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The establishment of a business requires various factors to be considered out of which analysis of market is the prime. The case of Metricum here defines the required decisions to be made at the right time while considering the opportunities in the market. Metricum is a an established international SME with its manufacturing bases in Sweden and China apart from a wholly owned subsidiary in Romania for sourcing their raw materials and the case now deals with re-structuring the Romanian operations into exploring or venturing less developed Eastern Europe markets by its CEO Will Hatton who is a visionary and takes quick and wise decisions for the benefit of company like that of finalising a deal of collaboration with Chinese competitor yielding 25% of production from China and owning 95% equity of the privatised Romanian firm.
1.1 Business issue of the Case
The case hereby questions the feasibility and options available to venture into less developed Eastern bloc countries, apart from recognising the skills gaps for Romanian firm, since it has no dedicated marketing staff and the issues handled by Sales manager of the company it is hence necessary to focus on the key questions arising in the mind of the CEO Will Hatton which is the crux of assignment.
Assessing and Understanding unfamiliar markets
The common form to analyze any environment to initiate business activities is to undergo a proper research in terms of political, economical, social, technological, environmental and legal considerations which in short is known as PESTEL analysis. To understand these factors one has to start the process of research by collection of raw data from the reliable sources like government websites, books, journals and newspaper articles for that particular area, country or region and filter the same for finest presentation of do's and don'ts for the company to venture into that market.
The political system and its features like nature of the political system, ideological forces of the political parties and entries of power, the political structure, its goals and stability, political process like party systems, elections, funding of elections and legislation in economic and industrial matters and regulations, political philosophy, role of government in business and its policy approach towards the economic and business development forms the importance of the political environment for scanning before any business is to be ventured in that particular country.
For example if we analyze Hungary from Eastern European bloc we can say that the economic situation is changing quite steadily in the past few years. The country's GDP is negative -6.34 in 2009; inflation is about 4.21 in 2009 still higher than that in year 2006 but less than the previous two years. The consumer expenditure is decreasing continuously from the past four years. Economy hit in year 2008 by global economic crisis, and large foreign debts figure out Hungary as an unpotential market for investment. Hungarian government is making continuous efforts to make investment environment favorable for foreign investors. The government is taking forward steps towards free market economy and to pursue privatization program. Although some of the organizations are losing confidence for foreign investment. Hungarian politics is working towards building up of economy, improving economic situation and introducing social welfare reforms.
2.2 Economic Environment
The country's economic condition describes the situation prevailing for the success of the business because the net disposable income, GDP, inflation, unemployment rate, consumer expenditure patterns, market growth aspects, impact of economic crisis on the sectors where a company wishes to expand its venture into market arena needs to be assessed as it is vital for the firm base of the company operations in that particular country.
For example- If we analyze Hungary from Eastern European bloc we can say that the economic situation is changing quite steadily in the past few years. The country's GDP is negative -6.34 in 2009; inflation is about 4.21 in 2009 still higher than that in year 2006 but less than the previous two years. The consumer expenditure is decreasing continuously from the past four years. Economy hit in year 2008 by global economic crisis, and large foreign debts figure out Hungary as un potential market for investment.
2.3 Social Environment
The social and cultural environment has a major impact on the success of the business due to its dynamics; one can't predict the drastic or sudden change in terms of demography, age distribution, ratio of sexes and behavioural patterns, apart from cultural etiquettes such as work culture as in the case of major eastern bloc countries where meetings are more off unofficial gathering and time factor and punctuality is not given prime importance.For Example - In Hungary if the working hours are between 9:00 Am to 5:00 Pm . Hungarians will work even without a lunch break more than their scheduled work hours. Working with Hungarians involves building up of social relationships outside the workplace. However it can be said that business is usually discussed in events like lunch, reception etc. If anyone cancels the meeting at the last moment then it is considered by Hungarians as breaking of trust.
2.4 Technological Environment
The technology has a major impact on the business. It affects the business prospects, cuts down the profits and forces the management to change the course of the business operations. Any change in technology changes the work cultures, the methods and the systems. It affects the speed of the operations and gives a boost to the productivity of the production systems. Examples of technological changes are seen in aviation, electronics, energy, communication, consumer goods industry, optics, medicines and manufacturing. The technology has been on striving note with technical advancements catching up pace to match other competitors in the market which is necessary to survive in the globalised world. To do this the company have to considered the following factors; Source of technology like company, external and foreign sources, cost of technology acquisition, collaboration and transfer of technology; Technological development, rate of change of technology and research and development; Impact of technology on human beings, the man-machine system and the environmental effects of technology; Communication, infrastructure and managerial technology, with times changing it has become a necessity to upgrade the infrastructure in terms of technological advancement and in this respect of the case for Metricum, the eastern bloc countries whether it is Ukraine, Hungary etc. have outdated technology but striving for excellence by investing for acquiring new technologies.
2.5 Environmental factor
The outright exploitation of natural resources has more or less affected the very survival of human beings and other species as well, any country would definitely like to take into account the perspective of the business and the extent to which it effects the change in environment. As in this case the eastern bloc countries have abundant natural resources like coal, iron ore and other metals and non-metals but more or less these resources are to be extracted from the base of the planet which causes immense disturbance to environmental factors.
2.6 Legal Environment
Various laws need to be taken into account before venturing into any act of business in an unfamiliar market conditions. The major laws which have importance in company's interests are that of Employment law ( as in this case eastern bloc countries have certain restrictions in terms of providing and hiring employees outside their countries to protect the interests of their nationalities, the employer if at all needs to hire a employee from outside eastern bloc countries he should apply for work permit without which he/she can be prosecuted under law), Health & Safety Law where the company should provide the details taken in the interests of both employees and environment since the risk of accidents and mishaps may hinder the project scheduling and execution which in turn may affect the credibility and sustainability of the very business and survival of the company in that particular country.
3.0 Market Entry Strategies
The objectives of business on paper may be different from the ones to be executed as the virtual reality is not necessarily the same as expected, there are various types or entry modes to enter a market but as per the PESTEL factors the company has to assess the relevance of going towards one kind of entry strategy over other based on short-term or long-term strategies the company chooses for the business to flourish or perish.
The various modes of market entry are as follows:
Export / Import
Wholly Owned Subsidiary
Mergers & Acquisitions
Entry Mode: Export / Import
Export: Selling products and services in other markets of the world, it can be a direct export or indirect Export.
Import- It is the form of buying products and services from other markets of the world. Again as in the case of exports it is of two kinds
Export mode of entry is appropriate when the volume of business is not large, when the cost of production in foreign market is high, the political or other risk of investment in foreign market prevails on short-term basis, Production bottlenecks in foreign market, or the company has no permanent interest in foreign market, or even when foreign investment is not favoured by the government of that country which is the place of business.
Avoids cost of establishing manufacturing operations
May help achieve experience curve and location economies
May compete with low-cost location manufacturers
Possible high transportation costs
Possible lack of control over marketing reps
Entry Mode: Franchising
The other mode of entry can be that of a franchising where the franchisor sells his intangible property and 'insists on rules' for operating business, it is one of the low risk mode of entry in international market. The agreement is based on the consensus between the franchisor and the franchisee which is as follows, in franchise agreement the responsibility of franchisee is the payment of fee upfront and percentage of revenue apart from which he would be getting time proven concept and products and services that can be brought to the market instantly, while the responsibility of the franchisor is to provide managerial and technical assistance, support and ongoing training to ensure same quality of goods and services worldwide for which he entitles for new stream of income
The Advantages of going for franchising mode is that it reduces costs and risk of establishing enterprise for both sides hence a profitability venture can be brought in at much less cost as compared to other entry modes. The disadvantages of going for franchising mode is that it may sometimes prohibit the movement of profits from one country to support operations in another country and also the Quality control requirements need to be met as they are stringent quality checks failing to do so may lead to cancellation of the agreement.
Entry Mode: Licensing
Another mode of international market entry strategy is the licensing which is an agreement where licensor grants rights to a firm (licensee) in host country to produce or sell a product for a specific period of time & receives 'royalty' for the same. It is one of the best methods if at all for the firm/company or organization low cost way is the only way to exploit foreign market. Again as mentioned in the franchising mode of entry the licensee and licensor sign an agreement which has clear mentions of the responsibilities, the responsibility of Licensor is to give the license to use a patent, trademark or proprietary information of the company, brand etc. while the responsibility of Licensee is to pay royalty. The advantages of this form of agreement is it reduces development costs and risks of establishing foreign enterprise, lack capital for venture, Unfamiliar or politically volatile market, Overcomes restrictive investment barriers, Others can develop business applications of intangible property.
Entry Mode: Joint Ventures
It is one of those modes of entry where in two or more partners own or control a business which can be
Cross marketing arrangements
Technology sharing agreements
Production contracting deals
The above mentioned arrangements are in general but there are specific types of Joint ventures which are as follows
Non equity venture : one group providing service for another
Equity Venture : financial investment by MNC in business of local partner
The advantages of this form of agreement is it improves the efficiency, the firm benefits from the economies of scale and can spread the risk / cost, apart from accessing to knowledge e.g pool financial and technological resources. In terms of political factors the local partner can manage political risk better, collusion or restrictions in competition, partner with competitors, face competition effectively
The disadvantages of this entry mode is that risk giving control of technology to partner, may not realize experience curve or location economies, shared ownership can lead to conflict.
Entry Mode: Turnkey Operations
In this type of foreign entry market mode by a firm the contractor agrees to handle every detail of project for foreign client and handover the 'key. The advantages of this agreement is that one can earn a return on knowledge asset.
Less risky than conventional FDI.
No long-term interest in the foreign country.
May create a competitor.
Selling process technology may be selling competitive advantage as well.
Entry Mode: Wholly Owned Subsidiary
Overseas operation that is owned and controlled by an MNC
Could be Greenfield investments or acquisitions
No risk of losing technical competence to a competitor
Tight control of operations.
Realize learning curve and location economies.
Bear full cost and risk
Entry Mode: Mergers & Acquisitions
Outright purchase of a running company abroad or an amalgamation with a running foreign company
Quick to execute - instant presence in foreign market
Preempt the competitors
Less risky than green field ventures
Clash of interest
In Ukraine most widely used forms of legal entities used are the Limited Liability Company (LLC) and the Joint Stock Company (JSC) with Ukrainian and foreign participants. It is recommended that a LLC be used, while choosing between a LLC and JSC as it is easier to manage than a JSC form.
LLC seems to be more convenient during 100% investment. It is easier and gets establish quickly and has minimum capitalisation requirements of approximately USD 9,000
One strong issue with a limited liability company (LLC) is that members can withdraw their contributions at any time by giving three months notice. If another investor is involved in an entity then establishing a JSC (or establishing a JV entity offshore) may be more prudent.
A foreign company can also go for a wholly -owned company in Ukraine, if it company intends to carry out manufacturing or other local commercial activities in Ukraine. Foreign company can establish a representative office in Ukraine, which can carry out marketing, promotional ,and other auxiliary functions on behalf of the company. In Ukraine there is no prohibition to establish a wholly -owned subsidiary and have representative office at the same time by a foreign legal entity.
According to the needs and requirements of a company and their long-term plans, any one of these three legal entities (a joint venture, either as a stock company or Limited Liability Company, a 100-percent wholly-owned subsidiary, and a representative office) in Ukraine may be suitable.
Building internal skills and knowledge base of the company
Increase the Supply of Local Knowledge on a Project
Local knowledge is necessary to efficiently and effectively transact and maneuver within the social and physical arrangements of a foreign environment. The following examples summarize five strategies used by managers to increase their supply of local knowledge:
Intelligence Gathering. Identify and integrate key drivers, indicators, indexes, metrics and trends before entering a new market. Such information is compiled from public and proprietary sources such as industry trade associations, market research consultants and economic journals. Many informants report that industry-benchmarking partners are a key source of recent and reliable unit cost and productivity data for foreign markets.
Formal Training Programs. Educate and prepare personnel for global assignments-both personally and professionally. Teach both general strategies-to cope with heightened uncertainty in an unfamiliar market, and specifics-about the relevant actors, institutions, natural environment and technologies that will be encountered in a foreign assignment. Consultants provide such training for firms that lack global market experience.
Trial Balloons. Use scaled-down versions of full projects or partnerships to "get up the learning curve" before tackling larger projects. Experienced managers utilize this strategy to gain the benefits of trial-and-error learning before they irrevocably commit resources to a high-risk project or partnership.
While any organizations could produce a long list of the resources at its disposal, what is important is to identify those resources that can help create competitive advantage, and ideally that can be sustained into the foreseeable future.
From the above it is clear that resources such as brand equity, relationships with customers, effective distribution networks, and the competitive position occupied, are potentially significant advantage generating resources. These have been termed marketing resources as they relate directly marketing activities and are directly leveraged in the marketplace.
There are many marketing resources which are intangible in nature such as a firm enjoying the resource of close relationships with key customers might be more difficult for a competitor to copy than one offering cut price bargains.
By building these resources we have to be very careful that either these resources are contributing to the creation of sustainable competitive advantage for the organization or not? Where it does, or it could be leveraged to, the resources should be recognized as the source of a superior marketing strategy and protected from external recognition and internal myopia.
Strategic capabilities include issues such as dominant logic or orientation guiding management (which will strongly influence strategic direction), the ability of the organisation to learn (to acquire, assimilate and act on information), and the ability of senior managers tto manage the implementation of strategy.
Operational capabilities are concerned with undertaking individual line tasks, such as operating machinery, the application of information systems and completion of order processing.
Individual competencies are the skills and abilities of individuals within the organisation. They include the ability of the individual to analyse critically and assess a given situation (whether this is a CEO assessing a strategic problem, or the shop floor worker assessing the impact of a machine failure).
Corporate-level competencies relate to the abilities of the firm as a whole to undertake strategic, functional or operational tasks. This could include the ability of the firm to internalise learning, so that critical information is not held by individuals but is shared throughout the firm.
There are some other resources which Metricum have to assess so that they can build the internal resources and knowledge base of the company to allow them to do things effectively and efficiently. These are technical resources, financial standing, organisations, managerial skills and information systems.
Technical skill is one of the key resources in a world of rapidly changing technology. This involves the ability of the organisation to develop new processes and products through research and development, which can be utilised in the marketplace.
Managerial skills in the widest possible sense are a further resource of the organisation. The experience of managers and the way in which they discharge their duties and motivate their staff have a major impact on corporate performance.
Organisation structure is one of the valuable assets or resources. Some structures, such as matrix organisation, are designed to facilitate wide use of skills throughout the organisation. For organising the marketing effort product management, as pioneered by Procter and Gamble in the early years of the last century, has proved particularly successful in developing brand champions.
Implementing a single Global Strategy:
Building and implementing a global business strategy can be done only when the company has analysed its objectives and goals in long term vision. If the company wants to diversify its business into various arenas apart from geographical boundaries it has to start with an ethnocentric approach i.e. focussing on one's utilization of resources in terms of manpower, financial and marketing aspects. In this case Metricum has its operations in Romania working successfully and has interests in setup of business in Ukraine, for which it has to train its managers under new HRM policy for expats which would help them to assimilate and acclimatise to various conditions irrespective of entry mode it opts for. Cross border teams should be implemented to establish the expats for managing the business in Ukraine. Any company would first approach through ethnocentrism later polycentrism where in the organization employees both the nationalities of host country and the country where it runs its business, the benefits of polycentric approach would be the virtual involvement of locals and expats in running the business.
Metricum , manufacturer of hand tools, provides an example of a company that is pursuing a global strategy. In the past decade, Metricum was threatened by external and internal pressures. Externally, it faced a powerful Chinese competitor, its strategy to produce and market standardised products worldwide made it a low-cost producer, and enabled it to increase steadily its share in the world market. Internally, international fiefdoms and nationalist chauvinism at Metricum had stifled co-ordination in product development and new product introductions, resulting in lost opportunities.
In response, Metricum decisively moved toward globalisation. It embarked on a major program to coordinate new product development worldwide to develop core standardised products that can be marketed worldwide with minimal modification. The streamlining in R&D also offers scale economies and less duplication of effort, and new products can be introduced more quickly. It consolidated worldwide advertising by using two principal agencies, gaining a more consistent image worldwide. Metricum also strengthened the functional organisation by giving functional managers a larger role in coordinating with the country management. Finally, Metricum purchased small appliance business to achieve world-scale economies in manufacturing, distribution, and marketing.
The globalisation strategy initially met with scepticism and resistance from country management due to entrenched factionalism among country managers. The CEO took a visible leadership role and made some management changes to start the company moving toward globalisation. Today, in his words, "Globalisation is spreading and now has a life of its own."
In a nutshell the company's global strategy should consists of the following factors for long-term running of business and diversification of its services
Appreciating that success demands a presence in almost every part of the world in order to compete effectively
Making the product the same for each market
Taking advantage of customer needs and wants across international borders
Locating their value adding activities where they can achieve the greatest competitive advantage
Integrating and co-ordinating activities across borders
A global strategy is effective when differences between countries are small and competition is global. It has advantages in terms of
Economies of scale
Co-ordination of activities
Faster product development