Critical Factors for International Expansion

Technological advancement has led to the development of a global economy (Stiglitz & Joseph 2017). As a result, different types of organizations are establishing operations in foreign markets. International expansion creates new markets, offers a competitive advantage and diversifies a company’s assets. Organizations are faced with the task of determining which markets they should expand to. Steddler Inc. is a company based in the UK that deals with the manufacture and sale of stationery items. The company is considering to move its operations to Germany in 2019. Critical aspects that the company should consider regarding Germany’s business environment include an overview of the stationery industry in the country, business culture and push and pull factors. Other factors include the location, Regulations, political stability, foreign direct investment, company structure, and labour. In this paper, an analysis of these aspects will be carried out to determine whether Steddler Inc. should internationalise or not.

Overview of Non-critical factors.

Location

Location is a critical aspect when it comes to international expansion. As a stationery manufacturer, Steddler should base its operations in Berlin. It is the largest city and the country’s capital (Worldpopulationreview.com, 2019). The location will be suitable due to the presence of many schools, offices, and homes. The city also boasts of modern infrastructural facilities which make it favourable for international expansion.

Regulations

In Germany, regulations are abundant creating obstacles during the establishment of a business. The country’s national standards are very strict. To export to Germany, businesses are required to comply with national, European and international standards. Importers require an import permit or an import control declaration.

Company Structure

There are a lot of company structures in Germany that a business can operate on (Alabamagermany.org, 2019). The most widely used structures are the provisional company with limited liability and (UG) and the limited liability company (GmbH). A lot of businesses in Germany fall in the limited liability category. Steddler will use the limited liability structure.

Political Stability

Germany is stable politically. On March 2018, the country got a new government after almost six months of political stasis. A stable political environment is conducive for international expansion since it provides an environment conducive for carrying out business operations.

Labour

The availability of labour is a critical factor in terms of international expansion. In the third quarter of 2018, an increase of 115. 29 index points on labour costs was experienced in Germany (Tradingeconomics.com, 2019). The unemployment rate was 3.3%; this means that the company will incur a decrease in productivity. In terms of foreign direct investment, Germany is an attractive country. Germany’s foreign direct investment In August 2018, increased by 122.8 USD (Tradingeconomics.com, 2019); this means that Germany is an attractive country for foreign investors.

Critical Factors

Market Considerations

The stationery industry in Germany is well positioned. The demand for stationery items in the country is high. The total turnover of the stationery industry in Germany is more than 14.8 billion euros annually which means that each individual spends 182 Euros in a year. Around 35.2 Euros of the amount are spent in drawing and writing materials ranking the company second when it comes to the spending of stationery items in the European Union. In 2015, more than 70% of stationery companies experienced an increase in sales; this was caused by an increasing domestic demand that grew by 2.5% and an increase in demand abroad which grew by 5%(Perspectives, 2016). In 2018, revenue in the hobby and stationery items amounted USD 5640 million. An annual growth rate of 6.0% is expected annually in the industry. User penetration in 2018 was 16.5% meaning that the market is easily penetrable (Hobby & Stationery – Germany 2018)

Competition

Competition is a critical market consideration that a business needs to consider before international expansion. A market that is heavily saturated with a lot of competitors makes it difficult for business penetration. In Germany, 2200 wholesale companies operate in the stationery industry. Half of them have a net turnover of fewer than 500,000 Euros; this includes wholesalers that are selling writing instruments, office supplies, and paper products. However, due to mergers and acquisitions, the number of wholesalers has been on the decrease. Apart from wholesalers, the stationery market in Germany is complemented by 5500 retailers with a lot of them having a 250, 000 Euros turnover.

Economy

In Europe, Germany is the top economic power. The country’s GDP increased by 2.1% in 2017 (Tradingeconomics.com, 2019). Germany’s economy strengthened in 2017 with a USD 38 billion dollars or record budget surplus. In the third quarter of 2018 GDP fell by 0.2% (Germany GDP - Gross Domestic Product 2018); this was as a result of a decline in export and household consumption. In 2018, Germany’s economy was expected to grow by around 1.7 to 1.8% down from a 2.3% previous estimate. In 2019, the German government expects that the economy will grow by 2.0%.

Trends

Stationery products from Germany have created a positive image in the country and the rest of the world. Stationery brands from the Germany have gained significant market share over private labels; this means that if Steddler establishes itself as a German brand, it will gain significant market share in the world. The stationery market in Germany and the rest of the world is, however, experiencing various challenges. Technological advancements have led to the creation of mobile phones, computers, iPad, and laptops; this has led to the decline in the use of various stationery products such as pens since people fulfil their writing needs using various digital devices (Rostami et al. 2015); this means that the company will face this challenge when it establishes itself in Germany. The challenge is however not specific to Germany alone but also the rest of the world.

Culture

A country’s culture is critical in determining the success of a business in a foreign market. The official language in Germany is German while English is the official language in the UK. Steddler will have to ensure that they adapt to the language difference for them to reach a wider audience in their operations. Around the world, Germans are highly regarded for their office and workplace efficiency (Franch Jorge. and Carmon, 2018) British stereotypes claim that people in the United Kingdom remain based in class and caution structured hierarchies.

Business Culture

Business culture in Germany is marked by perfectionism, organization, and planning (Civitas.org.uk, 2019). Business relations tend to be formal reflecting the country’s values of punctuality, privacy and order. Germany has a strict hierarchy with the top-down approach being applied in the decision-making process. Respect for authority is very critical to Germans and subordinates rarely criticise or contradict their superiors in public (Entrepreneurship.de, 2019). In terms of time management, punctuality is critical. In case of any delay, it is important that one informs the person they are meeting with, early in advance. During business meetings, gifts are not exchanged. However, after a successful conclusion of negotiations, small gifts are appropriate. While carrying out businesses, the country’s dress code is understated, conservative and formal. Both men and women are required to wear a suit, men should also wear a tie. During meetings, Germans prefer to engage only in business in the smallest time possible.

Hofstede Cultural Dimension model

Hofstede cultural dimensions are important in assisting us to learn more about the country. Power distance deals with equality of people in a society. In this dimension, Germany has a low score of 35, which is similar to the United Kingdoms; this means that in Germany, people aim at equalizing the distribution of power, demanding justifications for any inequalities that might occur. Individualism addresses the degree of interdependence in a society. The country is very individualistic scoring 67, while the UK scores 89 (Hofstede Insights, 2019). People tend to focus on themselves as opposed to a larger society. Loyalty is based on a sense of responsibility and personal preferences for people. In the country, communication is direct offering a person the chance to learn from their mistakes.

Both countries score 69 in terms of masculinity. Germany is, therefore, a highly masculine society which prefers heroism, achievement, and assertiveness. It rewards success with material things. The country scores 65 on uncertainty avoidance while the UK scores 35. German has a lot of rules to contain uncertainty, it maintains a rigid code of behaviour and belief and does not tolerate unorthodox ideas and behaviours. Germany scores highly when it comes to long-term orientation (83). This indicates that it is highly pragmatic, it is a future-oriented country which encourages efforts and thrifts in modern education to prepare for the future. Establishing a business in the country will therefore not receive much resistance. Germany scores 40 when it comes to indulgence indicating that its culture is restrained in nature.

Push and Pull factors

Brexit

There are various push and pull factors causing Steddler to consider Germany as the country in which it will internationalize in. Brexit has had negative consequences on SME’s (BBC News, 2019). After Brexit, small businesses in the country will be required to pay VAT upfront on goods that will have been imported from the European Union.; this means that small businesses will incur an extra VAT cost and duty tax along the product. The company will, therefore, be forced to seek new suppliers within the UK. Transferring to Germany, which is within the European Union, will ensure that the company does not incur extra tax reducing the production costs leading to the success of the organization. After Brexit, the source of funding for small enterprises in the UK will be lost(Samuel, 2018). With financing from a lot of private banks, European governments, and the Eu, the European investment fund was able to pool billions through fund investments from 1994(Conversation, 2018). The EIF does not lend money to small business enterprises it only finances banks. After Brexit however, this funding will not be possible.

The United Kingdom is known for its highly skilled and mobile labour force and the favourable supply of workers from the European Union (Hohenthal, Johanson and Johanson 2015). After the Brexit vote, there has been a decrease in people applying for jobs in the UK. The other push factor is the country’s tax system that is very tricky, largely because the legal system of the country is adopted in a peacemeal fashion. In a year, it takes around 110 hours to complete the required tax obligations.

Pull Factors

There are various pull factors which make Germany a suitable country for international expansion. The stationery market in Germany is expected to experience growth in the coming years(Inc, 2018). With an annual growth rate of 6.0%, the industry is expected to increase its market volume by USD 7548 million by 2023. Germany is also one of the most populous country in the European Union since it has a large domestic market. It has a large consumer market thus offering a lot of opportunities for foreign companies to establish themselves. Since Germany requires high standards and persistence of quality, in terms of product offering and service, achieving success in Germany opens doors for businesses to access other markets within the European Union (Asprea.org, 2019). Germany has a central location within the European Union making it a centre for goods and services. The country is bordered by major economies in Europe offering immediate access to established and growing markets in Europe. Germany strongly supports SME’s 85% of all businesses in the country are small medium enterprises(Klandt, 2015). The country is very supportive of small to medium sized enterprises proving that size does not affect the success of a business. In Germany, the federal government has initiated a lot of reforms to enhance the framework of the general tax and keep the costs of labour down.

Conclusion

Globalization has created new markets for businesses to establish themselves (Stiglitz & Joseph 2017). Before a company chooses to expand internationally, it is crucial that it carefully selects the market that it will penetrate. In this paper, an analysis of Germany’s business environment was carried out to determine if Steddler should internationalize in the country. The information above revealed that Germany is conducive for international expansion. The country is stable economically and politically. It has modern infrastructure which will assist Steddler to establish itself in the market. The government of Germany has initiated various measures such as the reduction of VAT making Germany favourable for small medium enterprises. Hofstede cultural dimension insights prove that the Steddler can be successful in the country. Germany, however, has strict regulations which might slow down the company from establishing itself. The above analysis proves that Steddler can establish itself in Germany and become successful.

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Appendix

Company Profile

Steddler is a small manufacturing firm in the United Kingdom. The company deals with the manufacture and the wholesale of stationery items. The company does not sell stationery items directly to the public. It has built its customers base for more than 50 years. Currently, the company does not sell across the border of the United Kingdom. Steddler’s customers base includes local shops, small shops and small offices. It deals with the manufacture and sell of general office supplies, writing/ drawing materials, printer cartridges, paper-based supplies, general office supplies, shredders, office furniture and low-cost printers. Steddler has been very successful in its market and is considering to expand internationally.

Country Profile

Germany is a country located in central Europe. To the north, the country borders Denmark, to the east, the Czech Republic and Poland, to the south Switzerland and Austria and to the west Netherlands, Belgium, Luxembourg and France. The country has a population of 83 million with Berlin being the country’s capital city. Germany is known all over the world for its strict business culture. The country also produces quality products and is famously know for its automotive products such as Mercedes. The country has a social market economy with a labour force that is highly skilled. The level of corruption is also low in the country. In Europe it has the largest national economy and is known for its support of small medium enterprises.