Aptamil Power Milk - the Criteria Used for Choosing the Location of the Firm in China - Case Study Example

? Aptamil Power milk – Establishment of the firm in China Question 3 Reasons for Choice of Location of the International Expansion 3 Why the choiceof location is critical when expanding globally Choosing the appropriate location for expanding internationally needs to be carefully planned due to the following reason: the willingness of authorities in the target market to support the activities of foreign organizations can highly affect the performance of the latter (Rugman 2009). In China, the success of foreign firms in various industries verifies the willingness of the Chinese government to promote the foreign investment across the country (Rugman 2009). From this point of view, China would be an appropriate country for international expansion, even for short-term projects of such type. The importance of location when expanding internationally is further verified through the study of Luo (2000). According to the above researcher, the expansion of each firm internationally is likely to be influenced by three factors: ‘ownership advantages of a firm, location advantages of a market, and advantages related to the internal processes of a firm’ (Luo 2000, p.103-104). It is made clear that choosing the appropriate location can affect the internationalization efforts of a firm, depending on the existence of increased or decreased location advantages in regard to the country chosen. According to Neelankavil (2007) choosing the appropriate country for entry is quite important due to the following reason: the selection of an inappropriate country for entry ‘can lead to severe damages on a firm’s performance while the time period required for recovering from such damages can be quite long’ (Neelankavil 2007, p.82). Statistics published through governmental and non-governmental databases and ‘information released by global research agencies’ (Neelankavil 2007, p.82) can help to check the potential performance of a country’s market in regard to a particular product. 3.2 Criteria used for choosing the location of the international expansion 3.2.1 Customer base When having to expand internationally firms are likely to use different criteria in order to choose the location of the target market. For most firms, the key reason for deciding to expand internationally is the increase of their existing customer base (Ebner 2011). This means that the location chosen should secure the achievement of the above target, even in the long term (Ebner 2011). China meets the above term; the country’s population is quite high and the demand of products of such type, i.e. of products related to the nutrition of babies, is quite high, as also analyzed below. 3.2.2 Geographic distance When reviewing the appropriateness of a country as a target market emphasis should be also given to the distance between the home market and the target market (Tallman 2007). Indeed, ‘geographic distance’ (Tallman 2007, p.295) is often regarded as a factor that can highly influence the success of a product in a new market (Tallman 2007). Developing strategic alliances locally can be an excellent method for limiting the risks related to such initiatives (Tallman 2007, p.295). 3.2.3 Local demand for similar products The level of demand of products of similar characteristics is critical for choosing the location of a firm’s international expansion. In the case under examination the choice of China as a target market for Aptamil Power milk can be characterized as fully justified. In terms of its economy China ranks among the most powerful countries worldwide. In a report published by Economist (2013) emphasis is given to the power of the Chinese economy but also to the threats that the particular economy has to face since it is mainly ‘consumer – led’ (The Economist 2013). For Aptamil Power milk the Chinese market seems to be an excellent destination due to the following two reasons: a) the demand for products of the particular type is quite high in China (BBC News 2013), b) a recent scandal related to the quality of such products in the Chinese market led Chinese consumers to seek for imports of these products from other countries worldwide (BBC News 2013, South China Morning Post 2013); this initiative was so expanded that led the authorities in UK to set restrictions on the amount of milk cans that each consumer could buy (BBC News 2013). This means that in China the prospects for high sales of Aptamil Power milk are significant, a trend that justifies the choice of China as a target market for the specific product. Question 4 Strategic Methods of Entry and the Possible Consequences 4.1 Criteria for choosing a strategic method of entry The entry of a firm in a foreign market has to be designed using specific criteria. Most commonly, the size of the firm, the prior experience in regard to similar plans, the level of competitiveness in the global market and the culture of both the host and the target market are used as the criteria on which the choice of a method of entry in a foreign market is based (Tuunanen, Windsperger and Cliquet 2011). The method of entry chosen is also highly influenced by ‘the overall international strategy of each firm’ (Kotabe and Helsen 2009, p.205). For example, there are firms that aim to keep the full control of their establishments in a foreign country (Kotabe and Helsen 2009). On the other hand, certain firms seem to emphasize rather on the employment of local resources rather than on securing the control over their units internationally (Kotabe and Helsen 2009). In any case, the decision of a firm for expanding internationally needs to have the support of the stakeholders (Triantis 2013). The conflicting interests of stakeholders could highly affect the success of a firm’s internationalization efforts unless a strategy is implemented for handling these interests effectively within the shortest possible time framework (Triantis 2013). In practice, there are three approaches for choosing a method of entry in a foreign market: a) the ‘economic approach’ (Stonehouse et al. 2007, p.210) which is based on the level of profit that each method of entry could secure; using this approach a firm is expected to choose a method of entry that can guarantee the highest level of profit, compared to other methods of entry that can be employed in a firm’s internationalization plan; b) ‘the stage of development approach’ (Stonehouse et al. 2007, p.210); this approach is based on the following fact: the level of development of a product that aims to enter the international market is different, compared to the level of development of other products that are also involved in internationalization plans (Stonehouse et al. 2007); c) the ‘business strategy approach’ (Stonehouse et al. 2007, p.210); in the context of this approach, a firm would choose a method of entry that could be aligned with the firm’s internal and external environment, as this environment affects the firm’s strategy (Stonehouse et al. 2007). From a different approach, Jansson (2008) notes that the choice of a method of entry has to be based on the following criteria: a) the expansion of the firm globally; this means that the current position of the firm in the international market should be taken into consideration before choosing a strategic method for the firm’s further expansion (Jansson 2008), b) the level of ‘local adaptation’ (Jansson 2008, p.61); the term refers to the changes that would be required on a firm’s product so that the particular product to be welcomed by consumers in the target market (Jansson 2008) and c) the level at which a firm has managed to promote its ‘global integration’ (Jansson 2008, p.62), i.e. the alignment of its strategies and operations with the characteristics of foreign markets in which the firm already operates. In regard to the above, each firm that aims to expand internationally should choose the strategic method of entry that best suits to its needs and characteristics and that can mostly help towards the success of the product in the host market. 4.2 Available methods of entry and consequences At this point, reference should be made to the following fact: each method of entry is likely to have different consequences (Albaum, Duerr and Strandskov 2005). Each firm should choose the method of entry the consequences of which would be more easily handled, meaning that the risks for the success of the whole project would be minimized (Albaum, Duerr and Strandskov 2005). The above fact is made clearer by referring to the consequences of the strategic methods of entry available to firms that seek to expand internationally. 4.2.1 Exporting Exporting involves in ‘the direct selling of products to a foreign market through an intermediary’ (Ungson and Wong 2008, p.199). The above method of entry has certain risks, such as the unexpected changes in fees/taxes and the unexpected failures of local intermediaries (Ungson and Wong 2008), meaning especially the sudden closure of the intermediary’s business due to factors that could not predicted in advance, such as the destroy of part or all of the intermediary’s business unit due to fire or other event of similar consequences. 4.2.2 Strategic alliances The specific method of entry has the advantage of limited risks but it is also related to certain implications especially in case of lack of effective communication/ cooperation between the parties (Hitt, Ireland and Hoskisson 2008); in addition, local firms, when acting as strategic alliances can often achieve a series of benefits for themselves ignoring the need for the promotion of interests of their foreign counterpart (Hitt, Ireland and Hoskisson 2008). 4.2.3 Acquisition Acquisition is a method of entry which is often preferred when emphasis is given on keeping the full control in regard to the performance of the product in the target market (Hitt, Ireland and Hoskisson 2008); this strategy has been used by Toyota, since the firm has established a unique manufacturing process that cannot be set in risk (Hitt, Ireland and Hoskisson 2008). 4.2.4 Licensing The specific mode of entry has been related to certain implications, especially as a result of the breach of the licensing contract by the licensee in the foreign market (Ray 2010); licensing, as a trade agreement, is not effectively protected in all countries worldwide, a fact that can set in risk the interests of foreign firms that are interested in expanding their activities internationally. In the case under examination, exporting or licensing seem to be the two methods of entry that could best serve the interests of Danone, the firm that owns Aptamil Power milk, in regard to the firm’s entry in China. The firm could decide to proceed to a more dynamic mode of entry, such as acquisition, in case that the sales of its product in China would reach a satisfactory level using exporting and licensing. References Albaum, G., Duerr, E. and Strandskov, J. (2005). International Marketing and Export Management. Essex: Pearson Education. BBC News (2013). Baby milk rationed in UK over China export fear. April 8, 2013. Available at . Ebner, H. (2011). Reasons for the Internationalisation Process of Companies. Norderstedt: GRIN Verlag. Hitt, M., Ireland, D. and Hoskisson, R. (2008). Strategic Management: Competitiveness and Globalization: Competitiveness and Globalization : Concepts & Cases. Belmont: Cengage Learning. Jansson, H. (2008). International Business Strategy in Emerging Country Markets: The Institutional Network Approach. Cheltenham: Edward Elgar Publishing. Kotabe, M. and Helsen, K. (2009). The SAGE Handbook of International Marketing. London: SAGE. Luo, Y. (2000). How to Enter China: Choices and Lessons. Ann Arbor: University of Michigan Press Neelankavil, J. (2007). International Business Research. New York: M.E. Sharpe. Ray, K. (2010). Mergers and Acquisitions: Strategy, Valuation and Integration. New Delhi: PHI Learning Pvt. Ltd. Rugman, A. (2009). The Oxford Handbook of International Business. Oxford Handbooks Online South China Morning Post (2013). Chinese dealers strip shelves of baby milk worldwide. April 12, 2013. Available at . Stonehouse, G., Campbell, D., Hamill, J. and Purdie, T. (2007). Global and Transnational Business: Strategy and Management. Hoboken: John Wiley & Sons. Tallman, S. (2007). A New Generation in International Strategic Management. Cheltenham: Edward Elgar Publishing. The Economist (2013). Are China’s economic goals at odds with its growth targets? July 20, 2013. Available at . Triantis, J. (2013). Navigating Strategic Decisions: The Power of Sound Analysis and Forecasting. Boca Raton: CRC Press. Ungson, G. and Wong, Y. (2008). Global Strategic Management. New York: M.E. Sharpe. Read More