Roca Radiadores S. A. is an entirely Spanish-owned company which has achieved extraordinary international expansion. To answer the question what motivated Roca to start internationalization we need to pay attention to the history and further expansion of Roca. Roca began its activities in 1915 as Compania Roca Radiadores S. A, a company that exclusively made cast iron radiators for domestic heating at its factory in Gava, near Barcelona.
Over the course of about 60 years, Roca established its first foreign subsidiary in France because by that time, all the possibilities of further expansion in the Spanish market were extremely limited. Roca’s capital is wholly owned by the family group arising from its founders. The shareholders currently comprise over 50 members of the Roca family. The total turnover has been increasing steadily, reaching now over 800 million euro, with profits over 35 million euro per year. Roca has a stable financial statement. Roca makes decisions very slowly, evaluating the risks involved.
It hardly uses bank loans, thus financing its growth mainly on reserves. Roca sells its products in over 70 countries in the six continents. Roca began increasing its international commitments as exports volumes rose. It was extremely difficult to start up exports in different countries. It faced technical barriers, varying national customs in different countries, trading limits, social differences in different countries, but there were several factors which motivated Roca to start its expansion and thus gain from internationalization:
1. All the possibilities of further expansion in the Spanish market were extremely limited. So, it explains desire to grow 2. Stable financial statement (Its growth is based mainly on reserves, not on loans) 3. Higher profitability after entering the international market 4. Obtain prestige in the domestic market 5. There is no information in the case study about competitors, but clearly there are always competitors and this fact must be taken into consideration in discussing Roca’s internationalization process.
Assuming that there are competitors, Roca was motivated to internationalize its sales and operations because internationalization would help it reach greater economies of scale in order to be more competitive. Furthermore, Roca would want to move against other competitors in foreign markets Roca has successfully overcome through all the initial stages of internationalization process such as exports or licences and production capacity and now it is on the final fourth stage as a global and multinational company.
Roca went beyond the limits of the domestic market in 1974, when it opened the first subsidiary of the ROCA FRANCE in France. Since then, the company has opened a number of subsidiaries in over 70 countries, not only Western Europe, but also the countries of Latin America, Eastern Europe, the Far East, and emerging countries. Since then Roca has became one of the largest exporters of Catalonia. Also, in order to reduce costs Roca inaugurated mostly export-oriented factories for the production of Roca goods; producing in countries such as Settat, Morocco where they entered into a number of external agreements.
Roca is always careful when entering into a new country, choosing only those where there is strong demand for their products. With the development of the internationalization process Roca has established the Department of Expansion, which is responsible for gathering information about foreign markets, competition situation, consumers, as well as the economic situation in the country of concern. Also Roca always takes into account the features of each country, like differences in water pressure, type of waste pipes employed, national customs, etc. nd making modifications to production processes in each country.
Roca is one of the world’s largest manufacturers of sanitary and heating division, air conditioning and ceramics, and so its organizational process cannot be identified only by one model. A combination of a global-centralized and a decentralized organizational structure is best for the company, since the decisions that Roca must make are highly specialized depending upon whether it pertains to managing the global company or managing a local subsidiary.
The model Roca follows entails that the decisions of the global Roca company should be taken at the level of the parent company while at the subsidiary level decisions that must be made to reduce costs by acquiring information about partners, distributors, etc. are under the umbrella of the subsidiary. The parent company, Roca, must address the core issues of development of the whole company as well as control interest, establish new subsidiaries in new regions and look after the work for the company according to a variety of financial and managerial reports that it receives from the subsidiaries.
It also should engage subsidiaries to the search for new ways of development on their localizations. In particular, while opening a new production or establishing relations in a new market, the parent company may enter into temporary contracts, which will operate until the subsidiary is established on a new location. These are the decisions that best made in a global-centralized organization structure. At the same time the main aim of each subsidiary is to be responsible to the parent company for a profit and loss basis.
Unprofitable subsidiaries can be easily dropped off and their managers should understand it. Although subsidiaries are sovereign they benefit from any goodwill and recognition of the whole company. So the subsidiaries are interested in their profitability, each subsidiary should search for new contacts, watch out for the productive organization of work of the company and then file reports on their operations with their parent companies to the parent company.
So each subsidiary is responsible for the reputation of the company on the local level while the parent company is doing it on the global one. Roca has chosen to create production subsidiaries as its entry strategy for various countries because subsidiaries allow the parent company to achieve a closer and more continuous contact with the market.
The creation of a subsidiary also decreases the number of intermediaries and makes it possible for the parent company to obtain a deeper knowledge of the market. Financially, the production subsidiaries allow Roca to avoid import barriers, which in turn reduces the final price of the product. Production subsidiaries also provides Roca with a better understanding of the host market, and makes it easier and quicker to adapt products for the foreign market and to respond to market changes.
With all these advantages associated with the usage of production subsidiaries, it is evident why Roca chose the creation of production subsidiaries as its entry strategy. Roca’s international organization is flat in order to give subsidiaries greater autonomy since subsidiaries are closer to its markets. This not only provides Roca with better insight into foreign markets but also allows Roca to commence international operations more rapidly since basic infrastructure already exists.
Thus, Roca can beat out potential competitors. The flat organizational hierarchy means that decisions can be made more quickly, which is necessary when a company owns so many subsidiaries, as Roca does. From another angle, since one of Roca’s major advantages is its reputation for high-quality, durable products, production subsidiaries will allow Roca to maintain control over its production processes and therefore maintain the high quality of its product offerings.
The factors that led Roca to choose creating production subsidiaries as its entry strategy for specific countries such as Portugal, China, India, and Poland because after considering factors such as local costs, market size, tariffs, laws and political considerations, these countries were likely the ones with conditions most amenable to foreign investment through establishment of production subsidiary facilities. These countries in particular have lower costs of production due to lower labor costs.
For example, India has many resources and capabilities in the IT business, a high number of English speakers, and significant government support for foreign investment. Furthermore, since Roca has a large product range, it would be difficult to transport the different products from just a few central distribution centers instead of the production subsidiaries. Lastly, the nature of the hygienic furnishings industry is such that not much specialized technological know-how is necessary. There is not a lot of innovation that relates to hygienic furnishings and so there is not a lot to bar competitors from entering the market.
Thus, production subsidiaries will allow Roca to begin selling in foreign markets more rapidly, thus preempting potential competitors. The most significant drawback to this method is the high cost involved with creating or acquiring production subsidiaries. Usually, acquiring firms overpay for the assets of the acquired firm. Furthermore, there may be issues of culture clash between Roca and the newly acquired company. Acquiring firms also requires many resources and effort on the part of Roca because Roca must first identify appropriate companies to acquire. Roca Radiadores has had tremendous success in regards to entering new markets.
They achieved this by pursuing a strategy which entails primary integration through a distributor and later switching operations to a subsidiary. These tactics were employed by Roca Radiadores in: France, Portugal, the Dominican Republic, Italy, Belgium, United Kingdom, Germany, Argentina, Poland, China and India. To fully comprehend the success of Roca’s strategies we will dissect some of the big moves Roca made and found success in pursuing this strategy. The first international venture Roca pursued was Roca France, where Roca only employed a sales subsidiary, not a distributor.
It would seem frivolous to employ a distributor in France due to its close proximity to Spain. However, the inclusion of the sales subsidiary was a wise tactic, enabling Roca France to isolate and accurately determine who their customer base was. The localized sales subsidiary was able to focus on infiltrating the market and broadening the scope of Roca’s presence in the French market without diverting attention away from Spanish operations. The sales subsidiary offered a means for Roca to exist in the French market, leading them to reduce the responsibilities of the distributor.
The expansion into Portugal was the first venture which required cooperation between the distributors who was replaced by a subsidiary. Roca Portugal evolved over a series of years; initial entrance involved distribution of sanitary products and later heating and cooling products. Years after observing market performance and gathering information about the Portuguese market, Roca saw an opportunity to expand further by purchasing a porcelain factory to produce sanitary products; the purchase drove costs down for Roca and eliminated imports.
As the process was redefined quality standards were reduced, but the reason for this is because the Portuguese market appeared to be insensitive to changes in quality, but adept to changes in price. Having employed a distributor provided Roca the ability to test their success in the Portuguese market, unlike the French market where they required high quality products similar to those sold in Spain. The switch to a subsidiary was facilitated through a merger with York Portugal, a company specializing in air-conditioning and heating systems and therefore established a new firm Roca York AR E Refrigeroca.
To determine demand Roca relied on past performance of the porcelain company acquisition as well as the heating and cooling systems. The merger and the creation of the subsidiary both for sales and distribution allowed Roca to reduce costs of outsourcing responsibilities to third parties, expanding Roca’s scope of control over the product line and expansion process. Granted, by this point in time, Europe had removed any trade barriers and tariffs, but localizing the operation kept costs down and made Roca products highly competitive in the Portuguese market. Similar strategies were pursued in Italy and Latin America.
The strategy Roca chose to pursue was tactically sound considering that they were capable of expanding both within and outside of the European continent. It was an ideal strategy for expansion because of said variables: gaining information about the market, competition, capable and knowledgeable sales force, legal knowledge, and language proficiency. This plan allowed Roca to easily identify who the customer base is, how to target them and what their user needs are. If Roca sought the advice of a market researcher, there would be high costs associated with the service.
Distributors had a higher incentive to ensure that they reach the target customer; they stand to gain a portion of the sales. Information attained from the distributor will serve a means to gauge if it is worthwhile to subsidize and commit to the market. Distribution methods would allow Roca to accurately gauge who is their key competitor and determine how they can compete, either on price or quality. By valuing their competitors through the research provided, there will be a clearer image whether there is room for growth or if the market is saturated.
Access to an experienced sales force provides knowledge as to how to engage the customers and will be knowledgeable of which channels of distribution need attention. Through observation of the distributor’s sales force, Roca can observe and later on replicate the methods they used when they expand to a subsidiary. The final two variables which emphasize why the tactic of entering through a distributor is ideal include fluency in the language and an all encompassing understanding of the legal structure.
Language fluency is vital to success in a foreign country, especially where the language varies from the company’s place of origin. The distributor would be responsible for converting any and all information into the language spoken into that area, including: advertisements, websites, packaging, directions and more. Had the distributor not been in place to serve as an intermediary there would be huge costs incurred in an effort to customize informational and marketing processes.
Having a reliable source to advise Roca about legal constraints will avert them from violating regulations as well as help them capitalize on all that the law has to offer to protect Roca and its products. Beyond the scope of the distributor is the responsibility of the subsidiary. A simple power transfer occurs where Roca regains control of the operation in the foreign location and reduces the role of the intermediary, the distributor. At this juncture issues with language barriers, legal issues, and customer identification have been dealt with.
The subsidiary is therefore a means to solidify Roca’s presence in the market and further expand their market share in this area. There are some drawbacks to this model. Consider the fact that the distributor may be unreliable. Roca had to rely on the distributor to provide accurate information about the market and the customer base. Were the distributor reluctant or unsuccessful in ascertaining this, continued involvement in the market may lead to stagnant sales and possibly a failed international expansion.
Furthermore, the strategy entails a significant power shift for Roca. In this case there is a possibility that Roca loses sight of the sanctity of the Roca brand therefore threatening the longevity of Roca. However, the greatest drawback can be expected from the sales force who are not salaried employees. The sales force has no incentive to be loyal to Roca, so there should be a swift transition from distributor to subsidiary to take on salaried employees who will be a bit more consciences about their performance and the success of the company.