Entering the New US Water Sports Apparel Market - Case Study Example

International business management: A case study of entry into a anew market. (Name) (Institution) (Course) (Instructor’s Name) Date of submission Name……………… Victoria Park Road Kelvin Grove 3089 (07) 3511-3225 Fax (07) 3511-3224 22 October 2010 Mr. Robert Green, Chief Executive Officer, Sportive Inc. 31 Ramsgate Street Brisbane Qld 4000 Dear Mr. Green, As per your request, the following is a report that analyses options available for Sportive Inc in venturing in the US market. The report discusses the various issues surrounding each option available to the firm. The report contains information sourced from relevant literature on international business management. A number of theories have also been employed in the report in discussing and vetting the various options. One section of the report gives an overview of the theories and models in international business expansion strategies that can be applied to understand the situation in your organisation. The other part of the report makes conclusions and gives recommendations that should be implemented in the company in order to ensure the success of the firm in the new market. It has been both a pleasure and challenge working on this report as it presents new work experience for me and enhances my personal learning and development process. I will be more than pleased to make further clarifications or respond to any queries on this report if need be, so feel free to contact me. Prepared for: Robert Green Prepared by: ………. Executive summary This report discusses a number of options available for Sportive Inc, which is a virtual company based in Australia planning on entering the new US water sports apparel market through the newly patented hi-tech Reno Surf Skis. The report specifically addresses FDI options as opposed to transaction options. The report notes that FDI investments require a lot of expertise and intensive market research and also close evaluation of all the available options in order to make the right choice. The report identifies that establishing a new factory in the new market will bring the firm closer to the relatively larger market. On the other hand, the firm has little brand recognition and equity hence Sportive Inc has to rely on an established player for distribution purposes in the short run as other options will be evaluated with time. Among the major recommendations that report makes is that the firm should increase its presence in the new market through product diversification and hiring celebrity brand ambassadors. Contents Executive summary 3 Contents 4 References 5 1.0 Introduction 5 1.1 Company background information 5 1.2 Purpose 6 1.3 Considerations 6 2.0 Discussion 7 3.0 Conclusion 12 4.0 Recommendations 12 References 1.0 Introduction 1.1 Company background information Sportive Inc is a leading Australian based organization listed in the Australian Stock Exchange dealing in the manufacture of a range of water sports apparel and equipments used by sports enthusiasts mainly in the Pacific region. The company was established in 1980 by the founding owners Jody Smith and Allan White who up to today remain as executive directors. The company’s head offices are located in Brisbane along the Ramsgate Street from where all operations are directed with the factory located in the Richlands industrial area in the outskirts of Brisbane. The company’s main brands include Flyn fishing hooks and reels, Tymo ski jackets, Racer surf clothing, Hero diving suits, Hunter speed boats, Superfast surfboards, Glam wave skis and a range of snorkelling and water diving equipments. Our newest addition to our line of products is the high quality Reno Surf Skis which was launched earlier this year. All these products are developed with an environmental concern in mind with the environmental effect of all our operations kept on the minimum. 1.2 Purpose The purpose of this report is to analyse various possible international business concerns that are relevant to the company as it plans on entering a new market specifically the US in marketing the newly patented hi-tech Reno Surf Skis. The report makes use of a number of theories and models present in relevant international business management books and journal articles. The report identifies the most appropriate action for the firm and also gives recommendations for the firm in ensuring the success of the company in the new market. 1.3 Considerations The report considers specific national concerns that determine the choice of country or region. Among these considerations are; market size, economy of host nation, physical distance of the country relative to Australia, population, national culture, political stability, governance and legal issues, government regulations and competition. These national concerns are crucial in determining possible entry strategies. These are: exporting, joint venture with a local company, merger with a local firm, franchising and licensing and acquisition. All these options are discussed in the next section. 2.0 Discussion In this age of globalization, many companies are exploiting new markets and with the plans come new challenges. Liang, Musteen and Datta (2009) indicate that there are several foreign market entry options available for firms namely; exporting, licensing and franchising, joint ventures, acquisitions, Greenfield options. These options can be categorised as transactions modes (licensing and exporting), FDI and hybrid modes which are various combinations of the two categories (Lane et al. 2000; Grant 2005). They note that the first category allows minimum investment and gives the firm little control over the operations in the new market. FDI also known as greenfield comprises establishing subsidiaries, acquisitions and joint ventures which give the firm more control and power over operations in the host country. This implies that firms that keen on a hands-on management approach need to consider the greenfield option while those that use a hands-off approach should use transaction (Anderson et al 2002). The power structure of the host country determines the choice of strategy in that countries where there is high power distance are best suited for FDI while those with low power distance are suited by exports and licensing. Anderson et al (2002) argues that where organizational power structure and that of the host country match, then FDI is most appropriate but where the two are opposite, transaction modes are appropriate. Grant (2005) observes that organization with a vertical organisation structure match with countries with high power distance and those with horizontal structures match with countries with low power distance. Developed countries such as the US, Europe and Australia have low power distance while developing countries in Asia and elsewhere have higher power distances. The power distance consideration contradicts the economic consideration of the host country. Grant (2005) notes marketers should first assess the spending capacity of the target market before making any investments. Lymbersky (2008) concurs with this and says that it is obvious that developed countries receive the highest levels of FDI yet, according to the power structure argument, they should be receiving less of FDI and more of transaction investments. He notes that world famous brands such as Toyota based elsewhere in the world prefer making FDI’s in developed countries which have low power structure. According to Lymbersky (2008), economic concerns such as the spending capacity of the locals override the power structure concerns for firms and country in determining the level of investments and mode of entry those firms use in the new market. Meyer et al. (2009) concurs with Lymbersky (2008), to say that institutional development and availability of resources in the host country will influence the level of investment in the market entry strategy choice. Each of the foreign market entry modes has its strengths and weaknesses hence the need to develop a comprehensive criterion to assist in choosing the right strategy. Grant (2005) proposes a set of five ways to assess the merit of each strategy based on source of competitive advantage, barriers to trade, resources and capability of the firm, returns on the resources and costs of the transaction. A firm whose competitive advantage is country-based should concentrate on transaction modes while a firm whose competitive advantage is firm-based can adapt either transaction modes or FDI. Companies such as Toyota have company-based competitive advantage hence the company has opted to set up factories in several countries all over the world while still exporting to others. Barriers to trade either in transport costs or import restrictions also limit market entry options. Where such restrictions exist, firms have to opt for licensing firms in the existing country or to establish subsidiaries in the host country. Establishing foreign subsidiaries requires substantial investment and resource capabilities especially pertaining to marketing and distribution (Shama 2000). Therefore firms have to consider their resource capabilities in choosing the entry mode. Resource difficulties often force firms to form joint ventures in order to increase their competitiveness against the established players in the host country is good example is the joint venture of Fuji-Xerox and Caterpillar-Mitsubishi in the Japanese market (Grant 2005). Brouther and Hennart (2010) say that such joint ventures have to be formed by firms with complementary resources and not just any other. A firm has to consider the transaction costs of the mode of entry chosen. Major costs that need to be considered are; costs of negotiation meetings, exchange rate risk and information risk. The transaction cost of licensing and franchising might be hidden where the licensees and franchisees do not keep to the agreement. This implies that the brand loses in its publicity and public image. A good example is Starbucks and McDonalds where Starbucks owns and operates its coffee houses while McDonald relies on its franchisees adherence to the agreements and the firm’s management style. As such, McDonalds’ faces a greater publicity risk than Starbucks (Klug 2006). National culture of the host country is very critical in determining entry mode. Lane et al (2000) observe that culture influences how managers think and approach strategic options. This is similar to the aforementioned issue of a country’s power structure. This is important in that it helps the investors to better understand the local competitors and predict how these competitors may respond to various actions or trends in the market. Griffith, Cavusgil and Xu (2008) on the other hand say that the difference in managerial thinking influenced by national culture affects how competing firms segment their markets. The Learning theory by Johanson and Vahlne perceives the internationalisation process of a firm as a learning process (Klug 2006: Tallman 2007). The theory argues that an inexperienced firm in the international market starts off with little knowledge through exporting before deciding on other entry modes that require more resource commitment. However, this theory does not specify a time schedule on gaining of knowledge hence it is hard to attribute the FDI expansion to knowledge gained rather than timing. The monopolistic advantages theory by Hymer and Kindleberger claims that firms with monopolistic tendencies go for FDI rather than transaction agreements in expanding into foreign markets in order to gain control of markets (Klug 2006). The choice of FDI is motivated by presumed disadvantages or liability of foreignness namely: Less local knowledge Discrimination through regulations and taxation Exchange rate fluctuations Geographical distance The same theory claims that firms have to eliminate these liabilities through Superior technology or management that cannot be imitated by local competitors Country of origin effect Economies of scale in that firms investing in foreign markets are large in size and endowed with more resources (Klug 2006) The eclectic theory by Dunning is the most accomplished theory on FDI. It argues that a firm will consider FDI if it has ownership advantages in that it has specific advantages over local players in the host market. If these advantages are identified, then the firm has to realise the advantages through internalisation and finally invest in the new foreign market if there are locational advantages (Klug 2006). 3.0 Conclusion Considering the above theories on FDI, Sportive Inc recognises that its competitive advantage is company based mainly through high technology and innovation and excellent management and safe products. This allows the firm to set base in another country without t losing this competitive advantage. Unfortunately, the firm has little resources to establish an efficient distribution network in the larger US market. This implies that the firm can set up a factory in the new market but has to outsource distribution services from established players. Because the US market has established players in the sports apparel and equipments industry who dominate the market and have strong brand equity and brand recognition, Sportive Inc should exploit this rather than seek to challenge them. Nike is the leader with other strong players being Adidas, Kappa, Reebok, Puma and Asics. Given that these players have strong financial resources, it would be next to impossible for Sportive Inc to acquire any of them. On the other hand, none of these established players has a dominating presence in the water sports apparel market and hence such an arrangement with Sportive Inc who have a new patent on the new technology on the Reno surf skis will allow the chosen local firm to gain a larger share of the water sports apparel market. Sportive Inc on the other hand will penetrate the US market and introduce their corporate brand in the new market while Sportive Inc will ride on the local firm’s brand recognition and attain the local appeal. 4.0 Recommendations 1. Nike Inc should be approached to negotiate distribution terms. 2. The new factory should import employees as much as possible from Australia to avoid losing the technology advantage through imitation to local players. 3. Sportive Inc should increase their product range to cover other sports disciplines such as track events to increase corporate brand presence and recognition in the market. 4. Sportive Inc should in the long-term, dependent on the rate of penetration of the US market consider establishing branded stores as suggested by the learning theory. 5. Owing to celebrity adoration in the US market, Sportive Inc should consider hiring a celebrity brand ambassador a strategy that has worked very well for its target partner Nike. 6. Sportive Inc should carry out a comprehensive research to assess the criteria used by established players to segment the market in the US. 7. Sportive Inc should market its brands as local content to elicit patriotism References Anderson, N, Ones, D, Siinagil, H & Vuiswesvaran, C. (2002). Handbook of industrial, work & organizational psychology: Organizational psychology 2nd ed. Brisbane: Sage Brouther, K & Hennart, J. (2010). “Boundaries of the firm: Insights from international entry mode research.” Journal of management. 33 (3), 395-425 Grant, R. (2005). Contemporary strategy analysis. 5th ed. London: Wiley-Blackwell Griffith, D., Cavusgil, S. & Xu, S. (2008). “Emerging themes in international business Research.” Journal of International Business Studies. 39, 1220–1235 Klug, M. (2006). Market entry strategies in Eastern Europe in the context of the European Union: An empirical research into German firms entering the Polish market. London: DUV Lane, H, DiStefano, J, Maznevski, M. (2000). International management behavior: text, readings, and case. 4th ed. London: Wiley-Blackwell Liang, X, Musteen, M & Datta, D. (2009). “Strategic Orientation and the Choice of Foreign Market Entry Mode: An Empirical Examination.” Management international review. 49:269–290 Lymbersky, C. (2008). Market Entry Strategies: Text, Cases and Readings in Market Entry Management. London: Christoph Lymbersky Meyer, K., Estrin, S, Bhaumik, S & Peng, M. (2007). “Institutions, resources, and entry strategies in emerging economies.” Strategic Management Journal 30, 61–80 Shama, A. (2000). “Determinants of Entry Strategies of U.S. Companies into Russia, the Czech Republic, Hungary, Poland, and Romania.” Thunderbird International Business Review. 42(6) 651–676 Tallman, S. (2007). A new generation in international strategic management. Sydney: Edward Elgar Publishing . Read More