Introduction
Internationalization is an expansion process that firms undertake to capture specific international market. The firm must however seek to analyze the political, economic, social and technological factors that may boost such interactions. ABC breeding company is a firm which currently operates within Australian boarders and basically deals with beef and daily breeding activities, with is primary business are being Perth. It also offers consultancy services to the farmers. However, its recent growth has caused the firm to think of expanding into the US market. Basically, the company has established the Texas state as the ideal destination, and its internationalization process will be boosted by the Free Trade Agreement that exists between the US and Australia.
ABC breeding company will greatly benefit from this diversification process especially considering that Texas state, and more specifically Houston city, has been accredited worldwide for its leading role in livestock production. Moreover, population density of Houston will offer a viable market for the ABC breeding company. However, the success will be more readily realized if the firm opts to engage a strategic partner who has vast knowledge and expertise in the target market’s conditions. Although priority will be in Texas, the will also seek to diversify to other states such as California and Georgia in the near future. Basically, this paper will discuss the internationalization process of ABC Breeding Company as it seeks to expand its business to the US market and in particular, the Texas state.
The ABC economic operations
ABC breeding company is among the large breeding firms in Australia. Having being into the industry for four years, the firm has greatly developed and expanded in the industry. Its strong and innovative research and development programs have always enabled it to increase its customer base every other year. The firm has nevertheless identified Texas, one of the US states, as their expansion location. This internationalization decision was arrived at after some thorough market analysis by the senior management and the firm’s stakeholders. The firm considers Texas since it’s considered as one of the leading agricultural state in the US (Texas-Agriculture, 2010). Its great value in the livestock farming triggered their expansion decision. The table below shows that state ranking in terms of livestock production.
Table – Livestock: Cattle and calves
Trade agreement
The North American Free Trade Agreement (NAFTA) has greatly boosted trading relationship between the US, Canada and Mexico. The NAFTA was signed in 1994 and since then the three states has actually developed a trilateral trading block in the northern America (NAFTA, 2009). The NAFTA trading bloc also went further to incorporate Australia as it attempted to diversify its markets in 2005. The 2005 Australia-U.S Free Trade Agreement (AUSFTA) eliminated and also greatly reduced the tariffs between the member countries. As a result investors from the respective states are greatly encouraged to expand their operations within the market. With the significant agricultural growth in Australia in the resent times, the US has opted to encourage the sector investments by further eliminating tariffs on the agricultural related products. There are also special Quotas which allows the Austria firms to export an increasing amount of products in to the US market duty free and without quantity restrictions.
Some of the benefits that ABC will accrue from this internationalization process
Among the major benefits includes market diversification (Alkhafaji, 2003, p. 148). With internationalization, ABC breeding company will reach out many customers and thus increase its profitability level. The expansion will therefore assist the firm to lower the competition rate that it’s currently facing in the mother country. Considering the increased agricultural growth and development in Australia, the sector has increased competition as firms scramble for the limited clients and consumers. Internationalization therefore offers excellent market to an agriculturally related firm in Australia considering that the field has tremendously increased their operations and standards.
Internationalization also assists firms to significantly reduce their investment risks level as well as enabling the firm to tap in new knowledge and otherwise unreachable resources (Krist, 2009, p. 76). This is because a wider market portfolio offers relatively secured returns compared to a narrow and restricted portfolio. The market also tends to spread the company’s risk to relatively wider market which positions the firm better than when it’s operating nationally. Since the economic activities in one country can greatly fall in a certain period, internationalization assists the firm to at least boost its operations from the other branch.
The main benefits that will accrue from internationalization will be driven by the fact that Texas has for a long time been recognized as the hub for cattle breeding business as evidenced by the above table. Although the state is the leading producer, the possibility of a differentiated breed from Australia will tend to be more attractive in the market, which is already established. Moreover, the fact that the state is the leading breeder implies the presence of experts in cattle breeding who will come in handy to offer prompt services for ABC Company without having to incur extra costs on training. In addition, all the essential inputs necessary for cattle breeding as well as reproductive facilities are likely to be readily available thus ABC Company will reap benefits immediately.
However, being a new market, it will be important for the ABC Company to engage a strategic partner based in the state of Texas. This will be beneficial in the sense that the strategic partner will have already an established market niche, a factor that will greatly enhance the penetration of ABC products to the market.
The political, economical, social and technological analysis
The ABC breeding company has undertaken a thorough PEST analysis on the intended expansion location and established that Texas political and economic environments provide a safe trading ground and an environment that empowered the farmers thus increasing their purchasing power. There is also a trade protection mechanism in the state which is propagated by the free trade agreement (FTA) between the US and Australia (Free Trade Agreements Australia, 2010), that will enhance movement of products to and from Texas. The company will however experience some exchange rate difficulties which might lower their profitability levels (Krist, 2009, p. 177); however, the presence of swap operations may lower the exchange rate risks between the operations of the two nations. Other positives from that analysis include a hospitable local cultures and technological strength of ABC breeding company.
The internationalization process
The ABC breeding company will have to outsource some of its management services in order to lower the costs. The outsourcing will however be done until the firm stabilizes its operations within the new market. Among the services that the company plans to outsource includes.
In order to effectively penetrate the breeding market in Texas, ABC Company will have to have a strategic pricing mechanism which ensures competitiveness of their products. Considering that the American Brahman breeding association is still excellently performing in the state, the ABC Company will have to market its products intensively in order to gain popularity. Its pricing process should be determined by both the internal and external variables. The internal variables are the costs which are directly related to the production, research and development, product modifications and packaging, the freight charges or even the consultancy costs. All this costs mainly add some value to the firm’s products. In this case since the firm will Marjory depend on the Austrian branch for most of its productions and product modifications, the price will be determined there. Among the external variables that should greatly determine the ABC pricing strategy are the government regulations. Considering that the US has eliminated and reduced most of the importation tariffs between the two states, the price should be affordable to the consumers. The company therefore should employ cost-based together with the competitive pricing approach when determining how much they should charge for their products. Efficient and effective pricing will assist the company operates well within its new market. Considering that the farmers would wish to have quality and affordable products, a relatively cheaper price will help the firm out perform its rivals.
Internalization allows firms to exchange knowledge and competencies across nations. It is therefore evident that ABC breeding company limited will acquire new production techniques from the breeding firms in Texas. The transfer of knowledge usually occurs as firms within the same industry tend to interact. Through the continued interaction, ABC breeding company will improve the quality of their breeds as they will have an opportunity to test them in the actual sense (Goldin & Knudsen, 1990, p.392).
In order to efficiently offer their products throughout Texas, the firm intends to open a regional outlet in Houston, the largest city in Texas. Being highly regarded for its Brahman breed of cattle as well as the hub for crossbreeding not only in America but across the world (American Brahman Breeders Association, 2010), the city provides an ideal market for ABC breeding company. Moreover, the Houston city is famous for hosting high profile international livestock shows attracting buyers from far and wide, thus providing an important and viable market where serious breeders (such as ABC) can fetch good sales. However, the company will also open some another distributional outlet Dallas, although the distributional outlet will basically rely on the Houston in its many operations, basically because it provides a ready market due to its popularity in breeding and confidence it has created during its history, as well as due to its population density given that it is the largest city in Texas as shown in the table below. The two outlets will efficiently supply the Texas state with all products which the ABC is currently offering. The outlets are also aimed at reducing the supply chain which will consequently enable the firm to provide their products at a stable price. Since the firm is in its initial stages of internationalization, all its operations will be closely monitored by the mother in Australia. The Texas branch operations will however assume its full autonomy as it stabilizes into the market. The table below shows the extract of the first ten largest cities in Texas.
Table – Geographic Area: Texas -Place
The firm also intends to expand its operations into the rest of the US states in the near future. The firm therefore plans to expand its operations to California and Georgia within a two year period. Although the two markets may not be as sound as Texas, Georgia may be an ideal market for beef given that only about 16% (1 in 6) of the population is involved in agriculture (Georgia Cattle, 2010). On the other hand, California will be an ideal market given its ranking (eighth) in terms of livestock production and due to the fact that it accounts to about 40 out of the 275 recognized cattle breeds in the world (California Cattle, 2010). The expansion activity will however be based on the success of the firm’s current expansion in Texas.
Due to capital limitations, the ABC Company intends to seek some financial assistance from the institutions within Australia. In this case the Australian branch will assume the payment obligations on behalf of the Texas branch. It is important to understand that ABC breeding company opts to raise the expansion money from their mother country in order to prevent the extra charges which the firm would be charged in Texas. although there is liberalized trade between the US and Australia it is important to understand that financial institutions will not charge similar interest rates to both the domestic and foreign investors (Waters, M., 2001, p.84). The difference usually arises due to the risk involved in the overall lending process. The foreign company will be charged higher interest rates as they possess relatively higher risks compared to the domestic investors.
ABC Company will also use promotional marketing strategy. This is so considering the fact that the firm is new in the market. They will therefore sample their products to the few selected farmers who mostly dominate the beef and daily farming in Texas. They will then offer them some free breeding services in order to boost their products in the market. The specialists will then undertake some follow ups in order to ensure that better and improved results are attained. Although the process will be expensive as the firm will not only offer some of their products for free, but also their services, the outcomes are expected to be great (Rodrik, D.,1997, p.23). This is because the witnesses or the selected farmers will have developed enough trust and faith for the ABC products. The same farmers will assist the firm to efficiently market its products to the rest of the farmers in Texas.
The company will also establish a consultation services which will assist the US farmers to grow and develop their agricultural practice just as Australia has been able to do in the resent periods. The specialist will be fully committed to quality services in order to grow the firm’s reputation. In addition the consultations will be done with utmost good faith in order to benefit the US farmers.
The current ranking of the Australian agricultural activities will not only offer a comparative advantage to the ABC breeding firm in the Texas market, but will also assist in boosting and advancing the breeding technology in the US at large. The free trade agreement within the two countries will also assist the firm to fully and efficiently adopt in its new market.
Conclusion
Internationalization is one of essential tool of expansion in the business world. The move assists the firm to explore new markets within a different jurisdiction. It also enables companies to boost their profitability level since it widens their financial portfolio. Internationalization does not only benefit the specific firm but it also the respective countries as they mutually benefit. ABC breeding company tends to benefit significantly from this process especially given that its feasibility study established that there is a viable cattle breeding business and unexploited market in the Texas state in the US. Given that there is transfer of information and knowledge between the two nations which is supported by the relation, ABC Company will take advantage of the FTA to diversify its business.
Reference
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