ZhangNational Steel Company Case Study
LiuHong is tasked with the responsibility of convincing the chairman andthe investors of Zhang National Steel Company that expanding into theinternational markets is the best strategic move and essential forthe survival of the company. The responsibility comes in the backdropof a surplus in domestic production of steel compared to local needs.Thus, Hong should make the first argument by pointing out that thesupply of steel in the Chinese economy has reached a saturation pointand the market presents limited opportunities to increase revenuestreams. Besides, Hong should emphasize that internalization wouldallow the company to increase its profit margins and take fulladvantage of economies of scale.
Accordingto Zabotkina (2013), there are two classes of drivers thatincentivize firms to internationalize including business environmentdrivers and firm drivers. Also, these drivers complement each otherto ensure that the internationalization process is efficient.Competition in the business environment is the paramount externaldriver of internationalization. By 1996, China accounted for morethan a third of the world’s steel production leading to theemergence of new firms aiming at capitalizing on the existinginfrastructure and favorable government policies (Casillas &Acedo, 2012). The intense competition in the domestic market makes itnecessary for firms to start selling their steel in the globalmarketplace. Also, the competition between China, European steelproducers, and the United States presents an advantage to Chinabecause it has surplus domestic supply and would, therefore, have abetter pricing mechanism in the global marketplace.
Anotherdriver for internationalization is the growth rate in India and otheremerging markets. Steel manufacturers in the emerging markets have nocapacity to meet the rising demand. Consequently, Chinese firms havethe opportunity to venture into the global marketplace and meet theglobal supply deficit for steel(Ugarova, 2015).Also, the large-scale privatization in China gives Chinese companiesthe requisite synergy to compete in the international markets.
Inthe Chinese market, the steel industry has registered aggressivegrowth over the last few decades. Consequently, the industry withinthe Chinese economy has reached the saturation stage of the productlifecycle. Therefore, the opportunity for enhancing the growth andprofitability of the company through generating additional revenuestreams domestically is limited (Mihin & Vaskova, 2015).Currently, the global steel industry is undergoing the growth stageof the product lifecycle meaning the production yet to reach asaturation stage. The aggregate steel production and overall interestin industrial establishments have risen exponentially over the lastfew decades (Mihin & Vaskova, 2015). This means that ZhangNational Steel Company can only lengthen its product life cycle byventuring into the global marketplace.
Despitethe exponential growth in the total steel production andinternationalization of Zhang National Steel Company, it is nonecessary to move labor force overseas because of several factors. First, the quality of steel from China is high and more affordablethat the steel from US and Europe(Ugarova, 2015).Besides, China has a huge pool of skilled and non-skilled labor thatlowers the cost of production making it a top destination for amajority of manufacturing firms (Zabotkina, 2013). The other reasonas to why Zhang National Steel Company should not move its laboroverseas is that it provides employment to a large number of localpopulation which would be rendered unemployed. Besides, the provisionof employment enhances the growth and development of the economy,promotes industrialization and in effect increases the domesticdemand for steel.
Fromthe preceding discussion, it is clear that there are enoughinternalization drivers to incentivize the chairman and investors ofZhang National Steel Company to make a decision forinternationalization. With the saturation of the Chinese market, aventure into emerging markets would ensure that the company remainson a growth trajectory and continue its life cycle.
Casillas,J. & Acedo, F. (2012). Speed in the Internationalization Processof the Firm. International Journal Of Management Reviews,15(1), 15-29.http://dx.doi.org/10.1111/j.1468-2370.2012.00331.x
Mihin,V. & Vaskova, E. (2015). Trends In Global Production andConsumption of Finished Steel Products. Economy In The Industry,(1), 78. http://dx.doi.org/10.17073/2072-1633-2012-1-78-80
Ugarova,O. (2015). Analysis of The Global Steel Product Analysis of TheSteel-The Global Product of Ferrous Metal Production. Economy InThe Industry, (4), 48.http://dx.doi.org/10.17073/2072-1633-2013-4-48-53
Zabotkina,V. (2013). Rationales of internationalization: Rethinking academicmobility. Perspectives Of Innovations, Economics And Business,13(4), 59-66. http://dx.doi.org/10.15208/pieb.2013.19