International Marketing Performance of Wedgwood - Essay Example

-International Marketing - Wedgewood Contents Contents 2 Introduction 3 Recommended market 3 Factors Affecting Entry Mode Decisions 4 Recommended mode 5 Advantages and disadvantages of the four modes of entry 12 Chosen mode 14 Proposals on whole channel 17 References and Bibliography: 18 Appendix 21 Introduction Wedgwood is a part of a UK bases PLC known as Waterford Wedgwood. Wedgwood's main product area is china tableware while it also dabbles in children's ware, home d'cor products, jewellery and other miscellaneous products. Due to the prevailing economic slowdown and the credit crisis the company has gone into administration and is not doing very well in the UK and as a whole. A prudent decision to take at this point of time would be to enter a foreign market to expand its business, which offers present and future potential of high growth. Recommended market Wedgewood should enter an economy which has been showing consistent high rate of growth and offers the same for the future, and one of the best options is Russia. The Russian economy grew at 6% and 8.1% in 2008 and 2007 respectively, and witnessed an average GDP growth rate of 7% over the last decade. By 2008, the country had a forex reserve of $600 billion. The country is also looking at entering the WTO or the World trade organisation. GDP stood at $1.757 trillion in the year 2008. (Russia, April 2009) Goldman Sachs has predicted that Russia along with Brazil, India and China would become larger in terms of size than the present US and European economic powers over the next forty years. According to the report the Russian economy would surpass the economies of Italy, France, UK and Germany by the years 2018, 2024, 2027 and 2028 respectively. It is also being claimed that by 2050 Russia will be the only country amongst the BRIC nations which would have per capita income equivalent or to big European economies. By 2050 Russia would also have the highest per capita income among the BRIC countries. (Dreaming With BRICs: The Path to 2050, 2003) (Hult T., 2009). The country has also got a growing middle class which constituted 45% of the total population in 2003 (Senaeur B., and Goetz L., March 2003). Recent reports have also pointed out the positives and strengths of the retail sector in Russia. In a recent report Russia has been ranked 3rd in terms of the attractiveness of retail market and retail development opportunities within a group of 30 countries (A.T. Kearney Global Retail Development Index, 2008). Moreover about 39% of the population in the country is between the 15 to 39 age group. Carrefour and IKEA are just some of the global marquee name operating in Russia. Growing middle class with increasing disposable income and high rate of economic growth makes Russia an attractive retail destination for global majors and local companies as well. (A.T. Kearney Global Retail Development Index, 2008). Factors Affecting Entry Mode Decisions Internal factors: UK based Wedgwood is famous for its high end china tableware and other home d'cor stuff. It is looking at expanding into markets like Russia. Characteristics of desired mode: Low need of financial expenditure at the initial stage then increased chances of higher ROI at a later stage. Specific factors in context of Transaction: Russia is socio economically quite different from Western economies, owing to its communist past. So it won't be easy for Wedgwood to select the Licensee partner. External Factors: FDI policy in Russia has improved as the leaders across political dispensations have started welcoming FDI into the country (Minniti M. et. al, ). This is evident from the fact that total FDI over the period 2002 to 2006 increased 20 times over. It stood at $52 billion in the year 2007 (Souza L.V.D., April 2008). Recommended mode Academic literature provides various theories in context of choosing the mode of entry into a foreign market. Sequential iterative model of Young et al. (1989) the four factors which affect the entry mode by Hollensen (2007: 298) when combined together and used for scrutinising the circumstances, provide a significantly comprehensive view of the situation. Figure 1: A combined model of Young et al. and Hollensen's model Source: Adaption from Hollensen (2007, 4th edn) & Young et al. (1989) There are various methods or modes of entry into a foreign market. The company which wants to expand into the foreign market would look at the options available in front of it and would choose the best available option in concurrence with the above mentioned adopted model. The modes of expansion into a foreign country are: Exporting: Under this method goods are produced in the domestic country and then transported to and sold in the other countries. One of the best points about this method is the fact that there is no need of direct production in the foreign country. This happens through arrangement between the exporter, the importer, the transporter and the concerned governments and their trade laws and regulations. Licensing: Under this method of entry into the foreign market, a company from the foreign market takes the license of using the brand name, trade marks, production process or method and even patents of the firm which is expanding its business there. The foreign firm is known as licensee while the expanding firm is known as licensor. The licensee pays a stipulated fee in exchange of the rights for using the aforementioned properties and might also get distance and technical guidance and knowhow from the expanding firm. It is a comparatively safer mode of foreign investment or expansion for the licensor as the licensee would pay it a certain amount in terms of getting the license and also ensure that its brand name and products are sold in the foreign country. But the potential of earning huge amount of profit is comparatively less a bulk portion of the profit goes to the licensee who is putting in the production, marketing and distribution chain in place. Joint venture: Another mode of entry into the foreign market is through joint ventures. This method decreases the risk of failure for the firm which wants to expand in a new market. A joint venture with an exiting company, which has knowledge about local market conditions and finer nuances often decreases the huge risk involved for the expanding firm. These two entities share technology and knowhow, management insights, etc. Often it is the case that a particular industry in a foreign country is only accessible to a company only through the joint venture route due to prevailing trade laws. Moreover the expanding firm can take opportunity of a built in distribution channel and other relationships, which are essential for success in the world of business, which would otherwise have taken a lot of time for the new company to develop in a foreign market. But this mode of entry has got its own set of complexities. The firms in a joint venture are constantly battling issues regarding two opposite forces namely cooperation and competition. The expanding firm gets into a joint venture with a local foreign firm to surpass prohibiting trade laws or to leverage its local management skills or local knowhow but again the expanding firm aspires to do business independently some day in that country also. So it often is unwilling to go the whole distance in providing the other firm with all its technical knowhow and IPR or intellectual property rights. The foreign firm on the other hand wants to have a position of strength in its own country and therefore sometimes doesn't provide the amount of assistance to the expanding firm which is usually warranted from it. Only a fine balance between the two entities in a joint venture could ensure its success. FDI: FDI or Foreign direct investment is another popular mode of entry into the foreign market under which, the expanding firm becomes the owner of resources and facilities in the foreign land, where it is expanding its business. The expanding firm would invest its capital, people, technology, etc in the new venture. It might happen that the expanding firm buys an existing unit or it might decide for establishing a completely new unit in the host country. Smaller firms usually are not in a position to go for this route as the amount of capital and wherewithal required is very high in this mode of entry. (Foreign market entry modes, n.d.) (Jain C.S., 2003) The above four modes of entry have their own sets of positives and negatives. The mode of entry chosen by the expanding firm is dependent upon various parameters. These are: the risk appetite of the firm, the financial position of the firm, the significance of its intellectual property, trade laws and barriers, how fast it wants succeeds in the new market, etc. Fig2. Mode of Entry vs. Total cost over time Source: IW/AS/International Market Entry: IMmarketEntryModeFDIL6.pdf The above diagram clearly shows that under the FDI route, the Total cost of investment falls more than the other channels. Advantages and disadvantages of the four modes of entry Exporting: Advantages - In this model the risk is minimised and also investment is considerably low. This is suitable for firms who are looking for a quick entry into the foreign market. Disadvantages -High logistics cost, prohibiting trade laws, tariffs. Only partial knowledge about local market is gained. Licensing: Advantages - Minimisation of risks, need of lower investment. Can bypass different trade barriers; offers high ROI. Disadvantages - Licensor can't control the day to day activities and use of its intangible assets like trade mark, brand name etc. Licensee firm after acquiring technical knowledge could turn a competitor. Joint venture: Advantages -This mode of entry offers equitable distribution of risk. Exchange of technical and management knowhow takes place. This mode might be necessary in some markets due to presence of trade barriers and laws. A joint venture is seen by the local customer base in the foreign country as an insider and the usual scepticism towards a new entity is diminished. It is highly recommended for expansion into socio culturally different markets. Disadvantages - The risk is greater in this mode than first two modes of entry. Also the control is watered down as it is shred between two partners. The partner also has the chance of turning into a competitor after it has acquired all proprietary knowledge about technology from the expanding firm. FDI: Advantages - FDI mode is generally encouraged by the host country government as well as society. This mode offers highest degree of operational freedom and IP safety, and also helps generate local support. Disadvantages - In this model the risk is maximum and lack of local knowledge and insights act as impediments for the expanding firm. This mode of entry generally requires strong commitment and focus as the gestation period could be long and the firm could take a long time to reach breakeven point in the new market. (Foreign market entry modes, n.d.) Chosen mode Waterford Wedgewood has not been doing well financially which is evident from the fact that its revenue has been decreasing consistently. In fact in the year 2004 it had revenue 831.9 Million Euros which has come down to 671.8 million Euros in 2008. Gross profit has also followed a similar trend with 328.6 million Euros in 2008 in comparison to 416.8 million Euros. (Financial statements, April 2009) Moreover the company has recently gone into administration. Also it has delisted itself from the London Stock Exchange and continues to trade only on the Irish Stock Exchange (Wedgwood comes off stock exchange, December 2008). The company has also been witnessing slower growth and uptake of its products across the range in different markets it operates. UK, US or Japan, have all fallen pray to the prevailing economic slowdown and credit crisis. As most of the products by wedge wood are perceived to be luxury items and not as items which is absolutely necessary, consumers in this slowdown hit economies are restricting themselves from buying and are saving money instead. So Wedgewood is not in a position that it can put in huge amounts of new capital investments into the Russian market. At the same time the entry into the lucrative Russian market is essential for Wedgewood from a strategic perspective. The choice of entry mode into the foreign market depends upon the weightage of factors like inherent risk of the market and venture, prospective return, resources needed and the kind of control the expanding firm would have (Jain C.S., 2003) Export mode again has its own negatives like; transportation cost of small and brittle articles to be sent in bulk to Russia is high. Moreover the firm wants to have long term play in Russia to counterbalance its other markets. Again FDI mode is not plausible at this moment considering the present financial situation of the company. Wedgewood does not have the resources to raise huge amounts of capital for fresh direct investments into Russia. Wedgewood could select the joint venture mode of entry into the foreign market but its financial position does not permit so. Also to build a local distribution channel, management team, manufacturing facility won't be easy. Licensing is better for Wedgewood in comparison to the other options as it would offer considerable freehand to Wedgewood in terms of concentrating on its businesses while the Russian market is being taken care of by the licensee firm. Also Wedgewood would receive a hefty fee in exchange of granting the license. Moreover the licensee firm would invest in building up the Wedgewood brand in the market and put in all its own resources in terms of manpower, real estate, etc. In the process Wedgewood would receive a considerable amount as license fee which would help it to rectify its financial position. Once the brand is built up in the Russian market and the license period gets over and also when Wedgewood's financial position is better, it can always look to carry on the business through fresh direct investments. This strategy would ensure that the company is able to build a base for itself without much investment into the new market and when the brand gets recognized and the company gets financially healthy, it would invest directly into the market to leverage the brand equity which has been built through the licensing model. Therefore Wedgewood should follow a two pronged strategy of licensing and then move onto direct investment. Entry Mode and Strategy of Wedgewood: Fig3. Strategy in different phases Continue with Licensing Mode Continue with Licensing Mode But Prepare for Direct Investment Initiate FDI The above diagram depicts the strategy Wedgewood should follow in entering the Russian market. When it is financially in a weak position it would piggy back on the licensing mode to minimise risk and maximise return. When the situation improves it should ready itself and do due diligence about direct investment. Finally when its brand is established and well known in the market and the licensing period has got over, Wedgewood should go for direct investments to reap the maximum profit with maximum control over operations. Proposals on whole channel During the licensing phase the licensees should set up their outlets at supermarkets and hyper markets. They should not dilute the Wedgewood brand by setting outlets at low quality malls or hypermarkets; only those places should be chosen which have value for quality brands. Later on when Wedgewood would decide to go for direct investment they should open high-end stand alone outlets or outlets at high standard malls. [Word Count: 2680] References and Bibliography: A.T. Kearney Global Retail Development Index, 2008, Emerging opportunities for global retailers, [Online], Available: http://www.atkearney.pt/res/Documentos/GRDI%202008.pdf [28th April 2009] Dreaming With BRICs:The Path to 2050, 2003, Goldman Sachs, [Online], Available: http://www2.goldmansachs.com/ideas/brics/book/99-dreaming.pdf [28th April 2009] Hult T., 2009, The BRIC Countries, Global Edge Business Review, [Online], Available: http://globaledge.msu.edu/newsAndViews/businessReviews/gBR%203-4.pdf [28th April 2009] Economy Russia, April 2009, The World Factbook, Central Intelligence Agency, [Online], Available: https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html [28th April 2009] Jain C.S., 2003, Handbook of research in international marketing, Edward Elgar Publishing Foreign market entry modes, no date, Waynesburg University, [Online], Available: www.waynesburg.edu/depts/modules/documents/BUS417supplimentalinfo-foriegnmarketentrymodes-southpointecenter-tedzobb.doc [28th April 2009] Financial statements, April 2009, Waterford Wedgwood Plc, Reuters, [Online], Available: http://www.reuters.com/finance/stocks/incomeStatement'stmtType=INC&perType=ANN&symbol=WTF_u.I [28th April 2009] Senaeur B., and Goetz L.,March 2003, The growing Middle Class In Developing Countries And The Market For High Value Food Products, University of Minnesota, [Online], Available: http://ageconsearch.umn.edu/bitstream/14331/1/tr03-02.pdf [28th April 2009] Wedgwood comes off stock exchange, December 2008, BBC, [Online], Available: http://news.bbc.co.uk/2/hi/uk_news/england/staffordshire/7785618.stm [28th April 2009] Minniti M., Zacharakis A., Spinelli S., Rice M.P. and Habbershon T.G, 2006, Entrepreneurship: The Engine of Growth, Greenwood Publishing Group Souza L.V.D., April 2008, Foreign Direct Investment: Russia and the EU, OECD, [Online], Available: http://www.oecd.org/dataoecd/12/43/40578459.pdf [28th April 2009] Appendix i. Figure 1: A combined model of Young et al. and Hollensen's model ii. Fig2. Mode of Entry vs. Total cost over time iii. Fig3. Strategy in different phases Read More