International business strategy
Options of entry modes
The decision concerning how a business gains entry to a foreign market usually imposes significant impacts on the outcomes. The options of foreign market entry modes vary in accordance with the level of the risk that they impose to the business, the control and the dedication of resources needed and the Return on Investment (ROI) that they guarantee (Hill & Cronk 2010). The two principal entry modes that a business can deploy to facilitate global expansion are the equity and non-equity modes (Duane & Hoskisson 2008). The non-equity mode of entry comprises of exporting and contractual agreements while the equity mode of entry comprises of joint ventures and Wholly Owned Subsidiaries (WOS). The following paragraphs offer a discussion of the various methods that the business can deploy to gain entry into the global market (Alkhafaji 2003).
Exporting is one of the well-established and conventional approaches that businesses have deployed to target foreign markets. It mainly involves the direct sale of locally produced goods in a foreign country (Peng 2008). A notable characteristic of exporting is that production of goods is not required in the foreign country, implying that there is no need to invest in production facilities in the foreign countries. A significant percentage of exporting expenses are derived from marketing expenses (Peng 2008).
Licensing grants permission to the company to make use of the property belonging to the licensor; this is mostly intangible and includes elements such as trademarks, patents and method of production. The licensee is required to pay a fee prior to having the rights to make use of the intangible property and gain assistance during technical production. Licensing as a mode of entry has the potential of delivering high rates of return because there is little investment in the side of the licensor (Hill & Cronk 2010).
Foreign Direct investment is also an entry method that refers to the direct ownership of production facilities in the foreign country. Direct investment usually entails the transfer of resources such as human capital, financial capital and technology. Some of the avenues through which FDI can be facilitated include establishment of a new business entity and acquiring an already existing business entity in the foreign market (Goldsmith & Hu-Chan 2003). Direct ownership offers high level of control regarding the firm’s business processes and increases the ability of the company to have a better knowledge of its consumers in the competitive market. The significant constraint is that it needs high amount of resources and high amount of dedication to deliver positive results.
Joint Ventures and the reasons for its choice in this paper
Joint Venture is motivated by five core purposes, which include gaining access to the foreign markets, the distribution of risks and rewards, distribution of technology and a collective product development, and compliance with government set of laws (Hodgetts & Luthans 2003). Another potential benefit associated with joint ventures is that it facilitates political connections and the channels used for distributing products basing on the relationships. Joint ventures are usually effective in instances where the strategic goals of the partnering companies are in convergence while there is a divergence in their competitive goals and when the size, resources, scope and the market power of the partnering companies are relatively less than that of the industry leaders (Goldsmith & Hu-Chan 2003).
Potential constraints associated with joint ventures when entering the Chinese market include the absence of support from the parent enterprise, cases of mistrust regarding the proprietary knowledge and cultural clashes. Other issues include conflicting viewpoints regarding new investments that are not symmetric and the ways that can be deployed to end the relationship (Duane & Hoskisson 2008). The following table 1 shows a comparison between the various entry modes to foreign markets.
mode advantages disadvantages
Exporting i. Speedy entry
ii. Increases the scale because it relies on existing facilities
iii. Risk minimization and increases investment i. Trade barriers and tariffs increases expenses
ii. Costs of transportation
iii. restricted access to information at the local level
iv. the firm is perceived to be an outsider
Licensing i. risk minimization and increases investment
ii. speedy entry
iii. high Return on Investments
iv. can avoid the trade barriers i. licensing duration is usually limited
ii. the licensee has the potential of becoming a competitor in the long run
iii. there is no control regarding asset use
iv. potential cases of knowledge spillovers
Joint Ventures i. the firm is perceived as an insider
ii. integrates the resources of two firms
iii. minimal investment need
iv. overcomes the barriers associated with restrictions regarding ownership and the cultural distance i. management difficulties
ii. there is dilution regarding control
iii. imposes significant risks compared to exporting and licensing
iv. potential cases of knowledge spillovers
v. there is a possibility that the partner can become a potential competitor in the long run
Foreign Direct Investment i. greater knowledge concerning the target market
ii. better applicability of specialized expertise
iii. reduces case of knowledge spillover
iv. there is insider perception i. imposes higher risk compared to other entry modes
ii. requires high amount of resources
iii. difficulty in the management of the resources at the local level
The desired partner and the governance attribute
The entry into the Chinese dairy market will involve a joint venture with the Shanghai Guangyu Food Company Ltd, which specializes in the production and sale of assorted dairy and egg products. The choice of Shanghai Guangyu Food Company Limited as a partner was reached after a careful analysis of the company’s business level strategies, policies, its competitive positions and how well the company associates with the consumers of dairy products in China. The following section outlines the reasons for the choice of the Shanghai Guangyu Company Limited as a partner during the entry into the Chinese dairy market (China Briefing Media 2005).
Reasons for the choice of the firm
The first reason for the choice of the Shanghai Guangyu Food Company Limited is that there is limited potential that the company may become a competitor in the end. This is because the company the company engages in diverse food commodities, and milk supply is not a core business consideration for the firm. This comes to Norco’s advantage since it will exploit the good name that the company has established in the food market in Shanghai (Yinya 2005).
The financial position and feasibility of the company was also taken into consideration prior to the arrival of the decision. According to information gathered from the company’s website, it has managed to attain the qualification regarding independent international trade and has aIDitionally involved itself in economic unions with the various leading manufactures in the Republic of China. In fact, the company is currently embarking on intensifying its cooperation with willing international entities to widen its business scope and establish a mutual relationship with collaborating companies in the dairy market. The company has a rich financial and production history, minimizing any risks associated with its downfall during the joint venture. For instance, the company’s level of production has peaked at 1800 tons of powdered milk and various tonnages of egg powder and butter (Yinya 2005).
Another reason for the choice of the company is that is that its base operations are undertaken in Shanghai, which is a target market for Norco products in the larger Chinese milk market. The Shanghai’s dairy market is large and constantly growing, despite the fact that it is fragmented, which means it imposes significant challenges for companies dealing with food and dairy products. In aIDition, China still relies on imports, which means that this is a perfect chance for the penetration of new markets with new and existing dairy products. An aIDed advantage is that the Chinese government is supportive towards the dairy sector, meaning that investors in the dairy market are less likely to face market barriers.
Advantages for collaborating with the firm
There are strategic benefits associated with entering into a joint venture with the Shanghai Guangyu Food Company Limited. Some of the strategic benefits are that the joint venture offers include an opportunity for Norco to achieve new capacity and knowledge, and access larger resources in the Chinese dairy market. Another potential benefit is that Norco will share the risks with the Shanghai Guangyu Food Company Limited.
Market overview of Huangpu District in Shanghai
The dairy consumption in the Republic of Chinese is anticipated to grow compared to the dairy markets that are located in Europe despite the low consumption per capita of approximately 42 grams/ day. Basing on this, there is a potential that the dairy market in China is likely face significant growth, especially in its urban cities such as Huangpu District in the Shanghai, which is the target location for the entry into the Chinese dairy market. In the Huangpu District, milk accounts for at least 6 percent of the dairy industry in the present day Chinese dairy market (Yinya 2005).
There are significant demand drivers in the Chinese economy despite the dismal low consumption rates with regard to the per capita basis. In the Huangpu District and other urban areas, personal income has increased by approximately 7-8 percent during 2011. As a result, the Chinese people are spending more on healthy foods such as milk products, which presents a potential market for the case of Huangpu District (Yinya 2005). This trend is evident by the increasing awareness on health and the residents of Huangpu Districts are perceiving milk as a core requirement of their basic diet. Refrigeration facilities enhance regular buying trends and enhance consumption, which presents a potential opportunity for milk supply in the Huangpu district and the larger dairy market in China (China Briefing Media 2005).
Alkhafaji, A 2003, Strategic management: formulation, implementation, and control in a dynamic environment, Routledge, London.
China Briefing Media 2005, China Briefing’s Business Guide to Shanghai & The Yangtze River Delta, China Briefing Media Inc, Hong Kong.
Duane, I & Hoskisson, R 2008, Understanding Business Strategy: Concepts and Cases, Cengage Learning, New York.
Goldsmith, M & Hu-Chan, M 2003, Global leadership: the next generation, Pearson education Inc, New York.
Hill, C & Cronk, T 2010, Global Business, McGraw Hill/Irwin, New York.
Hodgetts, R & Luthans, F 2003, International Management, McGraw-Hill Higher Education, New York.
Peng, M 2008, Global strategy, Cengage Learning, New York.
Yinya, L 2005, Investing in China: The Emerging Venture Capital Industry, GMB Publishing Ltd, Hong Kong.