 2).
The company expands without giving attention to the impact on the sales of the “old” stores. One of the franchisees’ biggest complaints has to do with rent paid to McDonald’s. The value is calculated based on the restaurants net sales and varies from 14% to 21%, while the McDonald’s pays the real estate owner 5%.The arrangement is typical of their business model worldwide, but in Brazil it is illegal and a criminal offense to sub-let a location for more than the original rent. The company also charges a 5% royalty (which in the United States is .
4%) and 5% advertising fee. After trying to get rent reductions and not succeeding, many franchisees decided to take McDonald’s to court. They formed together to make Independent McDonald’s Operators Association, IMOA(McDonald’s 4). They want to have their rent permanently reduced.
About 20 stores already have closed down in Brazil and many more will continue if McDonald’s doesn’t do something.Fast food restaurants are not the only ones who have a difficult time going international. The Internet has grown rapidly over the past ten years and continues to excelerate. Internet companies have started going international and running into many complications. eToys was one company who learned this first hand.Toby Lenk founded eToys in June 1997 and had all hopes to become one of the most famous names on the Net.
eToys Inc. is a web based retailer of toys, video games, software, videos, music and baby related products.He wanted to build a massive online toy warehouse that would give Toy ‘R’ Us a run for its money. The key, Lenk thought, was focusing on customer service and convenience (Weintraub 2). The company’s web site gives detailed product information, helpful and useful shopping services and innovative merchandising through easy-to-use web pages.
The company had approximately 1.9 million customers at the year end. In July, 1999, Lenk started to branch out by buying online baby-supply retailer BabyCenter(Weinbtraub 2).In 2000, he launched the BabyCenter brand in the United Kingdom. eToys based its strategy on competitive pricing without spending significantly an advertising to build brand awareness.
eToys’ total spending on TV and print ads in 2000 was about $36 million, the same as it was in 1999. Which means their market area increased but their advertising didn’t. They made numerous other mistakes which were very costly.
eToys geared themselves to address adults as buyers. They failed to connect with children as consumers in Europe, something it also failed to do in the United States. Globally, the company also failed to exploit the full potential of the Internet in building customer relationships (Gomoloski 1). Perhaps the biggest mistake they made overseas is that it appeared to ignore the possibility of competition in the fragmented UK toy market. Toys ‘R’ Us seemed to be the only competition.
But eToys’ operation was easy to copy and it quickly faced stiff competition. Now there are at least 20 different companies in the United Kingdom that sells toys online. On January 4, eToys cut 380 jobs in Europe and said it would cut another 320 by the end of March.
It has now closed its British operations. They are inching closer to bankruptcy everyday. After the mistakes going international before they were ready and not becoming affiliated with an off-line partner. In the end, the global lesson is not all that different from those closer to home: Business-to-consumer e-business should ensure that they have the resources to build market share and brand awareness.
Their online operations should use the Internet’s features to create a unique value proposition and build relationships with suppliers and customers. If they can’t , they should cut their losses and withdraw(Gomolski 1).Companies that venture into other countries on their own are not the only ones that can fail. Many times joint ventures between two international companies have difficulties. AT&T is a perfect example of how joint ventures can go wrong.
AT&T, the biggest US long-distance phone company, has had numerous failed international joint ventures including the World Partners alliance with Japanese carrier Kokusai Denshin Denwa, Singapore Telecommunications and Telstra in the early 1990’s and its Unisource joint venture with Telia, Swiss Telecom and Telecom Netherlands that was dissolved in 1999. Their most recent blunder was a joint venture with British Telecommunications, Britain’s second biggest phone company, (BT). The saga of BT is full of lost chances. Four years ago, it tried and failed to merge with MCI.
In 1998, AT&T and BT formed Concert in an attempt to serve companies around the world. After the joint venture, Concert embarked on an 18-month buying binge. They teamed up to buy one-third of Canada’s biggest wireless phone outfit, Rogers Cantel Mobile Communications. The companies in April jointly took a 30% stake in Japan Telecom(Weber 1). Concert never met the financial expectations of either company and incurred more debt than anticipated.
They posted operating losses of $800 million annually over the past few years(Pappalardo 1). But mounting losses and dropping sales caused each company to search for a way to end the venture. So in October 2001, they finally pulled the plug on Concert.
With few exceptions, each company is taking back the assets it brought to the venture. AT;T is keeping the Concert frame relay in Asia, and it’s also taking over BT’s interest in AT;T Canada(Pappalardo 1). AT;T is forgiving a $200 million loan it made to BT and is assuming BT’s debt in the Canadian division. BT will retain its customers and networks in Europe and the UK.
Concert customers will be transferred to either AT&T or BT, but they won’t see to many changes.There are many early warning signs for when a company is experiencing difficulties. A decline in sales, lower profit margins, sustained losses, increased debt, a highly leveraged balanced sheet, negative working capital and reduced cash flow are overt signals of financial distress(Zwaig 1). Concert had many of these warning signs but continued to conduct business.
Primarily two problems hamper companies. The first is inexperience. Companies going global face the problem of “unknown unknowns”-they don’t know what they don’t know. Any one or more of numerous differences in international markets can trip them up. Second, being typically smaller firms, perhaps in the $50 million to $250 million range in annual revenues, they lack the resources to deal properly with potential problems(Monti 1).One way to succeed in international business is to start out with a strong competitive advantage, such as loyal customers, superior products or services, more effective business systems, assets and resources, partners, and so on. The company can then use these as an advantage in to entering foreign markets.
Since a lot of companies don’t have this competitive advantage they need to rely more on the internationalization process. They can do this by following what is called the “Way Station” approach to the internationalization journey(Monti 2).The way station has four different components: planning a trip, selecting the mode of transportation, dealing with roadblocks, and making a commitment. Each of the four components can be either the “high road” approach or the “low road” approach. The high road gets better long-term results, whereas the low road can obtain quicker, easier results but usually at the expense of not building a sound long-term position(Monti 2).
The objective is to leverage core competencies into under-served market opportunities(Monti 2). If a company takes the high road approach this means being proactive. Being proactive is anticipating the needs of customers and preparing to meet their future requirements better than competitors can. If the high road is taken companies will be leading with strengths, defining success broadly, setting lofty goals, and establishing immediate targets. In contrast, the low road approach to planning the trip means being reactive. A company will rely on personal experiences and gut feelings.
The low road includes exporting labor to lower-cost markets. Of course, many companies have successfully gone overseas seeking cheaper labor. But these companies, include Nike and Levi-Strauss, already had other sources of competitive advantage, such as styling and branding(Monti 3). Reactive strategies can work to begin with, they are not the best method for long term ventures.
How a company chooses to enter a country or market-through a joint venture, an acquisition, or a direct investment-is the second most important decision in the internationalization journey(Monti 4). The high road approach means being in the driving position. While in the driving position, companies are maintaining more than 50% control of the decision-making process. Quickly diversifying the customer base beyond the existing customers plays a huge part in the high road approach. The low road approach takes a riding position. The riding position is the exact opposite of the driving position. They control less then 50% ownership and simply follow and rely on a single or a few customers.
The riding strategies may work for a while, but eventually most companies regret it if they have locked themselves out of international control.Globalizing companies typically must respond to strategic challenges and modify operational approaches after they have entered foreign markets(Monti 5). Taking the high road here means taking an anticipatory approach.
Companies recognize most of the potential challenges that will be faced in the new market and being prepared with appropriate responses. Kentucky Fried Chicken anticipated most of the problems it would face in entering China. So it prepared accordingly. One step it took was to secure a supply of high-quality chickens by taking on a local poultry producer as one of its joint venture partners(Monti 5).
The high road also takes a long term view. In contrast to the high road, the low road approach means that companies are frequently surprised. Reacting to challenges with responses that are not well developed or tested is a main point to the low road approach. Companies typically get drawn into price wars rather than value wars.
Sometimes companies have to react to surprises, but anticipating them is even better.After entering a foreign market, companies need to decide whether to commit for long term, take advantage of short-lived opportunities, or exit because of adverse conditions(Monti 6). The high road in this part means taking a global approach.
They need to view the new foreign venture as an integral piece of its global strategy and giving the new venture sufficient time to bear fruit. This part of the strategy seems obvious enough, but time and time again companies pull out because they didn’t turn a profit right away. Companies cannot expect instant results when going international. Another key factor to taking the high road is to bring back new technology from the foreign venture to the domestic operation.
In contrast, the low road means taking a local approach. By doing this they are not investing to build up the venture as an integral part of the global portfolio, such as developing local managers and capabilities(Monti 6). In the low road approach, companies are applying the same performance criteria to the new foreign venture as to established domestic businesses.
Taking the local approach also means they are existing the venture at the first sign of trouble. In the Asian crisis that began in 1997, smaller companies tended to exit early. In contrast, larger corporations such as General Electric, Coca-Cola, Procter ; Gamble and Germany’s BASF used the crisis to make opportunistic investments(Monti 7).
Avoiding commitment can work for a while, but eventually a globalizing company has to make some serious investments.The research about the internationalization process provides two overall findings. First, the more a company takes the high road approach at each of the way stations on the international journey, the better its performance(Monti 9). Second, there are many differences in individual practices at each way station, such as using customer feedback when planning the trip and changing human resource policies when dealing when roadblocks. Even smaller companies can do it. Managers need to monitor their progress over time.
Even if they start on the low road, there will come a time to shift to the high road. Watching for the signs of success and failure will help identify that time(Monti 9). Newly internationalizing companies need to avoid being stuck in the ditch or having their luck run out. They should have the commitment to stick it out when they don’t succeed at first, even with a high road approach.
Going international is a great way to expand and strengthen a company, but its also a sure way of driving it into the ground. McDonald’s, eToys and AT&T all took the chance on striking it big internationally. Their ventures weren’t very fortunate. They made a few mistakes and are now paying the price. Companies everyday can succeed globally if they know what they are doing and have the financial funding Bibliography:WORK CITIEDAT;T, BT pull Concert plug. CNN Money.
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