Appropriate Internationalization Model for Senseo - Case Study Example

Table of contents Title Page Introduction 4 Key success factors 4 Key competencies 5 Internationalization model 7 Threats 8 New markets 9 Conclusion 10 Recommendation 10 References 12 Appendix 14 Introduction In many years internationalization has remained a big challenge for many companies especially those do operate in the global arena. This is because different economic environments are presented by different countries. In many occasions, different countries have different policies that govern Direct Foreign Investment activities. The objective of this report is to discuss the case of Senseo alliance, firm that deals with the production and marketing of coffee pods and coffee machines. The report will look into various key success factors, key competencies, threats and venturing into new markets (Andexer 2008). Finally, the report will discuss the appropriate internationalization model for Senseo and thereafter draw conclusions and recommendations that can be used by the managers to internationalize their businesses. Key success factors The industry for many years now has witnessed tremendous growth which is associated with growth of demand for coffee across the world. Because of its high demand, coffee usage has spread to other countries of the world from Ethiopia where it was first discovered. For example after coffee was first discovered in the ninth century in the highlands of Ethiopia. It is demand made the product to be very common in other countries of the world. Some of the countries that had had the experience of coffee by the 15th century included: Egypt, Yemen, Persia, Turkey, Azerbaijan and other several countries of North Africa. However, important to note is that the demand for the product has been motivated by the fact that it plays a very vital role in the society. In some countries especially from Africa and Asia many people had preferred the product because it was used during religious ceremonies. On the other hand, coffee has been associated with political activities. This means the product apart from its natural use had been associated with different activities within the society. The other important factor that has led to rapid growth of the industry is attributed to the fact that this product for many years has been packaged and sold in different sizes. However, this is contrary to the past when the product was only sold as filter coffee in only 500 grams packets. The development and introduction of new packaging systems has been as a result of innovation within the industry that has enabled coffee in the modern world to be produced and roasted in different styles (Muhlbacher, et al 2006). Coffee bar culture in developed markets has also been a cause factor for the industry success. This is because many could wish to pass by different coffee homes for their drink. This trend for many years has been considered by different coffee manufacturers as a stable market that will be used to make more sales (Mitgwe 2006). Competition is also a key success factor for the industry. The key players for the industry included: Proctor and Gamble, the Kraft Foods and Philips and Sara Lee. These three players in the industry have been identified with their ability to introduce the Single Service Pod Machines into the homes so that to create demand for coffee at homes as it is in the case of coffee bars. The competition has also seen the introduction of specialist coffee shops which have been very influential especially among the youths who are fond of espresso fresh coffee beans. Finally, the introduction of coffee machines has not only helped in the preparation of coffee in a faster way but has also boosted the revenues for the respective manufacturers through large sales across the globe. Refer to appendix 1 below which is a table showing the sales of coffee machines to different parts of the world. Key competencies and international competitiveness The Senseo Concept was introduced in 2001. The concept was developed by Philips. The idea was aimed at producing coffee pod machines under the Senseo brand. The machines were developed in order to make use of the coffee pods that were being produced by Douwe Egberts. The resultant of the idea therefore was the formation of the partnership between Philips who was an expert in electronics and the coffee roaster, Douwe Egberts who was the supplier of coffee pods. Since the deal was sealed, the Senseo concept has seen the emergencies of key competencies that are very vital for its success in the global market. The major competitive advantage that the Senseo has developed so far is the ability to protect the idea (Hill 2007). For example the low cost manufacturers from China who are used to manufacturing and selling cheap coffee machines have not managed to copy the idea. I believe this a key competency for any company that intends to move into the international market where ideas are stolen by the competitors. For example many retail stores and chains like Aldi and Wal-Mart are fond of asking manufacturers in China to make for them anything they might have seen in the market. However, with case of Senseo it has never been easy because the idea is generated from two parts namely the coffee machines and the coffee pods. The current market price for the traditional cup is between 4 to 5 euro cents. On the other hand the price of pod coffee between 16 cents for the Senseo and 30 and 32 for the Nepresso and Tchibo. This difference is mainly attributed to companies’ greediness to set high prices for high profit margins without taking into consideration the fate of the users. The concept has also managed to develop a market niche whereby there is no competition. While the competition has remained very stiff in the ordinary coffee market, the Senseo concept with its pods has managed to venture into the pod market where price competition is still very low (Mitgwe 2006). I think this a very important strategy that will see the partnership sell coffee in a very simple and manageable way. This has helped dominate in the total market sales of the pods in Germany. For example in the year 2004, the Germany market for pods stood at 2,750 tones whereby Senseo alone managed to sell 560 million pods. Apart from innovation that has been introduced by the partnership and that has seen the Senseo benefit the new segment, the alliance has also managed to create an identity that clearly links coffee and appliances which has been nicknamed as the ‘key and lock system’. This is because of the clear connection that is there between coffee and coffee appliances. Finally, apart from the development of key skills from the two collaborators, the Senseo alliance has also managed to protect its intellectual property rights. Perhaps this is because of the agreement between the two companies retain their original intellectual property. Internationalization models Internationalization theories are very important for those businesses that wish to venture into the international market. The three important internationalization theories include: the network model, the transaction cost theory and the Uppsala model. Under the network model, the suppliers are expected to create good relationship with the other countries in order to ensure that the company is able to serve the customer well when it decides to internationalize. On the other hand, the transaction theory refers when the company chooses to enter into international business but does most of its activities like licensing internally without out sourcing. Under this model, the companies seek to reduce costs (Luo 2002). Finally, the Uppsala model explains how firms slowly ventures and intensifies their activities in the global market. Internationalization is heavily depended on the experience built from the domestic environment. In the case of the Senseo, the Uppsala Model is the most appropriate because it will assist the alliance to identify those experiences that have been gained at home and then compare them with the foreign ones. For example, the Senseo alliance is very much aware that competition always exists irrespective of the region or locality and that competition can lead into two scenarios; positive and negative (Mitgwe 2006). For example the Senseo has been challenged with the protection of their intellectual property. This has been witnessed when the other companies decided to copy the idea of Senseo and yet nothing could be done. This is a very important experience from the domestic point of view. The Senseo alliance was founded in the Netherlands and therefore if they intend to venture into the new markets, it must first consider venturing into the neighboring countries in Europe before moving further to the other countries outside Europe. This model is important in the sense that it will allow the alliance to move gradually from one region to another. However, it is important to note that not all regions present same opportunities and this means therefore that the alliance cannot jump to far countries where opportunities are almost certain. Threats for Senseo and future sales Given the nature of business in the global market, the Senseo is currently faced with very stiff competition. This has been as result that some manufacturing companies have managed to copy Douwe Egberts’ coffee pods. This means that other companies are able to manufacture their own coffee machines which are almost similar to the Senseo ones. The implication is that the market is likely to be invaded with several manufacturers and consequently the alliance’s sales are likely to go down (Lymbersky 2008). The battle in the market is very evident. This has been demonstrated by the way in which other manufacturers have tried to interfere with Douwe Egberts’ rights. This is because they also want to manufacture and market ‘me-too coffee pods’. This has been activated by the fact that the European patent covering the Senseo pods in 2006 being revoked. This development means that companies can now join in the competition by producing the coffee pods using the similar system. This heightened the competition between the alliance and the other competitors such as Tchibo, Kraft Foods as well as Nestle and Krups. The companies like the Nepresso and the Nestle are becoming mass producers of coffee machines something that has enhanced the competition in the market (Kolodko 2003). The final consequence of this kind of environment has posed a great challenge to Senseo concept in that the market will be flooded by many players who be dealing in the same line. Finally, stiff competition will mean that Senseo must review its prices in order to bear with the competition. However, this might not be a long-term solution since for any company to do well, it must have sound financial base and this can only be achieved if the company is doing well. According to Gregoriou (2009), this will compromise the concept to provide quality machines for the market. New markets Given the fact that competition was becoming very stiff in the local market and more especially in Europe, venturing into the new markets remains the best option for the company. Considering the different market segments, its evident that even though the market for coffee machines is evenly spread, still volumes vary greatly has indicated in appendix 1 below. For example North America leads in the total sales for coffee machines at 28.4 million units while Australia and New Zealand has got the least market volumes at 0.3 million units. This therefore means that the market has not been exploited. It is important for Senseo to consider venturing into the markets where the market volumes are still low and create the demand for the products as they continue to exploit the already developed markets (Wagner 2009). Some of the countries that Senseo may consider venturing into for new markets include: Eastern Europe, Latin America and Caribbean, Asia Pacific, Australia, New Zealand, Africa and the Middle East. These new markets have been identified from the 2008 report by the Euromonitor International. This follows low market volumes for coffee machines in the respective countries. Conclusion In order to conclude this report, it is important to highlight that a number of lessons have been learnt. First, internationalization is big challenge for many companies especially those do operate in the global arena. This is because different economic environments are presented by different countries. Second, there are several key success factors for international businesses which include: innovation, competition, demand and supply. Third, unfair competition has been identified as one of the main challenge of doing business in the foreign market. This is because of lack of proper policy to protect intellectual property. This has been demonstrated from the case whereby competitors try to copy other manufacturers’ ideas so as to match their qualities. Fourth, venturing into the foreign market requires the consideration of three main internationalization models namely: the network model, the transaction cost theory and the Uppsala model. In general terms, marketing and more especially in the global market is a very complex venture and it requires very detailed analysis to determine the pros and cons of doing business at international level (Bell & Crick 2004). Recommendations In order to help the management teams in different organizations to make good decisions with regard to the marketing and internationalization, the following recommendations have been identified: 1. Before engaging in international business, there is need to do a detailed analysis of all factors in order to determine whether the idea is viable or not. This is a very important decision because it will help the management to avoid rushing into decisions that may cost the business’ performance. 2. There is also need to assess the key success factors in the industry and their relevance to the business. The key success factors that need to be considered include: competition, innovation, demand and supply. 3. Finally, always there is need for the organizations that wish to enter into international business to develop the most appropriate internationalisation model which can be used as the company’s strategy to penetrate into the global business. This is important because it helps the organization in making sure that the company’s entry into the business does not fail. References Andexer, T 2008, Analysis and Evaluation of Market Entry Modes Into the Asia-Pacific Region: Based on the Example of a German SME in the Industrial Goods Business, GRIN Verlag. Bell, J & Crick, D 2004, Small firm internationalization and Business strategy, International Business Journal, Vol. 22. (1) 23-56 Gregoriou, G 2009, Emerging markets: Performance, analysis and innovation, CRC Press. Hill, C 2007, International Business Competing in the Global Marketplace, Irwin: McGraw Hill. Kolodko, G 2003, Emerging market economies, Ashgate Publishing, Ltd. Luo, Y 2002, Multinational enterprises in emerging markets, Copenhagen Business School Press DK. Lymbersky, C 2008, Market Entry strategies: Text,Cases and Readings in Market Entry Management, Christoph Lymbersky.McDougall, P & Oviatt, B 2005, Defining international entrepreneurship and modeling the speed of internationalization, Entrepreneurship Theory & Practice, pp. 537-553. Mitgwe, B 2006, “Theoretical Milestones in International Business: The Journey to International Entrepreneurship Theory”, Journal of International Entrepreneurship, Vol. 4, pp. 5-25. Muhlbacher, H, Leihs, H & Dahringer, L 2006, International marketing: a global perspective, 3rd Ed. Cengage Learning EMEA. Wagner, T 2009, Foreign market entry and culture, GRIN Verlag. Appendix 1 Table showing global market for coffee machines Country (region) Retail market volume (million units) Western Europe 17.8 Eastern Europe 0.6 North America 28.4 Latin America and Caribbean 4.1 Asia pacific 2.9 Australia and New Zealand 0.3 Africa And Middle East 0.7 Total 54.8 Read More