Feasibility of the Overseas Expansion of Acomb Tyres in India - Essay Example

REPORT ON THE FEASIBILITY OF THE OVERSEAS EXPANSION OF ACOMB TYRES IN INDIA INTRODUCTION The World today is witnessing in the era of Globalization. One can see that the world has been knit much closer than it was say two decades earlier. The availability of new & sophisticated technologies like the Internet, mobile communications etc. to all people regardless of their standard of living (in a majority of the world population) has led us to a sea expansion in the volume of international trade & communications. Companies today are much more interested in tapping newer & untapped markets in search of raw materials as well as to sell their goods. The best examples in this case would be the Information Technology & the electronics industry has seen such a rapid growth & widespread outsourcing of technology & manpower. The best beneficiaries in this case would rightly be India & China, with Russia just beginning to emerge to becoming a challenger to them in this are. The world has seen similar advances in other domains of trade & commerce as well. Companies today feel pride in declaring themselves as multinational corporations rather than be known more as local or regional players. The tyre industry is one such area, which has seen similar changes. Today major tyre industries like Bridgestone & Dunlop are popular & financially very strong owing to the fact that they are MNCs (Multi National Corporations). But, Yadong Luo (1997) is of the positive view that this must not deter other SMEs (Small & Medium Enterprises) from aspiring to go global as has been cited by Zoltan J Acks (2001). This report is written as an advisory statement to the Acomb Tyres of the UK (which is an SME) as to what are the pros & cons of setting up shop in other countries. In this report, the country under discussion is India. The reasons for selecting this country as the most favorable destination is discussed in the following sections of the report. GLOBAL STRATEGIES FOR OVERSEAS EXPANSIONS As the Acomb tyre Industries' major area of production is in the area of agricultural tractor tyres, the report concentrates on analyzing a suitable market for the same type of products. The present section concentrates on what are the reasons for global expansion as also what are the best strategies to initiate such expansions. Examples in support of the argument are discussed in the section that deals with the expansion of Acomb in India. REASONS FOR OVERSEAS EXPANSION & STRATEGIES TO DO SO There is no doubt that Acomb Tyre Industries is established & considerably popular in its native market in the UK with an estimated annual turnover of around 22m. But the following points that are described below outline the prime reasons as to why Acomb should consider a major overseas expansion: Limited Home Market It is a known fact that Acomb industries has won several awards for its unique and innovative products and has earned a solid reputation among farmers and other users of agricultural vehicles in the Northeast England and its surrounding regions. But a point to note is that the tyre market in the UK has been found to become stagnant in terms of growth & the economy. The tyre industry is no longer seen as a major contributor towards the development of the economy as it used to be so previously. Siobhan A Austen (1999) says that a prime reason for this can be attributed to the fact that the amount of sales of tyres on an annual basis; especially in the agricultural sector has reached its optimum levels owing to the limited amount of land available in the UK. Acomb has also been feeling the effect of the limited market, which is one of the company's prime reasons for asking us to prepare this report. The analysis of the prevailing market conditions in the UK have led us to the conclusion that it is time for Acomb to start looking for greener pastures. Better Profit Margins History has shown that today's major companies have come to dominate the market, the prime reason being overseas expansion. The best examples in this regard could be Goodyear & Bridgestone, which are a force to reckon with in the present day. Both companies enjoy a major share of the present global tyre market and are also found to have a large customer base. According to a study by Stephen J. Perkins (1999), this has been possible because these companies did not limit themselves to a country or a region and instead expanded themselves into all major tyre markets. The reasons as to how these companies have been able to earn better profit margins will discussed in the expansion strategies section. But the prime reason for such a possibility when a company expands has been found to be due to the product being able to command a better price in the overseas market, which does lead to increased profits. Another reason is that companies eventually succeed in finding countries & regions where the raw material needed for manufacturing any product can be procured at a much lower cost than the price for which the same raw material is available in the native market of the company. Another reason for the company succeeding in registering better profit margins upon expansion can be attributed to the fact that the distribution channels in that foreign market is more cost-effective and hence profitable to the company eventually. Global Competition With the era of globalization, many foreign tyre manufacturers are entering UK for setting up shop. This is seen to be causing direct competition between Acomb and these companies. Also, such companies are raking huge profits in overseas markets as well. This observation has led us to believe that if Acomb is really interested in seeing an increased turnover, then it must try to compete with those companies in those overseas markets also. Another interesting ploy could be forecasting. Acomb could possibly identify any overseas markets where its competitors are tipped to be entering in the nearest future whereby, the company could launch itself with full thrust into that market to offer better competition to them as also being the frontrunner in capturing those markets, thereby building up a customer base much earlier before others manage to do. Desire to grow Wright & Ricks (1994) define that entrepreneurship is another form of aspiration. It is the aspiration to grow & help other to grow and eventually aiming to touch previously unscalable heights in terms of the career graph. Entrepreneurship today means that one has to first try to survive in the vibrant market conditions & upon having survived, try to make one's foundation stronger by aiming to achieving higher targets and setting milestones for the future. The meaning of running a company not only means trying to manage a band of people and earning money, it means much more. Michael A. Hitt (2002) states that a successful company is one that would always strive to outperform itself with respect to its previously achieved targets in addition to competing with other companies as well. For this, a company needs to have three basic ingredients. A Dedicated leadership (Chairman, Directors etc.) who are capable of leading the company and help to take it to newer heights by making the correct decisions on critical issues. An efficient management team who can prepare & execute efficient, challenging & decisive strategies for the company's prosperity. They must be equally proficient in handling the workers (those under their purview) and must also be able to communicate and communicate efficiently with the management. Skilled & efficient workers, who are capable of producing goods of the highest quality. These three issues need to be looked upon by Acomb and the necessary changes need to be initiated in order to achieve success at a faster rate. And growth is possible only by hunting new markets and recruiting local talent (from those markets), who can help achieve the desired results if properly nurtured & encouraged. Learning & Tapping new Markets One important strategy for any successful multi-national corporation has been to tap potentially juicy, untested & new markets, wherein most of them happen to be overseas countries or regions. Robert M. Grant (2001) is of the view that this helps the company in gaining a decisive control over the market, and in some cases gaining complete monopoly over the market by preventing other companies from setting foot by resorting to all possible methods for doing so. Gaining popularity Any major Organization's success rate can be ascertained from the amount of popularity it enjoys with the population that it serves. A general consumer's psychological observation says that a consumer generally craves for a foreign brand (especially in the developing world), and that they feel pride in owning things of foreign brands. Another interesting observation that was made by Alexander F.Giacco (2003), is that some sections of consumers seek cheaper goods of high quality and feel that goods of foreign (especially from the industrialized nations) are of superior quality. Keeping in view the above points, it is suggested that Acomb try to build its consumer base by adopting such a mechanism, wherein the raw material can be procured preferably locally (with respect to the local market), and can then be procured locally, can be produced locally and could then be sold in the local market. Such a process is generally possible in markets in the developing world. A thing to keep in mind is that in developing countries, the company has to keep an eye on the pricing, such that the local population can afford it. This is possible if & only if the company succeeds in devising a competent & cost effective distribution systems in addition to production & distribution. But a question arises that what could be the best strategy that could be adopted, when a company makes entry into a new region or country. Two best possible solutions are proposed. The first proposal is that the company resorts to heavy advertising through popular broadcasting channels like television, posters, banners, and nowadays even through the Internet. A second approach could be to reduce the prices by adopting suitable strategies, so that the local people make a beeline for the Acomb's tyres, even when there is the availability of tyres made by local companies. The second strategy will be explained in the next section with an example from India. This method is so powerful that it can cause a stir among the local & established market players, so much so that many local companies tend to shut shop eventually. Thus it is very important for a company to gain popularity in the market where it intends to make an entry, in order to turn the local population into opting to buy its products. A FEASIBILITY STUDY OF AN OVERSEAS VENTURE IN INDIA BY ACOMB The report as part of its research and analysis had looked upon various issues and had studied the market conditions in various countries. A lot of factors were taken into consideration during the course of study, and after putting in a lot of effort and energy, we have come to a final conclusion that the Indian market is the most suitable for Acomb's overseas debut. The following section discusses the various reasons for having proposed India as the next suitable market. THE INDIAN SENARIO The Indian agricultural industry is the one of largest in the world. In terms of figures, around 54% of the totally available Indian landmass is used for cultivation, which is quite huge in terms of India's size. A major observation made by Shakuntala Mehra (2001) about the agricultural industry in India has been that a major section of agricultural activities are nowadays done by using modern agricultural and farming equipments like tractors, ploughs etc. This is a huge change in the Indian agricultural scenario that can be attributed to the fact that there has been a government drive on education farmers on the advantages of using modern farming equipments and tractors (as a majority of the agricultural population in India is illiterate). Today, the agricultural industry in India is booming, as there is abundant availability of water (through numerous dams) as also fertilizers at cheaper rates (through subsidies from the Indian Government) as cited by Jeffrey E Garten (2001). In fact, Robert E. Evenson, Carl E. Pray & Mark W. Rosegrant (2001) have cited that the agricultural Industry in India is prospering at a healthy rate of 5-6%. Another interesting observation can be made on the rising incomes among the Indian population. This has made it possible for people to buy things of better quality. The reason for this increased standard of living can be attributed to the fact that the Indian economy has opened up since the last decade and is moving towards an economic upswing along with china. Today India is seen along with China as a major destination for foreign investment as both countries possess huge amounts of raw materials that can be procured at lower rates. In addition, the cost of labor is also vary cheap with the average Indian quite content with earning one-fifth of what an average American earns for doing the same job. In spite of this, he (the Indian) is able to live a luxurious life owing to the low cost of living in India. The Indian economy, which was once referred to as a closed economy up to the early 1990s, opened up as a consequence of a series of political events and since then the Indian economy has been constantly growing at a rate of around 7-8% which is next only to China on a global scale. This transformed Indian economy is attracting many foreign companies who are interested in tapping the potentially huge markets in India. Many major industries irrespective of the nature of the industry have set up shop here in India and this has lead to intense competition among them. To feed a nation of 1 billion people, the country has to produce food grains in sufficient quantities. The Indian government has, therefore, ensured that farmers are able to buy modern farm equipments and fertilizers, by helping them in the form of loans & subsidies. The Indian tyre industry is equally very huge. Previously, some of the major players in the tyre industry especially in the agricultural sector in India were MRF, Apollo, and JK Tyre etc as has been mentioned in the works of Zoubida (Unk) Allaoua (1996). These are established and popular brands. All these companies thrived in the closed economy scenario prior to the 1990s, as they faced no competition from global players who were denied entry into the market. But the open economy structure has now allowed companies like Dunlop and Goodyear to enter the market and today these are major industry players in this sector with a market share of around 15-20% each with MRF being the only Indian company that managed to offer stiff competition to the new entrants and still continues to be numero-uno with a market share of 25%. Thus it can be seen that foreign companies have been able to gain a foothold into the overseas market. A recent market survey conducted by the IIM, Ahmedabad, India has found that this was possible, as Dunlop & Goodyear had offered tyres at competitive prices and had also sold at subsidies to farmers. Even their quality (of the agricultural grade tyres) was found to be superior when compared to the Indian versions as they were made through sophisticated processes and were more resistant to harsh conditions and were able to withstand stress easily. This has driven most farmers to opt for the tyres made by foreign companies in spite of the raw material being procured from local sources. STRATEGY FOR ACOMB TO ENTER INDIA The establishment of Acomb in India would involve five main factors: Manufacturing. Transportation. Distribution. Sales & promotion The report enumerates the most viable options for Acomb for each of these processes in order to set shop in India. 1) Manufacturing: This activity requires the procurement of raw material and subsequently processing at a suitable place (at a factory). The raw material for the production of tractor tyres i.e. rubber is available in huge abundance in India and at very cheap rates too. The company now needs to look at the option of whether to produce the tyres in India or make them at home itself. The most suitable and viable option is the establishment of a plant in India it self as this will enable Acomb to use locally available raw materials. Another major concern which was pointed out by could be the red-tapism involved in business transactions in India, but the actual truth is that the Indian government has realized its earlier folly and has now relaxed all rules & restrictions in order to attract more companies to invest in India. Thus, we feel that the establishment of a manufacturing unit in India would be a fairly simple job with the government even going to the extent of procuring land for the construction of industries & offices especially for foreign companies. Upon analysis, we have found that the Indian city of Hyderabad would be the most ideal place for setting up such a factory as it lies in central part of India and as such movement of raw materials and finished goods would not be a problem, with the local government being ready to offer all kinds of possible assistance. 2) Transportation: The finished product (tractor tyres here) needs to be transported to the various warehouses for storage and subsequently dispatched to the dealers who finally sell the tyres to the customers (farmers). With the extensive trucking system that India has and with the availability of good highways, we do not think that this factor would be a major cause for concern. 3) Distribution: The Distribution System in India will involve the manufacturing company dispatching the finished goods to all wholesale dealers who will then send the tyres to the retailer where it is then sold to the farmer. 4) Sales & promotion: This is a critical area for Acomb. Under this section, the company has to ensure that the sales of its tyres grow as time progresses and for achieving this, the company has to resort to heavy advertisements; announcing its arrival into the market. Another ploy for getting the people aware of Acomb's arrival would be to introduce some introductory offers wherein the tyres could be offered for competitive prices/slashed rates which would force other established & local players to follow suit, within which the local population would have become aware of Acomb's tyres. Thus it can be seen that Acomb is at an advantage if it considers launching an overseas market for its products in India. The reasons are obvious enough with an abundance of cheap raw-material, good infrastructure facilities for establishing industries, a good & well-established network of air, road & rail transport and most importantly a government that is ready to help with land procurement & Infrastructure development and deeply committed towards attracting foreign companies like Acomb to set shop in India. The establishment of such a factory in India will eventually prove beneficial to Acomb, as it will enable it to earn higher profit margins, and if profits continue to pour in owing to acceptance from Indian consumers, then it could also encourage Acomb to explore the markets neighboring India, which would be much easier to do so if Acomb were present in India prior to such an expansion. Thus, this will ensure gradual expansion of Acomb on a global scale, which will ensure that Acomb turns into a global player in the tyre industry. As has been mentioned before, the setting up of an Acomb unit in India will prove extremely beneficial, as it will be catering to one of the largest agricultural sectors in the world (54% of land under agriculture) and also because Indian farmers are increasingly turning towards using tractors for farming activities. REFERENCES 1) Wright & Ricks (1994), Emerging Paradigms in International Entrepreneurship. New York: Wiley. 2) Michael A. Hitt (2002), Strategic Entrepreneurship. London: Oxford 3) Zoltan J Acks (2001), SMEs in the Global Economy. Singapore: Eastern Economy 4) Siobhan A. Austen (1999), Globalization & Entrepreneurship: Policy & Strategy Perspectives, London: McGraw Hill. 5) www.internationalentrepreneurship.com 6) Robert M. Grant (2001), Contemporary Strategy Analysis: Concepts, Techniques, and Applications. 7) Yadong Luo (1997), Entry and Cooperative Strategies in International Business Expansion. Westport: Quorom Books. 8) Alexander F.Giacco (2003), Maverick Management: Strategies for Success. New Jersey: Associated University Press. 9) Jeffrey E Garten (2001), World View: Global Strategies for the New Economy. Harvard Business Review. 10) Stephen J. Perkins (1999), Globalization the People Dimension: Human Resources Strategies for Global Expansion. New York: Kogan Page 11) Zoubida (Unk) Allaoua (1996), India: Five Years of Stabilization and Reform and the Challenges Ahead. New York: World Bank. 12) International Financial Market and India. New Delhi: New Age Publishers, Pg. 244. 13) Shakuntala Mehra (2001), Instability in Indian agriculture in the context of the new technology. International Food policy research institute. 14) Robert E. Evenson, Carl E. Pray & Mark W. Rosegrant (2001), Agricultural research and productivity growth in India. Read More