Concepts and Principles of International Management module Example of assignment

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Report on Israel Chemicals Limited (ICL) and their UK operation, Cleveland Potash Limited (CPL). Terms of Reference This report serves as an analysis of the Israeli based ICL. The focus of this report will be the UK based CPL an extraction, manufacturing and distribution site. The report will firstly establish the history of ICL and CPL before discussing ICLs current circumstances and situation, making specific note of CPLs position within the ICL portfolio. Elements of this section will include ICLs (and subsequently CPLs): performance, markets, competitive advantages, financial status, management systems/styles and development plans/aims. Further analysis will consider: the impact of globalisation and efforts taken to ICL to be global, how it entered the UK and consideration it had to make as an Israeli company. This report will finish by giving recommendations on how ICL can improve and move forward in the UK. Initial Analysis: Company Profile Through participant observation the writer has gathered that currently, around xxx of ICLs worldwide production is in Israel, majoritaly from the Dead Sea and Negev facilities which produce: potash, bromine, magnesium and other products. The remaining xxx of production takes place outside of Israel through major subsidiaries such as: CPL (UK), Iberpotash (Spain), Amfert (The Netherlands) and BK Guilini (Germany). Other minor facilities are maintained in France, China, Chile and the USA. CPL, the focus of this report, is a mining operation in England, established in 1972. It is the UKs only potash mine and the largest single mining operation in the UK. The company, at this location, has permission to mine an area of around 42,400 hectares. There are two main sites to the operation: the mine and surface plant located at Boulby, and the shipping terminal on Tees Port. CPL sells 3 types of product: Red, White and Salt. The main purchasers of Salt (NaCl) are the internal UK market, USA strategic sales and France. The Red products are variations of Potash (KCl); these products are mainly sold to the continent and Brazil as strategic sales. The White products (refined KCl) are mainly used in Germany. Although the mission statement and corporate aims of the organisation are not listed publicly, plans and strategies that are can be summarised as efforts to Build on ICL Strengths (ICL, 2012) which are: global market access, innovation and development of technology and financial solidity - to be achieved by continuing the level of stewardship in the organisation and fostering growth both naturally and through acquisition. Company History: ICL formed as a conglomerate of two existing organisations within Israel. It began as been state owned, similar to large portions of Israeli industry at the time. Over the course of the 1970/80s, ICL expanded its operation and through governmental backing grew substantially, diversifying its operation. In this period, ICL made its first international venture, acquiring BK Guilini, a chemical manufacturer based in Germany. Its second international venture, the acquisition of Amfert, established ICL in the Europe, incorporating two manufacturing bases and several sales offices, as detailed by FundingUniverse (2003). ICL then developed a strategy to become more of an integrated producer (Wright and Gallun, 2008), using acquisition to vertically integrate the supply chain, from raw materials to finished products, a concept discussed by Miltenburg (2005). This repositioning was followed by privatisation and listing on the Tel Aviv Stock Exchange in 1992. The floatation 2

on the TASE left ICL as majority stakeholder, seconded by the investment firm Israel Corporation, leaving the government as a minor stakeholder. ICL continued to expand its operation through acquisitions in Europe and minor joint ventures in developing countries. The controlling stake in ICL at this point was held by Israel Corporation, to prevent ICL being purchased by its main rival Potash Corporation Saskatchewan (PCS). Recent acts undertaken by ICL were to acquire the largest potash producer in Spain, and purchase CPL, not only enhancing ICLs international profile but also signalling the restructuring of ICL to be a global entity. Financial status: ICL, in 2011 reported revenues of xxx worldwide, up by xxx on the previous year and although cost of sales had increased, margins still significantly improved (Bloomberg BusinessWeek, 2012). ICLs 2011 financial statements, available on Reuters (2012), suggest that cost control has remained leading to a Net Income of xxx. The UK operation accounts for around xxx of these sales, a consistent figure for several years, the writer identifies through participant observation. Available information points to ICL being financially strong, operating around or above the expectations of the industry (Bloomberg BusinessWeek, 2012) with CPL featuring as a profitable branch. Employee information: ICL employs xxx as of the 2011 report completed by CorporateInformation (2012). These employees are sourced from backgrounds and disciplines, the vast majority working within one country. CPL accounts for around xxx of these employees, working in general administration/management and the extraction, manufacturing, distribution departments. ICL operates by arranging executives in a flat management structure (Daft and Marcic, 2011), with functions set up as mechanistic i.e. particularly hierarchical and departmentally rigid (Gitman and McDaniel, 2008). Management systems: As a result of its history in the UK, mining is one of the most heavily regulated industries in the world. Mining legislation is prescriptive and the writers participant observance can attest that CPL has a strict administrative practice, enforced by the HMI. In addition, ICL/CPL has achieved several further standards to show its dedication and capability to operate within safe practices, with the highest level of quality in production, supply and regard for the environment (ISO, 2013). Performance and markets: ICL is currently the fifth largest potash producer in the world and second largest in Western Europe. It is also one of the worlds leading producers of other products e.g. bromine and magnesium. Statistics provided by FundingUniverse (2003) suggest ICL is responsible for 11 percent of total world potash production and 35 percent of world bromine production. ICLs market is global as its products, discussed above, are traded internationally and required in a variety of industries for a range of purposes. Even so, there are still several areas that provide a more prolific market. These are Western Europe (predominantly), Brazil, India and China. The latter three countries identified represent three letters of the BRIC acronym (ONeill, 2001) and are countries growing rapidly and becoming world economic leaders. In terms of CPL, the market is more specific as sales are derived mostly from Western Europe. The largest markets after the UK internal sales are: France, Spain, Germany and The Netherlands. As a result of geographical location and CPLs position to distribute, other markets include Brazil and the USA as strategic sales made by the ICL group. Competitive advantages:

To identify competitive advantages, it is prudent to consider capabilities demonstrated by ICL that lead to a competitive advantage, whether these skills are suited to a global strategy and to what extent its global operations increase competitive advantage. Capabilities demonstrated by ICL fall into the two categories, outlined by Lasserre (2007) as differentiation and cost leadership. The competences listed in these categories are extensive but the main attributes ICL has in differentiation are: superior technology, innovative design and superior quality, all elements discussed in publications made by the company including the corporate website (ICL, 2012). Aiming to gain competitive advantage through the differentiation capabilities is referred to by Lasserre (2007, p.45) as leading to enhanced customer value an important factor in competition. Cost leadership is less apparent in ICLs capabilities but it demonstrates: economies of scale in production and economies of scope in distribution and sales, which Lasserre would offer as leading to lowcost position (p.45). The above discussed suggests the focus for ICL is on developing differentiation as circumstances, for example raw materials, dictate that cost leadership is much more difficult to attain. When organisations operate globally, several issues in continuing to have a competitive advantage arise, usually in the ability to transfer capabilities across national borders (Kostova, 1999). ICLs greatest advantages have been gained through innovation and superior quality so operations in developed nations, historically renowned for innovation, such as Germany and the UK can only serve to strengthen the advantage. Through participant observation, the writer understands that the acquisition of CPL (entry to the UK) cemented ICLs achievement of ISO: 9001, an internationally recognised standard of quality (ISO, 2013). Furthermore, using Lasserres (2007) assessment, these advantages are more likely to be sustainable, as they leverage differentiation to meet the needs of a growing customer base. It is apparent then, that operating globally reinforces and increases the competitive advantages that allowed ICL to be successful enough to operate globally, initially! Further Analysis: Impact of global markets: In ICLs formative years the idea of globalisation was considered to be in its infancy (Nayyar, 2006) and although ICL sold internationally, all other activity was in Israel. As globalisation and global markets have developed, ICL, to maintain and improve its position, needed choose between localisation and globalisation. To best determine impact, it most reasonable consider ICL/CPL in terms of the factors, created by global markets, (Lasserre, 2007) that push for an organisation to be global, these are: technological, political, competition and social. These determinations, when made by ICL, served as a country assessment (Bouchet et al, 2003) as they highlighted the attractiveness in entering that market and the associated risks. Most obvious is access to the raw material but, still very relevant to ICL was technological pressures as CPL represented increased performance of its distribution network (a resource factor in country assessment (Lasserre, 2007)) as well as improved economies of scale in European activities, an important market factors for ICL. Other important pressures were competition coupled with political factors in both strategy and country assessment. CPL was an opportunity to fully integrate European operations so that it could fully meet the requirements of the market, whilst bolstering the operation to remain competitive in Europe and take full advantage of the European common market. Throughout this effort, ICL still had pressures to consolidate activities and focus on localisation, these were: cultural, technical, legal and commercial (Lasserre, 2007). The most relevant are those related to the technical and commercial factors. Investment to operate in a new country creates issues in ensuring product quality and specification which is essential, from a technical point of view, in the chemical and fertilizer industry and 4

requires that there is an integration of the infrastructure, which may prove troublesome and costly (Peng, 2009). From a commercial perspective, consideration was in whether the improved distribution network gained was more important than their ability to customise in their current network. In summary, considering these factors holistically shows the global pressures greatly outweigh the localisation pressures in ability to compete internationally, given their circumstances, making the purchase of CPL (UK entry) an effective decision. Further support for this argument is provided in the outlining country choice and related strategic importance. As a direct impact of global markets, ICL had make selections based on remaining able to competitively distribute worldwide. CPL, being based in the UK offered ICL with a sourcing country (Lasserre, 2007) giving it access to a wider manufacturing, sales, distribution and raw materials base, heavily increasing the strategic importance of the UK to ICL. Strategic importance of a country can be measured across four elements: market, resources, learning and competitiveness (Lasserre, 2007). In ICLs country choice, all four aspects were applicable in varying degree but most relevant were the resources i.e. raw materials and distribution network, and competitiveness (presence in the region and access to others) gained by being present in the UK. Global Strategy: ICLs aims to be a Global Player aspiring to establish a sustainable competitive position in the key markets of the world (Lasserre, 2007, p. 38). Part of any global strategy for an organisation is global positioning, a term used by Morschett et al (2010) to represent which markets an organisation focuses on, how it serves markets and how it is competitive in that position.. Through participant observation, the writer has gathered that ICL chooses its market classifications based on segments, revealing a focussed approach (Porter,1985) only considering a few customer segments and even given their relative size, uses a standardised approach (Griffin, 2008) treating segments without regard for geographical location or other adaptive qualities (Israelite, 2006). This is made possible because the value attributes - elements of the products or services that the customers value when making their purchasing decision (Lasserre, 2007, p.44) are similar across customer segments. The sum of which suggests that ICL is operating as a standardised niche differentiator (Lasserre, 2007, p.45), an appropriate position when considered against the assets of the organisation and the wider strategy employed. In further support of the above argument, positioning must reflect required market access for a Global Player strategy and it does, in its choices of country entry. For its major market, Western Europe, it has a key country in Germany and a platform country in the Netherlands. To attempt to remain well positioned, it has facilities in an emerging country, China with strong trade links to others such as Brazil and India. The terms used categorise these countries are offered by Lasserre (2007). The strategy of an organisation is always dependant on its design and ICL is no different. Design is primarily based on three key areas (the former usually informing the latter), the structures, processes and organisational culture inherent (Hill and Jones, 2012). Furthermore, for a global organisation, such as ICL, incorporating competitive advantages (discussed above) and any adaption to local requirements that is necessary. ICL has followed a standard developmental path in reaching globalisation beginning with export, moving to multinational operation and finally becoming global, integrating services, functions and products worldwide, to standardised markets. As ICL grew through acquisitions, it began to build a global business system (Lagerstrom and Andersson, 2003) but allowed acquired companies, for the most part, to retain their names and business autonomy, not necessarily gaining the greatest benefit from leveraging local knowledge to a global level (p. 84). This is no longer the case and currently, CPL operates as part of the Fertilizers Europe division, which in turn is part of the world functional global hub structure (Lasserre, 2007, p.55) which should demonstrate the following characteristics:

-Centralised strategic decision-making. Using knowledge developed as a participant observer, the writer can suggest that for ICL, this is only partly consistent as certain levels of strategic decisions are afforded to subsidiaries like CPL, drawing on localised expertise. -Functional management within subsidiaries. The UK subsidiary demonstrates this aspect via the corporate website (ICL, 2012) that that shows each function, even those which are global has representative management. -Careers are globally managed (expatriates). Again, utilising participant observation the writer can suggest that some executive internal promotions have been managed internationally but other careers, as a result of a lacking in the overarching global functions arent managed as such. This design effectively supports ICL in developing to being a Global Player by creating the following efficiencies. The allowance of rapid transfer of information and know-how and the utilisation of global functions to create coordinated activities, reducing wasted effort in production, sales and distribution through group wide sharing, concurrent with the transnational model, developed by Bartlett and Ghoshal (1999). Interestingly, none of the typical disadvantages, outlined by Lasserre (2007) are realised by ICL in its UK operation (CPL) as there is very little change in the targeted market, therefore requiring less flexibility than other industries may. Entry Strategies: Entry strategy, as discussed by Lasserre (2007) is comprised of three decisions, the first being based on the same factors as country choice it is a continuation towards operating in a country. When referring to these factors in terms of entry strategy they are discussed as pertaining to objectives by John et al (2002) an example, from the evidence above, is that ICL required access to the critical resources at CPL, the operational asset being the mine. A further objective, again, discussed above, is termed as co-ordination by Lasserre (2007) and relates to ICLs desire to increase its infrastructure, taking advantage of the UKs location. The second decision is the timing of entry (p.191) which considers when an organisation selects to enter based on opportunities and risks associated. It is heavily affected by the results of the previous decision for as differing objectives require different actions to be met. In any case, the timing of entry is dependent on the window of opportunity (p.194) and the risks the organisation is willing to take. As ICLs outlined objectives are primarily resource based, the window is restricted to whenever the rights to access are available, i.e. when the owner is selling. The traditional phases associated with the window of opportunity (Lasserre, 2007) are not fully applicable in this case, as CPL is unique in the UK, but if considered as part of a European operation then it could be argued that ICL moved in the competitive growth phase (Lasserre, 2007, p.194) which would have been highly risky were it not for its substantial resources. The third decision, reliant on a composite of previous decisions and requirements of an organisation, considers how to enter a country. The requirements in this case considers factors such as country risk, internal capabilities and returns on investment leading to a choice between, wholly owned subsidiaries (WOS), acquisitions, mergers and joint ventures (JV). Although there are other possibilities, they are not realistic under the circumstances (Lymbersky, 2008). ICL historically has chosen acquisition, the method also used in entering the UK a seemingly sensible choice given ICLs capabilities and the advantages of this method. Acquisition gave ICL immediate access to CPLs resources, assets and competencies at a price (50m) that was less than establishing an operation from scratch. ICLs industry is recognised as involving huge start-up with lengthy lead times further adding to the risk, which chief among the disadvantages in a WOS (Otto, 2010), especially when other arrangements are available. A merger or JV ceases to be viable due to the investment capabilities of ICL, as it would not have gained any of the increased benefits usually seen in 6

merging or JVs over acquisition. Furthermore, the typical issue in acquisition of cultural integration was lessened by the similarities in the cultures as discussed later in the report. Cultural Management Assessment: The following section is an assessment of the UK in terms of country fit with Israel incorporating management and other cultural factors that affect entry to the UK. The UK economy has been steadily growing for the past 50 years and a result enjoys benefits such as, high GDP per head, (Porter, Ketels and Britain, 2003), and a skilled workforce. Furthermore the UK is known to favour free enterprise and private ownership (Gamble and Kelly, 2001), initially a driving force behind the European common market and still functioning as a backbone of the system (Smith, 1999). Whenever considering country fit it is essential to understand the established business practices of a country, noting that the factors discussed are in the context of national culture, and may only apply in certain degrees to a particular organisation (Kitchin, 2012). In relation to UK, the following aspects are particularly relevant: -Attitude to hierarchy which according to Hofstede (2001) is the measure of how easily a culture accepts uneven power distribution. Trends suggest that democratic countries tend to have lower power distance (Crawford and Lok, 2004). The UK upholds that trend with a rating of 30%. The extremely low power distance score of Israel (11%) makes it almost likely that in business the two nations are compatible as, management systems are similar (Laurent, 1986 in Lasserre, 2007). -Attitude to the individual. Dorfman et al (2004) in their GLOBE structure, suggest that a countrys standpoint is either: individualist (primarily concerned with themselves) or collectivist (primarily part of a group). In Hofstedes (2001) rating, the UK score above 80%, showing high individualism. This rating is much higher than Israels but their score of 54% is suggestive that to a lesser extent they share the sentiment, allowing for the assumption that it may not create a clash. -Attitude towards risk, described by Schwartz (1994) as mastery, considers how well a country tolerates uncertainty. A country such as Israel (81%) with high risk avoidance dislikes the idea of ambiguity, whereas the UK (30%) thrives on the potential in the situation. An issue is likely to be created in risk analysis as countries with low uncertainty avoidanceattach a higher utility to the rewards (Noorderhaven et al, 2007), an Israeli naturally preferring to risk small amounts thus incurring smaller losses (Hampden-Turner and Trompenaars, 1998). At least Hall (1960) would theorise that this disagreement would be verbalised by these two nations and therefore most likely resolved. EU regulations (Craig, 2008) make acquisition UK businesses relatively simple as there is no requirement for governmental ownership, an issue ICL may have faced in other countries. A further consideration, language is a major issue in cross-cultural management, especially as the UK is notoriously mono-linguistic but all children in Israel are educated in English and, luckily, it is the Lingua Franca in business. From a societal angle, Hausmann, Tyson and Zahidis (2008) assessment of the two countries show they fair similarly in their attitude toward gender equality. Both scored around 0.7 overall in the above authors 2008 gap index suggesting their attitudes, mostly, will be the same and continued in business practice. Recommendations: Considering the above analysis of ICLs operations and its UK operations, several recommendations for progression are apparent based in: further development/integration of global functions, and global representation of activities. Currently, although part of the 7

European and Global fertilizers section, The UK operation, like many others is only attached to the global HR function in terms of the reports it makes under ICL corporate rulings, the writer draws of knowledge from participant observation. One issue presented is that recruitment and selection only take place at a subsidiary level. A recommendation would be for ICL to further integrate CPL (and other subsidiaries) into a global HR function to take advantages of the following factors. ICL would be able to ensure its UK operation was inline with the overall strategic vision of the organisation by utilising global or expatriate managers specialising in development of organisations to improve the strategic capabilities of ICL as a whole (Bartlett, Doz and Hedlund, 1990). A criticism of this approach is that full integration will remove the capability of CPL to adapt on a local scale (Joynt and Morton, 2000) but development of management to appreciate culture allows localisation to remain and should develop more capable global managers (Caligiuri, 2006), considering that ICL is a global organisation. Full integration of the HR function allows for the development of synergies that do not currently exist at CPL and may provide a significant cost saving. The second point above refers to the marketing aspect of global strategy and corporate social responsibility (CSR). Marketing has not been mentioned previously in this report as there is little evidence of its existence at ICL, hence the recommendation. On a global scale, CSR deals with ethical considerations for an organisation which are informed by the prevailing legislation, culture and practices of a country (Lasserre, 2007). ICL publish a CSR report that considers the entire organisations activities in three parts: industry, society and environment (ICL, 2011) which is available on the company website. The recommendation of the writer is that this publication be the focus of a marketing campaign in its European operations, including the UK. This will improve the corporate image of ICL, currently stemming from a social development in this region that leaves industries, such as mining and manufacturing with a poor reputation, requiring them to demonstrate efforts to be sustainable in the long term (Kleanthous and Peck, 2005). This development has reached the point where Western European societies, including the UK can enhance or destroy an organisation with ethical consumption (Co-op, 2011). This phenomenon is not limited to private sales but extends to B2B sales as customers of ICL have the same obligation in their supplier selection. Long term implications are that wider international sales are affected; suggesting that to remain a market force ICL will have to publicly incorporate its CSR in presentation of the company. Bibliography Bartlett, C.A. (ed.), Doz, Y.L. and Hedlund, G. (1990) Managing the Global Firm. New York: Routledge. Bartlett, C. A. and Ghoshal, S. (1999) Managing across borders: The transnational solution (Vol. 2). Boston: Harvard Business School Press. Bouchet, M.H., Clark, E. and Groslambert, B. (2003) Country Risk Assessment: A Guide to Global Investment Strategy. West Sussex: Wiley Finance. Bloomberg BusinessWeek (2012) Israel Chemicals ltd (ICL: Tel Aviv). Available at: http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=ICL:IT (Accessed 29th December 2012) Caligiuri, P. (2006). Developing global leaders, Human Resource Management Review, 16(2), pp. 219-228 Co-op (2011) Ethical Consumerism Report 2011. Available at: www.cooperative.coop/.../Ethical-Consumerism-Report-2011.pdf (Accessed 2nd January 2013) CorporateInformation (2012) Israel Chemicals Limited Company Snapshot. Available at: http://www.corporateinformation.com/Company-Snapshot.aspx?cusip=C37669150 (Accessed 28th December 2012)

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