Name: into the internationalisation of BMW and how

Name:
Chloe Newport

 

Student
ID: 15069379

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Module:

International
& Global Marketing

 

Assignment 1

“Critically evaluate how marketing affects one economic, one
political, and one cultural issue likely to be influential to firms engaged in
international and global marketing during the next decade”

 

 

 

 

 

 

 

 

This essay will be critically evaluating how marketing
effects one economic, political and cultural issue on a global scale. It will
look into the internationalisation of BMW and how it tackled the obstacles of
exchange rates when emerging into the Chinese market. How Trelleborg, a Swedish
company operating in Brazil, have overcome the political difficulties of trade
barriers to establish a harmonious relationship which is beneficial to both
home countries. How cultural attitudes and perspectives raise issues for Nike,
when entering new markets, specifically in China.

 

“Marketing is the management process responsible for
identifying, anticipating and satisfying customer requirements profitably.”
(Chartered Institute of Marketing, 2015) 1. International
marketing refers to a domestic company’s application of marketing in a foreign
market, the way it is using processes to communicate the value of a product to
potential customers. A diverse set of activities is involved within
international marketing, these include; franchise agreements between domestic
firms and foreign companies, the export of domestic products in to foreign
markets, direct investment into foreign markets and joint ventures between
domestic and foreign firms.

 

There are many theories and models used to study the
expansion of businesses into an international market. The Uppsala model of
gradual incremental stages to international business development based upon a
sequence of incremental choices. These steps are based upon knowledge of
foreign markets and operations of specific markets. Based on four case studies
of Swedish firms, Johanson and Weidersheim-Paul (1975) identified four
consecutive steps in the international expansion process of a company.

 

“Step 1: No regular export activities (sporadic export).

Step 2: Export via independent representative (export mode).

Step 3: Establishment of a foreign sales subsidiary.

Step 4: Foreign production/manufacturing.”

(Hollensen 2007) (see appendix 1) 2.

 

Johanson and Vahlne later developed the approach in a
dynamic model which the result of one series of events then develops into the
input to the next. The fundamental mechanisms of internationalisation are the
stage and change characteristics. The stage characteristics are the foreign
market (host country) knowledge and market commitment.  Market knowledge, especially experimental it
is assumed that knowledge, and commitment is related directly, hence, stronger commitment
in the foreign market is derived from sounder knowledge. The stage features
affect the successive changes in terms of the commitment decisions and also the
business activities. Thus; better knowledge of the market and commitment will follow
to commitment decisions to activities within the foreign market for the
business to be increased. Therefore, the internationalisation of a business is
the evolutionary process which is closely related with the learning of the
foreign market.

 

The internationalisation/expansion of an organisation across
foreign markets is relatable to the psychic distance where the preliminary
entry is to a foreign market which is closer and more familiar to the host
country in terms of psychic distance, followed then by other entries to markets
with greater psychic distance. Psychic distance is expressed as the “sum
of factors preventing the flow of information from and to the market. Examples
are differences in language, education, business practices, culture and
industrial development” (Johanson and Vahlne, 1977, p.24) 3. That being said, psychic distance is on the decline
due globalisation of a more homogenous world.

 

The Uppsala Model, however have limitations, especially in
the new global era. Although the model has greatly contributed to a broader
understanding of the internationalisation process of many organisations it does
not take into account changes and advancements that have happened within the
last 2 decades, rapid technology development and globalisation within the
international business environment exceed the model’s theory as it was based
upon manufacturing companies in the 1970’s. With the global advancements of
services and digital companies. Also, in some cases competitive forces and or market
opportunities may mean that firms cannot wait to do a stage by stage IGM
approach.

 

Following the
Uppsala model in order for a firm to decide to expand into a foreign market, it
needs to understand the potential market soundly, meaning understanding the
demographics, geography and the infrastructure of the potential market. A firm
will put together a strategic plan which assesses market size, costs,
competition, transportation and social or cultural characteristics.
International marketing has the potential for many benefits, expanding into a
foreign market has the prospect of increasing sales, especially when the
domestic market is saturated. By diversification of production and markets it
can reduce a firm’s economic risk. However, it can also bring a number of
possible disadvantages, political and economic risks of operating in countries
that are politically unstable and complications in an inadequately understood
cultural or social environment.

 

Political liberalisation along with economic globalisation
has provided a global market for firms prepared to operate internationally.
Countless companies progressively participate in global activities such as
outsourcing, imports, exports and the formation of production and sales abroad.
(Moosa 2003) 4. In recent years, after the deterioration of the
‘Bretton Woods Regime (1971)’, floating exchange rates have demonstrated
significantly unpredictable with aggressive short-term fluctuations but also
long over and undervaluation or key currencies such being; the US dollar and
the Pound Sterling. “In contrast to companies that only operate within a
country, multinational companies (MNC’s) face gains and/or losses arising from
exchange rate risks caused by the uncertainty of the exchange rates prevailing
in the future”. (Matson 1996) 5.

 

As companies are internationalising and expanding into
global markets the decision whether or not it is vital and advantageous to
hedge the risk of depreciation of the foreign currency compared to the home
currency is becoming increasingly crucial. 

 

BMW group, owner of the BMW, Mini and Rolls-Royce brands is
based in Munich, Germany since it was founded in 1916. However, by the year
2011, a small 17% of the cars sold were actually bought in Germany. As a global
business it had emerged overseas and expanded into new markets, one of which,
China. China has quickly become BMW’s fastest growing market, with 14% of BMW’s
global sales coming from the country. Countries such as Russia, Eastern Europe
and India have also become vital markets for the brand. When expanding into
foreign markets firms face challenges of operating within different systems and
currencies, because of external factors affecting negatively, for example, the
continuing weakening of US dollar and currencies like, Chinese yuan in which
the company is operating is leading to high cost of raw materials. Although
increasing sales revenues, BMW was mindful that profits were being
significantly diminished by ever-changing exchange rates. “The company’s own
calculations in its annual reports suggest that the negative effect of exchange
rates totalled €2.4bn between 2005 and 2009.” (Bin and Ying, 2012) 6

 

When
internationalising, firms face economic and political barriers, some more
difficult than others. Brazil has undergone significant development and is now currently
one of the key emerging markets in the world. The careful approach towards
their future with macroeconomic policies combined with the floating exchange
rate is seen as a key factor in Brazil’s positive economic development over the
past few years. “The growth for 2011 is expected at 5% and new trade
liberalization has been implemented to stimulate trade with foreign companies
(Embassy of Sweden, 2011).” 7 So, consequently Swedish firms and
also other foreign organisations in the Brazilian market are crucial in the
continued growth of their market. Around the world, trade differs some areas in
the world trade is free, however, sometimes trade barriers can be so extensive
that trade is diminished, it makes it problematic for firms to establish
themselves within a foreign market. Tariff barriers are charges imposed on
imports and direct taxes. Non-tariff barriers are barriers such as bureaucracy,
quotas and financial controls” (Doole & Lowe, 2008). 8

 

Trelleborg
Wheel Systems, a Swedish company that develops and manufactures within
industrial environments. They work within the automotive industry,
manufacturing motor parts. They have been established within Brazil since 1993.
According to theory, countries such as Brazil, collect capital for their
government and to safeguard their industry from foreign opposition. For
Trelleborg, import duties are high and problematic, ocean freight and other
charges that occur cause high surcharges on the goods for Trelleborg, a
significant entry barrier to Brazil. Import duties can also often be discriminatory
as they do not incorporate Mercosur countries, these are countries included
within an “economic and political agreement between Argentina, Brazil, Paraguay
and Uruguay.” 9 (www.ne.se) . Non-tariff barriers are also a
large factor when it comes to trade within Brazil, bureaucracy is used as a
form of protection. It can become a complication to a firm, such as Trelleborg.
The Brazilian authorities are very slow when making decisions. Bureaucracy can
be very inefficient which can cause timing issues for firms as they cause
administrative delays.  For Trelleborg, a
Swedish company, a significant barrier to entry in the Brazilian market are tariff
barriers, which prove to be costly.

 

When a
company engages in global marketing, it is vital that their promotional efforts
have to appeal to the consumers within the different cultures. Values and
attitudes of different countries can cause marketing communication problems.
Psychologist Dr. Geert Hofstede collated together cultural data from across the
world, beginning in 1970. By late 2010 this data was used to devise 6
dimensions of culture that define national values and attitudes of consumers in
specific countries. In order for marketing to be successful and effective a
company must customise their marketing approach to suit each country.

 

Nike found
these cultural differences a challenge when emerging into new markets,
specifically China. Sportswear has been increasingly popular in China in recent
years, this is a cause of a healthy economy and increasing disposable incomes.
“Over the last seven years, the market has grown at a compounded annual rate of
nearly 30%. Yet Nike’s sales in Greater China (i.e., including Hong Kong, Macau
and Taiwan) fell for five consecutive quarters, before recording a paltry
growth of 4% in the second quarter of Fiscal 2014.” 10

Cultural
barriers are a hindrance for Nike when striving to succeed in this market.
Using Hofstede’s cultural dimensions, it is evident that the US culture and the
Chinese market differ considerably. (see appendix 2) 11. Marketing
in new countries needs to be sensitive to the collective group of consumers you
are marketing towards. In 2004, Nike ran an advertising campaign staring LeBron
James defeating traditionally dressed Chinese people and a dragon. Although
China is a rapidly developing, its population are still very traditional. Their
traditions are ‘Confucianism’ where its teachings emphasise relationships and
loyalty. The marketing message caused offence by diminishment of the traditional
symbols that the culture saw as strong. Nike failed to pay attention to the
culture and the national customs of the target market by not following theories
and models such as Hofstede’s cultural dimensions.

 

To conclude, BMW
can implement a two-pronged tactic to managing their foreign exchange exposure.
A strategy named ‘natural hedge’ this is when they attempt to mirror the
currency of its operating revenues to its operating expenses. This then cancels
out exchange rate effects to a certain degree. The company closely watches the
global network and risk figures, while local treasury centres can review
exposure on a frequent basis, this can then be evaluated at the central
treasury department. BMW also use an internally developed model, this is used
to plan foreign exchange hedging for the future. The model shows that an
equilibrium rate for all the key currencies BMW are involved with, including
the Chinese Yuan, it can then indicate their over or undervaluation.

 

Tariff and non-tariff barriers are used in Brazil,
predominantly to protect its domestic market from competition from foreign
firms. If these import duties and tariff barriers were lowered this could
consequently lead to an increased competition within the Brazilian market. This
will always benefit the Brazilian consumers as it will provide cheaper prices
on products, however it could lead to the exclusion of Brazilian firms.
Furthermore; a decrease of tariff barriers would benefit Swedish companies,
such as Trelleborg by easing the exports on the Brazilian market. As for
non-tariff barriers, a main one being bureaucracy for entry of Swedish firms
into the market. It is very costly and time consuming and also administratively
problematic for both Brazilian and Swedish companies alike. If it was to be
lessened, it could lead to a better climate for businesses to operate within
and for cheaper products for the Brazilian consumers.

 

Cultural issues have affected Nike’s share in the Chinese
sportswear market. Due to the lack of understanding of cultural sensitivity,
they published an advert that their Chinese market took strong offence to. With
the Chinese market being loyal to its culture and traditions, this advert
created a loss in that market. Understanding the cultural issues, Nike should
first gain knowledge of their chosen markets and the cultural sensitivity of
said markets, before they implement marketing strategies and campaigns. From
this they could adjust their marketing strategies to best suit, allowing them
to use cultural differences to their advantage by creating new or expand on
existing trends in chosen market.

 

References

 

6 Bin, X. and
Ying, L. (2012). The case study: How BMW dealt with exchange rate risk.
online Ft.com. Available at:
https://www.ft.com/content/f21b3a92-f907-11e1-8d92-00144feabdc0 Accessed 29
Dec. 2017.

1 Cim.co.uk.
(2018). A brief summary of marketing and how it works. online
Available at: https://www.cim.co.uk/media/4772/7ps.pdf Accessed 28 Dec. 2017.

8 Doole, I.
and Lowe, R. (2009). International marketing strategy. 5th ed.
London: South-Western Cengage Learning, p.154.

9
Ec.europa.eu. (2017). Argentina – Trade – European Commission.
online Available at:
http://ec.europa.eu/trade/policy/countries-and-regions/countries/argentina/index_en.htm
Accessed 29 Dec. 2017.

7 Embassy of
Sweden (2011). Brasilia: Embassy of Sweden. Stockholm: Embassy of
Sweden.

10
Forbes.com. (2014). Nike’s China Problem. online Available at:
https://www.forbes.com/sites/greatspeculations/2014/03/21/nikes-china-problem/#65c55ddf7e95
Accessed 2 Jan. 2018.

2 Hollensen,
S. (2007). Global marketing. 4th ed. Harlow: PEARSON EDUCATION
LIMITED, p.63.

3 Johanson,
J. and Vahlne, J. (2009). The Uppsala internationalization process model
revisited: From liability of foreignness to liability of outsidership. Journal
of International Business Studies, 40(9), pp.1411-1431.

5 Matson, J.
(1996). Innovate or die. Royal Oak, Mich.: Paradigm Press, p.11.

4 Moosa, I.
(2003). International Financial Operations: Arbitrage, Hedging,
Speculation, Financing and Investment (Hardcover). 3rd ed. London: Palgrave
Macmillan UK, p.67.

11 Perrons,
D. (2004). Globalization and social change: people and places in a
divided world. Abingdon: Routledge, p.35.