Table of Contents
Internationalization is basically understood as the planning and implementation of both goods and services so that they can readily be adopted by foreign customers and adapted of specific locations within the international community (Haahti, Hall and Donckels, 2014). Internationalization is a trend that has seen significant popularity in the past decade or so and has revolutionized the way in which companies throughout the world do business and conduct their everyday operations (Sjursen, 2014).
One company that has done an impeccable job of internationalization is FEMSA (Fomento Económico Mexicano, S.A.B. de C.V.). FEMSA is headquartered and incorporated in Mexico, but is now a multinational retail and beverage company. Its main office is in Monterrey, Mexico, a mecca of international business and commerce in Latin America (Yordán and Romm, 1994; FEMSA, 2017). Importantly, FEMSA operates the single largest and most influential global bottling group, Coca-Cola, and owns the most abundant chain of convenience stores, OXXO, in Mexico. Moreover, it is the second largest stakeholder in the multinational company of Heineken International. It is not surprising, therefore, that FEMSA is a highly profitable company which boasts revenues of just shy of 20 billion USD in 2014. It is the fifth largest Mexican-based company, and has operations throughout the Philippines and Latin America, most of which are bottling/ manufacturing plants. (Femsa.com, 2017)
This research will carefully detail the history and background of FEMSA, paying particular attention to its initiatives to internationalize and appeal to a larger global marketplace. The paper will outline the company’s basic history of internationalization, detail its strategies for internationalization, critique these strategies using real examples from the FEMSA case study, offer recommendations for augmenting and improving its internationalization agenda, and finally provide a summary or conclusion.
FEMSA has enjoyed a long history and was first listed, in 1978, on the Mexican Stock Exchange. It was not until twenty years later, in 1998, that it made its first appearance on the New York Stock Exchange through ADRs. It is now a member of the IPC and of the S&P Latin America 40. However, its history goes back much further. It traces its origins to the foundation of Cervecería Cuauhtémoc in 1890 by a team of prominent Latin American business men. The brewery, during the 1910 Mexican Revolution, was taken over by new owners. (Yordán and Romm, 1994)
In around 1936, both Cervecería Cuauhtémoc and the Vidriera Monterrey were owned by a two-family partnership consisting of the Garza and Sada families. At this time, both families decided to restructure their holdings and create a joint-venture (JV) which later became known as FEMSA. The new JV serves as a holding company; it controlled the shares of both families. Its major shares were held in Cervecería Cuauhtémoc and FAMOSA (Fábricas Monterrey, S.A.). (On the record with Jose Antonio Fernández Carbajal, 2008)
Some 52 years later, in 1988, FEMSA was officially established after the previous holding company restructured its debt (Yordán and Romm, 1994). FEMSA is the main subsidiary of VISA, and its emergence is attributed to Eugenio Garza Lagüera who brought together four interrelated business ideas – alcoholic beverages, soft-drinks, packaging, and retail companies – to form a new, diverse international company. Today, FEMSA is a leading company which is highly competitive in the international beverage, packaging, and marketing scene. It participates in the beverage industry via Coca-Cola FEMSA, and is the single largest bottler of Coca-Cola products throughout the world. (Femsa.com, 2017) It also partakes in the international beer industry, via its large equity stake in Heineken – a leading brewing company with operations in more than 70 countries on all six inhabitable continents. Moreover, it participates in the retail industry through its subsidiary FEMSA Comercio. This subsidiary is made up of many small-format chains and individual stores to include OCCO and OXXO Gas, a fuel division chain of service retail stations. Its Strategic Business Unit is highly lauded for providing impeccable logistics, point of sale refrigeration options and solutions, and plastic solutions to FEMSA’s third party clients and business units. (Femsa.com, 2017)
|Philippines||Merger and acquisition (Coca-Cola Philippines)|
|United States of America||Export Management Company (Heineken USA)|
|Brazil||Merger and Acquisition (Vonpar)|
|Colombia||Foreign Direct Investment|
The Uppsala model predicts that when entering foreign countries, firms do so in increasing order of the psychic distance from the country. Basically, the model emphasizes that rational profit maximizing firms should be careful when evaluating the profit potential and feasibility of foreign countries and the countries in an order of decreasing expected profits (Johanson & Vahlne, 2009). The model assumes that at every instance, firms are proactively pursuing international opportunities and that obtaining information about the potential profitability of the countries is possible. Psychic distance relates to factors such as culture, religion, language, and development levels. Hofstede (2011) specifically points at culture as a major concern in a company’s decision to enter the market. The assumption held by Hofstede and confirmed by the Uppsala model is that the market-specific characteristics of a country such as national culture and business environment are an important link to the success of the firm.
Observing the investment patterns of FEMSA, it is clear that the company has taken into consideration the Uppsala model. First, the foreign investments of the company are concentrated in Latin America through acquisitions in Colombia and the Philippines. Further, the company has expanded its acquisitions to include Brazil. In fact, in Colombia, FEMSA has used the Foreign Direct Investment approach and has built its most efficient plant worth $250 million (Leith, 2015). The company’s confidence in the Columbian, Philippines, and Brazilian markets is as a result of the closeness in culture with the parent company’s country, Mexico (FEMSA, 2013). Hofstede predicts that in such a scenario where the investor invests in a country where they share similarities in terms of the national culture, there is a high likelihood of success (Hofstede, 2011).
The Uppsala model has also informed FEMSA’s investment decisions in the USA. Before FEMSA formed a partnership with Heineken, the company had only carried out export of its products to the Southern parts of the USA. Due to border proximity, Mexico shares a lot of characteristics with the states in the south of the USA (House, et al., 2002). As such, the company was cautious not to venture into the northern parts where huge differences existed. However, as the Uppsala model predicts, as a company continues to learn the business environment in which it exists, it continues to increase the investment. The learning curve of FEMSA was hastened by Heineken which had been in the USA market for a while. Therefore, instead of acquisitions or FDIs like in the other areas, FEMSA chose to give Heineken sole ownership of distribution rights of its products. This way, since the psychic distance that FEMSA perceived to exist with the USA was huge, the company was able to have its products sold in the USA without incurring costs of transport and creating distribution channels.
Within the business world, there are many useful strategies that companies can and do employ to internationalize their businesses in a cost-effective, efficient, and marketable manner. Studies indicate that companies which use smart internationalization strategies are significantly more likely to thrive and turn a lucrative profit in the highly competitive global marketplace (García-Merino and Santos-Álarez, 2011). This section will careful explain the three strategies FEMSA has employed most readily in order to internationalize: mergers & acquisitions, Foreign Direct Investment, export management companies.
FEMSA has viewed the use of mergers & acquisitions as a lucrative method of entering foreign markets. So far, the company has favored vertical acquisitions where it has become the buyer of the companies hence controlling the source of supply and distribution within the companies that it has acquired. A major concern for any company when deciding to go into a merger is the cultural implications. Basically, when a company acquires another, it is expected that it will provide the managerial expertise to make the company a success (Duncan & Mtar, 2006). Lack of cultural knowledge such as language, religion, and symbols is critical and it may result in operational problems within the company.
FEMSA invested in the Brazilian market through 100% purchase of Brazil’s privately owned Vorpar. In Philippines, it acquired 51% of Coca-Cola’s shares becoming the main shareholder of the company. In acquiring these shares, FEMSA’s PESTL analysis showed it that it had a high potential for success. The political environment in Brazil and Philippines are welcoming to investors. Further, considering that the two countries are considered as emerging markets, they have a likelihood of a high level of returns (Essoussi & Merunka, 2007). In fact, considering the large number of the middle class in Brazil, FEMSA considers itself to have gained a significant market in the country. An area that may present problems to the company is the legal aspects and especially in the Philippines. Basically, countries in the emerging markets have business laws that are still maturing. However, considering that the business laws in Mexico are also in their maturity stage, there is no comparative disadvantage in investing in Philippines.
The second strategy used by FEMSA is the use of Export Management Company. In this case, the company chose Heineken as its preferred distributer. According to the eclectic model, a company is likely to analyze the cost and returns from a given venture before it decides the best method to use (Whitelock, 2002). Basically, a company is likely to use the method that reduces the risks of failure in the given market. A major risk is that of the unknown. When FEMSA was operating in the USA, the company was coming from a position of knowledge of the southern population due to cultural closeness with Mexico (FEMSA, 2004). However, FEMSA did not venture into the northern parts since it was relatively new to the culture in this part. Therefore, owing to the increased risk of failure, the company had not invested there for long. Heineken had established its presence in the USA for some time and it was seeking a premium beer brand to present to the USA market. As such, FEMSA’s decision enabled it cut cost. Further, the eclectic model proposes that for highly specific products, the producer is likely to limit the distributors (Whitelock, 2002). This is what happened with FEMSA only giving rights to its premium products to Heineken only.
According to Dunning (1998), a firm will only decide to have an FDI if it can perceive benefits in Ownership, location, and internationalization. For the ownership advantage, it addresses whether the firm will be able to operate at a cost that is equal to or almost equal to those of local firms. Any cost that the company incurs for being a foreigner is quantified. These costs are as a result of geographical distance, cost owing to lack of legitimacy of foreign companies, and cost owing to unknown business environment. In its decision to have a subsidiary in Columbia, FMSA had considered the home advantage and realized that owing to its proximity to Columbia, it was familiar with the Columbian environment. Further, Dunning (1998) considered location expenses as those that determine whether the price of the commodity in the host country provides a compelling advantage to have a plant built in the country. Finally, the internationalization advantage determines whether the process will be carried out through FDI or licensing. For Colombia, after removing the factor of having to import its products, FEMSA considered it an environment where it would make profits hence the choice of FDI.
As shown, FEMSA does an excellent job of utilizing its internationalization strategies to gain a competitive advantage and expand its products and services throughout the world. However, like all businesses, there are areas in need of improvement. To further augment its internationalization plans and initiatives, the company should consider implementing some or all of the following three recommendations.
There is no doubt that the company does an above average job of forming mutually beneficial networks with many, different distribution companies throughout the globe. It has robust distribution networks throughout all of the United States and the European Union. However, it seems to lack distribution network arrangements with companies outside of the Western world (FEMSA.com, 2017). Particularly, it does not have distribution networks in much of Asia and Australia. These are two excellent marketplaces where people want to purchase the offerings of the company. Currently, Asia is the most populated continent in the world and most countries especially in Asia-Pacific have recorded robust growth rates. The middle-income earners have been increasing which increases the potential market for FEMSA’s products.
By applying the eclectic paradigm and the three elements of OLI used to consider benefits of internationalization, while ownership and location do not favor having a subsidiary in these countries, the internationalization element seems to point towards an efficient distribution system as the key to profitability (Whitelock, 2002). When in countries like Australia, the comparative advantages that Mexico has such as cost of labor are lost. Therefore, it would not make business sense to move operations to such an area and incur higher costs of production. In countries such as Australia, there is a growing market for foreign manufactured goods. Therefore, once the FEMSA products are produced, it should refine its distribution channels to ensure that the products reach these markets.
Currently, FEMSA’s alcoholic beverages are hardly ever seen in these portions of the world, in part due to a lack of partnerships with distribution companies. Studies indicate that even in the most remote portions of the world, some rudimentary distribution networks exist; it is simply a matter of companies researching their specifics and engaging in dialogue with their management teams (Dent, 2011). FEMSA could benefit from augmenting its networks with these companies. Then, it would not have to contact individual stores or distribution centers to sell its products; instead, it could simply form a contract with the network and enjoy the benefits of its products being distributed throughout the world (Rolnicki, 1998). In fact, the eclectic model predicts that when this process of having numerous distributors is used, it results in increased competition to sell more products (Whitelock, 2002). As a result, the persons competing now become the distributors. To be able to compete with other beverages in the new market, this method is appropriate as it enables the company to have a large number of its products in different categories.
As shown, the company specializes in very diverse product and service offerings which makes it stand out from the competition and provides it with an excellent and resilient portfolio. However, most of these options are available in only one or two locations and have not yet internationalized. In other words, while the company has internationalized, some of its individual products and services have not. A great example is its convenience and fuel chain, Oxxo. These businesses models could be easily internationalized and taken into other marketplaces. They are very well structured and have benefited the company in extraordinary ways. They already have their initial shortcomings worked out and are not highly profitable businesses that function well and turn a very lucrative profit. (Yanagisawa and Guellec, 2009)
According to the Uppsala model, when a company has a good understanding of the business environment in which it wishes to invest, then there is a high likelihood of being profitable in its new ventures (Johanson & Vahlne, 2009). First, Spanish is the main language in both Mexico and most of Latin America; therefore, the business models, paperwork, contracts, and other language specific business items can be used in the new locations without having to worry about translation issues (Yanagisawa and Guellec, 2009). Second, there is a lot of cultural similarities between Mexican people and residents of other Latin American nations. The business model would be appropriate for these cultural needs, beliefs, and worldviews. Through FDI, FEMSA can transfer the knowledge it has learnt in the domestic market and some of its foreign subsidiaries to the new companies to be opened. Further, using FDI, FEMSA will be able to benefit from directly selling products to consumers hence gaining market knowledge.
Therefore, there is absolutely no reason that these pre-established and already-tested models cannot be used in other marketplaces within the global community. It would be wise for FEMSA to at least consider taking the business models and setting up new businesses throughout Latin America. This would be an exceptional beginning marketplace for expansion for several reasons. Finally, the expansion would fill a gap throughout much of Latin America. People throughout the world need fuel and they need food items. These are the two major offerings Oxxo offers its customers (FEMSA.com, 2017).
Ultimately, there is no doubt that FEMSA has done an exceptional job of internationalizing its products and services and expanding its outreach into the greater community. Undoubtedly, some of its uncanny ability to do so it the result of the foundation on which it was built. Since its earliest days, the company has taken advantage of mergers and acquisitions and its ability to directly invest in the Latin American countries. The company has a very optimistic future ahead of it and its position will be even further augmented if it employs some or all of the aforementioned recommendations. By expanding and diversifying its manufacturing and processing plants’ locations through forming strategic subsidiaries, expanding its products into emerging marketplaces, and augmenting its networks with distributing companies, FEMSA will continue to excel at within international global marketplace.
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