Costco: Moving to China is a Strategic Move for Expansion of Target Market - Case Study Example

Name: Professor: Course: Date: Table of Contents Costco: Moving to China is a Strategic move for Expansion of Target Market 3 Introduction 3 Situation Analysis 4 SWOT Analysis 4 Strengths 4 Weaknesses 5 Threats 7 PESTEL 7 Political Analysis 7 Economic Analysis 8 Socio-cultural Analysis 9 Technological Analysis 9 Legal and Regulatory Analysis 10 Environmental Analysis 10 Costco 11 The Decision to Expand To China 11 Proposed Data Resources 12 Proposed Modeling and Conceptual Tools 12 Conclusion and Recommendations 13 References 15 Costco: Moving to China is a Strategic move for Expansion of Target Market Introduction The company under consideration in this business proposal is the Costco Wholesaler. Costco is a well renowned American retail store that plans to extend its current target market by launching its operations in the vibrant Chinese market. Financial analysts at Costco have evaluated the profitability of this move to China after considering all the advantages that this retail store enjoys in the U.S market. The Costco management is ambitious that the relocation process will be a viable venture for the retail giant. Costco has enjoyed immense dominance of the American wholesale market since it controls almost half the market of all wholesale distribution services in its home market in the United States (Euromonitor International 2011). This proposal highlights critical market entry elements best explained through the SWOT and the PESTE business analytical tools. The choice of SWOT analysis in the Costco new market venture project was necessitated by the need by the company strategists to fully comprehend the organization’s status and its environment. This is the primary tool that would aid planners for the entry into Chinese market to focus on key issues. Additionally, the PESTEL analysis was considered in this context for its ability to audit the macro environment that would influence critical investment decisions by Costco managers. Situation Analysis SWOT Analysis Strengths Costco is a well established distributor, a status based on which it is hoping to secure a location in the Chinese market that will give it a competitive edge over its already established competitors in China. Market analysts at Costco have selected Shanghai as their preferred location in order to compete fairly with other competitors in the same market region (Marketwatch, 2009). The company plans to outdo other competitors by providing products and services founded on the following company strengths as highlighted by Helms and Nixon (2010): Experienced sales and marketing personnel who can integrate the business with the community through creative customer catching approaches, for instance the membership program that will harness loyalty from the Chinese consumers, The firm’s high position in the U.S. (Euromonitor International 2011) distribution chain forms a formidable source of synergy for Costco to weather teething issues during the new Chinese market entry, Costco offers high quality products and services at consumer pocket-friendly prices (Datamonitor 2008), and this is a unique power for the company to attract small business owners, and families of all consumer classes, Being a famous brand, Costco will lure many customers from the adventurers Chinese consumers who have preferential taste especially for new products from the West (Yong 1996), The availability of verity of the American product that Chinese consumer may be looking for, Having ventured the Taiwanese market successfully (Andria 2010), Costco can capitalize on that initial Asian recognition Weaknesses Costco expects to perform below their expectation due to the current economic downturn that has affected the world’s economy and weaker elements in terms of: Tough competition from China-based distributors while it will be launching its services Challenges in appraising prices in order to maximize profits under the stringent Chinese government’s price controls and exorbitant tax rules (Marketwatch 2009). Problems in popularizing products to the Chinese locales owing to apparent social cultural and regulatory constrains that vary across the Chinese communities (Zu, Zhou, Zhu & Yao 2011b), The packaging regime that makes Costco’s products appear bulky may present the Chinese consumers with storage difficulties, There are likely challenges with introduction of the membership programs that the Chinese are not used to, unless innovative strategies are adopted. Opportunities Costco plans to divert the effects of the recent economic meltdown to cushion the customers from the rising product prices in the Chinese market through: Fair pricing strategies, a strategy that can help the company win large market share quickly in the new market, With its huge financial resources, Costco has the potential to design and develop products that will meet the needs and tastes of the Chinese population in a market piloting program before launching fully in China (Datamonitor 2008), Costco should seize the opportunity presented by technological innovations available in China to improve on its efficiency of the supplies chain in distributing its products. This is an opportunity for the company to open up these regions and capitalize on the ensuing benefits of increased sales revenues (Datamonitor 2010), The company’s marketing strategy is to focus on exploring avenues of directing their products to different cultural groups in order to open these untapped markets of Chinese vast economy, Costco plans to distribute its budget efficiently to ensure the company stays in business even in those seasons when their product use may drop. This will insulate the company from unforeseen seasonal changes in the Chinese market, There is great opportunity for Costco’s growth bolstered by the Chinese policy of encouraging more American firms to build business in China, The huge success of many American firms in the Chinese market is an opportunity that may motivate demand for Costco, thus fueling high demand for its American products. Threats Threats are inevitable for new entrants into any new market. Costco has th efolowing threats to confront in the Chinese entry: Sam’s club, which has already extended to China (Zimmerman 2001), will present the largest portion of Costco’s competitors in the Chinese market. Thus far, the club has six outlets as part of Wal-Mart’s 169 units across China. However, Costco is confident that it will create its own niche in the vast Chinese market due to its former experiences in moving to Taiwan. Chinese consumers may not be brand loyal, as they are trendy to new products implying that entry of new products similar to Costco’s will present challenges, There is an imminent threat from the imitator products widely available in China that sell at cheaper prices, which pose formidable threats to Costco (Francis 2010). It is imperative through the SWOT analysis that Costco is able to audit issues that the company can capitalize upon for competitive advantage while at the same time, and at the planning stage, is able to highlight potential confounding factors such as weaknesses and threats for feasible decisions that would be incorporated in the investment venture. PESTEL Political Analysis Apart from the government price regulations that China has implemented, Costco expects to benefit from the current political stability in the world’s fastest growing economy (Datamonitor 2008). This stability provides an excellent business atmosphere that definitely will benefit Costco as it relocates to China. Taxes and other levies and duties are favorable to a continual growth of the business in China. Chinese government is offering various incentives meant to benefit foreign investors to their economy such as Costco (Datamonitor 2009). If the management of Costco decides to take advantage of these governmental incentives, it will surely have an easy time upon entrance into China. Economic Analysis The company expects to face a hard time as it tries to shake off the effects of the recent global meltdown. This is because if there is another economic downfall, consumers of their products will change their spending habits in order to direct their money to avenues that are more urgent, which may ultimately lead to a massive drop in their profits (Datamonitor 2008). To cushion itself from this problem, Costco has implemented a balanced spending strategy that will ensure that the company survives any incidence of a meltdown in the Chinese economy; However, the good news for Costco is that being progressive multinational, its products are likely to attract the Chinese consumers who according to Jap (2010, p.95), tend to favor international brands against local products because they perceive them as of much higher and better quality and performance. Socio-cultural Analysis Costco, having developed experience in marketing its products to a capitalistic population back in the U.S., will have to change its promotion and marketing plan in order to attract this new communist population of the Republic of China. However, the company will be able to utilize its experience amassed in the neighboring Taiwan, which is also a communist society (Andria 2010). This will give it a competitive edge over other American-based competitors such as Sam’s club. The company will be trying to market the American culture to the conservative communists in China, which over time may proof a profitable strategy as the Chinese accept its products. Technological Analysis China being a hub of many technological innovations and new technological advancement (Zu, Zhou, Zhu & Yao 2011a), it is the ideal market that Costco should expand its target market to by relocating there. This is because the company will be able to take advantage of these innovations to streamline its service delivery in order to serve as many clients using the least amount of time and resources, especially through transfer of the American computing technology that is being hailed in the Chinese markets (Business Wire 1999). In addition, the company will be able to synchronize all its operations in all its subsidiaries in order to coordinate all its inventories and supplies schedules in real-time. Legal and Regulatory Analysis Some of the challenges that Costco expects to deal with in this new market is the price control regulations that the Chinese government has introduced recently (Knapp 2008, p.43). This will force the company to re-evaluate their pricing strategies in order to maintain a healthy profit margin while complying with these regulations. Costco plans to launch new products specifically for this overly controlled Chinese market. This will give the company products that they can rely on to meet their tax demands and keep the business in operation all year round. Environmental Analysis It is important that Costco understands the market environment in China increasingly being aligned with environmental protection policies that every business has to satisfy, Social cultural issues form the core of the basis for Costco to analyze and integrate its company culture appropriately with that of Chinese regulations, while integrating the ‘green strategy’ environmental rhetoric being sold to the Chinese by the people’s government (Datamonitor 2009), However China has been burdened with uncontrolled environmental pollution issues such as air pollution, water pollution and soil erosion, government is pushing for a balance on the stress imposed on natural resources motivated by the rapid economic growth (Datamonitor 2009). These are issues Costco will have to deliberate upon in long range particularly in its packaging policy so as not to appear environmentally insensitive before the Chinese consumers. In summary, use of the PESTEL framework would be crucial for Costco as it helps analyze many factors in the company’s macro environment particularly Chinese market. This tool has identified key factors upon which the managers must deliberate while formulating market entry policies. Costco The Decision to Expand To China It a good move for Costco to consider expanding its target market by going to China. The company will be able to capitalize on a massive population close to 1.3 billion Chinese citizens. A market of that size is hard to ignore for a wholesale distributor like Costco. In order to succeed, the company’s expansion and marketing strategy should incorporate the Chinese culture in order to capture their tastes and preferences. One of the major stabling blocks to Costco’s expansion plan involves the seemingly unreliable law enforcement system of the Chinese government (Datamonitor 2009). This because the company home nation promotes capitalism while the Chinese advocates for communism (Gerston 2003, p. 45). This is bound to present challenges on the road to Chinese expansive market. Financial analysts at Costco belief it is a worth investment to expand to China even though there are numerous challenges and obstacles of doing business in a Communist community like China. Proposed Data Resources To utilize the above relocation strategies, reliable and qualitative data is required to solve the existing problems and exploit the available opportunities for the benefit of the organization. Extensive market research will need to be done in order to explain how various social and cultural differences between China and the U.S would affect Costco from a trade perspective. In addition, proper market surveys and analysis need to done in order to establish the profitability of this new market segment that Costco hopes to capitalize on. Additionally, the Taiwanese Costco outlet should form a platform for the company to gauge social cultural influences over its intended entry into China. Proposed Modeling and Conceptual Tools Borrowing from tenets of the socio-cultural theory (Lantolf 2004), Costco needs to understand the different social and cultural traditions of the Chinese people. This will help them to make a transition from a capitalistic-minded society back in America to a Chinese population with different political orientations. This premise is crucial in that different cultures influence differently how people perceive multinational corporations such as Costco(Lantolf 2004). In addition, they will be able to understand and cater for their tastes and preferences that are pivotal for a cohesive relationship between the company and its customers. By utilizing its strengths and various opportunities in the market, Costco has the ability to capitalize on them to mitigate its threats and weaknesses that it is currently facing. It can do so by first understanding and incorporating marketing strategies that will be in accord with the social and cultural practices of the Chinese people. This will eventually create a familiarity complex among the Chinese citizens leading to its acceptance in this foreign market. In addition, the company needs to utilize the competitive theory in order to be able to compete more efficiently in the communist lead economy. The company should not focus majorly in competing with its business competitors in China, but should also compete with its suppliers and customers (Ellickson 1993,p. 99). It should target to satisfy all the needs of its customers in order to maintain loyal customers. In addition, it should make sure that it competes fairly with its suppliers in order to satisfy their needs and maintain a healthy supplier-wholesaler relationship. This is important since satisfied suppliers will ensure that the company can cater for the needs of its customers by making timely supplies. Finally yet important, the company needs to segment this target market into sections that share a common variable. This way, the company will be able to market different products to a brand spectrum of homogenous segments sharing a common factor. Segmentation will enable the company to concentrate its resources to target different segments that they will identify in the Chinese market. Conclusion and Recommendations The Chinese market being the fastest growing economy in Asia presents many challenges to any foreign company trying to launch its operations there. Therefore, Costco needs to first carry out a proper feasibility study of the market before they finalizes their preparations to relocate to this market. The most convenient way would be to divide the market into all possible segments before creating and developing their market plan. It is essential for the company to first conceptualize the idea fully by considering their internal and external forces before launching the relocation strategy. In addition, the company needs to understand all the socio-cultural perspectives that Chinese people share before developing products for this market segment. Finally yet important, it is crucial for the company to satisfy both its suppliers and customers fully in order to maintain a healthy relationship with them. 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