Martinez Construction is a well-established construction company in Eastern Spain. Because of a recent decline in contracts in the Spain society, Martinez Construction Company needed to expand to international market in order to survive (expand and grow). After a survey in the international market, the newly formed Democratic Germany seemed the perfect place. Furthermore, the best solution was to acquire an existing firm with the help of Treuhandanstalt (privatization agency). This was a result of the lack of liquidity of the Martinez Company.
Therefore, an alliance with another German company would not allow it to establish itself as a serious competitor on the international market. The intermediary for Martinez Construction was THA (Treuhandanstalt), a company created in the former German Democratic Republic, whose main purpose was to find private buyers for some 13 500 business and 15 000 parcels of real estate that had been owned by the former German Democratic Republic. Their primary job was to sell the companies and match existing companies with buyers.
That’s why Martinez Construction used THA’s services to find a new German company to acquire. From the time of his arrival in Germany, Juan felt that he was having a difficult time just getting acquainted with the Germans. . They didn’t seem to have time to get to know Juan personally: rush and urgency to complete the sale was the focus of their approach. Thus, THA found Konstruktion Dreizehn, based in Leipzig. Juan Sanchez was sent to handle the negotiations part of the acquisition in Germany. Juan was accompanied by Diego’s nephew and projected manager of the new German acquisition, Miguel Martinez.
His background includes a business degree from a university in the United States, as well as years of employment in the family business, although lacking in practical managerial experience. During the negotiations, there were noticed strong discrepancies between the business styles of the two representatives of the companies, the cultural barrier between the two being noticeable. However, they managed to arrive at a common point by modifying the initial contract, after Juan insisted. The final contract stated that the original price would be reviewed in two
years, and the contracted parties would recalculate it based on new and presumably more reliable data concerning the true value of the firm. The company had employed approximately 350 workers inside the German Democratic Republic (GDR). The THA had reduced the workforce to 100. Miguel and his team estimated that 50 employees would be sufficient. Miguel was frustrated by the unwillingness of some employees to actively participate in the formulation of ideas and implementation of new procedures and policies. Six months after Miguel’s triumphant arrival, his optimism was fading fast.
He had just received the latest report concerning the company’s financial position, and it was clear that the figures were far from what Martinez Construction had been led to believe. Cash flow problems were beginning to arise, and this threatened the very existence of the company. 2. Identification of the problem(s), causes and negative effects: 2. 1. Identification of the problem(s): The main problem of The Spanish Company consists of the fact that they were not prepared for the acquisition of a foreign company and further more for the negotiations with the German THA.
Companies which operate only in one country are not familiar with all the economic, cultural and political differences between societies because they are not confronted with them on daily basis. In order to do successful business, it is of major importance to acknowledge this differences and to take it into consideration when doing business. A second problem will be that the manager of Martinez Construction Company choose the wrong people in order to complete the negotiations and after words to develop the new business in East Germany. 2. 2. Identification of the causes that led to the appearance of this/these problem(s):
The problems arise mainly because the CEO of the Spanish company made his decisions of expansion in Germany on a blue-eyed approach. The idea occur to him when meeting German tourists in Spain that were relax and happy without taking into account that the East Germans were not allowed to travel so far and there are important differences between the mentality of Western and Eastern Germany. Another cause is represented by the Manager’s idea that he can develop a well-established business in the Eastern German because of cheap labor and raw materials.
His choice to expand on German marketplace was not based on rational facts or clear developed objectives. Despite the fact that the management of Martinez Company conduct a series of research regarding the different market entry strategies into German markets which ended with the solution of acquiring a company from THA, a market selection can not rely only on information based on secondary sources. There are always certain information that can only be found when visiting the potential marketplace (distributors, suppliers, the existing management and employees). 2. 3.
Identification of the potential negative effects that will appear if the problem(s) is/are not going to be solved: Negative effects on the short-run: * Lack of experience in managing a portfolio of business in another market than Spain as well as the lack of knowledge about the personality of German employees and the already existing procedures and policies * Different developed management information systems, governance structures, managerial skills and corporate processes * Lack of initiative coming from the employees because of fear and distrust of management due to the cultural differences between Spanish and German business practices.
* Exposure to unfamiliar business practices such as strict environmental and employee protection regulations that forced unexpected large investments in plant modifications. * Other costly projects that have not been foreseen during the negotiations process that would have required attention. * Cash flow problems The negative effects in the long run: * Cash flow problems that finally may threaten the existence of the German company or even of the whole company’s * Closing the German enterprise would mean losing the whole investment (money invested in research, development, implementation, the price itself paid to THA and other costs
that incurred over the time). * Inability to achieve the forecasted figures 3. Identification of alternative solutions for identified problems Solution 1: Joint – Venture with a company from Western Germany Joint ventures are the most common method of entering the market, especially in Europe, because it allows companies to gain competitive advantage through access to a partner’s resources, including markets, technologies, capital and people.
International Joint Ventures are viewed as a practical vehicle for direct investment along with knowledge transfer, such as technology transfer, from multinational expertise to local companies, and such knowledge transfer can contribute to the performance improvement of local companies. Advantages: * Access to local know-how which will help the company to evolve faster * Sharing development costs and risks, along with technology and complementary IP assets for the production and delivery of innovative goods and services * Cheaper than acquisition
* Reduce political friction and improve local/national acceptability of the company. Disadvantages: * A joint venture would not allow the company to establish itself as a serious competitor * Lack of control over technology * Many joint ventures fail because of a conflict in tax interests between the partners. Solution 2: Licensing Another solution to the above identified problem would be a method whereby Martinez Constructions would agree to permit a company in another country to use the manufacturing, processing, trademark, know-how or some other skill provided by the company.
This method may also be used to gain access to new markets that otherwise are inaccessible. Advantages: * Good way to start in foreign operations and open the door to low risk manufacturing relationships * Provides additional profitability with little initial investment * Low costs to implement * It has an attractive return on investment * A license agreement allows the licensor to retain ownership of the IP and at the same time to receive royalty income from it, in addition to the income from its own exploitation of it in products and services that it sells.
* Enables a business to reach customers that it normally wouldn’t be able to do on its own. Disadvantages: * A licensee can become the licensor’s competitor. The licensee may “cannibalize” sales of the licensor, causing the latter to gain less from royalties than it loses from sales that go to its new competitor. * The licensee may suddenly ask for contribution, such as technical assistance, training of personnel, additional technical data etc. All this may prove too expensive for the licensor. * Limited participation * Requires considerable fact finding, planning, investigation and interpretation. 4.
Selection of the optimal solution: 4. 1. Identify and choose the optimal solution among those presented above We have decided that the optimal solution for Martinez Construction Company to enter the German market would be to form a joint venture with a company from West Germany. 4. 2 Demonstration that the chosen solution is the optimum one. A joint venture is considered to be one of the easiest and safest methods a company could adopt in order to enter on a foreign market. In our case, we consider that the optimal solution would be for Martinez Construction Company to form a joint venture with a company
from the Western part of Germany because this part of the country was not under the communist regime, it is more developed and receptive to changes. In what concerns solution no 2, it suggests that licensing would be the best way for Martinez Construction to expand its business in Germany. Sometimes there are cases where licensing and joint venture methods are similar. They both allow companies to reach customers that it couldn’t reach otherwise; they save market research spending and present an attractive return on investment.
By following licensing model, Martinez company can easily and quickly penetrate the German market, using fewer financial resources. But if we take into account the other problems encountered in this case, namely cultural differences between German and Spanish, and lack of knowledge of international management, such a purchase would be a disadvantage. Nevertheless, the licensee can become the licensor’s competitor and the license agreement doesn’t always guarantee the necessary know-how for the licensee who might need technical assistance provided by the licensor.
5. Implementation of the solution When trying to expand globally through a joint venture strategy, Martinez Corporation must take into consideration three important elements: choice of partner, establishment of a strategic fit and the design of the joint venture organization. As prior mentioned, Martinez Company should choose a partner from the Western Germany as they are more accustomed to the Western style of doing business than the former German Democratic Republic. Thus, the negotiation could be more transparent and easier for the firm.
Furthermore, the most important thing that has to be taken into consideration is the field in which the firm with which the joint venture is going to be performing activates. This is because a classic joint venture is the merger of two companies which usually have complementary products or services in order to cover a larger part of the market share. As a result, Martinez Corporation should apply the joint venture strategy by making a partnership with an architecture firm. By joining these two kinds of companies two business segments will be covered.
This is a very good strategy because the future clients will have to sign only one contract and not waste time between two or more similar companies. Concerning the strategic fit and the joint venture organization, both the Spanish and the German companies will have to share the same vision in order to make the newly formed company to be profitable. The companies have the major advantage that they can complete each other in the sense of the business environment. This means that the German company will have the experience of working in the German business environment.
Furthermore, it could find cheaper and more qualified personnel (as the labor force in Western Germany is more expensive than that in GDR). The joint venture should be staffed by a full-time joint venture coordinator and other staff – designated by the 2 companies, as may be necessary to carry out the mission of the joint venture. On the other hand, Martinez Corporation comes with the know- how of production and the actual construction knowledge. This way, the structure of the new company shall follow that of the Martinez Company and similar technical prerequisites will be required for hiring of employees.
The capital for the new joint venture shall be provided by the two companies in equal shares, as to ensure limited risk exposure and possibilities for further investments. This is also due to the fact that Martinez should vote for an equity joint venture in order to be equal partners and share the same amount of risk. Concerning the organizational structures, this should be a mix between the two companies because, being two companies in two separate business areas, new departments shall arise. In addition, for the common departments they should choose the best people after a careful analysis of their skills.