Global Expansion of UK manufacturing Company
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This report is based on a small UK manufacturing company which considers expanding into a country in Europe that is in Germany in June 2022. The small UK manufacturing company named J Rotherham (Holdings) Limited wants to expand its business in European countries and has first thought to expand it in Germany and so before doing it the company wants to analyze the business environment of the country so that it can run its business appropriately (Kagermann et al., 2016). Thus this report provides a critical evaluation of the various aspects that are related to the external business environment and are assessed based on the decision taken to internationalize the SME manufacturing company or not. The three main reasons for its expansion are cost-savings, expansion in sales, and market diversity.
The SME company J Rotherham (Holdings) Limited is known as an administration company which was incorporated in the year 1995 on 7 September with its registered office located in West Yorkshire, Leeds. This company has been running for 25 years and has currently 4 active directors and 1 secretary. The company has more than 250 employees and has more than £50 million in turnover. As the company has been specializing in traditional stone masonry, exquisite fireplaces made of stone and bespoke kitchen worktops as well as natural flooring, it is having a huge rise in demand and is also having a strong growth for its products due to which it had to launch its product line into robotic line for manufacturing the worktops (Dominguez, 2017). This significant investment made by the company has enlarged its growth due to which there has been a high demand for their product from different countries of Europe. Because of this reason the company wants to expand its business to Germany. There are mainly five reasons because of which the company wants to expand to Germany and those are: 1) this country has a strong, dynamic economy, 2) has a stable good home for new ideas, 3) has a good cultural background to attract international customers, 4) receives both fund and support from professional areas and 5) has a diverse society.
Through the process of globalization, a historical transformation in areas like social, economic, political, legal, and cultural diversity can be developed. This process of interaction through the business environment among companies, people, and countries helps the business to grow to a large extent and also helps in encouraging the new form of ideas and technologies (Lecerf, 2020). This analysis is based on the comparison made between the two countries that are the UK and Germany (EU country) based on Cultural, Economic, Political, Legal, Technological aspects. All these factors are a part of the PESTLE analysis and are performed based on the SME selected for this report.
3.1 Economic Factor: While making a comparison between the UK and Germany on the factor of the economy it becomes crucial to know certain basic facts about them and that is, the UK is known as a leading trading power as well as a financial center and is the third-largest economy in Europe after Germany and France (Velásquez, 2017). The economy of Germany is known as the fifth-largest economy in Europe. It is also known to be a leading exporter of machinery, chemicals, household equipment, and vehicles. The reason behind which the company J Rotherham (Holdings) Limited is trying to expand to Germany is that once it can make its position in the Germany market; it will have the chance to export its product from Germany to other countries around the world which may become a beneficent factor for the growth of the company.
The GDP (purchasing power parity) of the UK according to the reports of 2017 is $2.925 trillion whereas of Germany it is $4.199 trillion. The GDP (real growth rate) of Germany as of 2019 is 0.59% estimated and of the UK it is 1.26% estimated (Düerkop, 2017). According to the report of 2017, the industrial production growth rate of the UK is 3.4% and of Germany, it is 3.3%. The main industries which the UK has are machine tools, equipment for electric power, textiles, equipment of automation, and many other products. Whereas Germany has got the world’s largest and technologically advanced producers of steel, vehicles, machine tools, automobiles, electronics, shipbuilding, and many more. Due to its large variety of technologically advanced products, Germany had $1.434 trillion in its export of products whereas for the UK it was only $441.2 billion.
Figure 1: Unemployment Rate in Selected European Countries
The other areas which can be considered as an economic factor for drawing a comparison include the unemployment rate which in the UK it is 3.17% in 2019 and Germany it is 4.98% in 2019. The labor force is far better in Germany than in the UK due to which the percentage also varies a lot according to the estimation reports of 2020. In the UK it is 16.033 and in Germany, it is 44.585 million (Kinsella et al., 2020). The budget of the UK in terms of 2017 report present 1.028 trillion of revenue and 1.079 trillion of expenditure and on the other hand, Germany has revenue of 1.665 trillion and 1.619 trillion of expenditure.
Figure 2: Germany vs. UK Labor Productivity
The German economic growth has recently picked up in the European debt crisis. It has got the largest trade surpluses in the world which accounts for a surplus of 7.3% of GDP in the year 2018. The country has competitive tax regulations, a highly developed economic framework and the infrastructure which it provides is of good quality leading to a highly qualified labor force and has strong legal protections.
3.2 Cultural Factor: The social and cultural environment between the two countries has a significant impact on the international expansion of the business. Variations in material culture, social conditions, and religion become a great influencer on the minds of the buyers. A failure in determining and understanding the cultural and societal factors present in a country will become a complex area for the company to grow in the international market (Puhakka egt al., 2019). It can also be seen that attitudes may not largely differ between countries on being supportive of the aspect of government intervention.
Figure 3: Difference between Germany and UK on Cultural Aspects
The relation which the UK and Germany have can be signified as a bilateral forum. Previously the relations were very strong between them. So to expand the business it becomes necessary to understand the business culture in Germany. The businesses which are in the UK mostly have a distinct hierarchy in them and they also try to observe the vast differences that are present in the social status of people, their dress, speech, and behavior as well so while expanding the business in Germany. Germany is known as the fifth-largest company economy and also for its major hub of European business both from service as from manufacturing industries. The ethics which are followed here are central to daily business practice and the communication between the employees is efficient and polite (Chen, 2019). While doing business in Germany the company needs to take seriously the matter of German values and must note the mentality and negotiating factor through fair agreements. No transparency is encouraged and better working conditions need to be provided. The organizational culture in Germany is also hierarchical as well as a meritocracy.
Both the UK and Germany represent two different welfare aspects of society in a form of contrasting images regarding the state regimes. These mainly stand on the two important distributional principles that are corporatism and liberalism. In the UK the role of the government seems to be much more in controlling the regulation of welfare so that individual commitment need not undermine for taking responsibility whereas in Germany the main stress is upon the government and it is their responsibility to take on the role of supporting the groups that are vulnerable and give access to proper employment (Dharshing, 2017).
Technology encompasses obsolescence, innovation, R&D, and automation and it becomes crucial to determine and evaluate the areas which the respective country utilizes for its production process and how the market embraces the new form ideas in the advancement of technology. Technological factors have a great influence on the decisions that are made by the company to launch any new product or to expand to another country globally.
Another most important aspect which is to be followed in terms of creating a comparison between the UK and Germany is the aspect of Technology. The German industry is considered to have a diversified technological advancement whereas the UK is a little far. The UK has several research and development institutes that are leading in the world and provides several opportunities to the entrepreneurs present in the economy (Mladenović et al., 2020). Whereas Germany has made its position in advancing in the field of science and technology and has become a 5th technologically advanced nation and is also having a leadership position in the area of information technology.
Figure 4: Technological Specialization by European Countries
For example, Germany is known as the leading car manufacturers both in the domestic aspect as well as around the world and is a home for many international brands like BMW, Mercedes, and Volkswagen (Starosta et al., 2019). It has got expertise in multiple sectors like infrastructure, medicine and engineering, and many more.
Here developed industries in the process face several different environmental issues like the economy of the country is not able to move forward without the aspects of industrialization. Factors such as environmental issues and pollutions used to be considered here (Nasiri et al., 2020). The process also includes private corporations, government, and other related organizations that execute environmental awareness aspects such as plastic waste recycling, eco-friendly product development, and air pollution, etc.
Here other environmental issues such as bad weather in the winter season are also considered as an environmental factor that affects manufacturing businesses. The policy of the UK for maintaining the environment is based on command and control that is based on certain standards. The mentionable aspect here is the UK also helps the European Union to develop policies for the environment here.
Germany is a country that totally relies on fossil fuels and near to 90% of the energy is generated utilizing it. As per the water sources, more than 86% of renewable water gets used in industrial processes. Environmental issues associated with this country are huge and emissions from coal burnings and several different industries here contribute to air pollution. Acid rain with the emission of SO2 is also a concerning fact. Waste disposals in rivers and sea used to be also considered as concerning fact.
Here the government has made several different efforts for reducing environmental issues such as the Federal Emission Protection Act 1994. Here strict enforcement of laws and regulations used to be another approach for reducing pollutions. For establishing pollution standards here ‘polluter pay’ principle has been enforced on industries. The government is also setting up goals for developing nuclear power plants for managing future energy requirements. Here the government of Germany is also processing to meet the requirements of the European Union for identifying preservation areas of nature.
Figure: Environmental Footprint of Germany
(Source: Nasiri et al., 2020)
As per the concern, the UK’s environmental concerns and approaches are more accurate and well structured to meet environmental requirements. Germany is on the way to developing such parameters. UK has also helped the EU in making policies about the environment (Rahman, M., 2019). The initiative of 1999 in Europe is about promoting sustainable development initiatives that are helpful for setting up targets. The strategy is also helpful for developing a management structure for the development of economical, ecological, and social aspects of the EU. Here the core concepts of environmental development used to be biodiversity and nature, health, waste and resources, and quality of life. Less strict laws of the environment would be helpful but the business approach should be as environmentally friendly as possible.
Companies that are operating in the UK environment used to follow the Employment Act 1996 that includes aspects such as minimum wage, sick pay, paternity and maternity pay, holiday pay, etc. this specific act helps in protecting the rights of employees. As per the legal aspects the UK used to one of the most sensitive stable countries. Several other acts also get operated like Equity Act 2010 that protects people from being discriminated against for their gender, race, or color.
Employment Act of 2002 also includes similar objectives in a precise manner. Key changes over regulations have been evaluated with time in British labor laws and minimum wage to combat deficiencies of the industrial process in a stricter approach (Brunow et al., 2019).
Figure: legal System of the World
(Source: Gegg et al., 2019)
Here the administrative approach is divided into five associated branches labor, social, administrative, financial, and ordinary. Here the regulations get applied effectively over the aspects. The legal system here gets shaped as per the constitutional laws but also depends upon the European Union (Gegg et al., 2019). Here laws associated with different states are mainly based on universities, schools, press, local government, and police.
Here the sense of legal stability is present and thus becomes beneficial for entrepreneurial and investment aspects in the country here. Here associated business line used to be based on competitive principles. For controlling the aspects of unfair market behavior here Federal Cartel Office used to be engaged. Thus aspects of fair competition encourage more and more foreign companies to invest in the country.
Both of the countries follow stricter rules for industries and labor engagements. Legal compliances about establishing a company in Germany are minimum and support new businesses in the environment by utilizing equity law (David, J., 2019). No benefits get provided to any company specially and each of them gets equal opportunity to compete in the country. Here Act Against Unfair Competition is used to provide safeguard to each company operating in Germany. Trademarks and patents of companies also provide strong protection aspects by providing registration for trademarks. Several rules and regulations require to be processed before entering the market. Here standards and quality of the environment, taxes, and customs here considered as a required aspect for getting into the country.
J Rotherham is a manufacturing and service company for kitchen worktops, stone fireplaces, luxury tables, etc. The company generally processes stone equipment for a household in the UK. The company here wants to expand the business in Germany in the year 2022. As per the population of Germany, it is around 83 million and most of them are associated with households (Kovalainen, J.M., 2020). Here a huge and potential market is there and competition aspects also concerning. Thus market entry mode is required to be determined in the preliminary process.
Figure: Indirect Export and Intermediary Partner
(Source: Schwäble, M.C., 2018)
The entry model of the business should be first establishing indirect export in the country. As J Rotherham does not have relevant experiences for executing business in the German environment thus this approach would be helpful. For mapping out the potential factors here risk testing would be evaluated in the primary process by indirect exports. The process would be about engaging one or more interested partners as it would be hard to utilize the market using a web-store. The process would be about developing business in Germany by utilizing minimum risks and to sell things using this approach. The later phase would include the physical existence of the company in the market as per the results of the initial venture in the process.
Indirect export used to be considered as the most useful and risk-free approach for a business to engage in international ventures. The process would be observing the established goals of the third party engaged in the business process in Germany. This would be helpful for the assessment of different aspects such as customer interest, social aspects, and cultural factors (Schwäble, M.C., 2018). The process also includes facts such as language barriers, and negotiation behaviors. The indirect exports here offer a way of testing the potential aspects of the products for operating in Germany. Any other entry mode does not get supported here as this requires evaluation of price aspects and products that gets provided at the same prices in Germany. For the process of indirect export added benefit is that it would require indirect export for handling business partners. This is about developing a double-edged sword that would be evaluated for business existence in Germany leveraging minimum risk here.
Before entering directly into the German market here several different aspects are required to be considered here. These aspects have been provided as a recommendation:
- Research about Competition:Brand recognition and loyalty used to be considered immeasurable. This is about customer commitment and trust that gets dependent upon customer values (Holtgrave et al., 2017).
- Cultural and Language Understanding:Cultural aspects used to be considered insignificant and during the planning phase it gets established for meeting the needs of the local market in the process.
- Review of Regulations and Bureaucracy: For managing existence in a foreign market understanding the aspects of regulation used to be essential that helps in maintaining reputation. Hiring a local attorney would help understand country-specific regulations. An expert on the new market ground would also help manage market strategy and business approach.
- Build Awareness:For successful industry marketing, the brand used to be important. Understandings about customer needs, problems, and preference of lifestyle would here be helpful in the process. Executing social media campaigns would also be helpful here.
- Scale the Strategy:Scaling used to be considered as an essential factor as most businesses fail for this reason. For avoiding such aspects a solid and sophisticated plan should be developed here for managing predictions and goals (Qi et al., 2020). This is about managing a business without harming reputation.
Here a strategy for entering into the German market has been established for a small-scale business in the UK named J Rotherham. All the relevant factors present in both the environment and how these factors can affect the business scenario have also been presented here. Entry mode has also been discussed as per the market constraints. The German market is decentralized and dynamic, and preferences and tastes vary from one area of Germany to another (Ra, W., 2020). As part of a large national business position, active market policies take geographical disparities into account. While exemptions, allowances, and write-offs help to drive effective tax rates to globally competitive levels, Germany’s comparatively high marginal tax rates and complex tax laws can constitute an obstacle for investors.
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