Global Markets Entry and Selection of IHRM strategies — UK Banking Industry

Keyword: Entry strategies, Joint Venture and Whole-owned subsidiary, Empirical data on success and failure of entry strategy, International human resource strategies – EPRG model (Ethnocentric, Polycentric, Regiocentric, Geocentric), Standard charter bank entry to Nepal, RBS joint venture in China, International business assignment writing services

Introduction – Background of Research

Hitt, Ireland and Hoskisson (2014) stated that globalization has presented companies with opportunities to diversify both its market and customer base. Global markets have helped the companies to spread their risk, extend product life cycles as well as improved sales and profitability. Nevertheless, to enter the foreign market companies need to select a suitable mode of entry which has a significant impact in success or failure of the company.

Moreover, Cavusgil et al (2014) added that after the entry to the foreign market company has to make a decision in terms of its human resource management strategies to achieve the objectives of the companies. The need of entry mode selection and consequently selection of human resources strategies even become significant when it comes to the banking industry.

The service nature of the banking industry, cultural differences, large capital requirement, quality customer service, Language issues as well as financial regulation makes it’s a complicated process in the banking industry (Crawley, Swailes and Walsh, 2013).

Objectives of the report

The purpose of this report is to examine the entry strategies of the UK banks and their selection of the international human resources strategies (IHRM).

The report will examine the entry strategies and selection of the IHRM strategies of various banks as multiple case studies to analyses and evaluate how strategies influence the performance of the bank in the international market (Rees and Smith, 2014).

Studies of the strategies

Entry Strategies

Morschett, Schramm-Klein and Zentes (2015) stated that there are ranges of foreign entry market strategies such as licensing, exporting, joint venture, franchising, merger and acquisitions as well as foreign direct investment used by companies to start operations in the foreign market. The selection of the strategy large depends upon the conditions of the international markets as well as objectives of the companies.

This report analyzes the two foreign market entry strategies which are joint venture as well as foreign direct investment (Merger and acquisition and green field investments) which are largely used by the banking industry (Claessens and Horen, 2015).

Joint Venture

A joint venture is known as an arrangement between two or more companies in which they agreed to share control and equity with the company from the host country. In other words, joint venture involves an alliance between the international company and local company from the host country. The objectives of joint ventures are usually to share technology, entry foreign market, risk sharing, compliance with regulation as well as research and innovation (Rao and Guru, 2015)

Prescott and Swartz (2016) analyzed the benefits associated with joint ventures are that it helps to over the legal regulation as well as over the cultural problems. The combination of the resources reduces the requirement for the capital as well as companies can spread their risk. Nevertheless, problems associated with the conflict of interest and degree control present a major challenge. The risk involve in the joint venture is larger in terms of technology and knowledge spillover.

According to Killing (2013), lack of trust and confidence between the companies is key element in failure of the international companies. In addition, the selected partner of the joint may become competitors of the company as well as the cultural clash is common problem in joint ventures.

The joint ventures are suitable especially in the services industry become it is difficult to export or license services to international market. The partnership with the host country companies helps to overcome cultural and regularity issues and joint ventures are preferable when host country have import barriers, cultural issues, sales variability issues as well as political risk (Wolf, 2016).

Success and Failure in Banking — Case study

Shakya (2016) highlighted that that the success story of the joint venture of the UK bank is standard charter bank entry to Nepal since 1987. The bank enter the market as joint venture but holds hold 75% ownership as well as have 21 branches as well as 450 local staff. Company has successfully grown in the Nepal which has resulted in developing local market knowledge, learning and deploying capabilities thorough understanding local market as well as from joint venture bank ownership has increased to 7% (Standard Chartered, 2014).

The example of the unsuccessful joint venture is that, Royal bank of Scotland in 2011 launched a joint venture with Chinese financial securities company Guolain securities and venture was known as ‘Hua Ying Securities’. The objective of the venture was to manage the share sales as well as debt management for companies in the china market. Despite the new venture is profitable, RBS has failed to receive benefits from the venture (Royal Bank of Scotland, 2016).

The RBS control and interest in the Chinese venture was lower and company has failed to develop knowledge and understand the local Chinese market. Chinese local management interest and involvement has not offered intangible benefits for the RBS (Ho and Carew, 2015).

Foreign Direct Investment – Wholly owned Subsidiary

Foreign direct investment involves the 100% and direct ownership of the facilities in the host country. Foreign involves transferring technology, skills and expertise, capital as well as a human resource. The range of techniques used for foreign direct investment includes the establishment of the company or acquisition of the company in the target market (Chang, Chung and Moon, 2015).

Lopez-Duarte and Vidal-Suarez (2014) added that the benefits of the direct investment are that it offers control and helps to develop better understanding in the local market. The company can transfer skills and expertise and use its international brand image which result in quick success in the host country market. The ranges of benefits include economies of scales and scope advantage, integrated supply chain, no knowledge spillover and profit sharing, no issues of control and interest conflict as well as protect company confidentiality information.

Nevertheless, foreign direct investment carries a large number of risk such as high political and investment risk. Moreover, companies have to invest in a large number of resources and capital intensive (White et al., 2014).

Murray, Ju and Gao (2015) evaluated that the direct investment approach is more useful when there are tariff and import quotas are present in the market and there huge potential for sales in the host country. The target market have reachable and profitable segment and country have low political and cultural risks. The foreign direct investments are more suitable country have investor friend investment policies and their limited restriction on the operations of the foreign ownership companies in the host country.

Success and Failure in Banking — Case study

Barclays bank in 2003 acquired a credit card company (Juniper bank) in the United States. The acquisition approach to entry the foreign market has proven success for the company and Barclays launched the bank under the name of Barclays Bank Delaware. The minimum political and cultural barriers between the US and UK has helped the company and its sales and profits (Hoover’s Incorporated, 2016).

Another success through establishment of the subsidiary from scratch is associated with standard chartered established its subsidiary in the Hong Kong in 1994. Company now has more than 80 branches in Hong Kong and employee more than 6000 employees in the country. The failure of whole-owned subsidiary includes HSBC bank in Brazil. Bank started its operations in 1997 in the country and further expanded in the country after acquisition of the Lloyds Brazil (Nishimura, Suzuki and Michie, 2012).

The changing market conditions, lower profitability as well as weaken currency has forced the Bank to sale its holding. This shows large investment in foreign depicts greater risk for the company (Sousa et al., 2015).

International human resource strategies – EPRG model

The ethnocentric, polycentric, Regiocentric and geocentric (EPG) framework identify the strategy and management approach during the course of internationalization of company. (Codita, 2011)

Ethnocentric

Codita (2011) highlighted that the dominance of one culture in some form over another culture results in ethnocentrism. The dominance could be marked though technical, cultural or ethical skills and based on the psychological factors. Moreover, the people of ethnocentric orientation people believe that there approach is superior and see foreign culture as little value.

In ethnocentric approach companies deploy domestic strategy to international market because of believe that these rules are test and proven in one market and i.e. good in another market. Ethnocentric approach means managers are transfer from the home country because local personnel’s cannot be given senior position in the company. The cost associated with ethnocentric approach is high because of the salaries as well as lack of career development usually result in high staff turnover and i.e. companies are unable to adjust their marketing activities according to need of the local host country market (Tian, Harvey and Slocum, 2014).

The ethnocentric approach helps to maintain the control and reduce the risk of conflict of interest in the international markets. The ethnocentric model can be applied to both joint venture and merger and acquisition to prefer the interest of home country company as when maintain effective control (Vance and Paik, 2015).

Polycentric

The focus of the polycentric approach is on specific feature of the host market. In the light of the polycentrism companies focus on the specific areas of the foreign market and i.e. deploy local strategies to overcome the problem. The staff are hired from the host country and given higher position in the company. The company believes that manager in the host country require autonomy and need a degree of freedom to make effective decisions (Thoo and Kaliannan, 2016).

Isidor, Schwens and Kabst (2015) added that polycentric strategy embraces the decentralization and rather having high degree of standardization its focus on the degree of differentiation in the market. In other words, it is opposite of ethnocentric approach which result in diminishing of the economies of scale and may result in ethical lapses. This approach works best to overcome the cultural and languages problems and local managers believed to provide superior customer services.

Regiocentric

Dlabay and Scott (2017) stated that the Regiocentric approach involves combining the homogenous group present in the foreign market. This presents the groups in the similar market and they embrace the similar characteristics. Therefore, companies use identical features present in markets of the country and through integration of the features it develop a regional strategy. Therefore, to extent it embraces the characteristic of ‘polycentric and ethnocentric approach’.

Therefore, companies are more focused on the regions rather focusing on specific country. The fundamental of the Regiocentric approach is focus on the need of adaption to the local market as well as get benefit from the global integration. The benefit of the Regiocentric helps to achieve economies of scales from regional integration as well as regional manager reasonable degree of autonomy. (Farndale et al., 2015)

Geocentric

Geocentric approach embraces the standardized market concept and company treats all international markets as one market. This universal approach is based on the assumption that customer can forget some differences and companies focus on the achieving the international competitiveness. The company’s focus on achieving the economies of scale through standardized markets and reduce unit cost.

The company head office as well as its subsidiaries is unified and employees are hired irrespective nationalities and parent, host and third country staffs are considered. The combination and hiring is based on selecting the best employees. The benefit of this approach that diverse employee help to overcome the communication problems as well as best skills are deployed to achieve better results. (Stahl, Bjirkman and Morris, 2012)

CASE STUDIES — Analysis of IHRM strategies selection to manage its foreign subsidiaries

Standard charter bank entry to Nepal – Joint Venture

Standard chartered started its operations in Nepal in 1987 and the mode entry selected was a joint venture. Bank deployed ethnocentric approach to managing the operations in Nepal which has helped the company to transfer the skills and expertise, as well as managers, develop greater experience of working in the cross-culture. Company focus was on the home market, but the objectives were to get benefited from the international transactions. The Ethnocentric approach helped to the company to replicate the success in the host country market (Neupane, 2015).

The added advantage was learning and experience as well as a minimum conflict of interest between the parties. The effective control and transfer of employees to Nepal has helped to maintain the degree of control but collaboration with local partner helped the company to understand the local market environment. Therefore, the success of the bank was joint venture which helped to spread the risk and sharing knowledge along with ethnocentric approach which has changed to Regiocentric (Chrysostome and Molz, 2014).

The dominance of the UK culture and market success for the standard chartered has resulted in that company to send UK staff to Nepal. The dominance was technical, cultural or ethical skills and based on the psychological factors from the home market. The skills and expertise of the managers from UK helped to replicate the success in Nepal.

The lack of skills and expertise among the staff in Nepal, especially little knowledge about banking industry when compare with UK, has presented the company with problem which was overcome by sending managers from home country. Managers were transfer from the UK because local personnel’s cannot be given senior position in the company (Varma and Budhwar, 2013)

The UK management believed that there approach is superior and see foreign culture as little value. In order to achieve the objective to replicate domestic strategy to Nepal market because of believe that these rules are test and proven in one market company has to use the specialist skills and expertise. The ethnocentric approach helps the standard charter to maintain the control and reduce the risk of conflict of interest in the Nepal. The transfer of skills, better control of resources and successful implementation of domestic strategy has resulted in success of the standard charter in Nepal (Ramamurthy, 2004).

RBS joint venture in China

The RBS joint venture with Chinese financial companies was started through a joint venture in 2011. Nevertheless, RBS adopted a polycentric approach which represents the need of the local people to overcome cultural and language problems in the Chinese market. Nevertheless, the company fails to get benefited from the joint ventures because minimum efforts were given to knowledge sharing and enveloping capabilities (Ho and Carew, 2015).

Li (2014) analyzed that RBS believe that culture differences were key area of concern, as well as minimum involvement in joint venture, has failed the RBS in the joint venture. RBS adaption of the polycentric approach and failure to adapt over time has lowered the value of the joint venture. RBS fails to deploy geocentric approach which might have helped the company to overcome the problems and develop capabilities through knowledge sharing. RBS will exit the market through IPO in coming months.

RBS entry to India was focused on specific feature such as cultural and language of the host market. RBS focused to deploy local strategies to overcome the problem of the India. To over the problem of Indian market RBS hired staff from the India and given higher position in the company. The lack of integration and fail to deploy UK staff in India has resulted in limited understanding of the host country (Das, 2015).

The management of RBS had believed that for successful in the local market manager in the host country require autonomy and need a degree of freedom to make effective decisions. The partnership with the host country companies helps to overcome cultural and regularity issues. The polycentric approach has limited success for the company in the company India with company strategy embraces the decentralization and rather having high degree of standardization its focus on the degree of differentiation in the market. The lack of involvement and focused on the adaption approach has provided little value.

The company could have been more successful through sending home staff to India and mixing with local staff. This approach would have led company transfer and develop capabilities in the host market and achieve greater success. Polycentric centric approach works best to overcome the cultural and languages problems and local managers believed to provide superior customer services but result in limited understating of the host market (Dutta, 2015).

Conclusion and Recommendations

Conclusion

The analysis shows that foreign market entry strategies selected by the bank represent a success factor. However, despite the selection of the right entry mode larger and retail bankers have been less success in the foreign market. The most success bank in the foreign market is standard charted which has deployed both joint venture and foreign direct investment approach to entry the foreign market along with ethnocentric approach.

This has helped the bank to success in a joint venture through knowledge sharing as well as in foreign investment. RBS has failed to deploy the accurate entry strategies and consequently inconsistent IHRM approach has resulted in failure of the company. Over the years, HSBC has been successful in the foreign market through geocentric approach but recent evolution in the market has resulted in the failure of the global strategy in the banking industry.

Recommendations

The two key recommendation based on the analysis are

  • Bank should choose ethnocentric approach at the initial stage in both joint venture and foreign investment. With development, the bank should change its approach to Regiocentric which helps to use global strategy but with local adaption.
  • Bank should not use the polycentric approach as well as a geocentric approach because the financial product and needs of the customers vary from market to market. If the market has low-risk acquisition is the best method along with Regiocentric approach but if the market is perceived risky then joint venture along with ethnocentric approach should be selected

 

 

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