Introduction
The purpose of this essay is to highlight the internationalization process of Dairy Saputo Inc. in the agricultural industry in Australia. It seeks to explore the motivations and mechanisms used by the company in getting into the Australian industry. The scope of the paper is the agricultural industry and multinational corporations entering the market since 2000. Only one company is selected, where focus is on the operations of the company in Australia and the target of those operations in the industry covered.
The essay relies on a qualitative methodology. It uses secondary data from journals, books, and the Internet. The paper links the analysis and motivations of the internationalization process of Saputo with the theories and frameworks of understanding internationalization. The two main concepts are the Uppsala theory and the Dunning motivational concepts representing the Eclectic theory. They are presented as reasons for choices made by Saputo in entering the Australian market.
Overview of the Saputo as an MNC
Dairy Saputo Inc. is a Canada-based multinational company specializing in the agricultural industry globally. It first acquired the Warrnambool Cheese and Butter (WCB) when it ventured into Australia. The company has proceeded to target more acquisitions within Australia to boost its position and market share. It recently confirmed the purchase of Everyday Cheese for 134 million dollars (CBC News 2015).
According to Saputo’s 2015 annual report, the company is one of the top ten dairy milk and cream processors in Canada. It is also the largest dairy processor in Argentina and occupies number four in Australian (Saputo 2015). The company specializes in cheese only in the US market. The company has more than a dozen name brands for its products sold in markets throughout the world. Its Canadian operations have 23 plans, 5000 employees, and contribute 36 percent of its revenue. The USA sector is second with 24 plants, 5200 employees, and contributes 49 percent of its revenues. The international sector where Australia operations belong contributes 15 percent of the company’s revenue and has four plants with 1500 employees. Saputo makes retail, foodservice, and industrial sales. Retail sales make up 50 percent, the food service makes up 38 percent, while industrial sales make up 12 percent of the total business (Saputo 2015).
Australia Country Analysis and Climate of the Industry
Political risk
The country enjoys an enduring democracy. Australia respects the rule of law and has a functioning judiciary. Investors’ concerns, shareholder disputes, and other problems that might affect a multinational company like Saputo can be dealt with according to the Australian law or the international law (Armagan & Ferreira 2005). Australia also exhibits a positive attitude towards foreign direct investment inflows (PWC 2010). The laws on employment and taxation based on the resident status of employees affect foreign and domestic firms alike. The law protects employee rights against wrongful termination, wages, and other employee benefits. Laws on employment, taxation, and compensation affect the ability of foreign firms to deal with locals and expatriate workers as they affect the ability of a firm to operate effectively in Australia (PWC 2010). The World Audit Corruption index ranks Australia as number 10 among the most corruption-free countries in the world and number 11 in the well-developed democracy category (World Audit.org 2014).
Economic analysis
Australia has a bilateral trade agreement with China, one of the largest markets in the Asian region. Doing business with the country is increasingly becoming demanding and diverse. Australian firms can change according to the circumstances and meet the challenges presented (Brumby 2014). In fact, business development and economic growth in Australia mainly depends on foreign investments. The country is a major recipient of Foreign Direct Investment (FDI). Australia has been home for investments from Britain, America, Japan, and China, among other countries (Verrender 2014).
Other than agricultural exports, Australia also depends on mineral exports. Declining mineral prices globally depreciate the value of the Australian Dollar, making the export business of agricultural products lucrative. However, it also leads to weakening of the Australian economy as an attractive place for capital inflows, which hurt the cost of business expansion and growth of the consumer market in the country (McLean 2013).
Australia has a population of more than 22 million people and a life expectancy of 83 years for females and 78 years for males. There are sufficient minerals and fertile land for production, with most areas having tropical temperatures, which make it a good market for dairy production and sale.
Financial risks
The Reserve Bank of Australia abolished exchange controls, thereby ensuring that investors can analyze and make investments based on the underlying market factors. The economy has been growing at approximately 3.3 percent every year for the last decade. The country levies a corporate tax of 30 percent, which makes it competitive in comparison with Japan, Germany, India, and France. The country is also the leading financial center for the Asia-Pacific region. Its securities exchange is the 9th largest in the world and has a value of more than 1.29 trillion Australian dollars. It is also allied to many major markets in the world. Investors can trade commodities and equity in the market and move capital into and out of Australia easily (Thite, Wilkinson & Shah 2012). This factor reduces the risk of major investments and ensures that there is protection through laws and rules governing the market. The vibrancy and reliability of the market serve as significant reasons for most foreign companies’ decisions to use it as a basis for acquiring Australian public companies (Figueira-de-Lemos, Johanson & Vahlne 2011).
Internationalization Process of the Firm (How, Why, with Whom, Key Challenges)
The primary reason for moving into the Australian dairy business is to gain economies of scale. The company made the acquisition based on forecasts of surging demand for dairy products in Asia. Acquisition of an Australian company that was founded in 1888 ensures that Saputo gains from heritage, brand recognition and market knowledge (Smyth 2014).
The reason for entry and spread of Saputo into the Australian dairy market was due to the promising market. The company appears to follow suppliers and customers. Australia has an elaborate agricultural industry that has excellent management and technologies that make it efficient and ready for scaling up. Other than market and efficiency as the main motives for Saputo, the company also considered strategic assets in the Australian dairy industry. Warrnambool Cheese and Butter and Everyday Cheese have important strategies and significant market penetration that makes the acquisition of these two companies a strategic move for Saputo to consolidate its business interests in the dairy industry. The strategic assets ensure that Saputo can gain from the growth of the Chinese and other Asian markets through the export business of the acquired firms (Dairy Australia 2014).
Survival and growth in the global industry require sufficient links with global supply chains. Getting into processing companies for dairy products helps Saputo gain manufacturing competency, market penetration, and can grow through value addition (Bell, Crick & Young 2004). It can align the local company interests with its global marketing interests to serve regional markets, instead of exporting dairy products from North America to the Asian market. An Asian subsidiary can meet the same need in an efficient and long-term sustainable way. The strategic assets allow Saputo to understand local Australian and Asian market demands and changes (Torres & Clegg 2014). Getting into Australia gives the company an opportunity to understand the dairy business and global trends; given that Australia is a major market and producer of dairy products globally.
Australia produces about 2 percent of global cow milk supply. Meanwhile, demand for major dairy products globally has been on the decline. This informs Saputo’s internationalization strategy to diversify its dependence on one market and grow its resilience in the industry (Tseng & Kuo 2008). The global demand for cheese is also rising. Asia is one of the regions that have seen increased demand for yogurt and liquid milk, and its biggest supplier is Australia (Dairy Australia 2014). Thus, acquisition of firms in Australia that are already major players in the industry makes them strategic assets for Dairy Saputo Inc. Australia contributes 1 percent of the world dairy trade while New Zealand contributes 32 percent in exports. On the other hand, the U.S. contributes 8 percent of exports (Dairy Australia 2014).
The Dunning’s perspective on international business research helps to bring out the reasoning for internationalization for Saputo. The Uppsala theory helps to explain the characteristics of the process that firms internationalize, which is also a feature of the ‘resource-based view theory.’ In Saputo’s case, the move to Australia is internationalization. The company gains knowledge that allows it to re-design its coordination system and reconfigure operations by gaining controlling stake of its two subsidiary companies. The companies in Australia are in charge of innovation on behalf of Saputo (Vahlne & Johnson 2013). Saputo faced limited challenges when entering Australia. The biggest obstacle was the difficulty in convincing shareholders of its target firms to sell their stake to facilitate the full acquisition.
Reflections
The entry mode picked by Saputo is relevant to entering a mature market with established brands, players, and marketing channels. Australia also has an excellent export structure availed through various government and private sector business interests. It offers the network necessary to support its mature industries in the agricultural sector. Saputo would have struggled if it chose to enter the market using other means of internationalization.
The acquisition of WCB gave Saputo a well-functioning subsidiary arrangement with an above average leadership position in the market (Forsgren & Hagström 2007). WCB acquired Everyday Cheese. The acquisition made the company a significant player in the Cheese segment of the market. The decision to run the companies as separate subsidiaries will allow Saputo to continue enjoying these market advantages because both WCB brands and Everyday Cheese brands are doing well in the market (Li & Gammelgaard 2014). They include brand reputation, knowledge of the industry, access to a strong employee culture, and the current relationship with existing corporate and retail clients. Based on this review, it appears that Saputo meets the successful entry criterion 5 as highlighted by Johnson and Tellis (n.d.).
This report has highlighted the facts that MNCs use to move into new markets. Using the case of Saputo has been useful in attaching relevant internationalization theory to reality. It is also possible to see that not all aspects of theory and frameworks apply to the case. For example, Saputo’s mode of entry can be classified as a subsidiary, but it is not a wholly owned subsidiary (Meyer & Thaijongrak 2013). The circumstances of public traded companies make it almost impossible to have wholly owned subsidiaries. There are other shareholders with minor interests in the company’s Australian subsidiary. At the same time, the subsidiary owns a majority stake in another rival company. The interconnection of the companies is what led to the realization of the main motivation of Saputo being the acquisition of strategic assets. The company’s agenda appears as a calculated move to have controlling stakes in established companies in industries that it seeks entry (Bueno & Domingues 2011).
The essay has shown that the degree of control in any entry mode for internationalization matters. More control gives the foreign company the ability to organize key resource and ensure success. For example, having a controlling stake at WCB allowed Saputo to acquire a controlling stake of Everyday Cheese and consolidated its market share. The control gives the company the rights of processes, patents, brands, and supply contracts, which are essential for its business success. Saputo entered Australia in 2004 and made the acquisition attempts for Everyday Cheese in 2014. The decade offered enough time for learning the industry and creating a strategy for responding to an overall decline in global dairy sales, amid the growth of the same in Asia. The overall industry trend has been acquisitions to take strategic positions in the global market, as the case of Saputo demonstrates (Paish 2012).
Multinational companies can pick entry mode as the acquisition as a way to avoid the ‘made-in-some-country’ brand (Mowla et al. 2014). In the case of Saputo, acquisition ensures that the company sustains its market penetration and expansion strategy with Australian brands. For example, it would be difficult for Saputo dairy brands to penetrate either Australia or its constituent export markets like China because of their foreign tag. Meanwhile, brands from Australia already have a historic association with these markets. Therefore, the acquisition provides a means to gain competitive advantages through brand recognition and market knowledge and distributor relationships.
Differentiating entry modes for MNC according to the level of control is a key consideration for internationalization strategies. Control is a measure of the way a firm can influence management systems of the organization to improve its competitive position and maximize its returns for firm-specific assets (Pla-Barber, Leon-Darder & Villar 2011). Acquisitions are part of a mode of entry with direct investment to obtain a degree of total control. Another qualifying mode of entry in this category is Greenfield investments. When picking an entry mode, firms look at cost efficiency of a governing choice. Here, the analyze behavioral uncertainties that are specific to the firm being acquired and the environmental uncertainties as determined by host country conditions (Pla-Barber, Leon-Darder & Villar 2011).
When a country has high market potential, it can absorb additional productive capacity. It is also able to offer opportunities for entering companies to achieve economies of scale and efficiency based on their activities. However, when markets are static, firms do not undertake large resource commitments because the sales projection cannot sustain their high investments (Pla-Barber, Leon-Darder & Villar 2011). Therefore, before opting to invest a new manufacturing or processing plant in Australia, as a saturated market for dairy, an MNC company like Saputo will consider the option for recouping the investment through increased sales. Given the conditions of the Australian market at the time of entry, Saputo could not make the move through investment in a new processing plant for cheese, butter, and other dairy products.
By acquiring a public listed company in a foreign market, firms reduce their commitment. They can quickly exit the market without losing a substantial share of their investment. As the same time, if the market is responsive to their firm-specific strategies, then they can easily advance their acquisition in the same company and in similar companies in the same industry as permitted by the host country’s laws. An advantage of acquisition and its low level of resource commitment compared to joint ventures for new companies is that it leads to reduced cultural conflicts in culturally distant cases. Being a foreign company is a liability in markets where local brands have a substantial share, and the local consumer culture is not friendly to foreignness. Through acquisitions, MNCs can delay the interaction of home and host cultures and can test various management strategies until they obtain cultural compatibility.
According to Kowalewski and Radlo (2014), effective economic institutions stimulate economic growth. They promote increased foreign investment and are therefore targeted by countries that need FDI as channels for growth. The researchers present the assumption that countries with a great threshold of trade openness and few restriction of foreign investment end up being the ones with the highest attraction for foreign firms seeking to internationalize. For the internationalizing firm, stable macroeconomic activity in the host country and a history of low inflation as well as stable macroeconomic activity will be indications for credibility in the host government (Kowalewski & Radlo 2014).
Application of the various theories of the Saputo case and overall internationalization processes of MNCs shows that the theories are successful in predicting and advising management decisions. For example, the Uppsala model that concentrates on learning and commitment building would be very effective in explaining Saputo’s success in Australia. The calculated takeover bid of WCB that won and the eventual acquisition of another company in the same industry a decade later now gives the significant multinational control that can only lead to more success and growth. It may also refer its lessons in Australia to other markets where it is entering or seeking entry (Jones 2009).
Nevertheless, the lessons presented by this case review may be irrelevant to firms that are starting out in the internationalization business and those that do not have sufficient capital to make outright takeovers. The Uppsala theory stresses on product and technological knowledge, where firms would be suited to exploit their existing assets rather than internationalize in different paths that they are unfamiliar with at the time of expanding. Importantly, different knowledge areas exist when applying the Uppsala theory (Andersson & Holm 2010). The first area is the market, the second is internationalization, and the third area of knowledge is product and technology. Firms can acquire and utilize the knowledge areas differently to inform their motivations for internationalization. In Saputo’s case, market knowledge was most important, thereby making the acquisition of market assets very important for its entry into Australia.
Besides, incremental internationalization has also been proven right. Rather than go into inertia after acquiring initial advantages, additional investment into the country or region makes sense as it brings new knowledge and commitment that can give the MNC more avenues for success in accordance with the resource-based view theory (Christofor 2008). Global managers can look at the theories and adapt them to their business situations, and then follow prescriptions of a given theory to gain success. When applying the theories, it is important to analyze their fit into a particular business and its strategies for growth. The Uppsala theory was relevant to Saputo because of the advancement of the business as an MNC, but it may be ill-equipped to advise global managers who are starting or entering a country that has different characteristics compared to Australia. In this case, it worked because the firm had sufficient internationalization knowledge, and the market had matured to support the entry mode.
For a large MNC like Saputo, entering a foreign market with total control is supportive of growth because such a company already has financial and human resources that facilitate higher economy of scale levels that would otherwise be underutilized when using other modes of entry. The large company has a large access to information channels and can deploy its large number of managers to deal with highly time-consuming activities related to the internationalization process. Lastly, knowledge of the internationalization process in a particular industry makes it worthy of large MNC entering a mature market to use total control approach for dealing with the complex foreign environment.
Following the Uppsala model, acquisitions and other total control methods help firms deal with their handicapped position in a new market at the time of entry. Ownership advantages allow it to bring external market knowledge while benefiting from existing market knowledge to compete with the incumbents. According to the resource-based view theory, the firm will be able to compete effectively when it has competitive resources that are unique to the competition (McKechnie, Grant & Katsioloudes 2008). In this case, Saputo can gain external and internal economies of scale due to its multinational status and the operations of its Australian subsidiaries. It uses their advantages to survive. Another imperfection that the company can tap is marketing skills, price collusion, and product differentiation. Effectively using these imperfections as entry strategies allow it to compete on an equal footing with incumbents (Malhotra, Agarwal & Ulgado 2003).
Conclusion
The essay has shown that internationalization, market and technology, and innovation are important motivations for MNC firms going into international markets. It has explored country characteristics of Australia and reviewed the internationalization process of Saputo in Australia. Several risks affecting the investment arose and were mostly related to the financial environment of Australia. Nevertheless, Saputo is doing well in regard to the global strategy of expansion and diversification of income sources around the world. Other than the company, the paper also relied on books and journals to present the theories of internationalization, especially the Uppsala theory, by linking it to the reviewed case and reflecting on its application to strategic decisions that global business leaders would make when internationalizing.
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