The Strategies of the Multi-National Companies in the Chinese Market - Term Paper Example

Doing Business in China Table of Contents Introduction 3 Discussion 3 Franchising 4 Joint venture 5 Wholly owned subsidiaries 6 Turnkey projects 7 Conclusion 9 References 10 Introduction China has attained the world’s second largest economic position with respect to the total gross domestic production. The economy of China grew by 9.2 percent as estimated in the years 2011-2012. Initially the Chinese economy was regulated by the local industries because the country refused foreign investments. The Chinese economy experienced a positive thrust after the country encouraged diversification of investments. . In order to enter the Chinese market, the Multi National Companies implemented several strategies especially in hospitality sector. The tourism and hotel industry of China has gained immense popularity in the world after the investments made by foreign companies. The opening up of the Taiwan tourist market extended the scope of hospitality industry in China as it enhanced the business potential and opportunities of the particular sector. The biggest source for growth of the Chinese economy occurred in the year 2010, after China surpassed Japan for its source of visitors. The number of tourists for Mainland China increased to 11.1 percent in the year 2013. These factors have driven the Chinese economy effectively and the foreign investments made by the MNC’s in the hospitality sector were benefited. This assignment emphasizes on the strategies that have been incorporated by the MNC’s in order to enter Chinese market and initiate their organizational practices. Discussion Since, China is a country with diverse cultures, careful market research is an essential parameter for the foreign companies. With respect to the hospitality industry, it is essential to focus on a particular region for generating sales. China has been regarded as multiple countries within one country because of the demographics. The western hospitality companies have been able to gain the interest of the customers in China by implementing careful research about the Chinese market. Several MNC’s have been able to maintain their sustainability by acquiring information about the people and the place and their requirements with the help of government websites and business information centers. In order to enter the market of China and maintain sustainability, most of the companies had to send representatives (Brahm, 2004, p.72). The representatives would provide consultation to the hospitality companies and help them to gather initial support from the country. Since, Chinese market was at a developing stage when the foreign hospitality companies entered the market; therefore circumstances were very difficult for the companies. In the contemporary era leading hospitality companies, such as Marriot and Stark have been able to establish their customer base effectively. However, many small MNC’s did-not receive proper response from the people of China because of their limited income level. Therefore, finding the right partner was a very essential strategy that helped the MNC’s to develop in the competitive Chinese market. There are majorly four market entry strategies that have been incorporated by foreign Multi National Companies of hospitality industry in China. Franchising Franchising is a method of marketing strategy wherein local companies purchase the trademarks and operating procedures of an existing business. Franchising helps MNC’s to develop and construct their reputation in different countries. Famous hospitality organizations, such as McDonalds and KFC have adopted the franchising technique to enter emerging markets of foreign countries. The organizations, who provide franchises, gain their profit by sharing their trademark and personal business framework to other retail companies. The profit that is acquired by the retail companies are also shared with the franchise owners. This strategy is efficient because it has low political risk, low investment and high expansion power in different regions of the world (Ambler, 2008, p.18). The franchising strategy of KFC in China is one of the best examples that can be considered for expansion of business in the hospitality sector. KFC has been named as the number one foreign brand in China by BBC in the year 2013. The Yum! Brands is well known in China because it one of the most popular and fastest growing retail hotel industries. Yum! Brands have been able open more than 6000 KFC and Pizza Hut restaurants in China. KFC initially marketed the products in China and studied the demand for retail chain restaurants in the Chinese market. After thorough study the company started endorsing their brand in China and motivated retail companies to purchase their trademark and procedure for production. Initially KFC and Yum! Brands faced some challenges in the competitive restaurant market. However, the restaurant gained immense fame in the Chinese market by the end of the year 2010 (Basu, 2008, p.12). Therefore, franchising is one of the most important strategies that have been incorporated by famous MNC’s, such as KFC to enter the Chinese market. Joint venture Joint venture is the strategy wherein two or more companies build partnership in order to extend their business. Joint venture has been adopted by most of the MNC’s in the world for doing business in foreign countries. With respect to hospitality industry, the MNC hotels have adopted such strategy and expanded their business as well as maintained sustainability. There are mainly five objectives for the implementation of joint venture strategy: technology sharing, risk/reward sharing, market entry, conforming government regulations and joint product development (Chee, 2007, p.39). Joint venture market entrance strategy has been implemented by the Wyndham Hotels and Resorts in China. Wyndham Hotel Group has established joint venture with the Ramada Hotels in China. Initially the Chinese political environment was closed for foreign multinational companies. However, the joint venture policy was incorporated by the country to allow foreign investment with the collaboration of local companies of China. The joint venture strategy has proved to be very beneficial for Wyndham Hotel Group because it has enabled the company to hold the emerging customer market of China. Most of the Chinese people preferred visiting Wyndham and Ramada Hotels in the country because of the outstanding performance of the hotel in the entire world. Wyndham Hotel Group is currently located in 66 countries and it has different work environment and cultural values for different countries (Ching, 2009, p.98). The joint venture strategy also became efficient for the company because the company did not have to face the political hurdles that are generally experienced by the wholly owned organizations established in China. Wholly owned subsidiaries Wholly owned subsidiary is an important strategy for marketing in foreign countries. It has been evident that there are very few companies that adopt such kind of policies for extending their business potential. Wholly owned subsidiary enhances the brand value because it is completely controlled and regulated by single entrepreneur. This factor raises the interest of customers towards the organizations. Wholly owned subsidiary strategy is potentially costly and often complex however it has several benefits in smooth running of a business. With respect to the Chinese hospitality sector, the Hilton Hotel Group is the best example that shows wholly owned subsidiary (Chao, 2012, p.33). The Hilton Worldwide entered China in the year 1988 and expanded its business significantly. Hilton Worldwide works on the principle of wholly owned subsidiary i.e. it has no joint ventures in China. The investments made by the company have profited the Chinese economy and it has also helped the company to maintain its sustainability. Currently, there are 27 hotels of the Hilton Worldwide Group in China. This shows that the company has entered the Chinese market and established its business operative procedures peacefully without the interference of any vendors. Wholly owned subsidiary strategy is not cost efficient and it has high risks in economically developing countries, such as China. Undoubtedly, there have been several challenges that the company had to face initially, regarding cultural aspects and the competitive hospitality market (Libeberthal, 2004, p.42). However, Hilton Worldwide is one of the most popular hotel groups in China working alone in its business operations. Turnkey projects Turnkey projects in the hospitality industry have become very common in the world. After China opened its economy to foreign investments, there have been significant changes in the market operative procedures and the way companies work towards their profitability and sustainability. It has been observed that several organizations of the hospitality industry have provided their contract for designing and construction to the local companies of China. The business strategy implemented by the companies has two major advantages. First of all, the companies do not have to experience any hurdles for property related issues or construction issues because the vendors accomplish efficiently. Stay Bridge Hotel Project is of the best examples for turnkey business management. Many companies have experienced resistance while entering the Chinese market for hotel or restaurants. Thus turnkey projects are beneficial because the company’s initial hurdles are generally handled by the local contractors (Collins, 2011, p.55). The problem with this strategy is that the organizations have to share their business plan and construction style with the local contractors, which becomes a risk factor because such information can be leaked to rival companies that most of the companies do not prefer. There are some other strategies that MNC’s have incorporated to enter the Chinese market such as establishment of direct trade links via export business. However, direct export of products does not fall under market entry and business operational strategy. Hotel and tourism industry has tended to become one of the fastest growing industries across the globe. Hospitality industry has a significant role to play in China’s economy. China has immense population and it is a large country which has made the government rule very difficult. Several economic reforms in the past have made the political power institutional. China has been regarded as a socialist country by the world (Murray, 2004, p.62). The introduction of MNC’s in the Chinese hospitality business has resulted in chaos by the communist political factions. Therefore, the operative procedure of China is difficult for the companies as they undergo several thrusts politically. China has developed to become one of the fastest growing economies in the world. This factor has attracted many MNC’s of the hospitality industry to the country. The economic state of China has been found to be stable in the past few years due to which massive investments have been made by foreign companies in the country. Thus, the economic condition of China has a positive influence on the hospitality sector. In order to maintain sustainability in the Chinese market, it is essential that there is a clear and transparent contract developed between the business partners. The Chinese entrepreneurs of the hospitality industries have special interest towards the foreign capital that is being invested in their country. It has been observed that Chinese partnerships with the western companies work well if some incentives are given to the partners against their performance. The Chinese corporate owners appreciate rewards and recognitions; therefore most of the MNC’s have developed incentive programs for the business partners as well as reward and recognition programs that can motivate the growth of the business (Moster, 2004, p.128). The competitive market of China has been very resistant towards the development of the hospitality industry in the past. Having clear contracts are useful for the foreign companies because the Chinese Companies generally incorporate the terms of their contract as guidelines in their organizations, which helps in regulating the work environment accurately. Conclusion From the above discussion it is possible to state that, there has been some significant developments in the Chinese economic condition as a result of enhanced market practices by MNC’s doing business in China. Several strategies have been considered by the organization in order to enter and operate in a competitive market, such as China. Important hotel companies, such as Starwood, Marriot, Wyndham etc, have implemented new strategies to enter the emerging market of China. In order to generate profitability and provide better products and services to the consumers, the hospitality companies have done great research with respect to the political and the economical conditions of China. Joint ventures and franchise strategies have been profound to enter the market of China. Furthermore, the joint venture strategy has been proved to be beneficial in the business operating procedures as it has limited the issues that foreign MNC’s generally face in developing economy, such as China. Apart from the travel and tourism sector several industries have established their business operating procedures in China and it has a positive impact on the customers’ response towards those companies. Therefore, it is clear that joint venture, franchise, turnkey project and wholly owned subsidiary strategies have been significantly important for several MNC’s for entering developing economy, such as China. References Ambler, J., 2008. Doing business in China. New York: McGraw-Hill. Basu, P., 2008. Doing business in China. New York: Springer. Brahm, L., 2004. Doing business in China. London: Routledge. Chao, S., 2012. Selling to China. New York: Springer. Chee, H., 2007. Myths about doing business in China. New York: Springer. Ching, M., 2009. Doing business in China. London: Kogan Page. Collins, R., 211. Doing business in China. New York: Springer. Libeberthal, K., 2004. Harvard Business Review. London: Sage. Moser, M., 2014. Doing Business in China. London: Rowman and Littlefield. Murray, G., 2004. Doing business in China. New Jersey: John Wiley & Sons. Read More