Table of Contents
List of Abbreviations
2. Theoretical Approach of Internationalisation Strategies
2.2 Essential Internationalisation Strategies
2.3 Motives and risks of Internationalisation
3. Volkswagen AG and its Internationalisation Strategy
3.1 Short company profile and historical development
3.2 Phases of Volkswagen’s Internationalisation Strategy
3.3 The Internationalisation Strategy of VW illustrated through the example of the People’s Republic of China
List of Abbreviations
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This essay analyses internationalisation strategies by using the example of the German automotive manufacturer Volkswagen (VW). First, there will be a theoretical approach to internationalisation by defining the term and explaining the different opportunities and risks of internationalisation. Following this, essential internationalisation strategies for entering foreign countries and markets will be considered. The main part of the essay will deal with the Volkswagen Aktiengesellschaft (AG) and its internationalisation strategy. Following that, there will be a short description of the historical development of the VW AG before the three main phases of Volkswagen’s internationalisation process and the internationalisation strategy for the Chinese market will be worked out. Finally, the conclusions will summarise the results of this essay.
2. Theoretical Approach of Internationalisation Strategies
The term ‘internationalisation’ stands for a multitude of activities and processes and is an omnipresent and inescapable topic for companies in the twenty-first century. In a broader context internationalisation stands for sustainable and for the company significant foreign operations. These foreign operations can have a lot of different aspects, from a high export rate measured by the total revenue, to the point of foreign direct investments with subsidiaries, own production facilities and strategic alliances all over the world. To measure the degree of a company’s internationalisation activities there are basic indicators:
(1) Added value in a foreign country,
(2) Number of employees,
(3) Share of foreign people in the management,
(4) number of subsidiaries,
(5) Amount of foreign direct investments,
(6) Export share (Krystek and Zur, 1997; pp. 5-6).
However, this way of quantifying individual features carries the risk of distracting from the overall business-related character of internationalisation. In addition to the quantitative attributes the overall level of internationalisation is also observable in the corporate culture, objectives, strategies and management thinking of companies. Furthermore, internationalisation is a corporate philosophy, in which the main objective is long term stability and growth of the company that is based on sustainable and expanding overseas activities. A further characteristic is the increasing process of internationalisation in the area of small and medium-sized enterprises (Glaum, 1996; pp. 9-10).
2.2 Essential Internationalisation Strategies Export
The export is a widespread form of internationalisation because of its containable risk and the opportunity to enter a foreign market with comparatively low resource commitment. Hence, the domestic and foreign market should have certain similarities so that it is easier for the company to exactly meet the market requirements without having a direct market presence or customer proximity. Exports can be divided into direct and indirect exports. In case of direct exports the company sells the product straight to the final customer, whereas indirect exports use a foreign distribution partner as an interface between company and final customer. On the one hand, a company can benefit from indirect exports by using the market experience and the contacts to prospective customers that the foreign distributor provides, however, with that comes the risk of having little control and contact to the final foreign customer. For indirect exports the foreign distribution partner bears the full business risks whereby the company’s profit margin will be diminished (Yu, 2009; p. 89).
Licensing / Franchising
Licensing is deemed as the oldest method of contractual relationships and is particularly suitable for culture-free and standardised products. In the licensing procedure the licensee pays a licence fee to the licensor which is in most cases a defined percentage of the sales revenue or sales volume between three and five percent. In exchange the licensor entrusts the utilisation rights for patents, trademark rights, industrial property, technology and know-how under predetermined licence conditions to the licensee. After that, the licensee receives this intangible asset by the licensor for a limited period of time. The principle of licensing is often used when direct investments are prohibited, too risky, seem to be unprofitable or an export does not appear to make economic sense because of transportation costs or perishable goods. The advantages of licensing are the low financial risk and a constant financial return for the licensor. Nevertheless, licensing is a risky business for the licensor because the licensee can transform into a potential competitor and the licensor has only few possibilities to influence or control the business policy which in the worst case can lead to a negative image transfer of the brand (Wolf, 2011; pp. 15-16; Pausenberger, 1994; pp. 5-7).
Franchising is a special form of licensing with an increased international appearance on the worldwide markets, especially in the last decade. The franchisor allows the franchisee who continues to be self-employed to use an established business model or concept in exchange for a pre-determined payment that is in most cases a certain percentage of sales revenue. The essential difference to licensing is that all materials and ingredients needed for the realisation of the business concept and product manufacturing are supplied by the franchisor who also makes crucial decisions for divisions such as Marketing, product quality or pricing. Franchising allows the franchisor to gain an insight into the foreign market without actually having to be there. Moreover, this form of internationalisation allows extremely fast expansion because it is very resource-friendly and low in risk for the franchisor. However, international markets franchising often encounter obstacles because of different cultures, legislation or specific customer requirements (Pohl, 2005; pp. 5-6; Wolf, 2011; p. 16).
Joint Venture / Strategic Alliance
A joint venture (JV) describes the cooperation between two companies from different countries or economic territories. Therefore, a company searches for a JV partner in the foreign country to create a new joint venture, whereby ownership, control and management are shared between the partners. Setting up a JV can have several advantages, for example import restrictions or import bans can be avoided, a faster market entrance in the foreign market is possible and the already existing market knowledge and business contacts from the JV partner can be helpful. Furthermore, the capital requirement as well as the business risk is divided among the joint venture partners. If two companies establish a JV, the domestic partner company often hopes for a learning process and technology transfer, whereas the foreign company is aiming for a faster market entrance, market knowledge and access to the network of the JV partner. To minimise the risk of choosing the wrong JV partner, a company has the option to conduct extensive background checks on its possible new partner. In the course of this process financial, cultural, fiscal, legal, strategic and personnel factors will be evaluated in the hope of being able to establish a complete analysis of the potential risks involved in the venture (Bleich, 2009; p. 62; Pausenberger, 1994; pp. 21-22).
The strategic alliance is a cooperation form that is not commonly defined in the academic literature. Frequently, the term is used as a synonym for a coalition, strategic partnership or even joint venture which makes a clear demarcation very difficult. In general, a strategic alliance is defined as a relationship between independent companies which pursue the same objectives by making joint strategic decisions about common resource orientations. There are four essential characteristics that define strategic alliances:
(1) A strategic alliance is the result of the merger of two or more companies which remain legally independent companies and compete directly or indirectly amongst each other.
(2) An exchange relationship develops between the companies.
(3) The strategic alliance is oriented towards a medium to long term-cooperation and includes at least one value adding area.
(4) Control and output tasks are split across the companies involved.
Finally, an alliance can be considered as strategic if the reason for the cooperation is to achieve a long-term oriented goal with a direct influence on the strategic competitive position of both alliance partners (Kupke, 2009; p. 38; Pausenberger, 1994; pp. 35-36).