Xnikn00

University of Economics, Prague
Masters Thesis
2011
Niklas Nosek
University of Economics, Prague ague

Faculty of Business Administration
Masters Field: International Management
Analys of Internationaliza nalysis nalization Strateg of German Electr trategies Electricity Companies
Author: Supervisor:
Niklas Nikl Nosek, BA Martina Mart L. Jakl, lic. oec. HSG & Ph.D.
Declaration of Authenticity
I hereby declare that the Masters Thesis presented herein is my own work, or fully and specifically acknowledged wherever adapted from other sources. This work has not been published or submitted elsewhere for the requirement of a degree programme.
Prague, 26 August 2011
Niklas Nosek
Title of the Masters Thesis:

Analysis of Internationalization Strategies of German Electricity Companies
Abstract:
The thesis analyses internationalization strategies and processes that were used by major German electricity companies during their transition from purely national companies to some of the worlds largest electricity corporations with operations in many different countries. The paper starts out by outlining theoretical elements that are available to companies in general and then provides an in-depth analysis of the internationalization that Germanys major Electricity companies went through after the liberalization of German and European electricity markets. Based on this, the thesis then identifies key internationalization patterns in the German electricity industry and, by taking into account future developments, provides factors that will influence further internationalization strategies in the segment.
Key words:
Internationalization, Germany, Electricity
Master Thesis Niklas Nosek
Table of Contents
Table of Contents ............................................................................................................... I List of Abbreviations....................................................................................................... III List of Figures ................................................................................................................. IV List of Tables.................................................................................................................... V 1 Introduction ................................................................................................................ 1 1.1 1.2 1.3 2 Relevance, Motivation and Problem .................................................................. 1 Research Methodology ....................................................................................... 3 Scope of Work .................................................................................................... 3
Theoretical Considerations of Internationalization.................................................... 5 2.1 2.2 2.3 Definition of Internationalization ....................................................................... 5 Definition of Strategy ......................................................................................... 6 Reasons for Internationalization ......................................................................... 7 Push factors ................................................................................................. 8 Pull factors ................................................................................................ 10
2.3.1 2.3.2 2.4
Internationalization Strategies .......................................................................... 13 Selection of Country ................................................................................. 14 Selection of Entry Mode ........................................................................... 18 Selection of Timing Strategies .................................................................. 26
2.4.1 2.4.2 2.4.3 3
Internationalization in the German Electricity Segment.......................................... 33 3.1 Market Environment ......................................................................................... 34 Regulative Environment............................................................................ 34 Electricity Generation and Consumption .................................................. 37 Competitive Structures .............................................................................. 40
3.1.1 3.1.2 3.1.3 3.2
Internationalization of Selected Market Participants ....................................... 48 I
3.2.1 3.2.2 3.3 4
E.ON ......................................................................................................... 48 RWE .......................................................................................................... 59
Internationalization Patterns and Future Developments................................... 71
Conclusion, Recommendation and Outlook ............................................................ 79 4.1 4.2 Conclusion ........................................................................................................ 79 Recommendation .............................................................................................. 81
Bibliography.................................................................................................................... VI Literature ..................................................................................................................... VI Internet .......................................................................................................................... X Others ....................................................................................................................... XIII
II
List of Abbreviations
BMU BMWi CAPEX CCGT EMC EMIC EU EZH GATT gWh kWh p. pp. SG&A tWh WTO www Bundesministerium fr Umwelt-, Naturschutz und Reaktorsicherheit Bundesministerium fr Wirtschaft und Technologie capital expenditure combines cycle gas turbine export management company E.ON Masdar Integrated Carbon European Union Electriciteitsbedrijf Zuid-Holland General Agreement on Tariffs and Trade gigawatt hour kilowatt hour page pages selling, general and administration terawatt hour World Trade Organization world wide web
III
List of Figures
Figure 1: Thesis Structure Overview ................................................................................ 4 Figure 2: PESTEL-factors by author............................................................................... 16 Figure 3: Porters five forces in line with Porter............................................................. 17 Figure 4: Market Entry Modes by author........................................................................ 19 Figure 5: Overview of Timing Strategies by author ....................................................... 27 Figure 6: The Waterfall Strategy in line with Kutschker et al. ....................................... 29 Figure 7: The Sprinkler Strategy in line with Kutschker et al. ....................................... 30 Figure 8: The Combined Sprinkler/Waterfall Strategy in line with Kutschker et al. ..... 32 Figure 9: Electricity Production and Consumption in Germany by author .................... 38 Figure 10: Share of Energy Source in Total Electricity Generation in Germany by author.................................................... 39 Figure 11: Share of Renewable Energy Sources over Time by author ........................... 40 Figure 12: The Structure of the German Electricity Market by author ........................... 41 Figure 13: The largest Electricity Companies in Germy 2009 by author ....................... 42 Figure 14: Main Control Areas of German trans-regional Electricity Companies ......... 43 Figure 15: The 10 largest Electricity Companies in Europe by author ........................... 44 Figure 16: E.ON; Percentage of Employees working outside of Germany 1999 2010 by author ..................................................... 56 Figure 17: E.ON; Percentage of Revenue generated outside of Germany 1999 2010 by author ................................................... 57 Figure 18: E.ON; Percentage of Property, Plant and Equipment outside Germany 1999 2010 by author ..................................... 58 Figure 19: RWE; Percentage of Employees working outside of Germany 1999 2010 by author ..................................................... 67 Figure 20: RWE; Percentage of Revenue that is generated outside of Germany by author.............................................................. 68 Figure 21: RWE; Percentage of Capital Expenditures invested outside of Germany by author .................................................... 69 IV
List of Tables
Table 1: Company Overview E.ON by author ................................................................ 48 Table 2: Company Overview RWE by author ................................................................ 60
1 Introduction
Internationalization is a phenomenon that is deeply rooted in history and has progressed increasingly towards a source of nearly unavoidable pressure for businesses to expand their operations across their home country or even to start operations on an international scale. This pressure require companies to develop international strategies that take into account company specific factors as well as factors that are determined by the business environment in order to preserve the companys continuance. But in stark contrast to other industries, the electricity industry defined as the generation, transmission, distribution and sale of electricity in Europe and, in particular, in Germany barely showed any signs of international business activities until the late 1990s. German electricity companies focused on operations within their homecountry. But what began rather late, showed a very fast pace of internationalization in the late 1990s and have ever since. A number of German electricity companies now belong to the largest European market participants in the electricity industry with operations in a considerable number of European and overseas countries.
1.1
Relevance, Motivation and Problem
Internationalization is a common and important phenomenon that cannot be ignored by companies of all sizes all over the world. Small as well as large companies are exposed to competitive pressures that force them to expand their operations across their home countries borders in order to survive in the marketplace. The politically initiated liberalization and privatization of the electricity markets and its consequences on competition and other related developments have been discussed from multiple perspectives in the recent years. However, the internationalization of the electricity industry which was critically influenced by institutional changes has not been subject to extensive studies. A few articles and papers have dealt with internationalization strategies and -processes in electricity markets. These include a study by Haar and Jones (2008) on US energy utilities companies entering the European
markets1. Furthermore, there have been case related analyses by del Sol (2002) which dealt with Endesas (a Spanish company) international expansion onto the South American continent2 and Hgselius (2008) article about Vattenfall, a Swedish energy companys transition from a national company to an international player with operations in several European countries3. Nonetheless, not much is known about internationalization in electricity markets. In addition to that, literature is limited to the extent that specifics of German electricity companies in the context of internationalization are not taken into account. This thesis aims at providing information and analysis to contribute towards filling this gap. It does so by providing an in-depth analysis of two German electricity companies internationalization which enabled them to develop into one of the largest European electricity companies. The thesis is designed to find answers to following three central questions: What were or are the main reasons and motivations for German electricity companies to internationalize? Which strategies are pursued in the internationalization process? Will further internationalization take place? And if so, why will it take place?
Addressing these questions, the paper focuses on German companies that are active in the electricity industry, which is defined in terms of electricity generation, transmission, distribution and sales. Only Germanys largest electricity companies are subject to this thesis as barely any cross border business activities by small and medium sized German electricity companies can be observed.
1 2
See Haar, N. L., Jones, T. (2008) See del Sol, P. (2002) 3 See Hgselius, P. (2008)
1.2
Research Methodology
This thesis is based on a deductive reasoning approach, which indicates that the content of the paper moves from a general theoretical understanding that is valid for a wide range of industries and geographical area to a specific understanding that focuses on a particular industry segment and market.4 The thesis can be subdivided into two main parts; one theoretical and one that analyses practical approaches of internationalization and internationalization strategies in the German electricity industry. The theoretical section uses exclusively secondary research and is predominantly based on literature and to a much lesser degree is also based on information obtained via the internet. After providing the theoretical knowledge, the third chapter presents practical implementation of theoretical elements that have been described in chapter two. This part of the thesis is mainly based on qualitative and quantitative data that is publicly available. Typical sources are industrial organizations, newspaper- and magazine archives, and last but not least, the analyzed companys homepages and bookkeeping records such as annual reports. In order to complement the gathered information, primary research was carried out in the form of semi-structured interviewing which allows a flexible interviewing process and enables the interviewer to get involved in a discussion.5 The primary research in the form of interviews was chosen so as to obtain critical opinions and insights from people, who work in the companies that are a subject of this thesis, or respectively work in the industry that the considered companies are operating in.
1.3
Scope of Work
As shown in Figure 1, the thesis is structured in the following way; after the introduction in chapter 1, chapter 2 outlines theoretical contents regarding internationalization. This chapter approaches internationalization in a general way without including specifics of a certain industry, geographical area or cultural area.
4 5
See Babbie, E. (2004), pp. 24-26 See Bryman, A. (2004), p. 321
Figure 1: Thesis Structure Overview
The transition towards internationalization in the electricity industry is made in chapter 3. This is done by outlining the market environment and developments in the German electricity market in chapter 3.1. The subsequent section provides the reader with an indepth analysis of Germanys two largest electricity companys internationalization and describes how E.ON and RWE transformed themselves from purely national companies to Europeans largest companies in the electricity industry. In chapter 3.3 theoretical elements of chapter 2 and the electricity industry specific elements and developments that are dealt with in chapter 3.1 and 3.2 are combined. This section identifies theoretical elements and strategies that are relevant in the internationalization of the German electricity companies and outlines factors that could critically influence future internationalization strategies in this segment. The thesis is finalized in chapter 4 with by summing up the thesis findings in the conclusion which is followed by a recommendation.
2 Theoretical Considerations of Internationalization

This chapter elaborates general theoretical concepts of internationalization and strategies that are applicable to all businesses. To set a frame for the entire thesis, the two most important terms are defined. After that, important reasons and motives for corporations to take part in cross border transactions are outlined followed by a description and analysis of strategic choices on how to internationalize.
2.1
Definition of Internationalization
The term internationalization is susceptible to different interpretations and is a collective noun for a broad number of activities and processes.6 Moreover, the terminology of internationalization can be seen as a phenomenon that describes the engagement in activities that are connected to foreign countries or markets.7 Two perspectives towards internationalization can be outlined. On the one hand, internationalization can be seen as a companys initial engagement in international activities. According to this perspective, internationalization is a generally nonrecurring act.8 An example is a firms decision to export a product in order to enter foreign markets. In compliance with this perspective, a company can either be international operative or not international operative. On the other hand, internationalization can be seen in a process orientated and dynamic way. This perspective approaches internationalization as a process of increasing engagement in international markets.9 In contrast to the first perspective, a companys certain grade of internationalization can be identified in respect to the companys degree of engagement in international activities. This means that for example imports and exports activities implicate a relatively low degree of internationalization and foreign direct investment stands for a relatively high degree of internationalization.10
6 7
See Krystek, U., Zur, E. (2001), p. 5 See Perlitz, M. (2004), p. 124 8 See Bamberger, I., Wrona, T. (2002), p. 277 9 See Bamberger, I., Wrona, T. (2002), p. 277 10 See Barsauskas, P., Schafir, S. (2003), p. 19
In every sense, internationalization is a dimension of a companys strategic behavior and orientation. It is associated with many corporate strategies and is an element of corporate policy.11 Measuring and quantifying internationalization is difficult not least due to the number of different definition. Nonetheless, important indicators of internationalization are:12 the revenues that are generated abroad, the number of employees abroad, the participation of foreigner in a companys management, the number of foreign subsidiaries, a companys foreign direct investments, the share of exports of total revenues.
For the purpose of measuring internationalization, this paper will mainly focus on the share of employees abroad, the geographical source of revenue, the destinations of investments and the location of a companys assets.
2.2
Definition of Strategy
Strategy can be seen as the definition of intentions and the allocation or matching of a companys resources to opportunities.13 A strategy needs to take into account the companys environment as well as the companys resources, abilities and competencies.14 Strategy is based on the idea that what an enterprise can do determines what the enterprise should do.15 If the capabilities do not match strategy, a company is put in a position that it cannot maintain.16 Important to point out is that strategy does not have a permanent characteristic but it is to be adapted to changing circumstances. This means that the environment can cause a need for advancing an enterprises strategy.17 In addition, strategy is a plan
11 12
See Bamberger, I., Wrona, T. (2002), p. 277 See Krystek, U., Zur, E. (2001), p. 5 13 See Armstrong, M. (2000), p. 32 14 See Kutschker M., Schmid, S. (2006), pp. 798-799 15 See Glweiler, A. (2005), p. 80 16 See Harvard Management Update (2000), p. 4 17 See Hinterhuber, H. H. (2004), p. 17
that serves in order to achieve a companys long-term goals18. Moreover, strategies specify patterns for decisions that are to be taken by an enterprise.19 Strategy can be defined as ...the creation of a unique and valuable position...20 by using a different set of activities. Subsequently, one single ideal position does not exist. This implies that companies can choose a wide number of activities to position themselves strategically.21 Strategies are very important because they determine measures that are needed in order to ensure an enterprises long-term success.22
2.3
Reasons for Internationalization
There are a wide number of reasons for business organization to internationalize. In most cases not a single reason is decisive but a mixture of several reasons is causing companies to become involved in the process of internationalization. This creates complex multifaceted internationalization motivations and pressures.23 A further factor that is adding complexity is that the internationalization reasons may vary significantly according to an organizations specifics. These specifics are for example the industry a company is operating in, the geographical area or market in which it is active, its age or its competitive situation. Thus, a reason to internationalize might on the one hand be crucial for one company but on the other hand might not play any role for another company. In addition, as the before mentioned specifics are subject to change, a reason that represents a critical pressure or motivation to expand operations across borders in a certain point of time might become absolutely irrelevant at a later stage. Therefore, as the business environment or the intra-company situation changes, the reasons for internationalization will change, too.
18 19
See Hornby, W., Gammie, B., Wall, S. (2001), p. 290 See Kutschker M., Schmid, S. (2006), p. 798 20 Porter, M. E. (1996), p. 68 21 See Porter, M. E. (1996), pp. 67-68 22 See Bea, F. X., Haas, J. (2005), p. 50 23 See Morschett, D., Schramm-Klein, H., Zentes, J. (2010), p. 82
Consequently, the following section does not present a mutual exhaustive listing of reasons for internationalization which are applicable to all companies at each point in time. In general, reasons for internationalization can be subdivided into two categories, namely push and pull factors.24
2.3.1 Push factors

Push factors are internationalization reasons that create a need for internationalization based on pressures from the business environment. Internationalization in this context is seen as a way to overcome an unfavorable situation in the home market.25 One important push factor is associated with market saturation. If a company is operating in a market that is characterized by high saturation, it usually faces a decreasing demand for its product or services. In totally saturated markets, demand is only caused by customers that want to replace a good or service with a new one. Moreover, companies in saturated markets are confronted with limited growth opportunities inside the market as to reap market share from competitors, which often is the only source of growth, is cumbersome and resource intensive. A further characteristic of a saturated market is an intense competitive situation that often leads to decreasing profitability as a consequence of cost pressures caused by the need to decrease prices in order to sell a good or a service. These cost pressures become more intense with increasing market saturation and can endanger a companys survival.26 Internationalization can be a way of overcoming an unfavorable situation in a saturated market as an expansion of operations to new markets might offer a solution for the need of a company to find new growth opportunities or the need to increase profitability.27 Another push factor is associated with customer demands. Customers who begin to internationalize their operations may require their suppliers to internationalize, as well. Therefore, businesses that are exposed to a high dependency on a customer might internationalize as a response to customer pressure.28 The same accounts for suppliers; a
24 25
See Gutmann, J., Kabst, R. (2000), pp. 184-185 See Feuglistaller, U., Mller, C., Volery, T. (2004), p. 416 26 See Hill, C., Jones, G. (2009), p. 68 27 See Gutmann, J., Kabst, R. (2000), pp. 184-185 28 See Johnson, G., Scholes, K., Whittington, R. (2006), pp. 291-292
company might be pushed to follow its main supplier to another country in order to retain business.29 Similarly, organizations might internationalize as a response to competitors who are expanding operations across borders. This factor becomes especially important in cases where competitors obtain important competitive advantages through internationalization on their home market. In order stay competitive on a home market, a company might be forced to follow a competitors internationalization.30 A sourcing related push factor is the internationalization to secure the supply with raw materials or other resources. If the supply of resources is subject to increasing costs or decreasing availability in a companys home-market, the company might be forced to look for alternative sourcing opportunities outside its home countrys borders.31 Other reasons for internationalization are restrictions or limitations in a firms homemarket. By expanding to a foreign market, a company might be able to partially bypass these obstacles or at least reduce their impact.32 An example for a limitation are the restrictions given by anti- monopoly laws; A company might not be able to grow any further by the mean of a merger or an acquisition if the company already has a dominant market share in a certain country or region. By finding merger or acquisition opportunities abroad and thus internationalizing, a company can overcome limitations and thus precede with its growth ambitions. An additional internationalization reason that belongs to the category of pull factors are unsolicited orders from foreign customers. These orders can be a trigger for an organization to become involved with international business transactions and may be the starting point for a companys internationalization.33
29 30
See Dunning, J. H., Lundan, S. M. (2008), p. 67 See Wiesner, K. A. (2005), p. 66 31 See Wiesner, K. A. (2005), p. 67 32 See Johnson, G., Scholes, K., Whittington, R. (2006), p. 292 33 See Gutmann, J., Kabst, R. (2000), p. 185
2.3.2 Pull factors

Pull factors, on the other hand, are all internationalization reasons that represent positive incentives for companies to initiate an internationalization of their operations. By reacting to pull factors, an organization is aiming at using opportunities in order to put itself into a better position.34 One important pull factor for internationalization are market potentials in foreign countries.35 These market potentials are for example new customers or fast growing markets. By exploiting these potentials, companies are able to broaden the size of their market. The entry into another country can, for example, swiftly open access to a large number of potential new customers and thus potentially increase a companys sales and profits. Another central internationalization reason that belongs into the category of pull factors are economies of scale. Companies can decrease their average costs per unit as the output increases provided that output increases higher than input. The entry into new markets via Internationalization entails potential new sales markets for companies and thus the possibility to increase output. This especially accounts for companies that can sell similar products and services on several markets at the same time. Internationalization can thus be an important source to increase economies of scale.36 Differences between the business environment in one country and another are a further key motivation for companies to internationalize. These differences can be of diverse natures. Important differences between the countries that can represent an important pull factor are deviating costs. Among others, lower labor costs, lower costs of capital or lower costs for any other resource such as raw materials can be a source of cost advantages and thus attract a company to internationalize and to make use of favorable cost differences. Other differences between countries can be associated with consumers. Higher consumer spending, more frequent consumption of a product or service, and consumers ability to pay higher prices in foreign than in domestic markets are just a few examples of consumer differences between a home market and market abroad. These differences
34 35
See Feuglistaller, U., Mller, C., Volery, T. (2004), p. 413 See Johnson, G., Scholes, K., Whittington, R. (2006), p. 292 36 See Kutschker, M., Schmid, S. (2006), p. 85
10
can represent an important motivation to internationalize and the using of the differences. Further differences between countries that might influence a business to internationalize are differences in respect to the regulatory or administrative environment. These can enable an organization to benefit for example from taxadvantages, governmental subsidies or facilitate a company to produce under a relayed regulatory framework regarding for example labor employment or production restrictions abroad.37 The prospect of accessing resources or new capabilities is another relevant pull factor for internationalization. Especially the accessing of skilled labor, knowledge or new technologies can be a motivation to go international. Internationalization thus can be motivated by the effort to increase a companys innovativeness.38 Innovations that have been acquired abroad might be a source of competitive advantage and help to improve a business competitive position on its home market.39 Another significant pull factor is that internationalization enables a company to decrease its dependency on one single market. Temporarily unfavorable economic conditions in a home-market which might lead to a reduction in sales and profits can be compensated by another, foreign market. Internationalization in this context can be seen as a mean of risk diversification.40 A further pull factor for internationalization is the so called global integration which covers two main areas, namely trade liberalization and investment liberalization. The trade liberalization concentrates predominantly on the reduction of trade barriers such as tariffs and export quotas and supports trade among countries. Under the influence of multilateral trade agreements such as the GATT (General Agreement on Tariffs and Trade), trade barriers have been significantly reduced.41 These measures are making internationalization less resource intensive and thus represent a motivation for organization to get involved in cross-border transactions.
37 38
See Johnson, G., Scholes, K., Whittington, R. (2006), p. 292 See Morschett, D., Schramm-Klein, H., Zentes, J. (2010), p. 79 39 See Johnson, G., Scholes, K., Whittington, R. (2006), pp. 292-293 40 See Yu, M. (2009), p. 54 41 See Morschett, D., Schramm-Klein, H., Zentes, J. (2010), pp. 97-98
11
The second main area of global integration that supports internationalization is investment liberalization. This area focuses on the elimination of national rules and regulations regarding foreign direct investment towards globally standardized and accepted regulations. The TRIMS (Trade-Related Investment Measures) agreement by the WTO is one important multilateral agreement regarding the liberalization of investments.42 Another form of integration that represents a pull factor for internationalization is the regional integration as a consequence of the formation of trade blocs such as the EU, NAFTA, Mercosur or Asean. As a consequence of these trade blocs, cross-border trade transactions have increased in number and magnitude. The formation of the European Union (EU) and its focus on the integration of EUMember states as well as the economic involvement of third countries is a famous example of regional integration and a very important pull factor for companies to be become involved in cross border activities. The European integration entails three different manifestations; economic, social and political. The economic integration includes the operation of a free trade area among member states and numerous other countries. The creation and operation of a single market that ensures free movement of goods, services, capital and people within the EU member states is a further element of economic integration. This is reinforced by another element of economic integration; a currency that has been adopted in selected member states and several European third countries which represents a significant measure to eliminate currency risks involved in cross-border transactions.43 The social and political elements of the European integration aim for example at the encouragement of educational exchange, unified academic environments, promotion of free patient movement, unified visa policies and the reduction of physical borders between member-states. The European integration represents an important pull factor for the internationalization of companies as the expansion of operations across the home
42 43
See www.wto.org (2011) See www.europa.eu (2011)
12
countrys boarder is encouraged and alleviated by the economic, social and political integration of EU-member states.44 An additional pull factor is that both governments and nongovernmental organizations offer information and professional support to help companies expand their operations on an international scale. Especially export credit agencies are supporting companies in their internationalization endeavors by providing country specific information and by providing risk reducing instruments such as insurances and guarantees.45 Besides that, trade chambers in the companys home country and abroad are an important source of internationalization related information and contacts that thus make it easier for business organization to initiate cross border operations. Direct and indirect subsidies are often seen as another important pull factor. Host country governments offer foreign companys attractive financial and nonfinancial support for instance tax-breaks, financing support, infra-structure connection, import/export facilities or guarantees. These subsidies can represent an important internationalization motivation as it may be a source of competitive advantage not only for the home-market but also for the newly entered market.46
2.4
Internationalization Strategies
Three main decisions have to be taken once an organization decides to expand operations across borders; A country or a number of countries have to be selected, it has to be decided in which way the selected country or countries will be entered, and it has to be determined in which sequence the countries will be entered.
The three areas in which the decisions have to be taken will be assessed in the following three sections, namely selection of country, selection of entry mode and selection of timing strategies.
44 45
See www.europa.eu (2011) See Bouchet, M. H., Clark E., Groslambert, B. (2003), p. 50 46 See Wiesner, K. A. (2005), pp. 71-72
13
A company needs to take into account its specifics and the environment it is operating in. The internationalization strategy has to be in line with available resources such as financing and managerial capacities. The used order to describe the three areas of decision may not be seen as the order that businesses have to take to derive their decisions. This is because the three areas of decision may not be seen isolated as the selection of a certain country may require a certain entry mode. Similarly, to give another example, if a company decides to employ a certain entry mode, some countries may not be eligible.
2.4.1 Selection of Country

The goal of market selection in the context of internationalization is to identify and select a country or a group of countries that serve as a ground for a companys expansion beyond its national borders. It is of key importance to see the market selection in connection to the organization that intends to internationalize and all its specifics. The organizations specifics are for example its portfolio, its management style and its strategic goals. When it comes to the selection of a specific country, it needs to be ensured that the market fits the organization with all its specifics in order to make the internationalization successful. A market or country that is ideal for one company may not necessarily be suitable for another company even if the two organizations operate in the same market segment with very similar products.47 Therefore, generalizations in respect to market selection may be misleading as what accounts for one organization may not be applicable for another. This requires applying everything that is stated in this section with respect to a specific business organization. With regard to the selection a market, different countries need to be compared in order to make a decision in regard to which country to enter. There are myriads of criteria that can be used to compare countries and every organization needs to set criteria which are most relevant for successful operations after entering the market. The market selection process can be started by setting simple company specific must have criteria that can easily be assessed. Geographical distance, assess to the ocean or
47
See Johnston, S., Beaton, H. (1998), p. 86
14
the spoken language will serve as a pre selection process to find a pool of countries that fulfill basic criteria. For the next steps, it needs to be stressed that the different countries need to be compared regarding their potential future situation because a business that enters a country is most likely interested in the future prospects of a market. A countrys past and current environment is not necessarily a sufficient indicator for the future and therefore dynamics, trends as well as key influencing factors need to be identified.48 This makes it very challenging for a business to make the best possible choice with regard to which country to select. To give an overview of criteria and factors that can be taken into account during the process of a market selection, the macro environment and the industry and sector environment are to be distinguished. Macro-Environment Factors such as the climate in a certain country, the political stability, export activity, inflation, religious beliefs and practices and the level of school- and university education are examples of factors that form the macro environment of a country.49 The macro-environment covers all factors that form the broad environment in a country which impacts all organizations; whereas organizations can be impacted in different ways predominantly according to the industry they are operating in and to a less important degree to their company specifics. A framework that can be used as a basis for analyzing and for comparing different countries macro environments is the PESTEL framework (Figure 2). It subdivides environmental influences of a country into 6 categories and thus defines the macro environment as the interaction of political-, economical-, sociocultural-, technological-, environmental- and legal-factors.50 Nevertheless, this categorization does not provide factors that are independent and isolated from another as there are many links between the different factors.51
48 49
See Johnson, G., Scholes, K., Whittington, R. (2006), pp. 68-69 See Kutschker, M., Schmid, S. (2006), p. 435 50 See Johnson, G., Scholes, K., Whittington, R. (2006), p. 68 51 See Bensoussan, B. E., Fleisher, C. S. (2008), p. 171
15
Political factors
Economic factors
Legal factors
MakroEnvironment
Sociocultural factors
Environmental factors
Technological factors
Figure 2: PESTEL-factors by author
Industries and Sectors Environment After the general environment of a country has been subject to analysis, a more specific analysis has to be pursued that focuses on the situation in a countrys particular industry or sector. This includes among others the assessment of specific sales markets variables (market size, growth), procurement market variables (costs, availability of resources) and the competitive landscape (number of competitors, market share distribution, availability of industry cluster).52 When analyzing an industrys environment, company specifics play a very important role in contrast to analyzing the makro-environment. In the makro-analyzis, companies that operate in the same industry are affected by the makro-environment to a very similar degree. But the intra-industry environment is affecting organizations very differently depending on their specifics.
52
See Kutschker, M., Schmid, S. (2006), p. 435
16
Potential Entrants
Threat of new entrants
Supplier
Bargaining Power
Industry Competitors
Rivalry among existing firms Threat of substitutes Bargaining Power
Buyer
Substitutes
Figure 3: Porters five forces in line with Porter53
The industry environment in a country is determined by several factors. Porters Five Forces Model (See Figure 3) points out that an industry environment is constituted of five elements, which are not isolated from each other as pressures from one element might result in shifts within another element.54 Hence, the strength of the different forces may change throughout time which leads to new environmental conditions in a certain industry. The five forces model helps to identify and to assess the key features of a particular industry in a country and its competitive structure. Therefore, it also indicates an industrys profitability and its attractiveness for companies to enter it.55 Scoring models can be used as tools to compare the different countries based on different criteria. Company specific requirements and strategic goals can be taken into account when selecting a scoring models criteria. Quantitative criteria like a countrys projected market growth, inflation, number of customers are easily made comparable. On the other hand, qualitative criteria such as the cultural distance and social structures
53 54
See Porter, M. E. (1980), p. 4 See See Johnson, G., Scholes, K., Whittington, R. (2006), p. 80 55 See Porter, M. E. (1980), p. 4
17
are difficult to compare and when turned into quantitative data are often influenced by subjective perceptions. Most unlikely, a company is able to identify a country that fulfills all objectives better than the other countries that are at disposal. Therefore, priorities have to be set that are reflected in some higher weighted criteria in order to select a single country or a group of countries that best suit a companys internationalization ambition.
2.4.2 Selection of Entry Mode

Corporations that decided to enter a certain foreign market have a number of options on how to proceed. These options are referred to as country or market entry modes.56 Besides the number of options on how to enter a country, there is a wide range of factors that have an impact on the choice between the alternative modes of entry. To select the most appropriate mode of entry, organizations have to consider the costs and benefits of the market entry mode in relation to the foreign market.57 In addition, the choice of entry mode depends largely on different characteristics of companies. These characteristics include a firms size, know-how58, international experience, willingness to take risks, financial resources and competitive position.59 Further, a host countrys factors importantly influence the choice of market entry mode. These factors include cultural distance, governmental regulations, potential of the host markets etc.60 One example of a host country factor that can play an important role for the selection of entry mode are ownership restrictions for foreign companies; in some countries regulations prevent a foreign company from establishing a fully owned subsidiary. Due to this regulation, in some countries, this type of entry mode cannot be considered.61 The main differentiation criteria for the different entry modes are the level of resource commitment to a particular country and the degree to which a firm is operationally involved in a particular location. The higher the resource commitment and the
56 57
See Johnston, S., Beaton, H. (1998), p. 221 See Stonehouse, G. et al. (2004), pp. 208-209 58 See Kutschker, M., Schmid, S. (2006), p. 129 59 See Bradley, F. (2004), pp. 272-275 60 See Deresky, H. (2006), p. 245 61 See Deresky, H. (2006), p. 240
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operational involvement, the higher is the risk associated with a market entry mode.62 Risk in this context increases with the amount of resources that are invested to pursue a country entry strategy. The more resources have been invested, the higher is the impact on a companys performance or even the ability to survive in case a market entry has to be called off.
Market Entry Modes

LOW
Exporting
Licensing
Level of resource
Franchising
commitment and operational involvement
Contract Manufacturing
in host country
Joint Venture
Fully Owned Subsidiary
HIGH Figure 4: Market Entry Modes by author
Figure 4 lists the different market entry strategies which are going to be explained in the following section. The entry modes are listed according to the level of resource commitment and operational involvement in the host country. The first outlined entry mode is exporting which entails the comparable lowest level of resource commitment and operational involvement. The described entry modes should not be considered of as mutually exclusive. The options can be combined, making it possible for corporations to pursue different strategies at the same time and thus use strategies that suit the organizations or business environments demands best.63
62 63
See Johnson, G., Scholes, K., Whittington, R. (2006), pp. 295-296 See Perlitz, M. (2004), p. 186
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Moreover, a staged international expansion can be observed with many organizations that enter a market.64 This underlies that a company enters a market with a less resource and commitment intensive market entry mode, such as exporting, in order to minimize risk and be able to test products or services. The meaningfulness of further investments into the newly entered market can be evaluated more realistic as market insights and other local experiences can be acquired over time. Therefore, entering a country via exporting may represent the starting point for an organization to a gradually increasing local commitment and further investments. Exporting Among the different entry modes and forms of internationalisation, the most basic is exporting. Exporting enables a firm to expand across borders or to test out a foreign market, for example, to analyze the demand for a certain product or service.65 Compared to other entry modes, exporting requires a relative low investment of capital resources and a low level of international experiences. As such, operational facilities are not needed in the host country. Hence this entry mode is the primary entry mode selected by small businesses or businesses that are in a young stage.66 At an advanced stage, a firm can manage its exporting activities by appointing an export manager, an export department or alternatively an export management company (EMC). The EMC may be mandated to handle some, or even all exporting functions such as managing tariffs, duties, documentations, currency conversion, etc. Due to the specialization of EMCs, these companies might offer cost advantages compared to inhouse export management.67 An important advantage of export is that economies of scale can be used by selling products being produced in a companys home country on foreign markets.68 Moreover, only relatively few financial and managerial resources are invested abroad or transferred abroad, as the exporting is managed in the home country. This makes it easy to stop exporting in those cases where the transactions do not lead to the desired success.
64 65
See Johnson, G., Scholes, K., Whittington, R. (2006), p. 297 See Brown, R., Gutterman, A. S. (2003), p. 36 66 See Welge, M. K., Holtbrgge, D. (2006), pp. 110-111 67 See Deresky, H. (2006), p. 237 68 See Welge, M. K., Holtbrgge, D. (2006), pp. 110-111
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An important potential drawback of exporting is that this strategy is exposed to protectionist restrictions such as tariffs and duties. But in markets with regional trade agreements, this factor is not relevant. Moreover, exporting is connected with high transportation expenses.69 Licensing Another mode of market entry is licensing. It ...grants the right to a firm in the host country to either produce or sell a product, or both.70 Licensing is always based on a contract between two parties; whereas one party is the owner of an intellectual property (licensor) and the other party (licensee) acquires the right to use the intellectual property in a specific geographical area for a specific period of time. Licensing contracts provide a foreign company the opportunity for using for example trademarks, patents, technology, know-how and other protected rights in exchange for a licensing fee. The licensing fee can be specified in many different ways, but usually, fees are dependent on sales, but other forms of payment such as lump sums or cross licensing are possible, too.71 Licensing is a suitable option especially for corporations with valuable technical knowhow, patented products or valuable brand names or for firms with rapidly changing technologies that need to expand their technologies as fast as possible to gain acceptance and consequently be successful.72 The entry strategy of licensing requires no capital transfer to the host country and is, at the same time, a way to enter markets that are otherwise hard or impossible to enter because of host governmental regulations such as quotas etc.73 Besides the low need of capital, only a low level of managerial resources and knowledge about the respective foreign market are needed as the purchaser of a license in the host country is responsible to manage operations. Moreover, if licenses are given
69 70
See Rivera-Batiz, L., Oliva, M. A. (2003), p. 449 Deresky, H. (2006), p. 238 71 See Welge, M. K., Holtbrgge, D. (2006), p. 108 72 See Thomson, A. A., Strickland, A. J. (2004), p. 206 and Deresky, H. (2006), p. 238 73 See Hollendsen, S. (2004), p. 311
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to a company in the host country that has local market insights or even established sales channels, the market entry is more likely to be a success.74 On the other hand, licensing implies a low grade of control over the licensees business activities. This potential lack of control might cause that a product or service is not positioned in line with the licensors strategy or that the licensees way of conducting business is against some of the licensors compliance regulations. Therefore, licensing might be a source of problems that can affect a licensors home-market, too. Additionally, by entering a market via licensing, a company usually hands over confidential information, know-how and technologies. This can endanger a business competitive advantage as a licensee might hand over information to a third party or might become a competitor itself.75 This threat is particularly endemic in countries with insufficiently enforced patent and trademark protection.76 Franchising Franchising is another entry mode into foreign markets. It is a contractual vertical marketing system77 in which a company holding the right to a product, trademark, process etc. (the franchisor) grants another company (the franchisee) the right to produce and distribute the product or to use the trademark. The franchisor provides the franchisee the right and the duty to undertake business in a specific manner under the franchisors name. In return, the franchisee pays an initial fee and ongoing royalties in the form of a fee or percentage of sales to the franchisor.78 The franchisor commits itself to transfer know-how and to support the franchisee in respect to business practices, logistics, organizational issues, management, employee training etc. Moreover, the franchisor undertakes, prepares or coordinates sales promotions and advertising activities. 79 Franchising can be applied to numerous sectors. The most famous franchise-models are operated for in the food-, car rental-, cosmetic-, hotel-, and gas station business.
74 75
See Barsauskas, P., Schafir, S. (2003), p. 31 See Macharzina, K. (1999), pp. 699-700 76 See Welge, M. K., Holtbrgge, D. (2006), p. 109 77 See Dlfer, E. (2001), p. 179 78 See Burca, S., Fletcher, R., Brown, L. (2004), p. 238 79 See Macharzina, K. (1999), p. 700
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The advantages of this entry mode are a low commitment of monetary resources by the franchisor as capital is predominantly provided by the franchisee. Another advantage is that the franchisor does not need to provide or select large amounts of managerial resources; the different franchisees are responsible for selecting human resources by themselves. The management and financing role of the franchisee is responsible for another important advantage of franchising: franchising systems enable businesses to grow at a very fast pace in one or more foreign markets at the same time.80 A further advantage is that uniform business objectives and a uniform appearance towards customers can be ensured by contractual terms.81 Negative factors of franchising are that management and controlling activities need to be pursued by the franchisor in order to make sure that the franchisees carry out their duties and comply with the contract.82 An information asymmetry between franchisor and franchisee in this context make reliable controlling difficult. Contract Manufacturing A further entry strategy is contract manufacturing. In this case, a firm contracts the production to a manufacturer that is located abroad but at the same time retains control over marketing and sales activities of the product.83 Contract manufacturing involves the transfer of one or more production stages or the whole production process of a product to a contractor in a foreign country.84 Subsequently, the components or finished goods are shipped to the home country of the business or are sent to other countries. Similar to licensing, the client needs to provide the necessary product specifications and in some case information concerning the production process.85 The main advantage for contract manufacturing is that cost advantages in other countries can be exploited. The cost advantages abroad might be regarding cheaper labor or access to favorable raw material prices.86
80 81
See Kutschker, M., Schmid, S. (2006), p. 851 See Burca, S., Fletcher, R., Brown, L. (2004), p. 238 82 See Welge, M. K., Holtbrgge, D. (2006), p. 109 83 See Burca, S., Fletcher, R., Brown, L. (2004), p. 240 84 See Kutschker, M., Schmid, S. (2006), pp. 853-854 85 See Dlfer, E. (2001), p. 182 86 See Brown, R., Gutterman, A. S. (2003), pp. 36-37
23
Alternatively, contract manufacturing entails that a company externalizes certain manufacturing processes and thus has less control over some parts of the value chain. As a consequence, a company might be more prone to quality and/or delivery problems or problems that are caused by miscommunication between the company and the contract manufacturer.87 A market entry strategy that is based on a partnership agreement is an international joint venture, which is the creation of a new, legally independent company through an agreement of two or more companies from different countries to produce a service or product together.88 A wide number of constellations in respect to ownership of joint ventures are possible through agreed-upon proportions of equity. Moreover, different distributions of control, risk and return are definable in a joint venture contract, which leads to endless possible constellations regarding the management of the venture.89 Typically, an MNE chooses a partner in the host market in order to enter the respective market and to benefit from the partners experience, market knowledge and his managerial and technological skills. Moreover, criteria to choose a certain joint venture partner can be based on physical assets such as production facilities or established sales or distribution channels.90 One of the most important reasons for companies to decide on entering a market via joint venture is the sharing of risks with a partner and utilizing the partners local knowledge or his business infrastructure. Thus, entering a market via joint venture represents a rapid access to markets and resources. 91 Besides this, some local regulations or laws might force organization for enter a foreign market via joint venture. This is the case when wholly owned subsidiary are not allowed to be established by foreign companies. Regulations might stipulate that a certain share in a company has to be provided by a local entity. A potential drawback of this strategy is the possible tendency of the local partner to dominate the market and thus effectively blocking the foreign firm from direct contact with customers. The local partner often does this in order to maintain control over the
87 88
See Bennett, R., Blythe, J., Adler, H. (2002), p. 212 See Macharzina, K. (1999), p. 701 89 See Welge, M. K., Al-Laham, A. (2004), p. 472 90 See Deresky, H. (2006), p. 240 91 See Bradley, F. (2004), p. 249
24
venture and to prevent that too much local knowledge being gained by the foreign partner stopping him from starting business operations in the country on his own.92 Further important downsides are possible problems due to cultural background. If the joint venture partners have diverse cultural backgrounds, different perceptions for example in respect to risk or hierarchy may be a source of conflicts.93 Different cultural backgrounds can result in opposite objectives and opinions towards strategy and therefore endanger a joint ventures success.94 Fully owned subsidiary The most extensive form of entry into foreign markets is the form of a fully owned subsidiary. A fully owned subsidiary can be established in two ways; either by acquiring an existing business in the host country or by Greenfield investment.95 The acquisition of an existing company can provide a firm with assets and established operations in a host country.96 Moreover, it can offer access to distribution channels, market insights and existing customer bases.97 In contrast to Greenfield investments, a certain market share is acquired when an operating company is bought. Therefore, if a company wants to enter a market with static structures where market shares of competing firms are difficult to capture, an acquisition may be chosen as a strategy.98 Greenfield investments underlay a complete startup of operations in the host country. As such, relatively much time is needed until the right personnel are selected and incorporated and until processes are working properly. This form of market entry is especially chosen, when no suitable firm for an acquisition can be found or when technology or logistics considerations evoke the need to establish ones own operations.99 Subsidiaries are characterized by full control of the parent company over operations in the host country. Usually, this form of marked entry is of a long term nature as the high
92 93
See Rugman, A. M., Hodgetts, R. M. (2003), p. 496 See Hofstede, G. (1984), p. 111 94 See Barsauskas, P., Schafir, S. (2003), p. 24 95 See Macharzina, K. (1999), p. 701 96 See Bradley, F. (2004), p. 265 97 See Burca, S., Fletcher, R., Brown, L. (2004), p. 239 98 See Johnson, G., Scholes, K., Whittington, R. (2006), p. 350 99 See Burca, S., Fletcher, R., Brown, L. (2004), pp. 239-240
25
investment of financial and managerial resources for acquiring or starting up a subsidiary do not justify a short term operation of a subsidiary.100 One of the most important advantages of subsidiaries is a companys full control over business operations and decision making. As conflicts of interests are often a problem between partners in joint ventures, these problems can be avoided by establishing a fully owned subsidiary.101 A further advantage is that a subsidiary can be used for avoiding trade obstacles and decreasing risks of exchange rate fluctuations.102 On the other hand, negative aspects of this approach are the high investment of financial and managerial resources for the start-up of a fully owned subsidiary.103 Linked to the high investments is that a withdrawal from the market for example due to a change in strategy or unsatisfactory performance of the subsidiary is extremely difficult once the investment is placed. Moreover, wholly owned subsidiaries are especially prone to political risks such as expropriation as local partners are not involved.104 There is as well a great disadvantage due to the lack of partners: the parent company has to bear all losses or risks of the subsidiary itself.105
2.4.3 Selection of Timing Strategies

The following passage outlines strategies that consider the timing of entrance into a foreign country. A distinction between country specific and transnational timing strategies is made (Figure 5). The timing of entry is of high strategic importance as it determines risks, opportunities and the business environments a company will face.106
100 101
See Cooper, C. L., Argyris, C. (1998), p. 392 See Macharzina, K. (1999), p. 701 102 See Welge, M. K., Holtbrgge, D. (2006), pp. 112-113 103 See Rugman, A. M., Hodgetts, R. M. (2003), p. 498 104 See Welge, M. K., Holtbrgge, D. (2006), pp. 112-113 105 See Kotabe, M., Helsen, K. (2004), p. 283 106 See Luo, Y. (2000), p. 192
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Timing Strategies
Country Specific
Transnational
Figure 5: Overview of Timing Strategies by author
Country Specific Timing Strategies Country specific timing strategies deal with the timing that is associated with the entrance into a specific country. It always needs to be seen in relation to competitors actions. In regard to country specific timing strategies, first mover and follower strategies are distinguished.107 The first mover strategy implies that a company is the first company of its kind to enter a foreign market. Hence a company which wants to use the first mover strategy needs to enter a country before international competitors.108 A key reasons or motivations for using the first mover strategy is that the first entrant of a market can set standards which have to be considered by all competitors who want to enter a market at a later stage. This so called lock-in is a proprietary positioning in an industry and becomes an industry standard that needs to be adopted by competitors because if a business chooses to offer products or services that are different from the standard, it risks a loss of credibility and to fail on the market.109 Moreover, first movers can create a high level of brand awareness in the host country as customers attention is not shared with competitors. The brand awareness that is created in the initial phase can be a basis for sustainable market shares at a later stage, when competitors have entered a market, too.
107 108
See Kutschker, M., Schmid, S. (2006), p. 958 See Welge, M. K., Holtbrgge, D. (2006), p. 136 109 See Johnson, G., Scholes, K., Whittington, R. (2006), p. 256
27
Besides the customer relations, first movers have the potential to establish important relations with suppliers and distributors, which cannot easily be matched by the following market entrants.110 Another advantage of the first mover strategy is that due to a market environment in which no competitors exist (at least for a short term), market revenues are not shared with competitors and price pressures from competitors are not endemic. This environment enables companies to achieve highly profitable returns.111 The described reasons represent entry barriers for competitors wanting to enter the host country and may deter competitors from entering a market.112 Depending on the market specifics and the ability of competitors to overcome entry barriers, users of the first mover strategy can establish long-term competitive advantages over following competitors.113 But using first mover strategies entail possible problems, too. These are mainly based on the unknown environment, which is entered. Information that can be derived from competitors activities for example on how markets or consumers demand a certain product or service is usually not available.114 Moreover, some products or services need a rather long time until they are accepted and consequently bought by consumers. First movers often have to initially invest heavily into educating the customers to buy a product or service. The second strategy of entering a specific country is the follower strategy. It advocates that a company is not the first to enter a county but enters the country after competitors are already present in the host country.115 In general, the advantages of the follower strategy are the drawbacks of the first mover strategy and vice versa.116 A major advantage of companies which are followers is that they can learn from mistakes or best practices of first movers. Additionally, followers have access to more information concerning the country and the market. This makes it
110 111
See Grant, R. M. (2005), p. 236 See Welge, M. K., Holtbrgge, D. (2006), p. 136 112 See Kutschker, M., Schmid, S. (2006), p. 958 113 See Strietzel, M. (2005), p. 79 114 See Grant, R. M. (2005), p. 236 115 See Kutschker, M., Schmid, S. (2006), p. 960 116 See Luo, Y. (2000), pp. 195-196
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easier to consider whether a market is an attractive one to enter and if an organization will be able to be successful given the specifics of the particular market. Due to this, the risk for a follower failing in the host country is significantly lower than for the first mover. 117 Transnational Timing Strategies Transnational timing strategies deal with the sequence in which countries are entered. In this context, the waterfall approach (Figure 6), the sprinkler approach (Figure 7) and a combination of these two approaches (Figure 8) can be differentiated.118 The waterfall strategy (Figure 6) implies that different countries are entered step-bystep. First of all the market entry takes place in one country and after some time the next country is entered and so on.119
Entrance
Country A Country B Country C Country D Country E
Figure 6: The Waterfall Strategy in line with Kutschker et al.120
One important advantage of the waterfall strategy is that the expansion can take place in an orderly manner. It is also a relatively less demanding strategy in respect to the use of financial and managerial resources.121
117 118
See Kurtz, D. L., Boone, L. E. (2005), p. 46 See Kutschker, M., Schmid, S. (2006), p. 963 119 See Perlitz, M. (2004), pp. 124-125 120 See Kutschker, M., Schmid, S. (2006), p. 964 121 See Johannson, J. K. (2002), p. 460
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Another important advantage is that an organization can make use of its learning curve. Problems that were experienced due to mistakes when entering one country can be considered when entering the next one. Similarly, solutions and best practices that were used can be applied to the next market to enter. This gives an organization the opportunity to develop a standardized approach with processes and procedures on how to enter a country which can increase an organizations productivity the amount of countries that have been entered. An important downside of the waterfall strategy is the time that is needed to pursue this strategy as only one country is entered after another. This makes it necessary for a company to constantly reconsider its strategy which country to enter next and how to enter it as the environment in a country can change rapidly. The sprinkler strategy (Figure 7) connotes that a company enters several or all targeted countries simultaneously within a short period of time.122 Compared with the waterfall strategy, the sprinkler strategy has opposing strengths and weaknesses.123
Entrance
Country A
Country B
Country C
Country D
Country E
Figure 7: The Sprinkler Strategy in line with Kutschker et al.124
Using the sprinkler strategy is a much faster way of entering into foreign markets. Moreover, first mover-advantages are generated by the sprinkler strategy and countermoves by competitors can be pre-empted.125 The drawbacks of the sprinkler approach are the high amount of resources that are required to pursue this timing strategy which include among others financial and
122 123
See Perlitz, M. (2004), p. 140 See Johannson, J. K. (2002), p. 460 124 See Kutschker, M., Schmid, S. (2006), p. 967 125 See Kutschker, M., Schmid, S. (2006), p. 967
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managerial resources.126 Further, the sprinkler strategy implies a higher level of risk that a company is exposed to compared to the waterfall strategy because a high number of unknown markets are entered at the same time. Often, a standardized way of entering the different countries is chosen which may be too general as country specific factors such as legal regulations or the socio political environment of a country may be too different among the selected countries.127 Assuming homogenous conditions in different markets may lead to failure. But especially for companies which are described by the notion born global the sprinkler strategy is a basis for their operations. A born global is an organization that use their presence in multiple countries as an integral part of their business model. Moreover, the business model needs to be constructed in a way that allows a rapid international expansion which can be achieved for example by a close to homogenous marketing mix for products and services regardless of the country that it entered.128 The management of a born global firm concentrates on an international focus right from the start of operations rather than focusing on a home-market. This underlies, that a gradual internationalization process in which one country after another is entered is not pursued and not desired. The sprinkler approach of internationalization plays an important role for these born global companies in order to establish a rapid presence in multiple countries and to market products and services in these countries.129 Besides the waterfall and sprinkler strategy, combined strategies (Figure 8) can be used in entering countries, as well. 130 This tactic balances the disadvantages of the different approaches and makes it possible to distinguish between different countries or group of countries.
126 127
See Johannson, J. K. (2002), p. 460 See Pepels, W. (2004), p. 1099 128 See Hollensen, S. (2008), p. 65 129 See Onkvisit, S., Shaw, J. J. (2009), p. 19 130 See Kutschker, M., Schmid, S. (2006), pp. 968-969
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Entrance
Country A Country B Country C Country D Country E Country F
Figure 8: The Combined Sprinkler/Waterfall Strategy in line with Kutschker et al.131
Using the sprinkler strategy approach, companies have the possibility to enter similar countries with similar business environments at the same time. This makes special sense for countries that are in close geographical and cultural proximity and where the speed of entry is critical to capture regional market shares and customer attention.132 On the other hand, the waterfall strategy approach can be selected for countries that are very resource intensive or that are too risky to be entered with other countries at the same time. The decision for one of the strategies necessitates the consideration of many trade-offs because a perfect strategy without any drawbacks does not exist. Hence, corporation needs to evaluate carefully its strategic goals and find the most appropriate market entry strategy.
131 132
See Kutschker, M., Schmid, S. (2006), p. 969 See Pepels, W. (2004), p. 1099
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3 Internationalization in the German Electricity Segment

Germany is the largest European electricity market in terms of market value and accounts for approximately 20 % of Europeans total market value. The importance of this market in Europe is reinforced by the fact that the second largest market which is the United Kingdom, accounts for only about 13 % of Europeans electricity market value.133 Moreover, a number of important utility companies with operations in many European and overseas markets originate from Germany and started to expand their operations beyond their home country borders. The following sections will concentrate on Germany and utility companies that originate from Germany and will commence with outlining important elements of the German electricity market environment. Followed by that, a more specific practical approach will be taken by analyzing internationalization processes and strategies of two selected German companies electricity businesses. In the subsequent sections (4.3 and 4.4) the results of the previous sections will be combined and it will be discussed which theoretical elements are relevant for the internationalization of the analyzed market participants. Further, an outlook in respect to future internationalization developments in the German energy market will be outlined.
133
See Datamonitor (2010), p. 11
33
3.1
Market Environment
The Germany Electricity market will be approached in following manner; firstly, the market environment with respect to regulations will be outlined to provide the reader with information about legal influences. Then, electricity production and consumption in Germany are described to outline important developments and peculiarities. The subsection will be finalized with a description and analysis of competitive structures in the market.
3.1.1 Regulative Environment

Throughout the 20th century, unlike other industries, the electricity industry was not undergoing fundamental changes in respect to the industrys corporate landscape. This was mainly caused by governmental regulations such as state-guaranteed and controlled monopolies and other impediments of competitive industry environments that could be identified in almost all industrialized nations. The trend within industrialized nations towards liberalization, deregulation and privatization in energy related industries is motivated by the target to achieve more efficient power generation and prevent excessive pricing by creating or increasing competition among energy companies. This trend fundamentally changed the market conditions in the energy industry and consequentially has grave implications on all involved market participants. At the end of the 1990ties the German electricity generation companies were beginning to be exposed to a number of new challenges. These challenges were caused by legal changes, electricity markets liberalization efforts and carbon dioxide regulations that promised deep changes in the market environment and an urgent need for electricity supply companies to adapt their strategy to the new market conditions. A fundamental change in the legal environment was caused by directive 96/92/EC of the European Parliament and of the Council which was passed on 19 December 1996 and established EU wide common rules for electricity markets. These regulations were initiated by the EU-parliament and were an EU wide initiative to reframe the legal environment regarding the electricity and gas markets. It mainly was created in order to
34
open the electricity markets, to enhance competition in the gas and electricity industry and to develop a common European electricity market.134 With effect from 29 April 1998, the EU directive was included into the German legislation in the Gesetz zur Neuregelung des Energiewirtschaftsrechts (BGBl. I S. 730). The law aims at establishing a secure, environmentally compatible, consumerfriendly, efficient and reasonably priced electricity and gas supply in a market with fair competition.135 The most important change that came with the new energy law was the abolishment of the local and stable monopolies that defined a certain areal distribution of markets among local utility enterprises. It opened the doors to investors in all stages of the industrys value chain and thus allowed competition to the existing players in the electricity supply industry. Before the introduction of the legal changes, the electricity supply industry occupied an exceptional position; it was exempted from general anti monopoly legislation and numerous efforts to change the electricity supply industry or to limit or control their excessive price strategies remained unsuccessful until the implementation of the law.136 On the one hand, the existent monopolies assured the local utility companies with a secure market that is not prone to be entered by competitors. In addition, all customers within the defined geographical area of the monopoly were not given the possibility to switch to other power supplying corporations. Another advantage of the existing monopolies was that price strategies were implementable without the need to include competitors reactions or the fear that consumers could decide to change the electricity provider. On the other hand, growth by means of entering another regional market were strictly limited due to the local monopoly regulations and the fixed operating areas. Moreover, the abolishment of local monopolies also enabled foreign investors to enter the German market and as well as German utility companies to invest outside their home countrys borders.
134 135
See www.eur-lex.eu (1997) See www.bmj.de (2011) 136 See Mez, L. (2003), p. 193
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The law abolishing the local monopolies was considered controversial among the utility companies, politicians and consumers. A consolidation process caused by mergers and acquisitions in the utility industry was expected to occur. Consequentially, several utility companies feared to be overtaken by other companies. Other utility corporations regarded the opening as an opportunity to grow. Besides that, the question whether the consumers would benefit from the liberalization or would be harmed by higher energy prices after a consolidation was discussed in the media. Additionally, it was expected that the utility companies would become increasingly vertically integrated through mergers and acquisition and that large players will result from a consolidation and integration. A limited number of large players with high market power are considered a potential threat to fair market conditions and competition and require regulative measures by governments.137 A further change in the regulative environment came along with the German governments decision not to allow any new constructions of nuclear power plants and to generally refrain from using nuclear fuels for the purpose of electricity generation in the future. The law governing this decision came into force in April 2002 and represented a critical element in the strategic considerations of German energy supply corporations as nuclear power generation was and still is a critically important source to cover energy demands in Germany. The utility companies that operate the German nuclear power plants had to sign agreements with the government that ruled the operating lifetime of the power plants as well the disposal of the nuclear waste. In the year 2005, the German legislature passed a revision on the German energy law with the Zweites Gesetz zur Neuregelung des Energiewirtschaftsrechts. This law introduced and authorized the Bundesnetzagentur to act as a regulatory body that controls and approves terms and conditions for the connection and access to national transmission and distribution grids. The Bundesnetzagentur thus acts as a regulator to ensure nondiscriminatory market conditions regarding the access to the transmission and distribution networks and consequentially has to approve the prices for the use of the networks.138
137 138
See Olsen, O. J., Skytte, K. (2003), pp. 189 - 190 See E.ON (2008A), pp. 91-92
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Further, the law requires the legal unbundling of transmission and distribution activities from large electricity companies. This means that transmission and distribution units have to be legally separated with independent operations and accounting from the rest of the utility company that owns the unit.139 The introduction of an emission allowance trading system is another important form of regulation. From the year 2013, the utility companies need to purchase emission rights in order to generate electricity. Depending on the individual utility companys amount of emissions, costs for purchasing the emission rights accrue. A special tax for operators of nuclear power stations is a further governmental step that has an impact on the electricity generating companies in Germany. The Kernbrennstoffsteuer came into legal force on January 1, 2011 and imposes a fee for the use of nuclear fuel elements. The tax represents a grave financial exposure for German operators of nuclear power plants; an annual total of 2,3 billion euro are to be paid by the operators of nuclear power stations.140
3.1.2 Electricity Generation and Consumption

As indicated in Figure 9, the electricity production and consumption in Germany did not experience any significantly large growth rates from 1990 until 2010. From the year 2003 onwards, electricity production exceeded the consumption, which is attributable to electricity exports to Germanys surrounding countries. Moreover, the figure indicates a trend towards a stagnation of electricity consumption. This trend is expected to continue, as electricity demand is not increasing due to the high level of development and due to successful energy consumption reductions that are achieved by energy efficiency measurements.
139 140
See E.ON (2008A), p. 92 See www.faz.net (2011)
37
In respect to the energy sources of electricity generation, nuclear power generation remains to play an important role. As indicated in Figure 10, this energy source currently accounts for about one quarter of the total power generation and thus only slightly reduced its share in total electricity generation from the year 1992, when its share accounted to about 30 %.141
Electricity Production and Consumption in Germany 1990 - 2010 in TWh

700 600 500 400 300 200 100 0
Electricity generation
Electricity consumption
Figure 9: Electricity Production and Consumption in Germany by author142
Electricity generation from hard and lignite coal account for a high share whereas the use of the two resources was reduced between 1991 and 2010; in the year 1991, 150 tWh were produced from hard-coal whereas 117 tWh in 2010. The respective value for lignite coal in 1991 was 158 tWh which was reduced over time to 145 tWh up to the year 2010.143 Hydro energy only plays a very limited role in covering Germanys electricity demand as the natural prerequisites for using hydro energy are only given in a very limited number and are most widely already used for the generation of power. The electricity generation form renewable energy sources are significantly increasing in importance. As Figure 11 depicts, the share of renewable energy sources in the total
141 142
See www.bmwi.de (2011) See www.bmwi.de (2011) 143 See www.bmwi.de (2011)
38
production of electricity in Germany in 1991 amounted to only 3,1 %. In contrast, in 2010, the share amounted nearly 17 %.
Share of Energy Source in Total Electricity Generation in Germany (2010, in %)
Biomass, Other Photovoltaics 4% 7% Hydro 4% Wind 6%
Hard coal 19%
Nuclear 23%
Lignite coal 23%
Gas 13%
Oil 1%
Figure 10: Share of Energy Source in Total Electricity Generation in Germany by author144
Renewable energy sources are forecasted to proceed to grow in importance; on the one hand by the German governments ambition to substitute nuclear power generation with power from renewable sources, on the other hand by the aim to reduce CO2 emissions. The German governments ambitions plans to increase the share of renewable energy sources in the total gross energy consumption to 30 % by 2030, 45 % by 2040 and 60 % by 2050145 reinforces the growing importance of renewable energy sources in Germany in the future. The share of primary energy sources that originate from Germany accounts for only about 30 % of the total energy sources (referring to 2009). In 1991, the share of German energy sources accounted for 38 %.146 This indicates that Germanys dependence on the import of primary energy sources has increased throughout the last 20 years which can be explained by the physical lack of certain energy resources in Germany on the one hand and the lack of possibilities to extract the energy sources in an economical way on the other.
144 145
See www.bmwi.de (2011) See www.umweltbundesamt.de (2011) 146 See BMWi (2010), p. 15
39
Share of Renewable Energy Sources in Electricity Generation in Germany (1990 - 2010, in %) 20 10 0 %
Figure 11: Share of Renewable Energy Sources over Time by author147
100 % of uranium, 97 % of oil and 83 % of gas that is used for power generation is imported from abroad.148 The fact that uranium is entirely sourced from abroad is due to the natural unavailability of the resource. Whereas 90 % of the used hard coal was extracted in Germany, now only about one third of the used hard coal is sourced from regions within Germany.149 This is not because of a lack of hard coal but because comparatively high costs to extract the energy resource. Brown coal and renewable energy are the only energy sources that are not entirely imported from regions outside Germany. To sum up, the German electricity market environment is to a very important degree characterized by the large number of regulations that came along with the liberalization and deregulation and regulations that govern the reduction of emissions and the nuclear power phase-out. Especially the nuclear phase-out will lead to an increasing importance of renewable energy sources in electricity generation. In respect to the markets energy consumption and future energy demand, the market can be considered as a stagnating market.
3.1.3 Competitive Structures

The German electricity supply companies can be roughly subdivided into three basic categories; major/trans-regional electricity supply companies, regional electricity supply companies and local electricity supply companies. The ownership structure among the different companies is very complex; in many cases, a regional or local company is fully or partly owned by one of the major companies. Moreover, for example several
147 148
See BMU (2011), table 2 See BMWi, BMU (2006), p. 11 149 See BMWi (2010), p. 17
40
power plants are owned and operated by two or more companies of the different categories. Figure 12depicts the structure of the German electricity market and indicates the number of companies in the different company group. Moreover it indicates business relations to customers.
Figure 12: The Structure of the German Electricity Market by author150
The local electricity supply companies are highest in number. In many cases, these companies are partly or fully owned by the state or local municipalities. These companies serve a rather small area which is often a community or town. In many cases, these are the so called Stadtwerke which refers to the time before the market liberalization, when local monopolies existed. During the liberalization and privatization of the German electricity market, many of the local companies were bought by the major / trans-regional companies. A large share of the Stadtwerke have water management operation besides their electricity operations. Unlike the electricity market, the market for water management is
150
See RWE (2010A), p. 122
41
in most cases still a protected market which enables many of the local companies to operating in a local monopoly in their water divisions. The group of regional electricity supply company covers about 60 corporations. These companies are present in certain geographical regions and serve their customers. In many cases, the regional companies resulted from mergers among local electricity supply companies. Regarding their ownership, many different constructions are possible which contain for example a share of one of the 4 major electricity companies or the involvement of local communities.
The 10 largest electricity companies in Germany - sales to end customers in 2008 in billion kWh
Stadtwerke Hannover AG N-ENERGIE AG Stadtwerke Mnchen GmbH RheinEnergie AG EWE AG MVV Energie AG Vattenfall Europe AG E.ON AG EnBW AG RWE AG 0 10 20 30 40 50 60 70 80
4,4 6,9 7,9 8,1 10,9 11,6 24,2 78,1 81,6 85,5
90
Figure 13: The largest Electricity Companies in Germy 2009 by author151
Figure 13 illustrate the 10 largest electricity supply companies in Germany. The four largest companies are Germanys major/trans-regional electricity supply companies. These four companies, namely RWE, E.ON, Vattenfall and EnBW are responsible for a dominant share of Germanys electricity generation. Their accumulated market share in terms of total power generation amounts to about 80 %.152 The major electricity companies are large integrated corporations with operations in the area of electricity generation, transmission and distribution. Besides the electricity business segment, the gas and waste and water management partly represent further business areas.
151 152
See RWE (2010A), p. 122 See www.businessmonitor.com (2011)
42
Before the liberalization, 8 different companies were operating the high voltage electricity transmission net. With the liberalization and consolidation activities, four companies are namely RWE, E.ON, Vattenfall Europe and EnBW became the exclusive owners and operations of the high voltage transmission grid in certain defined areas of Germany. But with pressures form anti-monopoly authorities, the electricity transmission businesses of the four major electricity companies either already are sold or are planned to be sold soon; E.ON and Vattenfall have sold this business segment, EnBW is planning to sell a minority share of their transmission business to a infrastructure fond and RWE is planning to sell a majority stake.153
Figure 14: Main Control Areas of German trans-regional Electricity Companies154
Nonetheless, the areal distribution is still very important as the division of Germanys distribution network is responsible for a division of power generation and distribution activities, too. Therefore, Germany can still be subdivided into four areas of main focus
153 154
See www.handelsblatt.de (2011) See www.wiwo.de (2010)
43
or in other words into four control areas. In these areas, the major companys predominant share of revenue and of their operations takes place. These areas are shown in Figure 14 and indicate that the four major electricity supply companies have a strong regional focus which results in the fact that there are barely any investments done outside the control area. Going in line with the geographical distribution, the major companies barely have any customers than the ones inside their focus area. Cartel authorities accuse the major companies of avoiding competition among each other by maintaining the situation of area distribution. Moreover, the area distribution is partly held responsible for a lack of competition in German electricity markets and for high price increases during the last years despite the liberalization efforts in the industry.155
The largest electricity companies in Europe 2009 - consolidated electricity sales volume in billion kWh
EnBW (GER) Vattenfall (SWE) Iberdrola (ESP) GDF (FRA) RWE (GER) ENEL (ITA) EdF (FRA) E.ON (GER) 0 100 200 300 400 500 600 700 800
119,7 194,6 204,8 253,1 282,8 287,7 618,5 815,9
900
Figure 15: The 10 largest Electricity Companies in Europe by author156
Among the four major electricity supply companies that are operating in Germany, three are of German origin. The only corporation that does not have its roots in Germany is Vattenfall, which is a Swedish corporation that entered the German market in the year 1999 with a number of major acquisitions of German corporations.157
155 156
See www.wiwo.de (2010) See Bundesverband der Energie- und Wasserwirtschaft e.V. (2010) 157 See Hgselius, P. (2008), p. 258
44
As portrayed in Figure 15, the major electricity companies that operate in Germany play an important role in Europe. E.ON, RWE, Vattenfall and EnBW belong to the 8 largest electricity companies in Europe in terms of sales volume. These companies achieved their size through consolidation processes in the industry and grew by the mean of mergers and acquisitions. As the regulative environment in Germany preserved the company and industry structures, consolidation did not occur prior to the liberalization. Due to that, huge consolidation potentials became accessible not prior to the privatization and liberalization and triggered a wave of mergers and acquisitions within the German electricity industry. The consolidation and growth motives and reasons for German electricity companies will be discussed in the following. First of all, the corporations try to achieve economies of scale by merging or taking over a company with a similar portfolio. This aims at reducing a companys average cost per output and at achieving improved cost structures which as a consequence promise higher competitiveness. As the energy industry is relatively cost intensive compared to other industries, cost reductions can be an important leverage to improve a corporations competitive position. There are many examples for potential economies of scale, some relevant examples for electricity companies are the following:158 Increase of purchasing power regarding the purchase of technical equipment and the purchase of fuels for the electricity generation Improved possibilities of portfolio management and risk diversification in the area of power generation and trading Higher efficiency due to the distribution of marketing and SG&A costs among a larger number of customers Higher cost efficiency of customer service operations as fixed costs for the service infrastructure such as call centers are distributed over a higher number of customers. A further motive for mergers and acquisitions in the energy industry are market potentials. Companies can leverage market potentials that were created by the deregulation in the energy industry. Local markets that were previously protected are
158
See RWE (2000), p. 62
45
opening for competitors. In most cases, the only means of making use of the potentials that were suddenly made accessible is to merge with or to takeover an established company rather than founding a new entity or subsidiary and then relying on internal growth which is not a feasible strategy in many cases. Another motive for the consolidation of energy corporations is that overcapacities had developed due to changing industry environments. In order to stay competitive, pressures to reduce these overcapacities have arisen. Mergers and acquisitions represent a mean of reducing overcapacities more smoothly.159 Financing advantages are a further motivation for mergers and acquisitions. The electricity supply industry is characterized by the need of large investments for example into the construction of power plants or transmission and distribution facilities. In addition, the pay-back periods of the investments in this industry are very long. Therefore, the energy supply business is very capital intense. Large companies can achieve less expensive financing possibilities for investments and operations. For this reasons, a consolidation can come along with financing advantages for the involved parties. Vertical integration is another motive for mergers and acquisitions in the energy industry. Companies can achieve competitive advantages by using forward and/or backward integration to integrate value generation chain elements to their operations. For example the integration of fuel suppliers or fuel producers for the power generation such as a lignite coal mine operator can be motivated by securing supplies and favorable prices of fuels. An additional factor that had an impact on the consolidation of the industry and the growth of the players is the power and gas convergence. Electricity and gas companies are merging and establish common operations. This convergence is taking place because of several common elements in the two segments value chains. Economies of scale can be achieved when gas and electricity companies merge and share fixed costs for example of sales and customer service or other synergies. Moreover, electricity companies that operate gas powered power plants are likely to achieve important advantages by merging with or acquiring a gas supply company.
159
See RWE (2000), p. 62
46
And additional reason for the convergence of gas and power utilities is that a corporation can only grow by mergers and acquisitions up to a certain size because of anti monopoly regulations. But a merger with a company that is active in another industry is likely to be approved. The advantages of gas and power convergence are reinforced by the large number of mergers and acquisitions among electric and gas utility companies in Germany and in Europe. Important is that the mergers and acquisitions strategies always prerequisite the acceptance of EU- and German cartel authorities which try to prevent the reduction of competition among German and European corporations. Therefore, any consolidation plans need to consider the potential effects on the markets and the respective reaction of the cartel authorities. Consolidation in a certain market thus can only take place up to a certain degree.
47
Master Thesis Niklas Nosek iklas N
3.2
Internationa ionalization of Selected Market Participa cipants
For the purpose of anal analyzing internationalization processes and strategies that are used d stra in the practice, two German corporations are selected. These companies are E.ON and o Ge compa RWE, which are the two largest German energy companies. But not only in Germany, tw ut E.ON and RWE play a decisive role; the companies have extended their presence far nded beyond their home countrys borders. e cou
3.2.1 E.ON
The E.ON AG is curren one of the worlds largest private held electricity and gas currently eld el companies. The companys operations are located in Europe, the US and Russia compa USA whereas E.ON has ope as operations in the entire electricity value chain wh includes power ain which generation, transmissio distribution, sales and trading activities. In some countries, the mission, entire electricity supply value chain is covered. In E.ONs gas busin the company is business active in gas productio storage, trading and sales. duction, In the year 2010, E.ONs electricity generation capacity reached 68 GW which is , E.ON ed mainly installed in Ger Germany, the United Kingdom, Russia, Sweden, Italy, Spain, France eden, the Benelux countries and the United States of America. This makes E.ON one of the ntries a most geographically diversified electricity supply companies in the world.160 ally di
Name: Headquarters: Electricity sales volu volume: Revenue: Net income: Free cash flow: Employees:
E.ON Aktiengesellschaft Dsseldorf, Germany 2010 billion kWh 1030 million 92.863 million 6.281 million 1.917 85.105
2009 786 79.974 8.669 485 85.108
Table 1: Company Overview E.O by author161 erview As listed in
160 161
See www.eon.com (201 (2011A) See E.ON (2011A), p. 2 ),
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Table 1, E.ONs latest fiscal year showed revenues of nearly 93 billion Euro, a total electricity sales volume of 1030 billion kWh and a headcount of about 85 thousand employees. E.ON was formed in June 2000 as the resulted from a merger of two large industrial enterprises, namely Vereinigte Elektrizitts- und Bergwerks- Aktiengesellschaft (VEBA) and Vereinigte Industrie-Unternehmungen Aktiengesellschaft (VIAG). These two companies were established in the 1920s as holding companies for stateowned industry corporations. Both companies were not specialized on a certain business activity and underwent several portfolio changes throughout their history. Besides energy and energy related businesses, telecommunication, aluminum, chemicals, logistics and real-estate were some of VEBA and VIAGs business areas. VEBA and VIAG were partly privatized in the 1960s respectively in the 1980s and became entirely private held in the year 1988. The companies were listed in the German DAX and underwent a strategic reorientation which included the focus on energy and communication services as well as industrial production in the field of chemicals and aluminum. VEBA and VIAG were internationally active companies with operations ranging from export to wholly owned subsidiaries abroad and with a significant share of revenues and profits that were generated abroad. These international activities began very early on. Nonetheless, the two companys energy related businesses barely did internationalize until the late 1990s. VIAGs energy related businesses were run under the name Bayernwerk which concentrated on the electricity supply in the federal state Bayern and grew over time by the mean of acquisition of other German companies. Minority and majority shares in Hungarian and Swiss electricity companies that were bought in the 1990s represent Bayernwerks first international energy related business involvements. Moreover, with proceeding liberalization of the European electricity markets, sales activities in Switzerland, Austria, the Czech Republic and Italy were started with the aim to market electricity that was produced in Bayernwerks German power plants.162
162
See VIAG AG (2000), pp. 3, 108-111
49
VEBAs energy unit was operating under the name PreussenElektra AG with different wholly and partly owned electricity companies in different regions of Germany. PreussenElektra did not become internationally involved until the late 1990s by buying minority shares in N.V. Electriciteitsbedrijf Zuid-Holland (EZH), a Dutch electricity company, in Sydkraft AB (a Swedish electricity producer) and in BKW FMB Energie AG (a Swiss energy company). In the year 1999, PreussenElektra extended its capital involvement in EZH acquired the entire company and began its electricity sales activity in the Benelux region via EZH.163 The year 1999 marked PressuenElektras beginning of electricity export and trading activities by selling electricity through foreign merchants and offerings on Oslos and Amsterdams electricity exchange (Nordpool and APX). In addition, a sales office in Italy is found to market electricity that is produced in Germany and Switzerland on the Italian market. Besides that, PreussenElektra Polska is founded to build up and develop electricity trading activities in Poland and its surrounding countries.164 VEBAs and VIAGs activities in the form of electricity exports, the acquisition of stakes in foreign electricity companies as well as the acquisition of entire foreign electricity corporations and the foundation of sales offices abroad characterize the internationalization ambitions of the two companies. The liberalization of the European electricity markets enabled the internationalization to take place and is the beginning of E.ONs electricity segments internationalization. When VEBA and VIAG merged to E.ON in the year 2000, Germanys fourth largest industrial corporation and largest utility company was found. Europe wide, E.ON became the third largest electricity supply company at that time.165 Going in hand with the merger, a reorganization and a change in strategy was decided. The previous conglomerate strategy with a wide variety of business areas was abandoned in favor for a new strategy with a focus on two fields, namely energy and chemicals. In line with that, company divisions with operations outside the core business areas with a total annual revenue amounting to about 65 billion DM were
163 164
See www.eon-benelux.com (2006) See VEBA (2000), pp. 39-41 165 See www.spiegel.de (2000)
50
prepared to be sold.166 Consequently, among others, telecommunication-, glass-, packaging-, electronic components- and logistics businesses were sold within the year 2000 and shortly thereafter. In October 2000, E.ONs internationalization was propelled by an agreement between E.ONs Swedish subsidiary Sydkraft and the Swedish utility Vattenfall to swap shareholdings. In exchange for shares in HEW, a German local utility company, E.ON and Sydkraft received shareholdings in Norwegian, Swedish, Czech and Lithuanian electricity companies. Already one year later, in 2001, E.ON took over the British energy company Powergen. This strategic move did not only grant E.ON access to the British market and access to Powergens operations, but also to the US market; Powergen bought LG&E, a US American energy company in the year 2000.167 With the acquisition of Powergen and its US subsidiary LG&E, E.ON became the second largest energy service provider in respect to the number of total customers and power supplied.168 The next important step in E.ONs internationalization is the purchase of shares in Espoon Shk, a finish utility company. In 2001, E.ON acquired a share of 34 % in the company, and this share was increased to a 64 % share within less than a year.169 At the same time, E.ONs stake in the Swedish utility company Sydkraft AB was extended. These strategic actions represent E.ONs move to the Finnish market and underline E.ONs ambitions to increase its size and market presence in North Europe. Furthermore, the year 2002 is marked with an acquisition of 90 % of the shares in the Hungarian electricity company Eszak-dunantuli Aramszolgaltato (Edasz), which reinforces the international expansion in Eastern Europe. In 2004, E.ON expanded in the UK by acquiring 100 % in Midlands Electricity. With this acquisition, E.ON increased its number of customers in the UK to 4,8 million customers, which made it the second-largest electric distributor in this country.170 This acquisition reinforced E.ONs strategy to expand on the British electricity market,
166 167
See Deckstein, D., Dohmen, F. (1999), pp. 138-141 See www.independent.co.uk (2000) 168 See www.eon.com (2011B) 169 See Handelsblatt (2002), p. 14 170 See www.eon.com (2011C)
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which had been declared to one of E.ONs target markets by its former CEO Wulf Bernotat.171 In addition to the acquisition in the UK, E.ON entered the Rumanian and Bulgarian markets. In the two countries, E.ON bought company shares in 2004 and 2005 that were offered in the privatization of state owned utility companies. With the acquisition the two regional Bulgarian utilities Gorna Oryahovitza and Varna, E.ON acquired about 1,1 million customers and a market-share that amounted to about 25 % of Bulgarias total electricity market.172 In Rumania, E.ON signed an agreement with the government to purchase a majority stake in the regional utility Electro Moldova S.A. which marked the privatization of the state owned company. Electro Moldova had about 1,3 million customers and a market share of about 11 % of the countrys total wholesale market.173 E.ONs presence in the Benelux region is further increased in the year 2005 with the acquisition of the Netherlands fifths largest electricity and gas company NRE Energy b.v. This deal increased E.ONs customer base by additional 275.000 customers.174 In addition to the investments in the Netherlands, E.ON built up electricity generation capacities in Italy and invested around 400 million euro in a gas and steam power plant in the proximity of Turin. With a completion time of 2 years, this greenfield investment was aimed at entering the Italian market which was Europe fourth largest electricity market.175 In December 2006, E.ONs footprint in the Italian electricity market further widened by investing into a 75 % stake in one of Italys largest independent energy traders, Dalmine Energie SpA. This acquisition granted E.ON access to about 1100 industrial- and business customers who annually purchase approximately three billion kWh electricity.176 Shortly after purchasing the majority stake in Dalmine Energie, E.ON purchased the outstanding shares and became the sole owner of the company.
171 172
See www.wiwo.de (2003) See www.eon.com (2011D) 173 See www.eon.com (2011E) 174 See www.wiwo.de (2005) 175 See E.ON (2006), pp. 7, 19 176 See FAZ (2006), p. 17
52
A change that was motivated by establishing an organizational focus on E.ONs international growth strategy was the introduction of a management board member responsible for corporate development/new markets. Besides the CEO, the CFO, the Chief Human Resources Officer and the Chief Operating Officer the new position in the Management Board was established to enhance E.ONs market orientation and to further increase growth.177 In 2007, E.ON backed up from its plan take over Endesa S.A., Spains largest utility company. Prior to that, a takeover battle against Enel (a large Italian utility company) and Acciona (a Spanish conglomerate) was dragging on for more than a year. In return for abandoning their takeover plans of Endesa, E.ON was offered a package of different company participations in several countries.178 Consequentially, in Spain E.ON took over Enels electricity subsidiary Viesgo and a number of Endesa power plants with a total power generation capacity amounting to three GW and about 580.000 customers. In addition, E.ON was offered a share of 80 % in Endesas Italian subsidiary that operated electricity generation capacities of 7,2 GW and 80 % in Endesas operations and power plants in France with a generation capacity of 2,5 GW.179 E.ONs unsuccessful takeover attempt of Endesa was finalized with the acquisition of assets in Spain, France and Italy. This represented a further significant step in E.ONs internationalization. Another important event was the entry into Russias electricity market by purchasing a majority stake in OGK-4 in the year 2007. OGK-4 operated gas- and coal fired power stations with an installed power generation capacity of 8,6 GW which represents about 6 % of Russias entire electricity generation capacity. This move reinforced E.ONs ambition to gain a foothold in Russias electricity market, which was the fourth largest in electricity market in the world and was promised to grow about five percent on an annual basis.180
177 178
See E.ON (2008B), p. 20 See www.handelsblatt.de (2008) 179 See www.handelsblatt.de (2008) 180 See Wiede, T., Flauger, J. (2007), p. 16
53
Only several months later, E.ON intensified its presence in Russia and began to construct a combined cycle gas turbine power plant in Siveria which was going to add approximately 2,3 GW to E.ONs installed capacity in Russia.181 Besides its market entry in Russia, E.ON entered the Turkish electricity market in the year 2007 with a joint venture agreement with Turcas, a local utility company. Two newly set up entities (in which E.ONs stake was 70 %) developed, build and operated two 800 megawatt power plants in Turkey.182 In the years 2007 until 2009, E.ON invests internationally in renewable energy projects;183 In 2007 E.ON acquired a wind farm operator, namely ENERGI E2 Renovables Ibericas. This increased E.ONs power generation capacity in Spain and Portugal by approximately 260 megawatt. Besides the already operative projects, E.ON took over several renewable projects from ENERGI E2 Renovables Ibericas in Spain and Portugal that were planned or already under construction.184 In 2007, E.ON purchased Airtricity Inc. and Airtricity Holding (Canada) Ltd. This investment expanded E.ONs portfolio with assets in the USA and Canada. Along with these investments, E.ON became one of the worlds largest wind farm operators.185 In the year 2009, E.ON invested into the worlds largest offshore wind energy park off London in the UK which will be completed in 2012. In June 2009, a solar power plant was opened in southern France, which is E.ONs first solar farm. E.ON sugbed a joint venture contract with Abengoa Solar, a Spanish company to build and operate solar farms in Spain. Large wind farms in Texas and Pennsylvania, USA became operational in 2009. Thereby, E.ON increased its total installed wind capacity to 1.700 MW.
181 182
See www.eon.com (2011G) See www.wiwo.de (2007) 183 See E.ON (2011B) 184 See www.finanzen.net (2007) 185 See www.eon.com (2011F)
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A further internationalization move came in January 2010 along with the foundation of a carbon-sourcing joint venture between E.ON and Masdar, an Abu Dhabi based organization. The joint venture that operates under the name E.ON Masdar Integrated Carbon (EMIC) seeks to reduce power plants and industrial facilities CO2 emissions in the Middle East, Africa and Asia. Achieved CO2 emission reductions are then be used as carbon credits in the EU emission-trading scheme.186 Even though, EMICs CO2 reduction efforts do not represent E.ONs core business, the joint venture is a further step in E.ONs internationalization. E.ON is currently present in every of Europes most important electricity markets. North America and Russia represent further important sources of revenue. One important indicator for internationalization is the number of a corporations employees that are working abroad.187 With increasing internationalization, the relative share of employees abroad increases. As shown in Figure 16, in the case of E.ON, the percentage of employees working outside Germany increased from 37,5 % in 1999 to around 59 % in 2010 which speaks for a significant growth in the share of employees that are working outside of Germany. But as the focus of this thesis is the internationalization in the electricity market, the previous mentioned percentages need further elaboration; E.ON resulted from the merger of two industrial conglomerates, namely VEBA and VIAG. The two companies operations in other fields than their electricity and energy related operations are responsible for the consolidated share of employees of around 38 % working outside of Germany in 1999. The two companies energy related businesses were only to a very low degree involved internationally as their operations were mainly located in Germany. first not German managing board member.188 This is a reaction to the increasing importance of foreign markets for E.ON.
186 187
See E.ON (2011C), p. 16 See Krystek, U., Zur, E. (2001), p. 5 188 See www.focus.de (2010)
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Percentage of employees working outside of Germany

70 % 60 % 50 % 40 % 30 % 20 % 10 % 0%
58,7%
37,5%
Figure 16: E.O ; Percentage of Employees working outside of Germany 1999 2010 by author189
Consequentially, the rather high percentage share of around 40 % of employees working abroad in the first several years after the foundation of E.ON cannot be taken as representative for E.ONs electricity related businesses and Figure 16 does not consider the internationalization in E.ONs electricity business in an isolated way. If only the employees that were working in energy related segments were outlined in a graph similar to Figure 16, a much faster growth of the share of employees working outside Germany that starts at a much lower percentage value would be outlined. The relative increase in the share of employees is not the only indicator of the internationalization with respect to human resources; another important indicator is the participation of foreigners in a companys management.190 In the year 2010, E.ONs management was reorganized and Jrgen Kildahl, a Norwegian was appointed to be the An additional indicator for internationalization is the share of revenue that is generated outside of a corporations home country.191 As indicated in Figure 17, E.ON generated about half of its revenues abroad in the year 1999. In the following years until 2004 this share gradually decreased which speaks for a decreasing importance of business activities outside E.ONs home country Germany.
189 190
See E.ON Annual Reports 1999 - 2010 See Krystek, U., Zur, E. (2001), p. 5 191 See Krystek, U., Zur, E. (2001), p. 5
56
Percentage of revenue that is generated outside of Germany

60 % 50 % 40 % 30 % 20 % 10 % 0%
49,3% 46,3%
Figure 17: E.O ; Percentage of Revenue generated outside of Germany 1999 2010 by author192
This decrease can be explained with E.ONs change in business strategy and going in line with this, the move towards a focus on energy related businesses. The period from 2000 until 2005 was mainly characterized by divestments of businesses which were outside the strategic focus area of energy and investments into energy related fields. The businesses that were sold in this period (among others chemistry, logistics, aluminum) were highly contributing to the high share of revenues that were generated abroad mainly because a large portion from what was produced was exported to foreign markets. Hence, as the non-energy businesses were sold, the share of foreign generated revenues declined. Analyzing the development of the location of property, plants and equipment can be taken as another indicator for internationalization. The advantage of this indicator is that in contrast to comparing revenues, the economic cycle in the different respective countries of operation does not influence the expressiveness of this indicator. By analyzing E.ONs share of property, plant and equipment that is outside of Germany, statements about investment locations and the importance of foreign business operations for the corporation can be made. As depicted in Figure 18, E.ONs share of property, plant and equipment outside Germany rose gradually from 26,4 % to around 66 %. This significant increase underlines E.ONs investing activities outside of Germany and the role that foreign operations play for the entire company. Already in the year 2005, E.ON had more than half of its property, plant and equipment outside of Germany which underlines the ambitions internationalization of the company.
192
See E.ON Annual Reports 1999 - 2010
57
Percentage of property, plant and equipment outside of Germany

80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0%
66,2%
26,4%
Figure 18: E.O ; Percentage of Property, Plant and Equipment outside Germany 1999 2010 by author193
E.ON currently operates six nuclear power stations in Germany and owns stakes of five further nuclear power plants. With a share of 45 % of E.ONs total power generation in Germany, nuclear power generation is the companys most important energy source.194 E.ON is more dependent on nuclear power generation than any other German electricity supply company. This exposes the company to risks associated to changes in governmental regulation regarding nuclear power generation and might cause further internationalization to take place. As such, under E.ONs current CEO Teyssens, further internationalization strategies are planned; two completely new markets outside of Europe are planned to be entered. Regions and countries under consideration are for example Brazil, China, India and the Gulf-Region. What these countries have in common is their forecasted high economic growth and consequentially a significant increase in energy demand. In China for example, energy demand is projected to triple in the years between 2008 and 2035.195 The future importance of E.ONs new regions outside Europe is expressed in the target to generate 25 % of the corporations EBITDA outside of Europe by 2015 (currently only approximately 5 % of the EBITDA is earned outside Europe.196 To achieve this target, heavy investments into countries outside of Europe will have to follow.
193 194
See E.ON Annual Reports 1999 - 2010 See Flauger, J., Hennes, M. (2011A), p.31 195 See International Energy Agency (2010), p. 217 196 See Flauger, J., Hennes, M. (2011A), pp. 30-31
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By looking at new markets outside Europe, E.ON is among other trying to avoid the increasingly unattractive market conditions that are caused by the legal and governmental regulative frameworks. Furthermore, pressures from Germanys Federal Cartel Office and the EU commission which have a suspicious eye E.ONs market power in Germany strictly limit E.ONs growth opportunities in its home-country. As a consequence of the cartel offices menace to intervene against E.ONs market power, E.ON sold its German power transmission network to Tennet, a Dutch corporation. What is more, E.ON sold power plants to competitors to appease the cartel authorities. This illustrates E.ONs strictly limited possibilities to grow in Germany without steering into a conflict with antimonopoly regulators. But expanding operations beyond Germany increases risks despite the opportunities. E.ONs operations in Germany are highly profitable and achieve a ROCE of 20,5 %, whereas the UK business generates a ROCE of only 9,5 %. In Scandinavia, the ROCE is even lower amounting to 7,9 %. But even more critical is the ROCE in France, Spain, Italy and Russia with a value of about 4,5 % which is severely lower than this markets capital costs of 10,6 %.197 Therefore, despite the internationalization efforts, the German market is still highly important for E.ONs overall profitability which makes E.ON dependant on the market and especially vulnerable to changes in the German business environment.
3.2.2 RWE
RWE belongs to Europes five largest electricity and gas companies. Its product and service portfolio covers the entire value chain in the field of electricity and gas. This includes the production of oil, gas and lignite coal, the construction and operation of conventional and renewable power plants, gas and electricity transmission, energy trading, and the distribution and sales of electricity and gas.
In its home market Germany, RWE is the largest electricity producer. As listed in
197
See Flauger, J., Hennes, M. (2011A), pp. 30-31
59
Table 2, in fiscal year 2010, RWE employed nearly 71 thousand employees and sold nd em about 311 billion kWH to its 16 million customers. The resulting revenue amounted to ting re 53 billion Euros.198
Name: Headquarters: Electricity sales volu s volume: Revenue: Net income: Free cash flow: Employees:
RWE Aktiengesellschaft Essen, Germany 2010 billion kWH 311 million 53.320 million 3.308 million -879 70.856
2009 283 47.741 3.571 -614 70.726
Table 2: Company Overview RWE by author199 erview
RWEs history dates back to the 19th century; in the year 1898, Rhe ates ba Rheinisch-Westflisches Elektrizittswerk Aktiengesellschaft (Rhenish-Westphalian Electric power company) or Aktie lectric abbreviated, RWE was founded. RWE began to produce electricity in the year 1999 in a tricity single coal powered power plant, located in the City of Essen. Short later, RWE red po ortly purchases its first shares in tramway companies in order to obtain power supply rights t share tain po to further municipalitie In the following years, RWE built a gas supply network and ipalities. su broadened its geograph ographical exposure by merging with other power station operators, by ower s buying smaller utility companies and by building new power plants. Furthermore, a tility c majority interest in an engineering company was acquired.200 e After World War Two, RWE proceeded its extension of electricity generation capacity r ricity g to keep up with the increasing growth in energy demand. Further, R he inc , RWE invested in lignite coal mining operations and thus got further vertically integra ng ope ntegrated. An important mileston is the construction of Germanys first commercial nuclear lestone t comm power station which gets commissioned and connected to the grid in the year 1962. ich ge The 1980s showed the first important internationalization moves; Motivated by ves; M improving and securing the supply of fuels for power generation, RWEs future ecuring ion, RW company Rheinbraun invested into joint ventures with US companie to develop and raun mpanies
198 199
See RWE (2011), p. 2 See RWE (2011), p. 2 , 200 See www.rwe.com (201 (2011A)
60
exploit hard coal deposits in the USA. Moreover, Rheinbraun acquired shareholdings in Canadian and Australian companies with primary operations in uranium mining and processing.201 Beginning in 1988, RWE undertook diversification measures by acquiring a German chemicals and petroleum group including refineries and gas filling stations, furthermore it invested into waste and water management and obtained a majority stake in a construction company, namely Hochtief. Further diversification was achieved by investing in a new plant of RWEs printing machines business, Heidelberger Druckmaschinen AG.202 RWEs waste management operations were expanded into several foreign nations including the United States and Eastern European countries. In addition, the international construction projects of Hochtief as well as Heidelberger Druckmaschinens export business increased the importance of foreign countries and markets. Beginning in 1991, RWEs chemicals division began to expand internationally by taking over plants in the USA and Italy, becoming one of the worlds leading suppliers of raw materials for detergents and of alumina. In addition to that, RWEs raw materials business, Rheinbraun invested in mining activities in North America and became an important international player in the hard coal production industry.203 Furthermore, mineral oil and natural gas drilling and production operations in Norway and Egypt were included under RWEs purchase of majority shares in DEMINEX (Deutsche Erdlversorgungs-GmbH) in 1998. In the early 1990s, in contrast to RWEs other businesses, the electricity related segment concentrated on the expansion and investments in Germany. With the beginning of the privatization and deregulation of European electricity markets in Europe in 1996, RWE started to internationalize its energy segment by founding operations in the Czech
201 202
See www.rwe.com (2011) See www.rwe.com (2011C) 203 See www.rwe.com (2011C)
61
Republic, Croatia and Portugal and by purchasing minority shares in Hungarian and Swiss utilities.204 In 1999, the extensive diversification measures came to an end and a reorganization and focus on power generation and related services was concluded. Consequentially, RWEs telecommunication business was sold and the company started operations in the area of energy trading by establishing the RWE Energy Trading Limited (RET) in London, UK. This company aimed at trading with electricity and gas in Europe and was the first attempt in establishing a foothold in the increasingly important energy trading market.205 The year 2000 was predominantly marked by the merger between RWE and Vereinigte Elektrizittswerke Westfalen (VEW). VEW, a German company that was found in 1906 was mainly active as a regional utility company. The two companies decided to proceed with RWEs plan to reorganize operations toward a focus on energy and energy related products and services and waste and water management. Moreover, it was decided, that operations of both companies would be unified under the company name RWE. The merger made the new RWE Germanys largest electricity producer with 150 billion kWh annually and a headcount of around 170.000 employees. The companys newly formulated target was to become one of Europes leading producers of energy and energy related services.206 In the same year, the internationalization of RWE was taken to the next level with the takeover of the British water utility Thames Water plc. Along with this acquisition, RWE took over Thames Waters international operations in the United States, Australia and Asia. In 2003, the takeover of the largest water utility company in the USA, American Water Works Company was completed which further expanded RWEs business on an international scale. In 2002, after the investments that expand RWEs international market presence in the field of water management, RWE placed a bid to acquire Britishs largest electricity company Innogy plc. This corporation operated power plants with a total installed capacity of 9.600 MW and supplied close to 5 million customers with electricity, and
204 205
See www.rwe.com (2011C) See Handelsblatt (2011), p. 19 206 See www.spiegel.de (1999)
62
about 2 million customers with gas. With this purchase, RWE increased its number of customers to a total of 20 million and became the third largest electricity company in Europe in terms of electricity sales.207 In 2004, the Innogy holding company was fully integrated into RWEs operations and was run under the name RWE npower. Another investment followed in December 2002; RWE obtained the majority of STOEN S.A., a Polish electricity company that mainly offered electricity in Polands capital, Warsaw. With this acquisition, RWE is established a foothold in the Polish electricity market. Later, in 2007 the company was renamed RWE Stoen.208 In 2003, RWEs market presence in Eastern Europes electricity market was further expanded by acquiring a 49 % stake and management control of VSE a.s. (Vchodoslovensk energetika a.s.) in Slovakia. VSE a.s. had more of 600.000 customers which purchased about 4,6 tWh annually.209 Despite the declared focus on energy and water and waste management, E.ON still owned many businesses at the beginning of 2004 that did not fit its new strategic focus. These businesses were for example the construction company Hochtief and the largest printing machine producer Heidelberger Druckmaschinen. E.ONs majority stake in these companies was reduced from 2004 onwards and served as financing source for further investments in RWEs strategic focus on energy businesses and the companys expansion in markets outside of Germany. In 2005 RWE widened its capacities in the United Kingdom by purchasing Great Yarmouth Power Ltd, the operator of a combined cycle gas turbine power plant in Norfolk. This plant increased RWEs installed capacity by 420 MW. Additionally, investments into the construction of three wind farms in the UK with a total installed capacity of 100 MW were pursued in 2006.210 In 2006, RWE announced to invest into a 1.600 MW hard coal fired power plant in the Netherlands. In addition to that, RWE and the Dutch transmission system operator Tennet started to cooperate with the aim to expand electricity transmission capacities between the Netherlands and Germany to improve potential trading activities between
207 208
See www.faz.net (2002) See www.rwe.com (2011C) 209 See www.strom-magazin.de (2011) 210 See www.rwe.com (2011C)
63
the two countries. This significantly raised E.ONs engagement in the Dutch electricity market and consequentially reduced E.ONs dependency on Germany power generation capacities. In the following year, 2007, RWE decided to significantly invest into the British electricity market. The construction of two 1.650 MW combined cycle gas turbine power plants in Staythorpe and Pembroke and two additional large high efficiency coal fired plants with an output of 1.600 and 2.400 MW were planned. The commission of the power plants was scheduled to take place in and after 2011. Besides the power plants that were planned and build in the UK, RWE started further international expansion activities in the UK, France and Poland in 2007; the construction of an offshore wind-farm with an installed capacity of 90MW began in the UK, two wind farms with a total capacity of 20 MW were commissioned in France and two wind farms with a combined capacity of 70 MW were planned in Poland. Furthermore, a joint venture with Fri-El Green Power to develop wind power and biomass plants in Italy and to invest into wind power facilities in Spain was established in May 2008. RWE held a 50 % stake in the joint venture. Further plans for the construction and operations of onshore wind turbines in Poland, the Czech Republic and Hungary were concluded.211 An important milestone in RWEs internationalization ambition is the takeover of Essent in 2009 with a transaction value of 9,3 billion Euro, which represented RWEs largest acquisition for several years. Essent, which was the leading utility company in the Netherlands with more than 4 million customers in the Netherlands and Belgium, was taken over by RWE without Essents distribution networks and the companys waste management segment. With this strategic move, RWE increased its electricity generation capacity in the Netherlands by 4,7 GB.212 But cartel authorities only approved the transaction under the condition that RWE sold Essents majority shareholdings in a German utility in order to not gain further market power in Germanys electricity market.
211 212
See RWE (2009), p. 56 See www.manager-magazin.de (2009)
64
This transaction marked RWEs expansion in Europes Benelux region which was reinforced by RWEs investment into purchasing shares of Luxembourgs integrated national electricity and gas company.213 At the same time, RWE pursued investments into UKs electricity market by the foundation of a 50:50 joint venture with E.ON. The joint ventures task was to develop, construct and later on operate nuclear power plants in the UK. An installed capacity of at least 6 GW was intended to be build by the joint venture in the future. This long-term oriented joint venture was found to establish a foothold in UKs future electricity market.214 In 2009, the joint venture obtained the winning bid in UKs Nuclear Decommissioning Authoritys tender process. In 2009, RWE expanded its operations to new terrain by entering the Turkish electricity market. RWEs selected entry mode was a joint venture contract with the Turkish energy company Turcas. The newly set up venture in which RWE holds a 70 % majority was established to plan a combined cycle gas turbine power plant in Denizli with a capacity of 755 MW.215 Later, in 2010, the construction of the power plant was stipulated with an estimated capital investment of 500 million Euros and a scheduled commissioning date in 2013. After this initial investment, RWE planned to expand its operations in Turkey. Between 2009 and 2010, a number internationalization investments in the field of renewable energy generation were undertaken by RWE:216 RWE bought a 27 % minority share in the project developer company C-Power which built an offshore wind farm off the Belgian coast with 60 wind turbines and a total installed capacity amounting to 300 MW. The project was forecasted to be completed in 2013. A tender process regarding the development of two offshore wind farms off UKs coast was won; the Atlantic Array project increased RWEs installed capacity by 1,5 GW and the Dogger Bank project by 9 GW.
213 214
See RWE (2009), p. 58 See RWE (2009), p. 58 215 See Flauger, J. (2009), p. 18 216 See RWE (2010B), pp. 20-21, RWE (2011), p. 45
65
RWE signed a joint venture contract for the construction and operation of an offshore wind farm off the coast of North Wales; The Gwynt y Mor wind farm with an installed capacity of 576 MW.
A further growth in importance for RWEs operations outside Germany came along with a reorganization in 2010. A new organizational structure moved the coordination of activities in Central Eastern Europe and Turkey from Germany to the Czech Republic. A newly established entity in Prague, namely RWE East, s.r.o. was responsible for the coordination of operations in Central Eastern Europe and Turkey with effect from January 2011.217 The change in the organization aimed at increasing the efficiency of operations and is the first move towards an organization that relies on regional headquarters abroad to oversee operations in its region. RWE transferred responsibility from its home country into a regional organized company structure. RWE has currently electricity related operations in a number of European countries. Its most important market in is Germany, in which RWE is the largest electricity supply company in terms of sales. Moreover, the company has electricity operations in the UK, where RWE is the 4th largest electricity company and the Netherlands, where RWE is the second largest electricity company. These two markets are of high importance because of their high contribution to RWEs total revenues. RWEs Central and Eastern and South Eastern Europe division unifies electricity related business activities in Hungary, Slovakia, the Czech Republic, Poland and Turkey. RWE does not have an important market position in respect to electricity sales in the Czech Republic, Poland and Turkey. In contrast to that, RWE is the second largest electricity company in Hungary and the third largest in Slovakia. Europe wide, RWE is the third largest electricity supply company in terms of sales.218 One important indicator for internationalization is the number of a corporations employees that are working abroad.219 With increasing internationalization, the relative share of employees abroad increases. Applying this indicator on RWE leads to a development that is shown in Figure 19. Between the years 1998 and 2010, the share of employees abroad increased from about 21 % to nearly 52 %. Nonetheless, the latter
217 218
See RWE (2011), p. 62 See RWE (2011), p. 56 219 See Krystek, U., Zur, E. (2001), p. 5
66
share was already nearly reached in 2005 after which the share of foreign workers y near e fo decreased to a lower percentage value than the level that was recorded in 2001. wer pe record The drop in the share of employees working abroad between the years 2005 and 2006 is hare o yea predominantly caused by RWEs divestment of water management operations, mainly aused ment in North America. In li with the change in strategic focus, RWEs total workforce was . line WEs reduced by more than 20 % between 2005 and 2006. However, the number of r, n employees working in Germany was reduced by 13 % whereas the number of ing s n employees working abroad went down by more than 27 %. ing abr
Percentage of employees working outside of Germany Perc Germ
60 % 50 % 40 % 30 % 20 % 10 % 0%
21,2% 49,3% 51,8%
Figure 19: RWE; Percentag of Employees working outside of Germany 1999 2010 by author220 entage
With the acquisition of the Dutch Essent in 2009, the share of employees working tion emplo abroad increased again significantly and reached a level that is close to the current share s of 51,8 %. Overall, the RWEs internationalization activities are reflected by the increasing share Es int d th of employees working abroad. rking Another important indi indicator of internationalization is the developme of the share of lopment revenue that is generate outside of a corporations home country.221 In the case of enerated ntry. RWE, only about one quarter of the total revenue was generated outside of Germany in t q ted out 1998 (see Figure 20). This share rose until the year 2003 after which the share of ). foreign revenues decreased steadily until2007. decre The drop in the share of revenues generated outside of Germany from 2003 2006 is hare o ny fro mainly contributed a change in RWEs strategic focus towards energy related ed ch s ener
220 221
See RWE Annual Reports 1999 - 2010 Repor See Krystek, U., Zur, E. (2001), p. 5 ur,
67
businesses. This led to the divestment of the construction company Hochtief which pany achieved a significant p of its revenues outside Germany and the sale of shares in nt part d Heidelberger Druckma uckmaschinen, which was mainly export driven. In addition, the sale of en. UK and North America water operations in 2006 led to a further reduction of the merican ther re relative share of revenue generated abroad. reven
Percentage of revenue that is generated outside of Germany Perc side o
60 % 50 % 40 % 30 % 20 % 10 % 0%
24,0% 46,2%
Figure 20: RWE; Percentag of Revenue that is generated outside of Germany by au entage author222
Caused by divestments in Germany and increasing revenues from investments abroad, tments rom in RWE generated more than 46 % of its revenues from customers that are located outside t rs tha of Germany in fiscal year 2010. This value is expected to rise further, as RWE declared scal ye furthe to reduce its dependenc on the German market by seeking further investments abroad. endence rther i The investment activiti in terms of destination of CAPEX are illustrated in Figure 21, ctivities re illus which shows the devel development of the share of investments in proper plants and roperty, equipment and intangib assets that is invested outside of RWEs home country, tangible Es h Germany.
222
See RWE Annual Reports 1999 - 2010 Repor
68
Percentage of total capital expentidure on propert plant and Perc operty, equipment and intangible assets invested outside Germany equip tside
70 % 60 % 50 % 40 % 30 % 20 % 10 % 0%
62,2%
21,1%
Figure 21: RWE; Percentag of Capital Expenditures invested outside of Germany by author223 entage any b
In 1998 and 1999, RWEs investment into regions outside Germany was about 21 % of 9, RW rmany total CAPEX. This share was close to doubled in the year 2000 whi marks the highest is sha which increase in the conside nsidered time period and grew further until 2006. However, in the year 2007, relatively more was invested again in Germany which decreas the share of w ecreased CAPEX invested outside Germany. outsi In the period from 2007 until 2009, the share of investment inside and outside Germany m side a was close to balanced. But in fiscal year 2010, the share of CAPEX outside RWEs nced. PEX home country was significantly increased again and reached a value of 62,2 %. This as sign underlines RWEs ambitions to decrease its dependence on revenue generated in s amb venues Germany. In fiscal year 2010, nearly three quarter (73 %) of RWEs total electricity production 0, nea l elect was generated by RWEs Germany Division.224 Despite the investm RWE vestments in foreign markets, this dominant share of Germany in the companys electrici generation inant ectricity portfolio clearly shows RWEs dependence on its home country. RW RWEs declared target is to importantly decrease this dependence in the years to come. decrea This is important because of Germans harsh regulative framework regarding nuclear t becau work power generation and the increasing objections in Germany against coal fired power t gainst stations. Moreover, due to the high dependence on German operatio RWE is er, erations, significantly exposed to further regulatory changes or economical risks in Germany. A osed ical ri regional diversification reduces the impact of these risks on RWE as a whole. ication WE a
223 224
See RWE Annual Reports 1999 - 2010 Repor See RWE (2011), p. 76
69
Therefore, RWE plans to increase investments into foreign market in order to significantly raise the foreign countries contribution to the companys total revenue and earnings. In the year 2007, only 27 % of the companys earnings were generated abroad. RWEs plans to increase this value to 40 50 % until the year 2012.225 RWE does not only intend to expand in the countries that are already entered but considers to identify and to enter new country markets.
225
See Flauger, J. (2010), p. 29
70
3.3
Internationalization Patterns and Future Developments
This section outlines internationalization patterns and motives in the German electricity industry by connecting the theoretical elements which are described in chapter 2 and the German electricity market and its companies internationalization which are subject of chapter 3.1 and 3.2. Further, factors influencing future internationalization developments among German electricity companies will be outlined. Internationalization in the German electricity market began relatively late. The reason for that is grounded in the regulative framework which preserved market structures that allowed local monopolies and clearly distributed and separated geographical markets. Consequentially, competition was prevented and an expansion of the different market participants was very difficult. But not only in Germany the markets were protected from the entry of foreign competitors, in the surrounding countries and markets, protective legal regulations and the general tendency of governments to establish an energy supply that is independent from foreign influences prevented competition from abroad.226 One the one hand, this established the situation that German utilities did not need to fear foreign competition, but on the other hand, an international expansion and foreign investments were barely possible. The large German electricity companies result from industrial conglomerate companies with operations in diverse industries. In general, these conglomerates began their internationalization early but their electricity businesses focused nearly entirely on operations within Germany. With the liberalization of electricity markets in Germany and Europe starting in 1998, internationalization was made possible and German electricity businesses started their international expansion. Hence, the internationalization in the German electricity market is significantly influenced by the liberalization of European electricity markets. A general push factor that makes companies to pursue internationalization strategies is increasing competition. The liberalization of the electricity market put German electricity companies under pressure as competition among German electricity companies themselves and additionally foreign companies that entered the German market such as the Swedish company Vattenfall and the French EdF arose. Caused by
226
See Krompietz, M. (2011)
71
the increasing competition, for example E.ONs earnings were reduced by 25 30 billion DM within a period of less than 3 years after the liberalization laws came into force. Consequentially, the operational earnings of electricity companies experienced a decrease to the extent of 30 40 %.227 The competitive environment in the German electricity market that is party caused by the entrance of foreign players that entered the German market is an important push factor for internationalization. A further key motivation for the internationalization of large German energy companies is the access to growth potentials that were accessible with the EU liberalization of electricity markets. The liberalization promised to access new customers and consequently growth in revenues. Besides this, growth is associated with another pull factor, namely economies of scale. Electricity companies can achieve more profitable operations by increasing output and thus obtaining more favorable conditions for example in respect to the purchase of fuels and equipment. The role of German and European antitrust authorities is central in strategic considerations of German electricity companies. Growth and the creation of synergies is always limited by the anti monopoly authorities which aim at enhancing competition in the electricity markets. Due to E.ONs and RWEs high market shares, strategic moves that have an impact on the companies market power are observed by antitrust authorities. As a consequence of German anti monopoly authorities claims, E.ON had to sell electricity generating capacities to foreign investors and to divest its German high voltage transmission network to the Dutch company Tenne T Holding. This shows that growth potentials and the potential to generate synergies are very limited for large electricity market participants and that the strict antitrust regulations represent a push factor towards internationalization in the electricity industry. At the same time it needs to be outlined that only large electricity companies have the potential to achieve synergies in cross border transactions. This, in line with the high capital requirements for internationalization is the main reason for the fact that only large German electricity companies show international activities. The German local and regional electricity companies focus on a rather small area in their home-country and seek growth by expanding regionally.
227
See Schrmann, H. J., Schneider, E. (2000), p. 2
72
In respect to the entry modes of internationalization that were chosen by the large German electricity companies it can be said that the export of electricity to third parties abroad did not play a major importance. This is for the reason that the infrastructure for the transfer of electricity between countries was not established as the different countries in Europe had rather independent electricity supply systems. Cross country trade of electricity was possible only in inefficient ways. Additionally, the German electricity companies wanted to establish a foothold in foreign markets not by only exporting electricity but by establishing a market presence which allows them to participate in several value chain parts including the distribution and sales of electricity. Exporting in the sense of selling electricity to an external party abroad which takes care of all value generating activities besides the electricity generation and distribution would ignore important potential to create additional value for the German electricity supply companies.228 Therefore, sales offices of the German utility companies in the surrounding companies were founded in the late 1990s. These subsidiaries task was to market and trade the electricity that was mostly generated in Germany. This can be exemplified by VIAGs establishment of sales offices in Switzerland, Austria and the Czech Republic at the end of the 1990s. The entry modes of licensing and franchising do not play a role in the internationalization of German electricity companies. This is due to the nature of the business. Licensing and franchising require for example a trademark, patent, technology or another protected right to use intellectual property. This is not a major business element of electricity companies as they generate and market electricity based on technologies that are predominantly purchased by external companies. In addition, the utility companys business model is very complex and tailored to individual market conditions. This prevents the business model or parts of it to be transferred to other parties. Similarly, the general internationalization mode of contract manufacturing is not relevant for electricity companies due to the nature of the business. The most important internationalization modes in the German electricity industry are equity participations, joint ventures, acquisitions and mergers.
228
See Krompietz, M. (2011)
73
Equity participations were used intensively by German electricity companies directly from the start of their internationalization. They were used by the German companies as a strategic mean to position themselves in foreign companies and on foreign markets. The equity participations often represent a way of intensifying the importance in a foreign company gradually by expanding the share with time if the company and market remain an interesting investment. In many cases, E.ON and RWE used initially low equity participations to strategically position themselves for a complete takeover of a company after time. This is exemplified by E.ONs move to gradually increase its stake in Sydkraft AB, a Swedish electricity company; in the late 1990s E.ON (at that time still VEBA) purchased a small minority stake in Sydkraft. In the year 2001 this stake was extended to a majority stake which was followed by changing the name Sydkraft to the new company name E.ON Sverige in 2005. In 2008, E.ON purchased the outstanding 44,6 % of shares and made the former Syddraft AB a wholly owned subsidiary. Joint ventures were commonly established by German electricity companies with the aim to internationalize and to enter new markets. Often, the construction of a power plant with an established local player marks the initial engagement of a foreign market. This is for example the case in RWEs and E.ONs joint venture agreement with Turcas to build and operate a power plant in turkey. One important advantage of starting a joint venture on a foreign market with a local partner is that the German company can use the partners local market expertise and its already established infrastructure to transmit and market electricity. The sales channels and infrastructure for power transmission and distribution can be accessed if a local partner is involved. Without this, heavy investments besides the construction of the already capital intensive power plant would be needed. Furthermore, joint ventures with technological companies are agreed upon to make use of the technological expertise and for example develop international renewable power plant projects. Another very important reason for entering markets via joint venture is the distribution of risk among joint venture partners. German companies significantly reduce their risk of failing to produce and market electricity in a foreign market if they have a local joint venture partner.
74
The internationalization of large German electricity companies is importantly characterized by frequent and excessive merger and acquisition activities. Many large acquisitions propelled E.ONs and RWEs international presence.229 Several acquisitions not only increased the presence on the target companys home market but also granted access to further countries. This was the case when the target company had operations and/or investments in third countries and means that by buying a company in one particular country, several countries are entered at the same time. As such, E.ONs acquisition of UK based Powergen granted E.ON presence on the UK market as well as the USA, which was already entered by Powergen. Merger and acquisition strategies to internationalize are very capital intense and raise the question of how these strategies were financed. The major German electricity companies developed from large industrial conglomerate corporations with operations for example in the chemistry, aluminum, telecommunications and construction industry. The strategic reorientation towards energy related businesses made it possible for these companies to finance their national and international expansion by divesting other businesses that were not in line with their focus on energy businesses. In respect to timing strategies, a pattern could not be identified, as timing strategies vary with the different strategic internationalization moves. E.ON and RWE entered several countries one after the other, which corresponds to the theoretical concept of a waterfall strategy. In other cases, for example by acquiring a foreign electricity company that already had established operations in several third countries; many countries were entered at the same time which is typical for a sprinkler strategy. A gradual internationalization that is observable within many other industries and which begins with few export activities which are intensified by a joint venture before a wholly owned subsidiary is established is not evident in the German electricity industry. In contrast to other industries, the internationalization of German electricity companies can be characterized by fast speed. The different entry modes were used simultaneously and initial involvements were expanded rapidly by the German companies. This can be explained by the need to enter markets with fast speed. As such, strategic alliances were found to support electricity export and to prepare fully owned sales offices. Moreover, sales offices in strategically important regions were opened in order to serve as a
229
See Rabotin, M. (2011)
75
regional hub for further expansion in the region. One example for the regional hub is RWEs acquisition of Electriciteitsbedrijf Zuid-Holland in the Netherlands, which was bought in order to extend sales operations in the Benelux region from the Netherlands. Another pattern that can be observed is that the internationalization started with countries that were in close geographical proximity to Germany; The Netherlands, Switzerland, Sweden, Austria, The Czech Republic and Poland were one of the first countries that were entered in the year 1999 and shortly thereafter. To an important degree, this is influenced by synergies that can be achieved by the exchange of electricity among these countries and Germany. In countries that are located in greater distance to Germany, the potential for achieving synergies is much lower.230 In respect to the future, the German and European regulative environment is going to proceed playing a paramount importance in the German electricity market. One the one hand, anti-monopoly regulations are strictly limiting horizontal growth and restrict vertical integration of large electricity companies. Additionally, increasing pressures to reduce CO2 emissions are caused by legislative and regulative measures as well as from the society. In order to improve their carbon emission footprints, European companies seek to find compensation projects on a global scale that equip these companies with carbon certificates. The potential to find these compensation projects is higher in developing countries which will speak in favor of increasing international activities. Another future internationalization push factor is the nuclear power phase-out in Germany. As Germanys large electricity companies are the operators of the German nuclear power plants and will have to stop operating the plants, alternative investments need to be found. As nuclear power generation does not have such a negative image in other countries, the electricity companies might consider investments into the construction of nuclear power plants abroad. Pared with political regulations, a rising number of the electricity companies customers in Germany want to consume electricity that is generated on an environmentally friendly basis. Consequentially, the electricity generation from renewable resources is increasing in importance. But the effectiveness and profitability of power generation
230
See Rabotin, M. (2011)
76
from renewable resources depends critically on environmental factors which vary from areas to area. Considering the possibility of water energy, there are barely any potentials for hydroenergy investments in Germany left as investments into water energy projects in the past have made benefit of nearly all spots in Germany where such energy generation is feasible from a technical and economical point of view. Furthermore, only limited potentials for wind energy investments are available in Germany.231 Similarly, solar power generation is possible in Germany, but undeniable, there are geographical areas outside of Germany that are more suitable to power generation from renewable energy sources and promise higher efficiency and profitability than in Germany.232 Consequentially, German electricity companies will have to invest into environmental friendly energy generation capacities that are predominantly outside of Germany which will increase the companies international exposure. Another factor that speaks for further internationalization pressures and further internationalization of German energy companies are market potentials. Germanys future energy demand is characterized by stagnating- and according to several sources even declining developments in terms of consumption. Hence, in order to seek growth, foreign markets will need to be targeted. But the International Energy Agency (IEA) forecasts that in order to cover the future energy demand, the electricity generation in the EU will rise annually by only 0,6 % until 2035233. This development does not speak in favor of large scaled growth potentials and will not be sufficiently attractive for large German utility companies. In contrast to that, the IEA expects an annual rise in the electricity production of annually 3,1 % in India and 3,8 % in China.234 These significantly higher growth rates reflect the higher growth opportunities in particular regions outside Europe and makes it attractive for German companies to invest into these growth markets and thus internationalize beyond the borders of Europe. Therefore, internationalization will proceed to play an important role for German electricity companies to satisfy the need to find growth opportunities.
231 232
See Gnauck (2011) See Schrmann, H. J. (2011), p. 8 233 See Flauger, J., Hennes, M. (2011A), pp. 30-31 234 See Flauger, J., Hennes, M. (2011A), pp. 30-31
77
To summarize, the internationalization of large German electricity companies started with the liberalization of the German and European electricity markets at the end of the 1990s. The liberalization is a critically responsible factor for German electricity companies to internationalize as former protected foreign markets became accessible and offered growth potentials and potentials to create synergies. These motives can be referred to as pull factors. At the same time, a number of push factors promoted German companies to enter foreign markets. One of the most important push factors are German anti-monopoly regulations which prevent companies to exceed a certain level of horizontal and vertical integration. Regarding the entry modes and timing strategies of German electricity companies, a number of different strategies are used. Most importantly, purchases of shares in foreign companies which are extended with time, joint ventures and acquisitions of established foreign market participants are used as market entry modes. The capital intensive internationalization with acquisitions of large foreign electricity companies was predominantly financed by the divestment of businesses that were not in line with the companies focus on energy related services. Thus, the move from conglomerate companies towards focused energy service providers made it possible for E.ON and RWE to rapidly expand across borders. Mainly due to limited growth opportunities for the large German electricity companies in their home-country, the rising importance of renewable energy sources and the ambition to decrease dependence on the German market, internationalization is going to proceed playing a major role in the strategies of German major electricity companies. In addition, the high energy demand growth in regions outside of Europe speaks in favor for internationalization that goes beyond the borders of Europe, North America and Russia.
78
4 Conclusion, Recommendation and Outlook

In the subsequent sections, a conclusion that takes into account the entire chapters of the thesis is drawn. Moreover, limitations and recommendations for further studies are outlined.
4.1
Conclusion
The deregulation and liberalization in the German and European electricity markets are a factor of paramount importance for the internationalization of German electricity supply companies. The regulative environment that was in place prior to the liberalization prevented the internationalization of corporations and is the reason that the internationalization in the energy industry began relatively late compared to other industries. With the deregulation and liberalization, a rapid internationalization began to take place. A slow and gradual development of internationalization that is based on the acquisition of foreign market knowledge as described for example by the Uppsala Model of Internationalization is not evident in the electricity market. In contrast, acquisitions of foreign company shares and entire companies drove the transition from electricity companies that were focused almost entirely on operations in Germany to companies that have operations in many foreign countries. This capital intense international expansion strategy of the major German electricity companies was only possible because of their strategic shift from conglomerate companies with operations in many different industries towards a concentration on energy related business activities. Divestments of non-core businesses enabled the large electricity companies to finance their investments in foreign markets. In contrast to that, Germanys small and medium sized electricity companies barely show any signs of international activities. The reason for this is that these companies first of all lack the financing possibilities, and moreover, because an internationalization of a small and medium sized company would barely create any synergies that are worth the significant investment.
79
In respect to the internationalization motives of the major electricity companies, three major reasons can be identified. The first motive is the pull factor of making use of the market potentials that were made accessible through the privatization, liberalization and the regulatory reforms in Europe. The electricity companies entered the foreign markets to increase the number of potential customers and going in line with that, revenues and profits. A further major internationalization motive of the major electricity companies is the creation of synergies and economies of scale by acquiring foreign companies. The third major internationalization motive is to decrease the dependency on the German market as the growth potentials (horizontal as well as vertical) in Germany are strictly limited by anti-monopoly authorities and the stagnation of energy demand growth. In addition, the geographical diversification decreases the exposure of the risk that politically motivated regulatory changes in Germany lead to major disadvantages for the companies. Regarding the market entry strategies of Germanys major electricity companies, the analysis showed that the most important entry modes are joint ventures and mergers and acquisitions. As the investigations showed, licensing and franchising do not play any role in the context of internationalization of large German energy companies. The research showed that internationalization will proceed to play an important role for German electricity companies. This is mainly because of the growth potentials in Germany and in Central Europe are limited by the slow increase in energy demand. Regions outside Central Europe such as Brazil, India and China show a rapidly increasing energy demand and therefore represent attractive investment markets. Another factor that speaks in favor of further internationalization is the increasing importance and demand of electricity generation from renewable energy sources. As the use of renewable energy sources in regions outside of Germany are, in many cases, more efficient than in Germany, German electricity companies will consider producing electricity from renewable energy sources outside of Germany and import it to their home country.
80
4.2
Recommendation
A limitation to this thesis has to be seen in the lack of company specific internal data which was not available via the sources that have been used for this paper. The publicly available data that was predominantly taken from the companies annual reports, in many cases, does not make it possible to draw a conclusion in respect to internationalization relevant questions. This is because in nearly all cases, company data is publicized in a consolidated that makes it difficult and sometimes impossible to extract data and information regarding electricity related business. The issue of internationalization in the electricity industry can be illuminated from many different perspectives. In the recent years, media has been reporting about European energy companies that are exiting markets which were previously entered in the context of internationalization strategies. This raises the issue of company performance and sustainability of internationalization strategies. Internationalization strategies could be analyzed with a focus on company performance to gather knowledge on the questions of which entry mode is creating the highest value and long-term performance for companies. A further interesting field of study that could be based on this thesis is the internationalization of electricity companies sourcing strategies. Large German electricity companies have expanded their power generation, transmission, distribution and sales activities to European and North American countries only. Sourcing strategies internationalized in a more global way and are implemented by small and medium sized electricity companies, too. Electricity businesses typically source lignite coal from countries such as Russia, Columbia, South Africa, USA and Indonesia and oil and gas from Norway, Turkmenistan, Egypt, Libya, Algeria, Morocco.235
235
See RWE (2010A), p. 166
81
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Title of the Masters Thesis:

Master Thesis Niklas Nosek

2.3.1 2.3.2 2.4

2.4.1 2.4.2 2.4.3 3

3.1.1 3.1.2 3.1.3 3.2

Internationalization of Selected Market Participants ....................................... 48 I

Master Thesis Niklas Nosek

3.2.1 3.2.2 3.3 4

E.ON ......................................................................................................... 48 RWE .......................................................................................................... 59

Internationalization Patterns and Future Developments................................... 71

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

Relevance, Motivation and Problem

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

See Babbie, E. (2004), pp. 24-26 See Bryman, A. (2004), p. 321

Master Thesis Niklas Nosek

Figure 1: Thesis Structure Overview

Master Thesis Niklas Nosek

2 Theoretical Considerations of Internationalization

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

Reasons for Internationalization

Master Thesis Niklas Nosek

2.3.1 Push factors

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

2.3.2 Pull factors

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

See www.wto.org (2011) See www.europa.eu (2011)

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

2.4.1 Selection of Country

See Johnston, S., Beaton, H. (1998), p. 86

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

Figure 2: PESTEL-factors by author

See Kutschker, M., Schmid, S. (2006), p. 435

Master Thesis Niklas Nosek

Figure 3: Porters five forces in line with Porter53

Master Thesis Niklas Nosek

2.4.2 Selection of Entry Mode

Master Thesis Niklas Nosek

Market Entry Modes

commitment and operational involvement

Fully Owned Subsidiary

HIGH Figure 4: Market Entry Modes by author

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

Master Thesis Niklas Nosek

2.4.3 Selection of Timing Strategies

Master Thesis Niklas Nosek