Political and Other External Forces Surrounding Investment in China - Coursework Example

The Robert Gordon University Aberdeen Business School CHINA Name Course: International Business Tutor Date Word Count (3077) Executive Summary Through First Group’s expansion program, the company looks forward to expanding its passenger transportation services to other regions. China provides the ideal destination for First Group’s market due to its location, high number of consumers and growing market. The company shall base itself in Shanghai City, which is a growing economy with over 25 million inhabitants and about 22 million tourists annually. The larger republic of China has a population of 1,390,510,630, who can provide an ideal clientele base for First Group’s services (World Population Statistics, 2014). This report shall study the external forces surrounding investment in China; including, economic political forces. The report will also analyze the location advantage and modes of operation. In addition, the report shall analyze the entry strategies to the market. It shall weigh the pros and cons of each strategy and recommend the ideal strategy that First Group plc can use in entering and operating in the Chinese market. Table of Contents Table of Contents 2 1.0Industry /Sector Definition 3 2.0 Political and Economical Factors 4 2.1 Political Factors 4 2.2 Economic Factors 5 3.0 Location Advantage 6 4.0 Entry Strategy 9 4.1 Direct exporting from the UK 10 4.1.1 Advantages of direct exporting 10 4.1.2 Disadvantages of direct exporting 10 4.2 Licensing 10 4.2.1 Advantages of Licensing 11 4.2.2 Disadvantages of licensing 11 4.3 Wholly owned subsidiaries 11 4.3.1 Advantages of wholly owned subsidiary 12 4.3.2 Disadvantages of wholly owned subsidiary 12 4.4 Recommendation 12 5.0 Modes of Operation 13 5.1 Management Team 14 5.1.1 Chief Executive Officer/ President 14 5.1.2 Sales and Marketing Director 15 5.1.3 Human Resource Manager 15 5.1.4 Sales and Marketing Executives 15 5.2 Other employees 16 6.0 Conclusion 16 7.0 References 18 1.0 Industry /Sector Definition First Group plc is a UK based company that has for long dominated the transport market in the UK and North America. First Group is committed to quality, reliability as well as cost-effectiveness. The company offers a wide range of transportation services including first student, first transit, Greyhound, UK bus and UK rail. Over the years, First Group’s reputation has grown in both local and international markets, due to the presence of efficient transport networks. In the United Kingdom, First Group is the market leader as far as passenger rail services and bus services are concerned. The company plays a critical role of providing school transportation to thousands of school going children in Canada and the United States of America. Other major clients include private institutions like colleges, transit authorities, state officials among others. The major competitors of First Group plc in the USA and Canada include Veolia Transportation, Intercity Coach, budget airlines and MV Transportation Inc. The company’s contribution to the USA and Canadian economies is remarkable, with over 20,000 people having direct employment. That notwithstanding, First Group has faced several challenges that are hindering realization of its full potential. One of the greatest challenges is the economic uncertainties that have gripped the USA in recent times. This economic uncertainty is slowly manifesting itself in school board budget. 2.0 Political and Economical Factors The decision to invest in a foreign country is triggered by the desire to tap a larger share of the market and to make higher profits. Sudarshan (1996), in his studies, argued that investors willing to tap a larger market share in a foreign country must carry out a market analysis in order to determine the viability of such an investment. Various forces affect the decision and mode of entry to a given market. The forces include political trends and economic growth and stability (Sudarshan, 1996). 2.1 Political Factors Political factors include such aspects as labour laws, company law, foreign trade regulations, government stability, taxation policies among many others (Annoop, Raj & Neelankavil, 2009). Notably, investors will refrain from investing in a country that has a high record of political volatility. Incidences such as frequent riots and demonstrations will increase the cost of doing business in a foreign country. Normally, investors incur huge losses due to property loss, higher insurance premiums and business closures. China has a conducive political environment which in turn plays a greater role of encouraging international investors such as the First Group Plc. Furthermore, China is a signatory of various international laws and treaties that affect business operations, including the United Nations, World Trade Organization, World Bank, among others (Shambaugh, 2013). Additionally, the legal framework guiding the process of business registration and operation are flexible; thus, promoting international investment. 2.2 Economic Factors China is among the South East Asian countries which have recorded remarkable economic growth in the last two decades. This tremendous growth can be attributed to the sound economic decisions. The decision to replace socialistic approach with capitalistic one has made China to emerge the second largest economy across the globe. Analysts predict that the dependency ratio in China will reduce significantly in the near future, and therefore, there will be more resources for investment opportunities ((World Population Statistics, 2014). Further, the Association of Southeast Asian Nations (ASEAN) promotes economic growth and expansion through creating a level playing ground for member states, as well as removal of trade barriers in the region. In addition, the country is highly populated, and therefore, First Group plc can enjoy surplus labour supply. China’s resilience to the 2007-2008 financial crisis which took a toll on developing and developed nations alike is clear evidence of the country’s thriving market. With such a strong economic background, China is undoubtedly an incredibly promising investment region that is most likely to create value for money for an investment. 3.0 Location Advantage Porter was determined to provide organizations with a framework through which they could analyze the competition and also determine their strategies. The Porter's five forces examine the power behind the five opposing competitive forces that usually determines the firm’s long-term successes as well as competition. Michael Porter thus suggested five forces that can shape the attractiveness of an industry. The five forces model by Michael Porter has such elements as conflicting firms, threat of product substitutes and new market entrants and finally is the ability of buyers and suppliers to exercise their bargaining power in the market (Lussier, 2008). Porter’s Five Forces Rivalry that occurs between firms is as a result of market competition (Lussier, 2008). In China, the rivalry among transport operators is intense. First Group plc could face huge competition from the already established companies like the Chi Kong Passenger Transport Co. Ltd and China Shipping Group. First Group plc should therefore provide attractive services to their clients in order to have a greater share of the Chinese passenger transport market. In addition, First Group should employ various competition weapons such as lowering prices, technological innovations and researching on consumer needs in order to achieve a greater market share and profitability. The threats to new entrants, according to Porter, entail the obstacles that prohibit firms from joining an industry (Lussier, 2008). The barriers include the following; the government can create obstacles to new entrants by granting the monopolies and also regulating the firms in an industry. The government has an influence of determining the market participants through monopoly (Treacy, 1995). The travel industry in China is highly deregulated and this promotes international investment. First Group will therefore operate in a flexible business environment due to lack of government interventions. However, risk of breach in the patent rights such as trademark in China region is a major threat to an international investor. The threat of substitute is another factor that was identified by Porter in his five forces model (Lussier, 2008). Michael Porter identified that the substitutes have the effect of providing competition in the industry as well as limiting the profits of firms. For a firm in the transportation industry, substitute products comprise of the various forms of travel including air, road, rail and water, which offer both direct and indirect competition. Due to the fact that all a customer needs is to move from one place to another, and in the most convenient manner, they will always seek for companies that are affordable and capable of meeting their needs at the same time. Therefore, if First Group does not meet these requirements, then the customers will seek elsewhere for more satisfaction. First Group should aim at providing Chinese consumers with more value for their money. As such, the company should offer cheaper rates and excellent services (Dubrin, 2011). The bargaining power of buyers is a competitive force that is capable of affecting the performance and the operations of the firms in the industry (Lussier, 2008). The powers that the consumers have are very important aspect to consider due to the fact that it can bring down the prices of goods and services and demand for quality products. This, in turn, could result to huge losses. A large number of clients are believed to have more bargaining power as compared to the case when they are few. In addition, their bargaining position varies with time as well as the firm’s competitive strategy. In the passenger travel industry, customers have a wide variety of choices, and therefore, First Group must work harder to ensure that people choose to travel using them. From various market surveys done, First Group has been able to prove that it offers the best price without compromising on hospitality and customer satisfaction. This knowledge and experience will therefore enable First Group to operate effectively in the Chinese market. The last competitive force as detailed in the Porter’s five forces model is the bargaining power of suppliers (Lussier, 2008). In the travel industry, there are several requirements such as spare parts, licenses and fuel. Therefore, the requirements lead to an association between the buyers and supplies in one hand, and the companies that provide the raw materials for the production of goods. Powerful suppliers have the effect of exerting power on the travel industry .For instance; the suppliers can choose to sell the spare parts at high prices so as to make high returns. Suppliers usually have a greater influence in a given market and therefore they can change the prices of goods and services and also the quality. In a bid to ensure that it remains competitive in the Chinese market, First Group should study the prices at which the competitors are selling their products. The knowledge of competitors’ prices will enable First Group to set competitive prices, which are in line with what the market is offering (Dubrin, 2011). 4.0 Entry Strategy Various factors influence the decision on which market to enter, the entry strategy, when and to what scale. The choice is largely swayed by diverse factors such as cost implication, social-economic pressures, political and legal factors, trade barriers and firm’s strategy (Maskus, 2008). Ultimately, the goal of investing in the international market is to diversify on the market and make sustainable profits in the long run. In the expansion process to China, First Group shall consider the following options; (a) exporting from the UK (b) licensing and (c) to set up a wholly owned subsidiary. 4.1 Direct exporting from the UK In direct exporting, First Group will be directly involved in marketing its services to the Chinese market. As such, it shall set up a centralized position in Shanghai City, which shall be responsible for coordinating marketing, contracting, and pricing of services in China. This can be achieved in various ways, such as sending First Group’s representatives to China, appointing a local representative/agent who will coordinate all First Group’s activities and creating a First Group subsidiary in China which shall oversee all First Group’s activities in China. 4.1.1 Advantages of direct exporting In direct exporting of First Group’s services, First Group shall realize various advantages. These include better information feedback on the quality of services offered by First Group and areas of improvement. Secondly, it enhances better protection of First Group’s intangible assets such as trademarks and goodwill in the international market. 4.1.2 Disadvantages of direct exporting The short-run costs of implementing direct exporting are quite high and risky. First Group has to conduct thorough research on the how to implement the strategy, the pricing methodology as well as establish a reputable team that will oversee and coordinate the whole process. 4.2 Licensing In licensing, First Group will give a local firm (licensee) the rights and technological know-how on the implementation of First Group services. The licensee will offer First Group services for a stipulated period and marketing of First Group’s services in China. Thus, the licensee will pay commission and loyalty to First Group. As such, First Group can penetrate to Chinese market without First Group setting new operations there. This approach is by far much welcome in China, since it involves empowering the licensee to provide First Group’s services; thus, transferring technology to China and, at the same time, popularizing First Group’s services in the regional market. 4.2.1 Advantages of Licensing The cost implications in licensing are much lower. First Group can reach a wider market in China using the already existing infrastructures. In addition, using licensing, First Group can easily expand its market territory without incurring high costs of expansion. First Group can take advantage of the Association of Southeast Asian Nations (ASEAN) to penetrate the Chinese market. Licensing also paves way for future investment and expansion in the international market at a lower implementation cost. 4.2.2 Disadvantages of licensing The income and profits realized from licensing another company are lower when compared to other strategies of market entry. In addition, once you license a local firm you may loss control of production and distribution of your product, and quality of First Group’s services may be jeopardized. An incompetent firm can also largely ruin the reputation of First Group in the Chinese market. Another problem associated with licensing is a conflict of interest; whereby the licensee may take advantage of the license in promoting his product at the expense of First Group’s products. 4.3 Wholly owned subsidiaries A wholly owned subsidiary is the third strategy which First Group can use to enter the Chinese passenger transportation market. The process involves establishing your operations in the new market. In addition, it needs extensive market surveys and studies to establish the prudence of establishing a new operation. It is, therefore, an extensive venture in the short-run, but, may ultimately be cheaper in the long-run in terms of control and quality management (Mueller & Cubbin, 2005). 4.3.1 Advantages of wholly owned subsidiary A wholly owned subsidiary has various benefits over other market entry strategies. One, First Group shall have the full control over the management of its transportation business. As such, it can establish strong distribution networks within and outside China, implying more sales and profits. In addition, the approach will ensure that the quality of services is maintained. As such, First Group shall have the most benefits from its operations 4.3.2 Disadvantages of wholly owned subsidiary A wholly owned subsidiary will attract high costs ranging from field surveys, setting up, registration and operations (Manivest Asia Limited, n.d). Owing to the nature of First Group’s business, a wholly owned subsidiary might be expensive to run in China. 4.4 Recommendation The study has revealed various facts and figures in regards to the target market, which is the Chinese market. Several strategies of market entry have been proposed, notably, direct export from the UK; licensing and setting up a wholly owned subsidiary in China. After weighing the pros and cons of each strategy, the report highly recommends licensing as the ideal strategy in penetrating the Chinese market. Licensing is more beneficial, as opposed to the other two strategies. 5.0 Modes of Operation First Group will practice efficient and effective hiring and training procedures that will facilitate the attainment of the set objectives. Thus, First Group will employ the right staff with the right leadership skills to make sure that the company achieves success and continued growth in the Chinese market. The care and compassion during the selection of candidates will provide this company success. 5.1 Management Team The first Group management team will have the following members to achieve their plan and objectives. These will be men and women who are experts in their fields of specialization with many years of experience. They include the Chief executive Officer who will be the head of the company, Sales and Marketing Director and the Human Resource Manager. There will be other employees who will work below these senior members of staff. First Group China Organization Chart 5.1.1 Chief Executive Officer/ President According to Economist Intelligence Unit (2009), the success or failure of organizations in the modern business panorama largely depends on managerial leadership of the Chief Executive Officer. The CEO will clarify the First Group strategic intent by setting a clear vision. He or she will be required to build a strong organization; that is come up with a common mission that drives both management and employees. In addition, the CEO will be expected to shape the organizational culture; that is, build values and believes that will shape the organization positively. The CEO will liaise with the executive and the marketing director, in order to enhance growth and profitability. 5.1.2 Sales and Marketing Director The Sales and Marketing Director will be entrusted with the role of ensuring that the company’s products are properly advertised. As such, this individual should have a marketing background, be social and outgoing. In addition, the applicant must have superb communication skills. He is also expected to have a good background of Chinese major cities, in order to assist in identifying the right group of clients. The marketing director will conduct frequent meetings with the CEO and the Executive Manager, in order to discuss how First Group stands in the market. 5.1.3 Human Resource Manager This individual will be in charge of managing the welfare of the employees in the company. These are all key responsibilities that will ensure First Group run smoothly and error free. As such, the candidate will be expected to have managerial background, as well as good communication skills. Having a background in the passenger transportation will be a plus, but not necessary. 5.1.4 Sales and Marketing Executives This group of people will be the main ambassadors of the company in the field. They will play an important role in making sure that the company is marketed out there to the potential clients. They will be required to have prior knowledge in the sales and marketing field. This will help the company spend less time training them on what is expected of them once they move to market. Though not a necessity, experience the transportation business will be an added advantage to the candidates. 5.2 Other employees These are the people who will be in the company helping in the management of the company. Such people include the accountants, the receptionists, office messengers and the customer service agents. Although these individuals are not directly involved in the management of the company, they play a critical role in ensuring that company policies are implemented to the letter. The above employees will need to have prior experience in their relevant field before taking up their positions in First Group. 6.0 Conclusion The report has analysed various factors that must be put into consideration in First Group’s business expansion. China shall provide the best market for First Group products, due to various factors such as technological development, high population, and attractive social-economic and political frameworks. Oblivious of the ready market, an ideal entry strategy must be developed to ensure that the operations are successful and profitable to First Group. The proposed strategies are direct exporting from the UK, licensing of a firm to manufacture and market the product in China and to set up a wholly owned subsidiary in China. After establishing various pros and cons involved in each strategy, the report recommends licensing as the ideal market entry strategy for First Group. Further, it establishes some recommendations that can ensure that licensing works out well in the Chinese market. This report has clearly demonstrated that with visionary leadership, First Group has a chance of making it the Chinese transportation industry. 7.0 References Annoop, Raj & Neelankavil, 2009. Basics of International Business, London: M.E. Sharpe. Dubrin, A. 2011.Essentials of Management: Edition9.London: Cengage Learning. Economist Intelligence Unit Limited, 2009. Organisational agility: How business can survive and thrive in turbulent times. The Economist. Lussier, R. 2008.Management Fundamentals: Concepts, Applications, Skill Development: Edition4.London: Cengage Learning. Manivest Asia Limited. (n.d). Guide for Setting Up Wholly Owned Foreign Enterprises in China. Manivest Asia Limited. Maskus, K. E, 2008. Intellectual Property, Growth and Trade, London: Emerald Group Publishing. Mueller, D. C. & Cubbin, J. 2005. The Dynamics of Company Profits. Cambridge University Press. Shambaugh, D. 2013. China Goes Global: The Partial. Oxford University Press. Sudarshan, D. 1996. International Business Management. New York: Discovery Publishing House. Treacy, M.F., 1995. The Discipline of Market Leaders. Boston: Addison-Wesley. World Population Statistics, 2014. Population of China 2014. Accessed on February 19, 2014 from < www.worldpopulationstatistics.com/population-of-china-2014> Read More