Lezbo Sunglasses Company International Business Case Study

Company profile

Lezbo Sunglasses is a private limited company that specialises in the manufacture of affordable designer sunglasses. The company was established in 2004 in the UK consumer goods industry. Over the past decade, Lezbo Sunglasses has succeeded in penetrating the domestic market due to its aggressive distribution strategy. For example, the firm has increased its market share in the domestic sunglasses’ industry from 4% in 2008 to 20% in 2014.

In addition to effective marketing, the firm’s success has also been spurred by the adoption of effective strategic business management concepts such as the related diversification. This strategy has been implemented through the production of fashion and sports sunglasses. Griffin (2012) corroborates that related diversification strategy enables a firm to reduce the economic risks associated with depending on one business activity.

Furthermore, related product diversification enables a firm to exploit its capabilities optimally. In line with its related diversification strategy, Lezbo manufactures sunglasses for different market segments such as men, women, and kids. The firm’s sunglasses are of different styles and frame colours. The main styles that the firm manufactures include aviator, oval, sport, shield, butterfly, rectangular, square, wrap, round, rimless, and semi rimless. All its sunglasses are marketed under the brand name ‘Lezbo’.

Despite the increase in its market share over the past few years, the firm’s management team has realized that the cost of manufacturing sunglasses in the domestic market is increasing due to the global economic changes. For example, the 20087/2008 global economic recession has led to increment in the cost of raw materials imported from other economies such as China.

Therefore, the likelihood of Lezbo sustaining its low cost strategy and a growth in its profitability might be affected. In a bid to avert the occurrence of this situation, the firm’s owners have reached a consensus to integrate the internationalisation as its corporate-level strategy. The firm has identified the China as the preferred international market destination. This paper evaluates the various aspects that the firm might encounter in the international market and how it will manage the hurdles in order to succeed.

National business environment

Lezbo will enter the Chinese sunglasses market through the organic growth strategy. Subsequently, the firm will establish a wholly owned subsidiary in Shanghai, China. The company’s success in the host country will be subject to the prevailing national business environment in China. The major national business environments that will affect Lezbo’s operations in the host country are explained herein.

Political system

The Chinese government has adopted a socialist political system over the years. However, the Chinese government has undertaken significant improvement in its socialist system by integrating fundamental laws and regulations. For example, the country is governed through a constitutional system, which was adopted in 1982 and it outlines the fundamental laws. Moreover, the country’s political system is also comprised of an organisational form, as evidenced by the national and local peoples’ congress.

The National People Congress [NPC] is ranked as the highest state authority. On the other hand, the Local People Congresses [LPC] are mandated to represent the citizens at the local levels. The citizens elect both the NPC and the LPC leaders. However, the local and state governments collaborate in different governance issues, which have improved the level of political stability (Index Mundi, 2014).

The Communist Party of China [CPC] has governed the country from 1921 through the State Council, which is the central administrative organ. In addition, CPC has fostered a high level of unity within the country by collaborating with other political parties in the management of national affairs.

In addition to the above aspects, the country is governed through three main branches, which include the legislative, executive, and the judicial branches. The Chinese government is focused on reforming the country’s political system in order to be responsive to emerging challenges and address the populations’ needs (Index Mundi, 2014). Thus, Lezbo’s long term manufacturing capability will improve due to the low degree of political risk in the country.

National institutional environment

The attractiveness of a country to local and foreign investors is subject to the extent to which it has developed an effective institutional environment. Harrison (2013) affirms that the “role of institutions is now increasingly regarded as central to understanding the working of an economy” (p. 95). Some of the core components of the institutional environment include organisations such as the stock market and the central bank.

China has a well-established central bank, which was established in 1973. Some of the bank’s activities entail regulating the rate of interests coupled with maintaining price stability and low rate of inflation. China’s economy is subject to economic changes. For example, between 2005 and 2008, the rate of interest increased from 5.5% to 7.5%. However, Peoples Bank of China [Central Bank] has stabilised the rate of interest at 6% as illustrated by the graph below.

The country is also characterised by well-established financial institutions such as the Shenzhen Stock Exchange and the Shanghai Stock Exchange. These institutions ensure that the country’s financial systems are connected to the global economy. The well-developed financial systems create an environment in which Lezbo can access financial capital. Furthermore, the institutional environment will enable the firm to undertake its business transactions cost-effectively.

Government policy priorities

Harrison (2013) argues that governments [irrespective of the economic and political system] are required to undertake different responsibilities in order to promote growth and attractiveness of its economy. However, priorities in the implementation of policies vary across governments.

The Chinese government has prioritised its government policies on a number of socio-economic aspects, which include defence, security, immigration, telecommunication, air traffic control, banking, currency, education, public health, nationality, and labour relations. Fundamentally, the Chinese government is focused on nurturing a high level of economic stability.

Economic performance

Prior to entering the international market, it is vital for investors to evaluate the country’s economic performance. One of the economic performance indicators that investors should evaluate relates to the Gross Domestic Product (Harrison, 2013). Lezbo’s success in China will be subject to the country’s economic performance. The country’s GDP has increased substantially over the past decade despite the existence of adverse business cycles such as the 2008 global economic recession.

One of the factors that have stimulated the country’s positive economic performance is the adoption of an open-economy system, which has increased the volume of trade between China and the international community. Furthermore, the government has undertaken numerous economic liberalisations, which has fostered economic growth in various sectors. The graph below illustrates the growth in the country’s GDP over the past decade.

Industry structure policy

The industry structure constitutes a fundamental element in improving a country’s national environment. However, industries are subject to change due to diverse macroeconomic factors. Harrison (2013) asserts that the “industrial environment is also influenced by government policy” (p. 112).

The company’s decision to adopt the organic growth strategy arose from the identification of the attractive investment packages offered by the Chinese government. One of the industrial policies that improve a country’s competitiveness entails the adoption of free-market policy.

In an effort to improve the country’s attractiveness to investors, the Chinese government has adopted a free market approach by eliminating the legal constraints that hinder the entry of investors. According to Hitt, Ireland, and Hoskisson (2009), legal constraints are a major hindrance to international market expansion. The Chinese government has established Special Economic Zones [SEZs] in an effort to promote the country’s economic growth.

Investors in the SEZs are given an opportunity to own their enterprises. Additionally, the government has integrated tax incentives in an effort to attract local and foreign investors into the SEZs. For example, wholly owned Foreign Direct Investments that are established in the SEZs [with an estimated total investment of over $10 billion with more than 10 years of operation in the SEZs] benefit from a 1-year tax exemption coupled with a 50% tax reduction for a period of two years (Fan, 2009). Subsequently, the company will be in a position to invest in cost-effective manufacturing processes. Furthermore, the minimal legal constraints such as the elimination of taxes within the free zone will enable the company to implement its low-cost strategy.

Obstacles to overcome in the international business environment

One of the major obstacles that might hinder the firm’s entry into China relates to the existence of national cultural differences between the host and the domestic country. Heidtmann (2011) affirms that different countries are characterised by unique national culture, which refers to the shared values, norms, and beliefs held by a particular society.

Heidtmann (2011) affirms that the existing social-cultural environment affects organisations. For example, firms source their workforce from the society in which they operate. Thus, employees bring into the organisation different cultural elements such as beliefs, norms, and values. The national culture in China differs from that of the UK and this difference might require Lezbo Sunglasses to adjust its organisational culture in order to align with the national culture.

Lezbo’s management team recognises that the firm’s success in adjusting its organisational culture will be based on the extent to which it understands the Chinese national culture. In a bid to achieve this goal, Lezbo has conducted a comprehensive analysis of the Chinese national culture based on four main dimensions of the Hofstede model, viz. masculinity–femininity, power distance, individualism-collectivism, and uncertainty avoidance. The findings obtained are evaluated herein.

1. Power-distance – the UK characterised by a lower power distance index of 35 as opposed to that of China, which is estimated to be 90. This aspect shows significant difference in the acceptance of inequalities with regard to the distribution of power amongst individuals between the UK and China. Therefore, employees in the UK are opposed to hierarchical organisational structure. On the contrary, employees from China may accept hierarchical organisational structure, which illustrates a potential for conflict between employees. (The Hofstede Centre, 2014).
2. Individualism – the UK is an individualistic society, which is depicted by the high individualism index of 90 as opposed to that of China, which is estimated to be 20. This realisation shows that the society in China appreciates interdependence and establishment of long-term commitment amongst individuals. On the contrary, UK citizens appreciate working independently. The cultural difference with reference to individualism might adversely affect establishment of long term and strong relationship between expatriates from the UK and newly hired employees from China. (The Hofstede Centre, 2014).
3. Masculinity – this dimension assesses the extent to which success, competition, and achievement are integrated into individuals’ value systems. The UK and China have a masculinity index of 66 and 50 respectively, which shows that the two societies value success and achievement.
4. Uncertainty avoidance – this dimension evaluates the society’s perception of change. The uncertainty avoidance index in the UK is estimated to be 35, while that of China is 30. This observation means that most individuals in China avoid uncertainty/risk and they are comfortable with rules and norms as opposed to UK citizens. This difference might affect Lezbo’s effort to implement change.

The above cultural analysis illustrates the existence of significant differences between the UK and China. These cultural differences might affect Lezbo Sunglasses in its implementation of different strategic management practices.

For example, the high uncertainty avoidance index might cause some employees to resist any change efforts that the firm might propose. Consequently, the firm’s long-term competitiveness might be affected adversely due to its failure in implementing change, which is a fundamental aspect in attaining competitive advantage.

People management challenges

In its market entry, Lezbo Sunglasses has formulated a policy that requires the sourcing of a substantial number of employees from the host country. This policy is in line with the company’s corporate social responsibility strategy. Furthermore, the company will also take some expatriates from the domestic market, which means that the workforce will be comprised of the Chinese and people from the UK.

The firm’s management team recognises the likelihood of conflict amongst its workforce arising from the existence of national cultural differences between the UK and China. Therefore, it might not nurture a culture of collaboration among workers due to varying beliefs on individualism and collectivism.

The newly hired employees from China might appreciate the establishment of a high level of collaboration in the execution of various work process because of the low individualism index. However, their counterparts from UK might hold to the concept of working independently due to the high individualism index.

The existence of differences on the best method of executing job tasks might lead to internal conflicts amongst employees, thus affecting the working environment. According to Hitt et al. (2009), the existence of poor working relationship amongst employees is one of the main causes of a high rate of employee turnover in organisations Hitt et al. (2009) further affirm that employee turnover increases the cost of operation for a firm is forced to hire new employees.

Subsequently, the organisation might incur a substantial cost in the hiring process. Additionally, the newly hired employees might not have sufficient skills. Thus, additional cost is incurred in training the newly recruited employees. Therefore, conflicts amongst employees due to cultural differences might hinder the firm’s capacity to achieve its desired cost minimisation and profit maximisation objectives.

Management approach

The above analysis identifies the existence of cultural difference between the UK and China as one of the major obstacles that will affect Lezbo Sunglasses in its target international market. However, the company’s management team is focused on establishing its manufacturing operations in the host country through foreign direct investment. In a bid to enhance its success, Lezbo will undertake some remarkable adjustments to its human resource management strategies.

First, the organisation will adjust its employee-training program by integrating the element of cross-cultural training. Currently, the organisation’s human resource training program has not emphasised on cross-cultural training. On the contrary, the organisation has mainly focused its training programs on technical manufacturing aspects.

The training program will focus on employees in all levels of management, viz. the managers and subordinate staff. The decision to implement the concept of cross-cultural training is informed by the need to equip the workforce with skills that will enable them to appreciate the cultural differences.

The expatriates will develop a better understanding of the Chinese national culture, hence the society’s norms, values, and beliefs. Similarly, the newly hired employees from China will appreciate the cultural differences of the expatriates. Investing in cross-cultural training will improve the firm’s capacity to develop an organisational culture that appreciates the existence of cultural diversity. Thus, the likelihood of the firm improving collaboration amongst employees will increase.

Cross-cultural training will be undertaken through the incorporation of two main training methods, which include on-the-job training and field experiences. The on-the job training will mainly be used in training newly hired employees to understand the Lezbo Sunglasses’ organisational culture. This move will create an environment for interaction between expatriates and the newly hired employees. Conversely, the firm will be in a position to organise field trips in order to provide expatriates to gain first-hand experience on the Chinese culture.

Conclusion

Lezbo Sunglasses recognises that the business environment is subject to diverse macro environmental forces. Therefore, attaining long-term success will depend on the quality of strategic management practices adopted. The firm’s management team has realised that its success in the domestic market might be limited by high cost of production, which might hinder its capacity to implement a low cost strategy.

Subsequently, the firm’s management team has considered moving its operations into China. The choice of the China as the preferred investment destination arose from the identification of the high market potential and hence the likelihood of succeeding.

In its preliminary business environment analysis, Lezbo Sunglasses identified a number of factors that have stimulated the firm’s decision to move its manufacturing activities. First, the country is characterised by an attractive national business environment, as evidenced by the democratic political system, well-established national institutions such as the stock market and the central bank, and attractive government policy priorities.

The company’s decision to move has also been stimulated by its economic performance, as evidenced by growth in its GDP. Additionally, the adoption of the free zone policy has also increased the countries attractiveness, hence the company’s decision to adopt foreign direct investment strategy.

However, the firm recognises the existence of national culture differences between the UK and China as one of the major obstacles that might affect its success. The cultural differences might lead to conflicts amongst employees, hence affecting their productivity. In order to deal with this challenge, Lezbo will implement a comprehensive cross-cultural training program. Subsequently, the firm will be in a position to establish a favourable environment for working, hence improving collaboration amongst its workforce.

References

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Harrison, A. (2013). Business environment in a global context. Oxford, UK: Oxford University Press.

Heidtmann, D. (2011). International strategic alliances and cultural diversity; German companies getting involved in Iran, China, India. Hamburg, Germany: Diplomica Verlag GmbH.

Hitt, M., Ireland, R., & Hoskisson, R. (2009). Strategic management: competitiveness and globalisation: concepts. Mason, OH: South-Western.

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The Hofstede Centre: What about China? (2014).

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