International Business Strategies: Case Study of Netcare
Introduction
In a sector such as the medical industry where the aspect of acquisition and development of knowledge is an essential part of growth and maintained profitability, the health industry is hugely impacted by national political and legal restrictions. Organizations in this industry have to leverage the numerous obstacles to attain competitive advantage and survive in the foreign markets. Recently a renowned medical care company Netcare experienced a changing dynamics in its primary market in South Africa. This compelled the review of its internationalization process. Internationalization process is the activity of increasing involvement in international markets by local enterprises. For Netcare to succeed in the field of internationalization, it needed to possess first the ability to incorporate global thinking and understand foreign cultures. Netcare would benefit immensely by learning the various beliefs, values and international business strategies in other countries before embarking on the whole process of internationalization.
In the modern society, more and more companies are operating internationally. In almost every sphere of economies around the world, the importance of foreign-based operations is increasing. The foreign-based operations account for significant part of the global trade in both goods and services. Attempts have been made to theorize such internationalization of enterprises. However, there is no specific universal theory of internationalization. Most of the theories tend to put emphasis on the aspect of how business should internationalize rather than the reasons for internalizations and the advantages of the various approaches towards explaining the internationalization process.
In this paper, the research question of this paper is Which OLI advantages did Netcare initially employ in order to internationalize and how can internalization theory can enlighten the proper sequence of internationalization?
When choosing to enter a new market especially a foreign market, certain important considerations should be made by the firms wishing to join the international market. Some of these considerations include careful studying of the foreign market and understanding the barriers in that market. Barriers in terms of legal or regulatory services and other constraints are likely to affect the process of expansion.
For many years, the OLI model has offered a significant framework for the analysis of activities of internationalization and multinational enterprises. It has been used as the rationale behind international operations for various multinationals. The OLI model is also referred to like the eclectic paradigm and was developed by J.H. Dunning. It was first postulated in the year 1976. The model helps us understand International Business strategies by elaborating the process of decision making and the associated growth drivers that are primarily important in enabling companies to operate in the international market. The model was formed to help understand three forms of international expansion; foreign direct investments, exports and Licensing. The model supports the organization leader’s decisions on the selection process of the expansion strategies. This framework is an extension of the internalization theory. The paradigm can be used to analyze the Netcare case study. Some have argued that the model is limited and as such is not accurate in extrapolating precise methods for international operations.
The OLI model was developed with its major aim being to understand Foreign Direct Investments across the globe. The ability of a Netcare to accurately identify markets that suite their service or goods portfolio is of utmost importance to the eventual survival of the business. During the period of selection of expansion markets Netcare should have considered markets that offer prospects of growth and those that fit in a company’s international business strategies.
Netcare wanted to introduce new markets in its operations hence they had to define the exact context. Netcare had to consider their transactional cost of internationalization of the operations. The transactional cost theory states that the cost of transactions can only be justified within an organization if the transactional cost is to be applied in a free market environment. Netcare was already established as a reputable business in South Africa. In an analysis of the OLI framework, Dunning added three more important factors to be considered when discussing the Eclectic Paradigm. This is ownership advantage, location advantage, and internalization advantage.
Based on Netcare case study, Netcare already enjoyed widespread core competency in consolidating fragmented markets. They were the leading health care suppliers in South Africa. Based on the ownership advantage principle of the eclectic paradigm, Netcare was more likely to progress in the international market. The theory argues that if a company enjoys a significant competitive advantage over other companies then they are more apt to invest or engage in global production. Netcare was experiencing a shortage of nurses and other healthcare workers in South Africa. From the understanding of the location advantage, Netcare was in a position to increase their accessibility to places that did not experience the shortage problem. Location advantage refers to the alternative markets where a company can invest in value addition. Netcare was already established and thus had their own products. Through acquisitions, Netcare was able to retain the advantages of doing their in house production rather than licensing or using partnerships. Netcare organized its core competencies of consolidating fragmented markets and introducing a semblance of order.
Internalization theory
First, when understanding the internalization theory and its implications in international business strategy, it important to pay particular considerations to the main focus of the theory. The internalization theory pays particular emphasis on the imperfections of the marketplace. Netcare was expanding into an imperfect market condition. It had to analyse the market to ensure that if it expanded its continued growth and profitability was maintained. The marketplaces were regulated and influenced by different players. Netcare had to decide on either franchising existing health care companies in the foreign countries or just enter into the international market themselves. The issue of Bounded rationality is raised every time there is a discussion involving internalization theory. Bounded rationality is defined as the idea that people are more likely to make decisions limited in quality of reason based on fact and available information. The information that was available to Netcare Healthcare provider on the expansion into international market was confined to the knowledge they had on the operations they had in South Africa.
Another important consideration to make is one regarding asset specificity. Asset specificity is a term related to the inter-party transactions. In the case of Netcare, there were a lot of the operations involving different parties on the expansion into the international market. Asset specificity can also be applied to some extent to the issue Netcare experienced on both human and physical capital. Netcare experienced shortage of qualified staff in the primary nation of origin. Its internationalization process was therefore to some part determined by its need to look for a market that would help solve the problem at home.
The two theories, OLI framework and the internalization theory complement each other. The two theories help in analyzing the process of internationalization. The theories help determine the ideal internationalization process from market selection to the actual expansion into international market.
Conclusion
The analysis of this case study helps understand the various theories of international business strategy. Netcare had to fulfill the need for expansion by seeking new markets to invest in. The process of selecting the most appropriate market would typically involve Netcare being able to increase access to new markets, securing massive sales and be able to threaten competitor companies in the foreign countries. In England, Netcare was able to enter the market because the government majorly controlled the English market. Entrant of a private corporation definitely changed business in England. Netcare was able to use their core competency in arranging and reorganization of fragmented markets.
An international business strategy can be employed to mean that international subsidiaries are given the power to act independent of the parent company. Implementing global strategies led to the creation of a broad range of business strategies. The biggest challenge especially in developing effective international trade strategies on expansion and exploration of new markets is one of developing a single strategy that can be applied across the globe. This policy needs to maintain the same level of flexibility across the different markets. The case of Netcare gives a perfect example of how companies can navigate the tides of the international market to develop new markets amidst numerous challenges. Netcare having operated in South Africa initially had no much expertise in the global arena. It had to ensure compliance with different regulations in different foreign markets. Netcare believes that its core competency was in consolidating fragmented markets by introducing efficiency.
It was also shown that Netcare was able to make acquisitions of existing companies in host country which ensured that it was able to overcome the challenge of regulations. As international business environment grows and increasingly become complex, companies such Netcare should develop a deeper rationale for their global operations. Economies of scale, shortening product life cycle, and ballooning investments have helped transform small businesses like Netcare into multinationals. The two theories have in essence helped build a strong fundamental understanding of International Business strategy and how Netcare was able to navigate the tides of expansion into a new foreign market.
Klein, S. and Wocke, A. (2007). Netcare's International Expansion. Richard Ivey School of Business, 9B09M005(909M05), p.22.
VERBEKE, A. (2009). International business strategy: rethinking the foundations of global corporate success. Cambridge, UK, Cambridge University Press.
