Modes of Entry in the Foreign Market for the Leather Manufacturer and the Franchise Model as the Best One - Case Study Example

Executive Summary The growth in leather products is forcing the leather manufacturers to look towards different economies to sell their products. The United States due to their macroeconomic policies presents a huge opportunity for the leather manufacturers to sell their products. The government policies lay emphasis on growth, unemployment, inflation and maintain a balance in trade. The report helps to present the policies and the effect the policy have on economic growth, unemployment, inflation and trade. The report highlights the fiscal stimulus, policy to reduce debt, the monetary police to reduce cash rate. It also helps to identify the manner in which the policies are having their impact in consideration to the global economic recession and pressure from exchange rate and other functionalities. The report thus presents the trend analysis which highlight growth in the future years as also highlighted by the prediction based on the policies prevalent in United States. The report looks into various aspect of leather industry by gathering information which will help the leather manufacturer to enter the US market. The report thereby presents the different modes of entry into United States. Out of all the modes it indentifies the best mode to enter into United States is through the franchise model. The report thus helps to identify the manner in which the leather manufacturer can look forward towards entering the US market so that it is able to tap the potential the US market has and ensure that it is able to grow. Content Introduction 4 Purpose of the report 4 US Leather Industry 4 Macro Economic Policies prevalent in United States 5 Policy with reference to Economic Growth 6 Policy with reference to Unemployment 7 Policy with reference to Inflation 7 Policy with reference to Trade 8 Trend Analysis 8 Macro Environmental Analysis 11 Predictions 14 Situational Analysis 15 Reasons United States is looking towards import leather goods 16 Different modes of entry into United States 17 Leather Company Strategy to enter United States 18 Benefits of the franchise model 19 Conclusion 21 References 22 Introduction The company which deals in leather goods is looking towards entering into United States because of the great opportunity presented by the country. The growth in leather products and the increase orientation of people towards these products is forcing the company to look towards expanding its reach. For this the company is looking towards different opportunities presented by United States after evaluating the micro economic policies and the other factors which will ensure smooth operations in United States. The report thus presents the manner in the company should look towards entering United States so that it is able to grow its business and operation by ensuring maximum return and growth opportunity. Purpose of the report To identify the macroeconomic policies of United States to find the opportunity it presents for leather goods To identify the entry mode which will be best suited to ensure quick growth and help to capture the United States leather market To identify different factors by conducting macro economic analysis and other research to garner the potential the United States presents for the leather industry. US Leather Industry The US leather industry is one of the biggest leather industry and US imports majority of the leather products. It is the largest importer and imports around 23% of the world leather products. (US Market, 2007) When we look at the consumption in terms of expenditure it stands at $27.9 billion presenting a huge opportunity for the leather manufacturers. A break up of the different products imported highlights that US imports around 28% shoes, 27% leather clothes, and 7.8% fur with leather. This makes the per capita consumption to be $680. The growth and more trendy leather products are bound to make the rate grow further thereby making more people purchase the different products available. The US on the leather front have various friars and trade shows where different products are displayed and helps the manufacturers get a good return on their investments. With the growth and cheap products available with the booming leather industry elsewhere in the world the United States is bound to make their presence felt in every market as it consumes huge quantity of leather products. Macro Economic Policies prevalent in United States The macroeconomic policies have been designed in a manner which gives utmost importance to growth and timely check in the policies ensures they are able to keep with the world markets. This can be seen from the following The government policy to decrease the case rate to 4.5% on global cues helped to ensure demand and fight the global recession. (Neville, 2010) Looking from the financial angle the government policy to ensure guaranteed return on deposit and maintaining liquidity helped them fight the liquidity crunch. The fiscal policy was also such that it ensured that national debt reduces thereby supporting the growth and creating jobs. The fiscal policy drafted by United States also supports growth. The recent fiscal stimulus further acted as a boost to the macroeconomic policies and enabled the government to increase consumption demand from household. The strong banking sector reforms also ensured that the sector was profitable despite slow down worldwide. The policy framework of the United States government ensures timely intervention. This helps to keep abreast with the other economic changes and account for those. This can be seen from the “new liquidity guidance which banks and other financial institutions have to abide with”. (Tony, 2010) this thus strengthens the macroeconomic policies. Policy with reference to Economic Growth The macroeconomic policy framed by the United States government despite being positive have seen the economic growth slow down as “declining commodity prices, tough credit condition in the global market and slowing world economy has taken its toll on the growth of the United States economy”. (Neville, 2010) Still on the comparison to other economies United States has performed well because of “commodity export, flexible exchange rate, strong banking reforms and timely changes to the macro polices suiting the needs of the country”. (Neville, 2010) The long term projection for the United States growth is slow due to “work force which is ageing”. (Billy, 2010) Polices need to be drafted to ensure that the work force improves so the GDP grows. This will help to face the global pressure and maintain an exchange rate which suits the economy will help and ensure that the country is able to grow. Policy with reference to Unemployment The macroeconomic policy has been drafted to ensure that unemployment falls but the monetary policies on this front have been ineffective. This has been due to the global economic scenario. The global economies have seen a reduction in demand for goods and services which have rendered many jobs less. For the United States economy to revive back and ensure that employment opportunities rise will take time and industries will need to produce at full potential to ensure more jobs. The increased fiscal stimulus and changes in housing consumption will ensure that jobs rises as organisation will have to produce to match the increased demand which will help to bring more jobs and curb unemployment. Policy with reference to Inflation The policy framed for growth has enabled United States government to bring a check on inflation. The government policy to reduce the cash rate has helped and ensured that the wage rate doesn’t rises which has helped the commodity prices to rise and also enabled to curb inflation or restrict it to a certain extent. The role of central bank multiplies as concentrated efforts have to be directed to ensure that inflation doesn’t rise. The banks need to have a balance between “application of the rule which fosters growth predictability and discretionary approach to be flexible to allow for the changes”. (Claude, 2010) This will ensure that the macroeconomic policy suits the country and helps to reduce inflation. Policy with reference to Trade The policy drafted has ensured that trade continues to surge. This can be seen from the flexible exchange rate and strong fundamentals which have given exports a push thereby ensuring better trade compared to other economies. This has enabled the commodity rates to multiply and the strong export has enabled them to grow. Also the growth shown by the tourism sector is another area which will draw many takers and help to improve trade. The overall macroeconomic policies which include monetary and fiscal policies support growth for trade. With decrease in national debt the trade is bound to grow and will help the business community to benefit from it. Trend Analysis The trend analysis of the United States economy for the last five years and beyond that looks as follows The above chart shows a trend of GDP growth which is a major contributor for economic growth for 50 years. Based on it we can see that the economy in the last 5 years have seen many ups and downs. This has been mainly due to changes in economic conditions. The trend also shows that the economy is reviving and will look forward to grow. (Battellino, 2010) A look at the inflation trend shows the following The inflation shows that inflation has been a concern but slowly the United States government has been able to bring it down. With the growth in the economy this is bound to improve and the inflation will further move southward thereby reducing it. (Battellino, 2010) A look at the employment trends looks as follows The employment graph shows that employment has improved and is bound to improve as the economy poses more healthy growth rates. This will further help the economy and will thereby help them to grow and fight competition by enabling more jobs. (Battellino, 2010) This is seen from the unemployment graph below The graph shows that unemployment was decreasing but the recent global recession forced the unemployment to rise. This is bound to fall in the coming years as the economy will look towards functioning at full potential which will thereby help to reduce unemployment. Thus, the overall trend shows growth and a better future for the United States economy which helps to identify the macro environmental analysis affecting the leather industry. Macro Environmental Analysis This analysis will help to identify the potential United States has for the leather company. Since, these are factors beyond control so it influences all other companies in similar business similarly. This will thus act as a tool to decide the strategy to enter the Indian market. Political Political situation plays a very important role for any industry and more for a developed country. United States has a very high influence of “political factors and any changes in decision affect the overall bearing in the sector”. (OPpapers, 2010) This calls for an understanding of the scenario. Recently, the policy changes have affected the growth pattern. (OPpapers, 2010) The political situation has also been affected by the recent economic recession. In spite, of such situation the stability of the government at the centre has ensured reforms to allow more investment by increasing imports as the country relies on it to suffice its local population. Economic The economic situation affects the number of commuters. The leather industry for a developed country like United States gets affected by “the growth rate and the business cycle as during recession people don’t purchase different leather products during recession as they are considered leisure goods”. (Justin, 2009) United States, slowly coming out of recession provides an opportunity. The number of people purchasing different leather products like purses, belts, bags etc has increased. The income level and the growth rate also affect people purchasing different products. (Justin, 2009) Social The United States culture is strongly influenced by culture prevalent is social environment. United States being a diverse country this plays a prominent role. “With different people from different backgrounds, religion, income level, and habits affect the way a person stays and brings a change in a social outlook”. (Justin, 2008) Leather industry ensures that such an environment is created. This helps to ensure that customers are high on satisfaction and remain loyal. This is a common phenomenon seen in United States that “they remain loyal to the services which satisfy them and don’t switch easily even for a price”. (Justin, 2008) Thus, social factors have a huge role in United States. Technological United States has moved ahead in technological advancement. “The increased use of internet and the penetration level has acted as a boost for leather industry to get even the far of customers”. (Justin, 2008) This is allowing people to purchase products by seeing it online. This has increased as the literacy level has raised giving rise to more people using it as a medium to purchase different products over the internet. Leather industry has ensured a high technological level. The industry has been able to integrate the technology to ensure that their products are visible online so that the customers can look at it and purchase online. The integration of technology and better service highlights high congruence achieved by the leather industry. Environment The United States government has also framed laws for the environment. A cap has been put and steps taken to keep it within limits. The government has also taken steps to ensure that pollution due to waste of leather don’t rise and companies are also helping in it. The leather sector has also contributed to it by companies ensuring that the wastage from leather doesn’t cause landfills and methods are devised to reduce environmental harm. This is a step in the right direction and the leather industry can bank on it. Legal The United States government has rules in place regarding the entry and exit of players. “The government has put a cap on foreign investment in domestic players for the leather sector”. (Justin, 2008) This is ensuring that leather industry which complies with those is allowed a stake. The leather industry has been able to comply with the compliances laid down by the government. This has been the reason for the success of the leather players. Their leather manufacturers have different committee like audit committee, risk management committee, and nomination committee along with other similar committees (Justin, 2008) which looks into the aspects. This helps to ensure that the bank complies with the requirements. Predictions Based on the policies and the manner in which the polices are affecting different components the following can be predicted for the United States economy Growth is predicted to improve by around 1% as government spending has grown. This will lead to a shift in demand pattern from household thereby enabling the economy revive back The inflation is bound to remain low as industries will take time to produce at full potential due to the lack in demand presently which has reduced production The trade is bound to grow as United States is likely to attract investment from abroad The unemployment is bound to fall if the manufacturing units increase production which will take time but is bound to happen in the next few years The growth rate shows a huge market and potential for the leather industry due to growth in the economy Situational Analysis This analysis shows the present state of leather industry in United States. Based on this the leather company can prepare its strategy. Some of the factors considered are Market Background: The leather industry in United States is growing. The largest contributor here is the household sector. As the growth in the earnings for the household sector is on an upswing the retrospective effect will be seen on the leather market. The initiatives of the government will further give it a push. The factors contributing most has been the leather products from abroad. This is bound to grow given the country projecting itself as a differentiator. The new initiatives by the entire leather sector are seen as a root cause for further expansion. Market Size: “The estimated market size for United States leather industry is $27.9 billion”. (US Market, 2007) This is bound to move up. The different programs launched to attract more customers will add to it. The initiatives taken all around the country and with some major events taking place this will grow. Growth Rate: The leather industry over the years has shown impeccable growth. This has contributed to the foreign exchange kitty as well. “The overall leather industry has grown by 2.1%”. (US Market, 2007) When we compare it to other economies it has outperformed. With the recession getting over the positive trajectory is going to take over and will help the sector. Competitors: The level of competition is high. With various different companies offering similar products with slight differentiation in the offering is making it tough. New entrants are finding it tough to cope with it. Here, the providers who have been able to market themselves well have grown. This has been fuelled by the fact that they have differentiated themselves. Leather industry being a differentiator has scope where it can stand out. Reasons United States is looking towards import leather goods Export and import are different strategies which an economy looks forward for development of the country. Export oriented strategy is where “a country uses its own resources to produce goods and services and send it to the outside world”. (Smith & Todaro, 2005) Import substitution is “identifying the goods which are needed and imported and developing strategies to replace those with in house production”. (Smith & Todaro, 2005) Thus, the two leads towards growth and ensures well being of individuals. The United States is looking forward for import substitution has many advantages. Firstly, “it encourages domestic development”. (Yubraj, 2011) The economy by using its own resources ensures that the growth trajectory continues. Secondly, “it saves the country from economic shock”. (Yubraj, 2011) Economies, relying on itself ensures that when the other economies are in a downturn they are least affected by it. Thirdly, “saves cost of transportation”. (Yubraj, 2011) economies don’t have to indulge in the high transportation cost and the risk involved is less. Different modes of entry into United States The leather industry can look towards different modes to enter the US market. The different modes are as follows Export: The leather company can directly look towards exporting the leather products to United States. In this mechanism the leather company will enter into a contract with United States to export a certain quantity of goods directly. This will help the leather manufacturer to ensure that they don’t have to produce the goods in United States and can produce in their home country and sell those to United States. (Wolfe, 2010) This will help the leather company to ensure that they are able to retain their brand but will have to create a complete chain and network to sell their products. Licensing: The leather company can look towards licensing by entering into an agreement with the local players in United States. It is through the method of franchise where the local players enter into contract with the leather company and sell goods through the original brand. (Wolfe, 2010) This will help the leather company to get easy access to the local conditions and will solve the problems that will be encountered if the company looks to go all alone. Joint Ventures: In this method the leather company needs to create a partnership with a player in United States to sell their produce. Both this company work as a single unit and will require that the profits are spilt thereby affecting the leather company. (Wolfe, 2010) This will make it difficult for the leather company to control the market as entering into a joint venture will bind the company and hinder work in the long run. Strategic Alliance: This is a mode of entry where the leather company ensures into an alliance with a local partner to share a function like marketing. (Wolfe, 2010) This will make the leather company be dependent on the partner for all its activities and any problem encountered by the partner will affect the business of the leather company. This will have a long them effect as the leather company will find it difficult to manage relations in the long run. The above modes of entries direct that the best mode of entry for the leather company will be through franchise in the licensing model. Leather Company Strategy to enter United States The leather company has started to realize the potential the United States market had. It was not possible to produce everywhere due constraints of raw materials, cost, and other economic reforms which effects the price of goods. Instead the leather manufacturer should work on the franchise model. In this model the leather company instead of producing themselves either outsource from the home country or pass the burden of production to the local house. Creating a franchise group will enable the leather company to get access of the already created market. It will ensure that goods are of the same quality. The leather products provided by the company will find a market where the local conditions are understood properly. The leather company thereby can also use the local language to ensure maximum customer growth. This franchise model will also help to ensure that goods are available with the already created network. It will thereby help the leather company to solve both the problem of quality and language and ensured that more popularity was earned. Benefits of the franchise model The benefits the leather company will get due to this model are Firstly, the most important for leather companies is to “understand the local conditions and get it transformed so that the local people start to favour the company”. (Ellis, 2001) The reason for which leather companies are looking to get global is “because it can buy and sell goods in market which are profitable, distribute those in the best countries which favour them, produce at the lowest cost, get a global outlook and achieve economies of scale”. (Ellis, 2001) The franchise model brings these benefits as tying with a local player helps the leather company to get access to the local conditions and market. Secondly, “improve focus and efficiency by ensuring that the goods produced get passed easily through the chain” (Beck, 2010) Leather company if they want to be successful need to “have an appropriate structure and support system”. (Aharoni, 1996) They along with it need “flexibility so that they can grasp the strategic options which might arise due to environmental changes”. (Aharoni, 1996) This is all possible when the company adapts to the local responsiveness. The franchise model provides these benefits as it ensures that the leather company is able to make the necessary changes in the franchise agreement from time to time. Thirdly, the franchise model ensures that “they look to earn by satisfying customers on a regular basis an understanding of the condition such as culture, caste, religion and prevalent customs” (Kundu & Merchant, 2008) goes in a long way to build relations. This is seen by the fact that companies who were able to “delve themselves on the basis of customs were successful”. (Kundu & Merchant, 2008) the leather company by using the franchise model can ensure that they are able to deliver quality products and ensure loyalty with the customers. Fourthly, the franchise model helps to understand the culture which forms a vital part. This leads the company “to manage their finance properly so that they don’t fall into financial crisis”. (Slawomir, 2010) Thus the leather company need to see that they understand the cultural factors. This leads towards saving on the cost function. Companies being able to understand this are able to get a good chunk of the market. Fifthly, the franchise model ensures that the people hired are local people who are trained so that they understand the global factors better. This helps multinationals as the local factors when included integrated with the global ones helps to formulate sound strategies. This is an area where companies from all around the globe are working. This will prove beneficial in the franchise model as it will provide easy access to the work force and having a local player along will help to ensure that the local government regulations are met. This has been further substantiated by the fact that “employment is mostly local according to the local condition but strategies might be prepared keeping in mind the global and local condition on a global level”. (Castells, 2001) This will help the leather company as the local residents hired understand the global requirements and can pass that on to the consumers. This helps to create a ripple effect which will help the leather company to sell their products and services by making the consumer aware about it. This will help the leather company as “they are able to respond to the changes quickly i.e. bring about changes both in the market and production”. (Castells, 2001) Conclusion The United States provide a wide opportunity for the leather manufacturer due to the growing trend towards leather products. Also the macroeconomic policies and the economy coming out of recession provide an opportunity for the leather manufacturer to explore the huge potential the market has. The analysis also highlights that among the different modes of entry in the foreign market the franchise model will suit the most due to the inherent advantage the leather manufacturer will receive by using this model. Also, the trend and the growing opportunity to comply with the governmental regulation will further help the leather manufacturer to ensure that the franchise model provides them the maximum opportunity to maximize their return on investment. Thus, the leather industry can look forward to enter the US market through the franchise model and ensure growth in their business. 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