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The term global business is becoming more familiar in the current business context where, more and more small and medium enterprises (SMEs) trying to expand into overseas market. A similar company called Lifeway is a U.S.A. SME, which is rapidly growing in the home market. In 2008, the company was named 49th Fastest Growing Business by an American Magazine, Fortune Small Business (Lifeway, 2008).
Given that Lifeway intends to expand into overseas market (outside U.S.A), the Group report requires to provide analysis for the proposed host country’s strategic environment as well as a properly evaluated market entry mode for the company. We used three different analytical tools for analysing host country’s strategic environment that are described below:
- Hofstede’s Model of National Culture
- Porter’s Five Forces
- PEST Analysis
We evaluated different Market Entry Modes for Lifeway and selected ‘Exporting’ as a Market Entry from the following:
- Strategic Alliances
- Foreign Direct Investment
We selected Turkey as a host country for Lifeway to expand its operations into overseas market. Turkey is one of the largest producers of dairy products in its region as well as the country’s location is of a strategic importance, as its geographical location is connected to both sides of East and the West (Europe). We chose exporting as a market entry for Lifeway to expand into Turkish market.
Host country strategic environment analysis
It is crucial for Lifeway to critically evaluate Turkey’s strategic environment. The strategic environment comprises of various variables such as Government regulation, Country’s financial risks, culture, political stability, economy security risks, competitors, suppliers and technology.
Hofstede’s Model of National Culture
According to this model a country’s cultural values can be implicated with different aspects of the business e.g. Human Resource Management, Leadership Styles, Motivational Assumptions, Decision Making and Organisational Decisions and Strategy (Hofstede & Bond, 1988).
According to Hofstede, Turkey is a comparatively high power distance culture as compare to U.S.A. Organisational structures of companies in Turkey are likely to be tall pyramid with many supervisors and managers. Only top level management has the power to make strategic decisions. The wage difference between superiors and workers is high; management is authoritative and high level education takes precedence over performance. In contrast the opposite is true for the companies and businesses in U.S.A. like Lifeway.
The figure-1 (see p.2) shows clearly a huge difference in both the country’s cultural values in individualism. In collectivist society like Turkey, job selection process for management is usually based on family references. It is also assumed that managerial promotions are based on seniority and age. Conversely in U.S.A. an individualistic society, promotions are based on an individual’s ability and qualification rather than age and personal references.
According to Hofstede’s model masculinity in Turkey is low, 45 and high in United States, 62. In most cases Turkish leadership styles emphasise on quality of life rather than work. Moreover organisational structure is small with decision making mainly by groups. This is quite opposite to American society where organisational structure is usually large; emphasis is on achievement, motivation and self reliance.
There is a high level of uncertainty avoidance in Turkish cultural as compare to American culture. In business perspective, organisations in Turkey would have clear rules, regulations, standardise procedures, formalised structure and risk avoidance. People want job security, are committed to long-term contracts as well as loyal and predictable. It reduces potential employee turnover in the organisations. However organisations and people of U.S.A are willing to take risks, businesses have less regulation and workers have autonomy.
There is no data for Turkey; however United States is a short-term oriented society (see figure-1, p.2). In U.S.A., employees are selected on the basis of skills and ability with quick rewards and promotions having less job security unlike long-term oriented societies. Turkey can be classified as a long-term oriented society on the basis of other Hofstede’s dimensions.
There are a few question marks about Hofstede’s cultural dimensions concerning the accuracy of the data. Information found may be contradicting e.g. Turkey, a high uncertainty avoidance culture implicates larger organisations however it is also low in masculinity which implicates smaller organisations. Hence information should be considered as a guideline therefore cultural pa, therefore, stereotyping should be avoided. However it is a good starting point for Lifeway to have an idea of a very diverse culture as compare to its own.
Porters Five forces
Porter’s five forces is a widely known strategic business analytical tool which helps managers to understand better the industry context in which the firm operates.
There are numerous competitors in the probiotic industry. All of these companies operate internationally as well as in Turkey. This indicates the presence of market within the country.
According to a new market research report, ‘Probiotics Market (2009-2014)’, published by (Marketsandmarkets, 2010), the global probiotics market is expected to be worth US$ 32.6 billion by 2014, with the Europe and Asia accounting for nearly 42% and 30% of the total revenues respectively. The global market is expected to record a CAGR of 12.6% from 2009 to 2014.
The following list below mentions Lifeway main competitors.
Group Danone: their main probiotic product is Actimel probiotic yoghurt drink containing a unique culture called L.casei Imunitass, which is exclusive to Danone. (Presence in Turkey).
Yakult Honsha: they produce a drink called Yakult. Yakult is a fermented milk drink containing lactobacillus casei Shirota Developed by Dr Minoru Shirota, the drink has been around for about 70 years in some form. It was initially only produced in Japan but is now made in Holland for distribution throughout Europe. (presence in Turkey)
Nestlé probiotic products are mainly based on its LC1 brand and include:
Ski BioVita: probiotic yoghurt containing LC1 culture.
Sveltesse Optimise 0%: a probiotic, fat free, dairy drink containing a probiotic and fibre, available in Strawberry and Pineapple flavours.
Munch Bunch Drinky (UK): a yogurt drink designed for children, containing fruit puree and a gentle probiotic for children. It is claimed that the probiotic, lactobacillus fortis, is specially designed for children. (Presence in Turkey)
Whilst functional drinks still occupy the largest market share (at around 50% of all sales) probiotics (mainly dairy products) and probiotics (comprising mainly dairy products, cereals and baked goods) are the next largest sectors. Across Europe, the probiotic industry accounts for more than â‚¬1.4bn at consumer prices. These figures speak for it, the probiotic drink market has been rising since the year 2000 and the forecast is increasing (RTS Resource Ltd., 2010).
The capital cost of entry into the food industry is high especially since it will have to compete with the big name such as Danone, Yakult and also Lifeway Kefir.
These are some examples of substitutes to probiotic drinks:
- Probiotic capsules (new trend)
- Symprove (new probiotic in a non-dairy drink)
The level of differentiation for Lifeway products is moderate as they manufacture all of their range, quality being one of the most important feature as well as health and wellbeing.
Bargaining Power of Buyers
Buyers on the food market have high power as there is a large range of probiotic drinks, therefore competitors will be offering similar products and prices. Buyers will go to the store that offers a lower price. Everyone needs food on a daily basis; the number of buyers involves everyone. Lifeway could introduced their latest ranges created recently which could lead to product differentiation in regards to other probiotic drink, these approach could lead to a decrease in the bargaining power of buyers. The cost of switching from one brand to another is very low; usually there is more than one probiotic drink on the shelf of supermarkets. New trends have pushed buyers to purchase their goods online.
Bargaining Power of Suppliers
In this particular case the business is considering expanding to Turkey, suppliers will have less power. Lifeway is attempting to gain competitive advantage by cheaper outsourcing; a search for best suppliers in Turkey should result in a good deal. Suppliers in Turkey will want to secure a contract with a company with Lifeway’s profile. However at the present Lifeway is only intending to export their goods to Turkey. Lifeway is the country’s leading manufacturer of Kefir, these represents a main advantage as the organization enjoys the benefits of economies of scale in the home country.
In view of Lifeway new environment (Turkey), the PEST analysis is a critical analytical tool for evaluating a country’s strengths and weaknesses. It focuses on political, economical, social and technological factors and also helps to develop a broad view of a country’s landscape.
Turkey’s policy is based on liberalisation and free trade and also attempts to create location advantages to attract foreign companies (Datamonitor, 2009). In 2003, the Turkish government introduced the Foreign Direct Investment (FDI) Law to improve FDI policy. It mainly contains the abolishment of restrictions which leads to an equal treatment of foreign and domestic companies. Furthermore, Turkey’s main political goal is to achieve EU membership. This is a major political advantage if the country achieves EU membership, as companies would benefit from EU free trade policies in Turkey. This in turn opens the door to invest easily in other EU member countries for companies based in Turkey. Lifeway is one of the first companies in the dairy sector intending to expand in Turkey.
In contrast, there still exists a high political risk in Turkey. According to A.M. Best Company (2009), Turkey seems to be unstable especially focusing on regional, social and governmental aspects.
Major reasons for these instabilities are the terrorist groups, who are responsible for a mass of attacks in recent years and the existence of high corruption (Datamonitor, 2009). In addition, the tax system is very unstable according to OECD. The IMF, the World Bank and the investment environment by FIAS (Foreign Investment Advisory Service) have signaled concerns about the complexity of Turkey’s tax system. This complexity has been exacerbated by tax policy instability coupled with high and unstable inflation rates (OECD, p.6). These high inflation rates, e.g. 10.4% in 2008 are quite higher than inflations rates of other western European countries (PRS Group, 2010). Generally Turkey indicates a high political risk (CRT-4) which is defined as ‘Relatively unpredictable and nontransparent political, legal and business environment with underdeveloped capital market’, stated by AMB (2009, p.4). Hence high political instabilities and risks have an adverse effect on foreign companies like Lifeway where it takes time to adapt to the political condition in Turkey.
Due to the political instability in Turkey, this has a negative impact on the overall economy. Comparing the GDP growth rate during last year decreased from 9.2% in 2004 to 1.1% in 2008 meaning its economy is in recession (PRS Group, 2010, Country Forecast, p.8). Besides the financial crises above all high inflation and interest rates 6.5 % in 2009 (fxstreet.com) caused this economic downturn. Turkey’s economic risk is moderate because it experienced an erratic growth over the last few years due to a weak banking system, large current account deficits, and a lack of structural reforms (AMB, 2009, p.2). It means that although there is the existence of an economic upswing during the last decade but overall economy is still not recovered – e.g. imports are still higher than exports.
In contrast, plans for the implementation of free trade agreements raise hope among the Turkish population (Datamonitor, 2009). These agreements shall increase the international competitiveness and boost the relationships with foreign countries. In addition to that by starting to act and trade more internationally Turkey could also implement the EU criteria very soon. This would help the company in the future to expand the investment.
The unemployment rate of 10.4 % in 2008 is obviously caused by the lack of investment in education. Only 34.5 percent complete vocational or higher education which signifies a weak distinct tendency in the range of the service sector (PRS Group, 2010, Country Conditions, p.9). On the contrary primary and secondary sector workforce is about 59% which shows that Turkey’s excellence in these two sectors.
For further analysis of social and cultural factors of Turkey see section 2.1 on page 2-4.
Turkey only spent 0.71% of GDP in 2007 for research and development according to the Federal Statistical Office of Germany (2010). The lack of support in this sector would have an immense negative impact on foreign companies. Particularly the number of patent applications which is a major indicator of rating a country’s development in R&D and it was 24.50 per million inhabitants in 2007 (Federal Statistical Office, 2010). Although the Turkish dairy sector is distinctive, its products are still behind the quality of the EU (Reuters, 2009). Equipment and hygiene have fulfilled the recent EU standards but Turkish milk quality can still be considered as low.
However established government institutions try to compensate such deficits by giving financial aid to companies and private citizens in the form of subventions and loans for R&D projects (PRS Group, 2010, Country Conditions). Additionally there is an appearance of ‘drain brain’ (Datamonitor, 2009). It means that Turkish academics that are living abroad are coming back to their native country, recognising the potential of Turkey becoming an EU member. Thus foreign companies like Lifeway with the intention of expanding could profit by future trends.
DIFFERENT MARKET ENTRY MODES
There are four major market entry types which will be analysed and evaluated in order to make a decision that which market entry Lifeway should choose for Turkey.
Licensing is ‘a contractual transaction in which the firm-the licensor-offers some proprietary assets to a foreign company-the licensee-in exchange for royalty fees’ (Kotabe, 2008, p.293). For instance, a company is allowed to use the technology, know-how or even a whole product itself of another company against payment of so-called royalty fees.
Licensing does not need investing capital and is especially used by small companies which are looking for a fast and easy access to a foreign country (Kotabe, 2008). Lifeway could for example save transportation costs and tariffs and invest them in other branches. This is an easiest way of investing where there is no financial risk involved, no risk of product or performance failure. By licensing, the company would get its profits (royalty fees) and it would also benefit the Turkish government and national suppliers.
In contrast licensing may result in a firm’s giving away valuable technological know-how to a potential competitor (Hill, 1999, p.202). Lifeway loses its competitive advantage by sharing knowledge of producing the different kind of flavours that are very popular among the US. Adopting technology could improve the partner’s business and lead from co-operation to competition. Additionally, ‘Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability’ according to Hill (1999, p.202). Lifeway’s brand name might become weak with the possibility of losing the license as a result domestic companies could gain success.
Strategic alliances are cooperative agreements between two or more firms from different countries to participate in business activities, as stated by Parboteeah & Cullen (2011, p.161). Lifeway especially focuses on the International Joint Venture (IJV) which is the most common form of strategic alliance.
International joint ventures bring together otherwise independent firms to share resources in product design, production, marketing, and/or distribution (Chan et al., 2007). The company can gain the knowledge and the know-how of similar companies which could improve Lifeway’s Kefir. Lifeway could obtain the possibility to share its losses and it will reduce its amount of investment in Turkey (Kotabe, 2008). Additionally, by cooperating with a domestic Turkish company Lifeway can fit its Kefir to the people’s taste. Consequently additional costs for introducing and adoption can be reduce and Lifeway could get an insight of how to avoid cultural misunderstandings (Kotabe, 2008).
However at the same time cultural misunderstandings might appear within the alliance, especially when it comes to controlling the company, see Hofstede (section 2.1, p.2). Furthermore, Lifeway might lose its competitive advantage of developing and creation which made it unique in the US by sharing know-how and technology (Kotabe, 2008). Like it is said before that the Turkish dairy industry is behind the EU standard in the development of equipment and technology. Gaining the same knowledge as Lifeway, competitive companies in Turkey could conquer the European market and further expansion in Europe could result in increasing the competition. Evidently this would lead to a disadvantage for Lifeway.
Foreign Direct Investment
Parboteeah & Cullen states a Foreign Direct Investment (FDI) occurs when, ‘a multinational company owns, in part or in whole, an operation in another country’ (2011, p.161). Investing in manufacturing or R&D (research & development) facilities that are made or bought in foreign countries can be considered as FDI’s, for example. Turkey’s strong FDI policy is especially attractive to foreign companies because of its market potential, geographic proximity, and low labor costs (Deichmann et al., 2003, p.1771). This type of market entry potentially leads to higher profits in the early expansion of the company because it also avoids transportation costs.
Lifeway can even save more money, in virtue of prevention of double taxation agreement between Turkey and the US (worldwide-tax, 2008). In Turkey huge proportion of the workforce works within the primary and secondary sector because of the low education this provides low cost labour making Turkey even more attractive (Turkish Embassy, 2008 & PRS Group, 2010, Country Conditions).
However based on the low quality production of milk in Turkey Lifeway’s brand image could be damaged resulting in the production of the low quality of Kefir (AgriPolicy, 2009). (Paliwoda, 1997 p.154) described his point of view for FDI as, ‘a wholly owned subsidiary is slow to achieve, expensive to maintain and slow also to yield any tangible results’. Lifeway that just developed during the last few years the decision of such a risky market entry might be too early on the evidence of a country which is still characterised by uncertainties, instabilities and insecurities. A high risk is also applicable to the acceptance of the product among the population. Furthermore, there is a huge cultural difference in the society as well as in a business context. Therefore it is difficult for Lifeway to adjust quickly into the local way of doing business, see Hofstede’s cultural dimensions (section 2.1, p.2). Hence it’s not in the interest of the company to choose this market entry.
According to (Hill, 1999, p.201) export can be defined as, ‘producing goods at home and shipping them to the receiving country for sale’. There are two major forms of export: direct and indirect export (Kotabe, 2008). In direct exporting, a company will appoint an internal team that is responsible for exports by trading goods or services with a foreign middleman. While indirect exporting is when a company will sell its goods or services through some other domestic companies, so-called intermediaries (Kotabe, 2008).
Some major advantages could be attained by direct or indirect exporting. This type of market penetration is easiest and cost effective (Kotabe, 2008). Firstly, Lifeway doesn’t have to invest in production facilities such as building factory, warehouse, overhead costs and also labour costs etc. Lifeway, which is considered as an SME having small amount of equity (as compare to large MNCs) would want to have minimum financial risk. Secondly, time is an important factor, exporting makes it possible to get an immediate market access (Kotabe, 2008). Especially entering in a Turkish market which might experience an upswing in the near future, it should be realised that the company could profit from new regulations and subventions.
In contrast, exporting is unprofitable because of the existence of high transportation costs, tariffs and trade barriers (Hill, 1999). The Turkish government intervened to protect and support domestic companies of the dairy sector by demanding high tariffs for importing dairy products (Export.By, 2010). Products like Lifeway Kefir can be produced in almost any location because of a low value-to-weight ratio (Hill, 1999, p.201&202). As a result it can be said that the demand of Lifeway Kefir in Turkey may not be equal to other diary producing companies in Turkey.
Benefits of direct exporting would be to avoid information asymmetries because Lifeway would be still responsible for major orders and dispositions (Parboteeah & Cullen, 2011). Furthermore direct exporting is connected with higher sales potential and profit as compare to indirect exporting. However indirect exporting causes less committing errors. New environment, culture and language barriers could be avoided by this market entry mode or at least reduced (Kotabe, 2008).
Therefore, it is decided that Lifeway should pursue indirect exporting for market penetration in Turkey. This is because of various reasons such as Lifeway is relatively a small company with limited finances, the product is a simple and standardised hence no need for training and after sale support and also Turkish culture is very different than Lifeway’s business culture which is American, according to Hofstede (see section 2.1 on p.2-4). The company would achieve foreign market presence in less time at low cost and also with the passage of time increase market knowledge and reduce psychic distance (cultural differences). This would increase company’s prospects of investing further in the country.
After critically analysing Turkish strategic environment, it is suggested that exporting is the best suited form of market entry for Lifeway. The company is a relatively small and medium size enterprise and is only locally based in U.S.A. hence essentially it would have limited finances as compare to other large global companies. Finance is the biggest asset that any company holds thus cost effectiveness is the one of the fundamental strategic principles in businesses. Exporting could be viewed as the quickest and most cost effective form of market expansion. It doesn’t require complex activities and Lifeway could focus its efforts mainly on the marketing area to attract the new target market in Turkey for its Kefir products. It should also be considered that the desire of Turkey’s inclusion into EU makes it a safer choice as it complies with the laws and regulations of EU countries than others in the Far East.
Although there are some drawbacks of exporting for example, high tariffs, transportation costs and trade barriers. Nevertheless looking at Lifeway’s context and comparing the disadvantages of other market entry modes it is clear that exporting is the easiest and most cost effective form of expansion.
Subsequently the company could invest further and make strategic alliance as a joint venture with the local popular branding company upon success in Turkey. With the passage of time and depending on Lifeway’s success the best form of investment would be having a production unit in Turkey. This would also be very beneficial for the company if Turkey becomes EU member. It would open the doors for Lifeway to easily expand and penetrate into EU market.
Even if Lifeway doesn’t get the best responses from exporting, it would not be a disaster. Since the company would have taken minimum financial risk in expanding into foreign market. It would be a good learning experience for Lifeway. Whenever business environment becomes viable the company could strategise again and correct the mistakes.
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