Elecdyne`s Business Strategy and History in Japanese Marketplace - Case Study Example

Global Business: Case Study Contents Global Business: Case Study Contents 2 Introduction 3 Current/Future Business Environment 3 Countries to beconsidered for internationalization 5 Internal Analysis 5 Internationalization Factors 6 External Analysis 6 Choice of Methods 12 Conclusion 14 Reference List 15 Introduction Elecdyne, a Japanese electronics SME, is a nearly 20 year old company with 100 employees. The company is primarily a local business with both customers and suppliers located in Japan. It is presently struggling to survive in the competitive electronics market of Japan. The company wants to perform business internationally in order to improve its financial health. The following illustrations attempt to identify the regions, wherein Elecdyne should internationalize (Theme 1) and ways in which internationalize should be done (Theme 2). In the illustrations, three countries have been considered from which Elecdyne can choose, along with a comparative analysis of the countries and Japan through a combined SWOT and PEST analysis. Some of the most important factors that Elecdyne should consider are cost minimization and profit maximization with respect to internationalization in a country leading to improvement in profits and sales revenue (Hurn, 2009). The other factors include access to technology and availability of technological expertise in a particular country. Elecdyne also must take into account the access to new markets through internationalization as well as evaluate size of target markets before selecting a country. Besides these, political and economic factors are also very important as Elecdyne should not be taking too many risks. The culture-fit factor, which is one of the most essential factors to be considered, estimates the amount of organizational conflict can arise due to difference in Japanese culture and that of the host nation. Current/Future Business Environment The current business environment outlook and trends in markets in western and developing countries, other than Japan, have been captured through the following STEEP model. Socio-cultural The target markets for Elecdyne are developed and developing markets, which have considerable demand for quality electronics goods. Since Elecdyne uses original licenses from MNCs, products offered are not too cheap. So, Elecdyne targets the middle and higher income group of people. The current shopping trends with improvement in economy of developing countries and rising demand for Japanese goods, which are known for their high quality standards, is an advantage for growth of Elecdyne in foreign markets. Technological Since most of Elecdyne licenses are taken from MNCs, the technology employed is always high-end. The availability of research graduates in developing countries at lower wages rates than Japan is a major plus point, which will help Elecdyne to improve its technological capabilities. Economic The general economic trends are not very encouraging as the world economy recovers from a recession; but, many governments are giving tax rebates and reducing duties in a bid to attract new businesses. So, the time is perfect for Elecdyne to expand its capacities in countries, other than Japan. Environmental Elecdyne is a Japanese organization, which implements world class management techniques to reduce carbon footprint, conserve energy and apply superior waste disposable techniques. Many governments give rebates on taxes and duties for using fuel conservation techniques and recyclable products. Political The political scenario in most developing countries is in favour of allowing foreign businesses set up shop in their country. Most of them have laws against trade unions, which favour industrialization. Many of the EU’s national legislations support new businesses through tax breaks and reduced duties. Analysis of framework The framework that has been used involves an analysis, which is a combination of SWOT and PEST analysis frameworks. The SWOT framework analyzes strengths, weaknesses, opportunities and threats of Elecdyne`s plan of internationalization. The strengths and weaknesses that are internal by nature are determined and this is followed by a PEST framework. The PEST framework consists of political/legal, economic, social/cultural and technological factors. The various factors that affect internationalization have been identified will be segregated amongst these issues and provided with different weightings that are based on relative importance and proper relevance to requirements of Elecdyne. This analysis will combine the opportunities and threats recognized through SWOT framework with total scores of all issues identified through PEST framework in order to determine the country Elecdyne should choose for internationalization. If certain research data of an internationalization factor is higher rated than similar data from the Japanese market, it is given one to three plus (+) symbols and in case it is not as good as the same research data from the Japanese market, it is given one to three minus(-) symbols. In case the research data for a country`s market is the same as that for Japanese market, it will not be given a symbol. The plus (+) symbol points towards an opportunity and the minus (-) symbol points towards a threat and is subsequently multiplied with weight of the factor. Then, all weighted scores are added up to determine the country, which represents the biggest opportunity for Elecdyne. The weighted scores are averaged in each internationalization factor so as to account for any kind of discrepancy in the data for each factor. This method calculates the weighted scores not only with respect to Japan, but also with all other countries. Countries to be considered for internationalization Since Elecdyne has always thrived in the electronics market through cost differentiation strategy, the major strength lies in the fact that it has technology licenses of numerous MNCs. So, it is imperative that Elecdyne move to a low cost location, which help to reduce cost of production in order to increase profit margin and ultimately the sales revenue (Shoham, 2003). Thus, the most industry friendly countries in developing world like, India, China and Mexico, have been considered. These countries are in sync with the internationalization policy of Elecdyne. Internal Analysis Strengths Weaknesses Elecdyne has competed on price in the past, which has given it experience in effective cost management. The top management team has learnt English, which is almost imperative for internationalization and would definitely help the company gain access to larger markets. Elecdyne has competed and survived for twenty years in one of the most competitive markets of the world, thereby proving its resilience. Since capital reserves of the company are not huge, the internationalization plan needs to be of low risk. Elecdynes has competed on cost in the Japanese market, which leaves no room for brand building. All of Elecdynes manufacturing facilities are located in Japan, which has relatively high wages compared to developing countries housing manufacturing facilities of competitors. The expenses of technological licenses used by Elecdyne and non-availability of R+D graduates at salary packages offered by the company affects access to new technology. Internationalization Factors Factor Weight Culture-Fit 1 Cost Minimization 10 Access to Technology 5 Market Access/Size 4 Risk-Economic and Political 2 External Analysis Political Political Risk(2X) + = Less Risk - = More Risk Japan China Mexico India Government Type Political Instability Index – higher number equals more risk parliamentary government Socialist republic --- federal republic + federal republic + Political Instability Index – higher number equals more risk + - + War Risk– higher number equals more risk - - - Labour Freedom Index (higher equals more freedom) ++ + + Average -1 0 2 Market Access (4X) ISO Standard Prevalence (Certified ISO companies) higher number signifies more restriction and more investment in money and time ++ + + Size of Main Trading Union ASEAN ASEAN NAFTA - SAARC - Average 2 0 0 (Source: CIA World Factbook, 2014a; CIA World Factbook, 2014b; and CIA World Factbook, 2014c) Economic Economic Risk (2x) + = Less Risk - = More Risk Japan China Mexico India Public debt ++ - - External Debt per Capita U.S Dollars ++ -- -- Inflows of FDI (shows the trend of FDI and economic growth) ++ + + Inflation rate (higher inflation = more unstable economy) - - - GDP (Purchasing Power Parity) - - - Unemployment Rate- the higher the rate = more leverage for FDI incentives + ++ + Average 5 2 3 Cost Minimization (10x) Hourly Average Compensation Costs in the Manufacturing Industry (U.S. Dollars) ++ ++ ++ Collective Bargaining Coverage higher workplace regulations = higher costs + - + Tax + + ++ Average 20 10 25 Market Access (4x) Consumer Electronic Market Growth +++ + + Collective Revenue of Top Competitors in Electronics Industry (U.S Dollars in Millions) The stronger the competitors in the market, the tougher the market entry will be. --- - -- Population in Major Trading Area (Millions) ++ + + GDP per capita in Major Trading Union (Purchasing Power Parity in U.S. Dollars) amount of buying power the markets have - --- --- Average 2 -4 -6 (Source: CIA World Factbook, 2014a; CIA World Factbook; 2014b; and CIA World Factbook, 2014c) Social and Cultural Culture-Fit (1x) + = Similar - = Less similar Japan China Mexico India Power Distance ++ - - Individualism + - - Masculinity + - - Uncertainty- Avoidance - - - Long Term Orientation - - - Social Expenditure as % of GDP (Higher percentage indicates higher employee morale) - - - Average 0.5 -3 -3 (Source: CIA World Factbook, 2014a; CIA World Factbook, 2014b; and CIA World Factbook, 2014c) Technological Access to Technology(5x) Japan China Mexico India Gross Domestic Expenditure on R+D - - - Highest Ranked University in the World ranking = quality of human capital to draw from + - + Growth Competitiveness Index (GCI) for Technology (represents the economic strength and growth of the technology sector in a country) - -- -- Average -2.5 -10 -5 (Source: CIA World Factbook, 2014a; CIA World Factbook, 2014b; and CIA World Factbook, 2014c) Summary Table Factors Japan China Mexico India Culture-Fit 0.5 -3 -3 Cost Minimization 20 10 25 Access to Technology -2.5 -10 -5 Market Access/Size 4 -4 -6 Risk-Economic and Political 4 2 5 Average 26 -5 16 *Assumption: to normalise the results each –ve and +ve symbol represents -0.5 and +0.5 respectively. Through this summary table, it is very clear that the best country, where Elecdyne should expand to implement its internationalization policy is China. China has a weighted score of 26, whereas India has that of 16 and Mexico has a negative score of -5. So, the best option for internationalization is China, followed by India. The political risk is greatly reduced in India due to presence of a parliamentary form of government, whereas China, which has a socialist regime, has high political risk. The main differentiation factor where China scores over India is the cost minimization factor. The presence of a large population and low wage rates make China a low cost manufacturing destination. Since cost differentiation is the main strength of Elecdyne, which marks its products at a lower price than most of its competitor MNCs, a low cost destination is perfect for company`s internationalization policy. With growth of GDP in China, purchasing power of Chinese citizens has increased tremendously and so market access to Elecdyne`s products is also larger in China than in India. Due to lower economic debt, the economic risk to China is very low. Except these quantitative factors, there are also other factors, which prove China to be the best location for internationalization of Elecdyne. Many other electronics manufacturers have expanded to China, which has improved the supply chain and led to development of local suppliers. Choice of Methods Elecdyne has to decide the strategy for internationalization in respect to China. There are three options that can be utilized; they are licensing, exporting and foreign direct investment (FDI) (Ormanidhi and Stringa, 2008). International licensing is not an option for Elecdyne as company`s technological licenses have been leased from other firms and thus, cannot be re-licensed. The strategy of exporting is not a feasible option for Elecdyne due to high expense and consequently, it is impossible to maintain the core competency (Li, 2007). Although exporting is one of the most effective ways to access new markets, it does not lower expenses of manufacturing or provide access to newer technology. So, Elecdyne cannot use licensing nor export as its internationalization strategy in a bid to expand its capacities in China. This leaves Elecdyne with only one option, which is foreign direct investment (FDI); however there are three choices or strategies that can be implemented for FDI in China. Each of the strategies has their own set of strengths and weaknesses. The choices or strategies for FDI policy implementation are joint ventures, mergers/acquisitions and Greenfield site (Meldrum, 2000). All these strategies are evaluated below with respect to requirements of Elecdyne. The scoring has been done in a similar fashion as that of weighted scorecard of the factors. Joint-Venture Merger/Acquisition Greenfield Site Cost Minimization (10x) The expenses are equally shared with local partner + High integration expenses. Integration costs are those incurred by foreign parent company while integrating with their local partner - High liability cost. Liability of newness costs are those paid by subsidiaries for adapting to environment of the host country. - Access to Technology (5x) Local partner can steal technology or cause patent infringement - Provides access to new technology + Does not allow access to new technology - Market Access (4x) Gives the ability to access new markets + Gives the ability to access new markets + Gives the ability to access new markets + Economic and Political Risk(2x) The threat of political and economic risk is less + More political and economic risk - Highest amount of political and economic risk - - Culture-fit (1x) Conflicts pertaining to culture can arise - Culture disputes are can occur - Culture risks are relatively lower + Total 5 -4 -7 (Source: OECD, 2014a; OECD, 2014b; and OECD, 2014c) It is clear from the table that Joint venture is the best strategy that Elecdyne can use for its internationalization policy. Since China has recently opened up its market to global economy, there are a lot of rules and regulations in the country, which need to be taken into consideration. A joint venture with a local partner will save Elecdyne the cost of these compliances and also reduce capital requirements as the local partner will spend equally. This will drastically lower the risk involved for Elecdyne while expanding to a completely new country and market (Peng, Wang and Jiang, 2008). This strategy will also support Elecdyne’s cost differentiation strategy as cost of manufacturing will also be low. The local partner can give access to a large number of suppliers with whom it has worked earlier. Therefore, Elecdyne can save time and money in establishing the supply chain and evaluation of suppliers in China. Although problems like, conflicts of culture, can arise leading to problems in employee retention and satisfaction, such barriers should be removed by organizing team building and employee leadership activities. Conclusion After the analysis of Elecdyne`s business strategy and history in Japanese marketplace, cost minimization was found to be core competency of the company. The company wants to implement an internationalization policy, which is in line with core competencies of the company. Through a comprehensive scoring methodology, factors responsible for implementing the internationalization policy were compared with Japan and three other countries. China had the highest weighted score and best prospects for future of the company with respect to internationalization policy. Reference List CIA World Factbook, 2014a. China. [online] Available at: [Accessed 21 May 2014]. CIA World Factbook, 2014b. India. [online] Available at: [Accessed 21 May 2014]. CIA World Factbook, 2014c. Mexico. [online] Available at: < https://www.cia.gov/library/publications/theworld-factbook/geos/ja.html > [Accessed 21 May 2014]. Hurn, B., 2009. Will international business always speak? Industrial and Commercial Training, 41 (6), pp. 299-304. Li, J., 2007. Real options theory and international strategy: A critical review. Advances in Strategic Management, 24, pp. 67-101. Meldrum, D., 2000. Country risk and foreign direct investment. Business Economics, 35 (1), pp. 33-41. OECD, 2014a. Country Statistical Profiles 2014 - China. [online] Available at: [Accessed 21 May 2014]. OECD, 2014b. Country Statistical Profiles 2014 - India. [online] Available at: [Accessed 21 May 2014]. OECD, 2014c. Country Statistical Profiles 2014 - Japan. [online] Available at: [Accessed 21 May 2014]. Ormanidhi, O. and Stringa, O., 2008. Porters Model of Generic Competitive Strategies. Business Economics. 43 (3), pp. 55-64. Peng, M. W., Wang, D. Y. and Jiang, Y., 2008. An institution-based view of international business strategy: A focus on emerging economies. Journal of International Business Studies, 39(5), pp. 920-936. Shoham, A., 2003. Standardization of international strategy and export performance: a meta-analysis. Journal of Global Marketing, 16(1-2), pp. 97-120. Read More