International Business: Expanding Business in Emerging Market - Case Study Example

Expanding Business in Emerging Market Executive Summary The research paper will center on the business position and trade internationalization procedure of a North American multinational company, named Pasta World Inc. The headquarters of the corporation is located in Denver, Colorado, U.S. but it has numerous business branches in the western developed countries such as Germany, Canada, France and the United Kingdom. In order to progress its marketable surplus in the long run, the company must enlarge its business in the newly booming economies of the world. The political authorities of these countries approve liberal strategies for encouraging foreign investments in their economies. Increased foreign contribution augments the employability, per capita income and living standards of these economies. The best emerging market for Pasta World Inc.’s foreign business expansion will be China. The context of the research has shown that the restaurant industry of China is highly competitive in nature. In order to lead within the aggressive market, Pasta World must rely on effective product and process differentiation. The researcher has recommended that franchising is the best market entry option for Pasta World Inc. because, it is less expensive and less risky approach of internationalization. Table of Contents Introduction 4 Importance of International Business 4 Rationale for Expanding Business in Emerging Markets 5 Best Emerging Market for Pasta World Inc 5 Restaurant Industry Potential in the Selected Emerging Market 6 Modes of Foreign Market Entry 7 Best Market Entry Mode for Pasta World Inc 8 Conclusion and Recommendations 8 Reflexive Analysis 8 Reference List 10 Appendix 12 Introduction The research paper will focus on the business status and trade internationalization process of a North American multinational company, named Pasta World Inc. The organization is a public trading concern and its shares are primarily listed in the New York Stock Exchange. It had commenced its business in 1994 and has considerably expanded the extent of the business internationalization process, since then. The headquarters of the company is located in Denver, Colorado, U.S. but it has several business branches in the western developed economies of Germany, Canada, France and the United Kingdom (Henry, 2008). Pasta World Inc. conducts its trade in the global service providing industry. It owns its personal restaurants in more than 1500 locations of some western developed economies (Svensson, 2005). The company offers Mexican and Spanish food products to its consumers. Pasta, tacos, burritos, salad, chips and gauc are the primary food menu’s offered by the organization. The company claims to offer healthy food at affordable prices. It openly proclaims that the recipes and tastes of its food and beverage products are non imitable in the market. Pasta World Inc. tries to utilize organic food ingredients within its items. The edible products sold by the company contain minimal added flavors and synthetic colors. The restaurants owned by the organization are well decorated and serves its visitors with utmost luxury. Foreign business of Pasta World Inc. exists only within some developed countries. After the global financial crisis in 2008, several western nations were exposed of severe recession. Recessionary trails lowered the aggregate consumption expenditure and increased the costs of investments in these markets. Such outcomes have reduced the aggregate revenue and profitability of Pasta World Inc. in the global forum. In order to improve its commercial surplus in the long run, the company must expand its business in the newly booming economies of the world. The following context of the research paper will evaluate the best possible foreign emerging market of Pasta World Inc. The company will expand business in the foreign market because of market seeking objective. By resolving the objective, the company will be able to expand its market and hence experience greater demand for its products (DHL, 2013). Importance of International Business The great economist David Ricardo stated that optimal resource allocation and maximum surplus can be generated by a country, with the essence of international trade (DHL, 2013). Foreign trade is highly beneficial, if it is executed according to the norms of competitive advantage. Under the regime of this theory, a nation should only produce those goods and services, over which it possesses cost advantages in production (DHL, 2013). Increased revenue and profitability can be experienced by a company through foreign trade. In the contemporary world, companies are exposed to severe threats of market rivalry across both domestic and foreign economies (Solomon, et al., 2006). In order to improve core competencies in business, firms try to exploit their productive resources in the foreign market after saturation of their native market demand (McEachern, 2012). Rationale for Expanding Business in Emerging Markets Emerging market economy experiences middle to low per capita income level. Such nations include almost 80% of the global population and sums up together to form 20% of the world’s economies (Srivastava and Rego, 2011). Culture and markets of these economies are demanding in nature. Such countries experience high rates of emigration, growing young population, increasing domestic and per capita income thresholds (Lian and Ma, 2011). Figure 1 in the Appendix shows that the extent of internationalization practiced in some selected countries. The figure shows that countries such as Russia, Brazil and China experience the highest rate of business internationalization, compared to some developed economies such as Germany, Canada, U.S. and U.K. Furthermore, Figure 2 in the Appendix shows that the BRICM nations (Brazil, Russia, India, China and Mexico) are superior to the G7 countries (Canada, Germany, Italy, Japan, U.K. and U.S.), both in terms of innovation and efficiency (Lian and Ma, 2011). At present, the most prominent emerging countries are the BRICM nations. The political authorities of these countries adopt liberal policies for encouraging foreign investments in their economies. Increased foreign participation augments the employability, per capita income and living standards of these economies (Drauz, 2013). On the other hand, foreign companies are able to operate in such booming economies, at relatively lower costs (Lian and Ma, 2011). Even so, these firms enjoy the benefits of the growing market demand created by the middle income consumers from these economies. Emerging countries are rich in terms of factor services and are considered to be innovation hubs in the current epoch (Lian and Ma, 2011). Best Emerging Market for Pasta World Inc The best emerging market for Pasta World Inc.’s foreign business expansion will be China. From 1978 onwards, China has given up its conventional socialistic economic principles. Figure 3 in the Appendix shows that FDI (foreign direct investment) level in China is steadily increasing over time. More than 52.2% individuals of the country are categorized to follow unaffiliated religions (CIA, 2014). Thus, a considerable proportion of individuals in the nation are less culturally orthodox in nature. The Mexican and Spanish food offered by Pasta World Inc. will be preferred by these cosmopolitan individuals. China is the most populated country in the world. In 2013 it was estimated that 1,355,692,576 was the total strength of population in China (CIA, 2014). Hence, Pasta World Inc. will experience high domestic market demand for its products in China. The forecasted growth rate of the country for 2015 in 7.5% and the value of its gross domestic product in 2013 was $13.39 trillion (CIA, 2014). Furthermore, the per capita income level of China was 9240.27 CNY HML in 2013 (CIA, 2014). The aggregate value of final goods and services as well as per person disposable income thresholds in the country is increasing at a steady rate. All such aspects will help to increase demand for Pasta World Inc.’s edible products in China. The country is a member of several trading blocs such as the Association of South East Asian Nations (ASEAN) and Trans-Pacific Partnership deal (CIA, 2014). The public authorities of the country are liberal towards foreign business entrants. Compared to U.S. dollars, the exchange rate of Chinese Renminbi yuan has always existed above 5.9 scales since the last five years (CIA, 2014). Thus, the operational cost of Pasta World Inc in China will be relatively lower than the same in other western developed countries. The Global innovation ranking of the nation is 29 and its domestic innovation rate is above 43% (CIA, 2014). The above review ensures that the political, economical, social and technological features of China are highly suitable for Pasta World’s emerging market business expansion. Restaurant Industry Potential in the Selected Emerging Market The existing features of Chinese restaurant industry can be precisely evaluated through a Porter’s Five Force Analysis model. Bargaining Power of Buyers (high) The bargaining power of the consumers in the Chinese restaurant industry is high. This is because; the switching cost of the buyers within the sector is almost negligible, as there are infinite numbers of restaurant service providers in the Chinese restaurant industry (Drauz, 2013). In order to lower the bargaining power of the consumers, Pasta World must introduce greater service and product differentiation in its Chinese business. The organization can execute this by introducing innovative food recipes and leveraging high quality products offerings (Weber, 2007). Bargaining Power of Suppliers (low) The primary suppliers of the Chinese restaurant industry are the food suppliers of the country. There are infinite numbers of food suppliers within the Chinese restaurant industry. The intermediate items sold by the suppliers to the restaurant service providers are homogeneous and common in nature (Drauz, 2013). Thus, the restaurant owners experience low switching cost while procuring raw materials from the suppliers in China. Pasta World Inc. can acquire raw food products at relatively lower costs in China. Threat of New Entrants (High) The entry barriers in the Chinese restaurant industry are high. Any entrant must incur some fixed costs while commencing its business within the sector. Some capital expenditures are also requisites of such new businesses (Slack, Jones and Johnston, 2014). According to the Trade and Industry Department (2006) rules of China, the approximate capital requisite to open a new restaurant in China is HK$15,000,000 (Wan and Hoskisson, 2003). Furthermore, some major rivals within the industry much as Maxims and Star Seafood introduce artificial entry barriers for the new entrants within the industry. Thus, Pasta World needs to overcome all the entry barriers before commencing its business in China. Threat of Substitutes (high) The desire of having fine food can be satisfied through several substitutable options. The foodstuffs available from fast food centers or home cooked food preparations are the substitutes of the edible menus offered by the restaurants of China (Witcher and Chau, 2010). Thus, the threat of substitute within the industry is high. In order to erode its effect, Pasta World must offer rare and non imitable food and beverage products to the Chinese consumers (Singh and Waddell, 2003). Threat of Existing Rivalry (high) The restaurant industry of China is dominated by large restaurant chain owning companies such as Federal Restaurants, East Ocean and Hsin Kuang Restaurants. Being a giant multinational restaurant chain owner, Pasta World Inc. will compete with these firms in China. The company will be exposed to high threats of monopolistic competition, within which it can improve with the help of greater differentiation (Drauz, 2013). Modes of Foreign Market Entry The following table elaborates the various models of entry Pasta World Inc. can select, while expanding business in the emerging market of China. Mode of Entry Description Foreign Direct Investment This is an organic growth process, in which a company expands its business through its own customized investments and strategies (Froot, 2008). Merger or Acquisition These are inorganic commercial growth processes that involve selling, buying, combining and dividing asset bases of two or more companies. Such approaches are types of corporate and legal consolidations (Campbell and Netzer, 2009). Strategic Alliance A special type of agreement made between two or more companies, for accomplishing few specific business objectives (Sanders, 2011). Such alliances are made on the basis of manufacturing capability, intellectual property, capital equipment, expertise, knowledge and products of two or more companies (Mankiw, 2011). Licensing Through this process, business is conducted on the basis of a legal licensing document issued by the licensor to the licensee (Mahajan, 2008). Franchising In this process, through which an organization leases its own brand name or business model to some another firm, located in a foreign market, where it desires to expand its business. Best Market Entry Mode for Pasta World Inc The best Chinese market entry strategy for Pasta World Inc. will be franchising. Through this process of internationalization, the company will be able to augment its brand value in China, with the essence of the effective promotional activities conducted by its franchisee in the foreign market (Wan and Hoskisson, 2003). Through this, the company will be able to improve its productive resource base within a very short span of time. Pasta World Inc. will be able to expand its market demand share and prospective customer strength in China with a relatively lower degree of risk through the process of franchising (Tashakkori and Creswell, 2007). The company can successfully settle its business in China with low capital and sunk cost through this approach. Over time, as the company becomes popular in the Chinese restaurant industry, it can materialize some direct investments in the country. Conclusion and Recommendations The context of the research paper shows that modern profit making concerns should expand business in both domestic and foreign markets, for experiencing greater economic surplus in the long run. In order to experience economies of scale and optimal resource allocation in business, useful factor services of a company must be exploited in lucrative foreign markets, after saturation of home country demand (Bowman and Ambrosini, 2003). The context of the research paper throws light on the business of Pasta World Inc., North American multinational company. For experiencing adequate growth in trade, the company desires to expand the scale and scope of its business internationalization process, in the emerging market economies. These countries experience increasing per capita income thresholds and have adopted liberal policies in favor of foreign investments. The researcher claims that the booming economy of China is the best foreign market for Pasta World Inc. However, the company should enter in the Chinese market through the process of franchising. By doing so, the organization will be able to experience lower risk and cost during its business expansion process. Pasta World Inc. should introduce certain new strategies in the Chinese market. In China, the company should conduct business according to the norms of differentiation (Reading, 2002). The products and services offered by the company should be customized according to the local demand pattern of the country. China is a labour surplus economy and hence Pasta World should incorporate labour intensive means of production and operations in the country (McEachern, 2012). The company should strictly follow all the legal norms established by political authorities of the country. It should also ensure that bribery and corruption related problems does not adversely affects its Chinese trade. Reflexive Analysis From the context of the research paper, I have understood that companies of the contemporary era cannot experience growth in business without the essence of successful business internationalization process (Davis and Steil, 2001). The external political, economic, social, technological and legal environment in the current epoch has become highly volatile in nature (Ross, Vitale and Weill, 2001). In order to sustain revenue and profitability thresholds, companies must undertake adaptive principles in business. Pasta World Inc.’s business internationalization process in the western developed economies became less effective after the recession in 2008. It is rational for the company to expand business in the emerging economies because, these countries are experiencing greater demand and growth rates after globalization in 1990 (Kapferer, 2012). Brazil, India, Mexico, Russia and China are some prospective foreign markets for Pasta World Inc. However, I perceive that China is the best market for the country because it experiences highest population among all the other emerging countries. Even so, the restaurant industry of China is highly competitive in nature. Pasta World Inc. should expand its business in the Chinese market through the process of franchising. Under this regime, the company will be able to settle in the market of China with relatively lower risk and cost. 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Marketing to the social web: How digital customer communities build your business. New Jersey: John Wiley & Sons, Inc. Witcher, B. J., and Chau, V. S., 2010. Strategic management: Principles and practice. Connecticut: Cengage Learning. Appendix Figure 1: Extent of Internationalization (Source: DHL, 2013) Figure 2: BRICM and G7 Comparison (Source: DHL, 2013) Figure 3: FDI Inflow Growth in China (Source: Lian and Ma, 2011) Read More