In this chapter the background of the case study will be presented, as well as the purpose of the study will be stated, before an overview of the structure of this report is given. 1. 1 Background Description Today, many companies take the step to establish themselves abroad. The motives for internationalization are many. Perhaps the home market is saturated, presence in a certain country grants access to strategic resources or there are cluster effects to be explored in a specific region.
The decision makers of the companies that are becoming international have different experience, are in different situations and consider different motives before taking the step into the international market. (Masum/Fernandez 2008, 2) For the past few decades researchers have been debating over existing theories and developing new theories of international business to explain why and how companies internationalize. Internationalization theories are explaining different internationalization processes, which are taking place when companies expand across national borders.
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Ranges of internationalization have been discussed in various investigations with the conclusion that the majority of these frameworks fail to explain internationalization behavior of various companies, however, this doesn’t mean that they are not useful at all. (Pett 2008, 1) It is inappropriate to approach the internationalization process without formulating a strategy. Without a proper strategy the firm is about to fail in their internationalization. Formulating a strategy also involves deciding hen, how and which markets to enter. There are several market entry modes a firm can choose from, such as exporting, contractual relationships (licensing, franchising), as well as equity or ownership-based international business activities like FDI or collaborative ventures. (Masum/Fernandez 2008, 2) 1. 2 Research Purpose The purpose of this study is to gain a better understanding of the internationalization process of a SEE company, particularly the usefulness of the main theory: the Uppsala Model. 1 1. 3 Structure of the Report
The report is divided into six major parts: Introduction, Research Methodology, Case Study, Analysis and Interpretation, Implications and Limitations, and our Findings and Conclusion. The introduction part contains the background description of the general topic and the research purpose. Followed by the Research Methodology part, where the research method, data collection and data analysis is described. Then the chosen company is presented in particular and their internationalization process and their motives for internationalization are discussed.
In the Analysis and Interpretation chapter the theoretical background and to which extend the company followed the theory is presented, along with a broad discussion of the gathered empirical data. There are also some implications and limitations mentioned in the next chapter. In the conclusion there is a brief presentation of the findings as well as possible further research on the topic. 2 2. 1 Research Methodology Data Collection The data collected and used in this analysis has been mainly collected from websites and online databases. This means that the method applied was Desk Research.
As depicted by name Desk Research is the research technique that is mainly acquired by sitting at a desk. It involves collecting data from existing resources and, compared to Field Research, is the cheapest and quickest option. Nevertheless, there is always the problem of the validity, objectivity and credibility of the data found. There are basically two types of desk research: Internal Desk Research and External Desk Research. Whereas the former is being used only in corporations or companies that possess an internal database, the latter can be done by anyone.
External Desk Research is the actual method that was used when gathering information about the company, about the market and about other countries. 2. 2 Data Analysis First of all, it has been decided to go with the company Plantaze. Afterwards, a huge amount of data about the company’s history, strategy and current situation has been gath2 ered directly from their official website, plantaze. com. Moreover, detailed information about their products and production process has been found here.
Additional financial and statistical information was found on the website of the Montenegro Stock Exchange (MNSE), montenegrobreza. com, where the company is listed and traded. Normally, looking and searching for data in online databases is very expensive. Fortunately, there has been access to the WU network, where many online databases are available for the research. ‘Amadeus’, ‘Factiva’ and others have given supplementary data about the company’s foreign subsidiaries for example that were not that clear in the places looked before.
Actually, the main difficulty was finding data about the company’s operations abroad. For that reason it was necessary to get in contact with the Plantaze company in order to get more accurate data on their internationalization process. The people were kind enough and shared some very important facts and dates that completed the information pool that was needed. In order to work on the Excel sheets, economic, political and geographical data on the countries in which the Plantaze company is directly or indirectly doing business were needed.
For this, the official websites of the specific countries governments and other websites of some important international organization like the World Bank or the CIA World Factbook were used. Before starting to write about the company’s past, present and future situation in the company description, articles from the press about the company and its operations were read. Also a look at various customer reports and trade association reviews about the company were necessary, so that an objective and closer insight to the true image of the analyzed company could be provided.
Psychic Distance Psychic distance is defined as factors such as differences in language, culture, political systems, etc. , which disturb the flow of information between the firm and the market. Psychic distance chain refers to economic, geographical and cultural distance. (Johanson/Wiedersheim-Paul 1975, 308). Hofstede’s model of cultural dimensions from 1970s as one of the first theories that could be used to explain observed differences between cultures, has become an internationally recognized standard and major resource in cross-cultural studies. The original theory identified four cultural dimensions for distinguishing cultures: • Power distance dimension (PD) focuses on the degree of inequality between people with and without power in society; • Individualism dimension (IDV) refers to strength of interpersonal connections and share of responsibility among people; • Uncertainty Avoidance Index (UAI) measures degree of tolerance towards uncertainty and unknown situations and • Masculinity (MAS) referring to gender differentiations and inequity in society.
After some more researches Hofstede added a fifth dimension - long-term orientation (LTO) which relates to how much society values long-term devotion to traditional values; and in the 2010 a sixth dimension - Indulgence versus restraint defining the attitude of society towards gratification of basic and natural human needs related enjoying life and having fun. (mindtools. com 2012) The following factors were used for this case study: The geographical distance is an important factor to calculate transportation cost from the production facility in Montenegro to the sales markets abroad.
The figure was calculated by measuring the air line distance from Podgorica (Montenegrin capital) to the capital of the reference country. It is the most important figure for Plantaze as it is a mainly exporting company. So this factor was overweighed against all the other chosen factors. The cultural distance consists of the above-mentioned dimensions, power distance, uncertainty avoidance, individualism, and masculinity. Regarding to Hofstede the differences of the dimension of country A and the reference country, i. e. Montenegro, are calculated in a first step.
This difference has to be squared and divided by the variance of the whole spectrum of countries. Cultural distance in exporting is important because of the sheer nature of the product. Drinking wine is something that is embed in the national culture, thus making the cultural distance a factor that needs to be taken into consideration. Furthermore for marketing and communication reasons the cultural distance between two countries can make a company change the strategy. 4 It was calculated by using the Kogut and Singh-Formula:
When calculating the internationalization process of the company regarding only the subsidiaries and the joint venture the cultural distance variable gains importance. Because entering a market in this way, by greenfield investment, a company has to think and act on a long-term level. The country’s culture can be decisive in whether the own company will be successful or not. The “wine” distance measures the wine consumption per capita of a nation compared to Montenegro. This figure is relevant because it would make no sense for a wine producing company to enter a market that scores low.
As already mentioned wine consumption is something that is highly linked to the nation’s culture and their drinking habits. That is why this is a relevant figure. To calculate the wine distance, the same formula as above has been used. The economic distance was not taken into account because of the fact, that it is not relevant for this type of industry. To calculate the psychic distance the above mentioned factors have been standardized to numbers between 0 and 1, while 0 stands for Montenegro respectively a country with the same figures than Montenegro and 1 for the country with the highest distance to the reference country.
The factors have been weighted according to their importance. In the exporting internationalization process the geographical distance has been weighted with 60%, the cultural and the “wine” distance were weighted with 20% each. In the subsidiary and joint venture internationalization process the geographical distance has also been weighted with 60%, the cultural distance with 40% and the wine distance was not taken into consideration. 5 3 3. 1 Case Study Company Description (www. plantaze. com) ‘13jul-Plantaze’ is a wine-producing company from Montenegro.
Its history takes us back more than 100 years, more specifically to 1907 when the Montenegrin wine ‘Vranac’ won its first prize in London. It was but more than 50 years later, when the government of Montenegro decided to invest in the development of agriculture, that the led to the creation of the company Plantaze as we know it today. Between 1964 and 1974, Plantaze expanded the vineyard to 377 ha and the wine cellar capacity to 26. 000 hl. In the 1977-1982 period, the company realized one of its most important projects.
Transforming the arid and rocky soil of the ‘Cemovsko’ field into one of the largest green oasis of the Balkan area is not something to be overlooked. 62 million U. S. dollars cost the creation of the largest vineyard in Europe at that time, covering 2000 ha of orchards and vineyards. The geographical position makes this place so unique. Located at about 30 km from the Adriatic See, on the river Bojana, the ‘Cemovsko’ field has a microclimate of its own, suitable for quality grape production.
In 1979 the main processing plant was built near the vineyard. ‘Agrougostitelj’, ‘Agrokom’, ‘Agroekonomski institut’, ‘Uvoz-izvoz’ and ‘Ribnjaci’ merged with Plantaze in 1998. 2005 was the year in which the company established a joint venture with their Italian partners and added the first sparkling wine ‘Val’ to the product range. During the years, they successfully obtained international certificates of quality such as the ISO 9001:2000; HACCAP or the ISO 14000. In 2007, Plantaze invested 2 million euros in the remarkable wine cellar ‘Sipcanik’.
Located at 30 meters below the soil, covering about 7000 m2, this completely natural area has the perfect climatic and technological conditions to age over 2 million liters of wine in wooden barrels, oak barriques and bottles. In the last 10 years exports have risen by 530% to 4 million bottles in 2008. The company exports to over 30 countries situated all over the world, from the U. S. A to Canada, to the E. U. countries, Russia, China and Australia. Today, Plantaze still owns and manages Europe’s biggest vineyard at ‘Cemovsko’ field, which stands on 2310 ha and contains three wine cellars with a capacity of 310. 00 hl. They recently announced that the investments made in the period 2003-2009 were over 40 million euros. With an annual production of 22 6 million kilos per year, Plantaze is the biggest producer of wine and table grapes in Montenegro. A quick look at their company’s official website will be enough to understand that this company has something special about it. Their mission statement is to produce worldclass quality products with which they can satisfy their loyal customers and gain new ones.
It must be added that the company is not just producing and selling wine and grapes. An 85ha peach plantation that averages an annual production of 1. 200 tons is one of their most prized possessions. As of 1957, Plantaze produces and sells about 100 tons of Californian trout. The ‘Mareza’ fish pond covers 6. 000 m2 and is exclusively fed by fresh spring water. The grapevines used are not being bought; they are being grown on a nursery of rootstocks that spreads over 40 ha. Two restaurants complete their portfolio. Mareza’, a restaurant with a capacity of over 400 seats, located 5 km outside of Podgorica and ‘Jezero’, with a capacity of over 300 guests, located along the main road between Podgorica and Petrovac, on the shore of the beautiful and relaxing Skadar Lake appear in every touristic guide of Montenegro. Coming back to the wine business, we can see that Plantaze offers a great variety of wines. 11 types of red wine and 6 types of white wine are currently in their catalogue. Furthermore, we can find a special rose wine made from red grapes applied in the white wines production. Three types of brandy complete the offer.
The Plantaze company is probably one of the most successful brands and businesses in Montenegro. Their incredible attitude towards the environment and their fine attention to detail stands before every product they make. The Plantaze company must be a proud flag-bearer and ambassador of Montenegro because they managed to achieve something that many firms only dream of, and that is to produce traditional goods from your local country and culture at the highest quality possible. For this reason and others, the company Plantaze has been chosen to be analyzed and presented. 3. 2 Internationalization Process
Because the company has a history of over 40 years, in which it sold goods on an international level, the need for splitting up the process into more than one period was created. Therefore, the internationalization process was divided into four different phases. 7 These phases are not equal. For example, the first period is twenty years long, whereas the second one is fifteen years long. The reason for this is that the first two periods were slower from the internationalization point of view than the last two. So, in the first period that is between 1964 and 1984, they started selling their products on the Yugoslavian market and in Albania.
The argumentation for the fact that Yugoslavia has been added to the internationalization process is actually very easy to follow. Because for the company at stake the cultural distance is of great importance, it was clear that Yugoslavia had to appear on the graph. Although from a political and technical point of view, there was only one single country and one single market, taking the cultural differences into consideration, the situation changes dramatically. The seven entities that are now seven different countries have their own traditions, habits and culture.
Therefore, selling products all over the ex-Yugoslavian territory makes the process an international one. Furthermore, if the Uppsala Model is the center point of this presentation, gaining knowledge about different cultures and using it into new markets, like Plantaze did, just proves out argumentation. In the second phase, from 1985 and 2000, numerous other markets were penetrated. Of course, after 1991 and the fall of ex-Yugoslavia, the products sold into these new established countries could officially be called exports. The company entered some Central European countries like the Czech Republic, Slovakia, Poland and Hungary.
In the east, Bulgaria was chosen to start exporting to. The first countries from the European Union in 8 which the firm started internationalizing were Italy, France and the U. K. , in which they established a wholly-owned sales subsidiary in London. Russia was the first distant market they choose. In the third period, or between 2001 and 2004, the focus remained on Central and Western Europe. Germany, Austria, the Netherlands, Belgium and Sweden were the next markets they entered. The third period also meant a development of the internationalization process.
Some very distant markets such as China and the United States were submitted to the process. The fourth and final phase takes place from 2005 until the present day, in 2012. Norway and Switzerland are the newest addition from the European continent, while Canada and Australia are another two distant markets to which the company started exporting. 3. 3 Internationalization Motives To figure out the motives for the internationalization of Plantaze a quick look at Dunning’s different categories of motives is necessary. Strategic Asset Seeking Resource Seeking Efficiency Seeking Motives for Internationalization Network Seeking
Market Seeking 9 Dunning (2000) explains how market and resource seeking motives have been the two most recognized categories of motives before. These two categories still correspond to most first time internationalization by firms. Overall, efficiency seeking and strategic asset seeking motives increase in significance and are more common as motives for companies already engaged in multinational activity. He also shows that closer relations with customers and durable relations with suppliers were important motives. Furthermore, he suggests that internationalization was more driven by opportunities rather than threats. Hansson/Hedin 2007, 5) Market Seekers: Companies that invest in a particular country or region with the intention to supply goods and services are called market seekers. This category of motives focuses on demand aspects. (Hansson/Hedin 2007, 6) Plantaze’s home market is limited as Montenegro is a small country and so it brings the firm not enough revenues. This fact and also to diversify the customer base of Plantaze to reduce the dependence on the home market are reasons why they decided to go abroad. Resource Seekers: According to Dunning (1993) resource seeking means to invest abroad in order to obtain resources.
This could be resources that can be acquired at a lower comparative cost, or simply does not exist at all in the home country. (Hansson/Hedin 2007, 7) Plantaze is not seen as a resource seeking company, as the conditions for producing in Montenegro are unique. Sometimes skills and capabilities are resources that can be used through collaboration with a business partner. Efficiency Seekers: The purpose is to rationalize structures of established investments in order to gain from common governance. Often those benefits come from economies of scale, but also risk diversification.
Therefore, efficiency seeking is seen as gaining from the differences of factor 10 endowments, cultures, institutional arrangements, and economic systems etc. (Hansson/Hedin 2007, 7) Economies of scale and scope as well as the increase of sales and profits are issues that an efficiency seeker often focuses on, and so does Plantaze. Another motive for the company to internationalize is that Plantaze might be able to lower the tax burden. Strategic Resource Seekers: Strategic resources are for example patents, knowledge, the skills of employees, and strategic supplies necessary for developing comparative advantages.
By focusing on developing strategic resources the company supports its long term strategic objectives. (Hansson/Hedin 2007, 8) Plantaze’s aim is it to create brand awareness in foreign countries and to transmit the positive image of Montenegro by producing a traditional product from the home country and selling it to other countries. Network Seekers: The network orientation reflects to what extent companies participate in alliances, cooperative ventures and other forms of similar social connections. Networks outside the organization can be very important for the companies.
Companies intend to nurse, develop and expand their existing networks. (Hansson/Hedin 2007, 9) Developing useful foreign relationships is an important factor for Plantaze. Their partner have knowledge of the local markets and the necessary skills. 4 4. 1 Analysis and Interpretation Theoretical Background The Uppsala Internationalization Model The Uppsala Internationalization model is a model of a firm's choice of market and form of entry when going abroad. It was developed by a number of Swedish researchers, Johanson, Wiedersheim-Paul and Vahlne (1975, 1977). The model was named after the business 11 chool of the Swedish city and based on the process of internationalization of four Swedish manufacturing companies with operations in more than 20 countries. The model assumes that internationalization is a progressive process made of several successive stages. The main aspects of internationalization are market knowledge and level of commitment in a particular host country. The major obstacle to international operations is the lack of knowledge about foreign markets and operations, which can be overtaken gradually by actively engaging in such foreign environments (Forsgren, Hogstrom, 2004; Lakomaa, 2009).
The Swedish researchers noticed that observed companies had begun to operate abroad in nearby markets and then slowly penetrated markets far away. They entered new markets through export, and after several years of exports the company could establish wholly owned or majority-owned operations. Thus, the process of progressive internationalization is built on four stages that are: sporadic export, export via independent representatives, foreign sales subsidiaries and production and manufacturing units in foreign markets. Source: Forgren and Johanson 1975, 16 12
The figure shows that additional market commitment will be made in small steps, both in the market commitment and geographical dimension. The geographical dimension means that firms enter new markets with successively greater psychic distance, defined in terms of factors like language differences, culture and political system, etc. Therefore, companies internationalize by going to those markets they can most easily understand and where the perceived market uncertainty is low. Criticism of the Uppsala Model There were several critics referring to the Uppsala model.
Some of them are that the model is too deterministic (Reid, 1983; Turnbull, 1987) or that the model doses not take into account interdependencies between different country markets (Johanson and Mattson, 1986). Studies have shown that the model is not valid for service industries, situations of highly internationalized companies and industries and that the whole internationalization process has speeded up. Firms also tend to enter 'distant' markets in terms of psychic distance at an early stage (leap-frogging tendency), because the world has become much more homogenous and that has lead to that psychic distance has decreased. . 2 Application of the Uppsala Model Only by simply looking at the internationalization process that the Plantaze company followed over the years, it is easy to conclude that the firm followed more or less the theory that the Uppsala Model describes. In the beginning, for example, when the firm started selling their products only on the ex-Yugoslavian territory and Albania without having the need of going to distant markets is clearly the kind of behavior that a newly founded enterprise would have in the Uppsala Model.
After learning from this experience (because in from the companies point of view, since culture plays an important factor, it learned a great deal from selling on the whole territory of Yugoslavia, where seven different entities and cultures were mashed together under one flag) they could start and wonder off to other countries and cultures. In the second phase of their internationalization process, countries from Eastern Europe were chosen and some small steps to the Western part of Europe were also made. The first important milestone in the company’s history is the opening of their first sales-subsidiary in the United Kingdom.
It is called Monteadria and it is located in 13 London. This particular step can be noted as the exception from the rule since the firm ventured off to a distant market directly by establishing a sales-subsidiary and not starting by exporting and then gradually develop. Nevertheless, it is quite difficult for a company that is active on the market to truly and without exceptions follow the Uppsala Model since it does not take into account other important factors such as market attractiveness, market size and others.
The globalization and internationalization effect can be seen in every market and in every country. Because of that, because of the massive inflow of information and data available in a blink of an eye, companies show leapfrogging tendencies and go to more distant markets earlier. The overall psychic distance between countries has decreased. Plantaze took full advantage of the fast moving business world in which they operate. The company grew rapidly and intensified export activities worldwide. As a result, their export figure has increased by more than 550% since 2003. 5. 1 Implications and Limitations Implications of the Study The main implication of the study would surely represent if whether or not managers that handle the company use the Uppsala Model when entering the internationalization process. Just by looking at the export path explained in the Excel sheet above, it is easy to conclude that the firm applied the model. Of course, the fact that the managers specifically used the Uppsala Model or that the pattern used just randomly fits, is something that needs to be analyzed more in detail.
In contrast, when it comes to the path chosen by the company for entering new markets and countries via wholly-owned or partially-owned subsidiaries or joint-venture, the situation changes. The path chosen is not similar to the Uppsala Model. One argument would be that they chose to enter the British market with a subsidiary in London before opening one in Belgrade or Sarajevo. The logical step, according to the Uppsala Model would be to start with establishment of subsidiaries in neighboring countries and afterwards spread out to other, more foreign countries. 14 5. 2 Limitations of the Study
The main limitation of this study would be that it revolves around the Uppsala Model and thus making its criticism point, the major liability of the study. The model is old and was not updated to the current economic situation. For example, in today’s business world, companies have the tendency to leapfrog some entry modes and to go directly to more physically distant markets. The world today has become more homogenous because of the globalization process that has been going on in the last decades and the psychic distance has also decreased. The company described and used in the study, Plantaze, is not the perfect fit to the Uppsala Model.
The point that the company posses enough financial resources leads to the fact that consequences of their commitments won’t have a huge impact on their balance sheets. Moreover, the company is not obliged to go abroad to gain new market knowledge and gain experience because today they can call on other sources for additional information and know-how. Universities, government databases and institutions or other companies from the branch can provide this kind of data. Regarding the limitations of the research, the fact that the findings are closely linked to a specific context is underlying.
This research has been confined to a few countries in the European Union. This may not be sufficient to generalize our findings in this paper. However, this paper points out the direction and may act as an indicator how our company internationalized. Thus, we believe that our findings are useful to better understand the driving forces of the internationalization of Plantaze. 6 Conclusion and Future Research The path chosen by the Plantaze company follows to a certain degree the theory of internationalization that the Uppsala Model presents.
No one knows for sure if the higher management of the company intentionally acted in this manner or if the match is just a random one. To better understand their internationalization process, in future studies, interviews with the persons responsible and who took the decisions must be conducted. Only then, only with that data, the study can truly show how the company reacted to the internationalization process and how they proceeded. Nevertheless, without having that data available to be 15 used, and only through analyzing ex-post the steps taken in the past, the Uppsala Model provides a possible framework for companies to follow.
In addition to future research possibilities arising directly from the limitations, it should be recommended that future research may explore longitudinal research design for further contribution to international business in this context. 16 7 References Publications Birn, Robin J. 2001. The Handbook of International Market Research Techniques, London 2001 Hansson, Anders and Hedin, Kim. 2007. Motives for internationalization. Small companies in Swedish incubators and science parks, Uppsala Hofstede, Geert. 2001. Culture’s Consequences: Comparing Values, Behaviors, Institutions, and Organizations Across Nations.
Thousand Oaks, CA: Sage. Johanson, Jan and Wiedersheim-Paul, Finn. 1975. The Internationalization of the Firm – Four Swedish Cases, in: The Journal of Management Studies, 1975, 305-322 Kent, Raymond A. 1993. Marketing Research in Action, New York Kogut, B. and H. Singh. 1988. The Effect of National Culture on the Choice of Entry Mode, in: Journal of International Business Studies, 19(3): 411–432. Masum, Mohibul Islam and Fernandez Alejandra. 2008. Internationalization-Process of SMEs: Strategies and Methods, Vasteras. Pett, Timothy L. 2008.
Examining SME Internationalization Motives as an Extension of Competitive Strategy, in: Journal of Business and Entrepreneurship, 2008, 1-13. Internet CIA Factbook n. a. : Hofstede’s Cultural Dimensions. Understanding Workplace Values Around the World http://www. mindtools. com/pages/article/newLDR_66. htm, accessed October 15, 2012. 17 Plantaze www. plantaze. com , accessed October 15, 2012. WHO http://www. who. int/substance_abuse/publications/global_alcohol_report/msbgsruprofiles. pdf, accessed October 15, 2012. Worldbank http://data. worldbank. org/indicator/NY. GDP. PCAP. CD, accessed October 15, 2012. 18 8 Appendix 19
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