International Business Strategy - Essay Example

Title: International strategy By: Institution: Course: Instructor: Date PART I One-page summary on the project Nike is a United States based company that develops and supplies sportswear as well as apparel worldwide. Founded in 1962, the company has one of the comprehensively perceived management systems that have made it have an established and a maintained competitive advantage over the decades (Carbasho 2010, pg3). The company had an initial primary goal of distributing a low-cost Japanese high-quality athletics shoes to the American customers. However, the company has grown to be one of the best and dominant companies in the world that produce, distribute, and manufactures shoes at every marketable price point to a global market (Carbasho 2010, pg6). Nike operates in over 160 countries in the world and employs over one million people from both direct and indirect perspectives. Nike has a great zeal of promoting innovation and product improvements as stated in their missions and visions (Carbasho 2010, pg19). In this way, the company has been at the forefront in creating business opportunities for itself thereby setting it apart from its competitors. Notably, the basic understandings of success in a company are directly attached to its internal function ability. However, the company has realized the importance of international market. Even though Nike operates in more than 160 countries across the globe, there exists some niche market that the company still needs to exploit (Carbasho 2010, pg21). One of these markets is the Chinese market. The company has its presence to the Chinese market but not to its full potential. In fact, it is Nike’s competitor Puma that has its presence well established in the Chinese market. In this regards, the company is contemplating on increasing its presence and business activity in the Chinese market. This report therefore focuses on international strategy that Nike will use to explore more on the Chinese market and some of the challenges it faces. The report will also include strategic options that the company will use to achieve its objectives. The report starts by looking at the organization structure and functionality of Nike. Organization structure of the company Nike traces its management structure from its founders’ initiatives and management instincts. Bill Bowerman and Phil Knight, the founders of the company, became partners at the convenience of sport. Even though the company has operational points in over 160 countries in the world, Nike has a matrix organizational structure. In this case, it has multiple lines of authority as set up by the founders, and some individuals that report to at least to two managers. The company’s employees report to team managers who on the other hand take these reports to the department managers (Carbasho 2010, pg55). The brands of Nike have many divisions within the company, with apparel for Nike brand, Converse, and Jordan brands forming examples of the major divisions of Nike created for specific products and tastes. More than that, there are functional departments of Nike such as Nike design and investor relations as part of the organizational structure of Nike Company. Each brand consists of its own department to whom the team managers’ report to. In the same way, each brand has separate department managers who are allowed to act independently of the chief executive Officer (CEO). In what is regarded as horizontal organizational structure, the team managers and the employees make decisions regarding specifications and production while the department managers focus primarily on the policy-related issues of the company (Goldman & Papson 2000, pg36). The vertical organizational structure of Nike comprises of the company’s Chief Executive Officer (CEO), currently Mark Parker, and a board of directors who are chaired by the co-founder of the company, Phil Knight. Notably, the company employees are entirely responsible to both of the managers at every managerial level. Basing on Nike’s global popularity, Nike uses a matrix structure which is on order to allow the company to make better decisions and react effectively to the emerging issues in the market (Goldman & Papson 2000, pg43). Moreover, this structure makes it react quickly that the average department heads that may at some point be removed from the decision making processes. Through Nike, it has also been proven that both the functional and provisional structures can be applied in any management structure and thus become successful. More than that, it has made it very possible in terms of producing endless possibilities in the short-run and long-run goals within the organization. Functional analysis of Nike The supply chain of Nike has a vivid view of the company’s global nature. Although the company’s headquarter is in the United States, all its production takes place outside the United States. In addition, the company makes a lot of sales outside the U.S. than in the U.S. A critical analysis of the functionality of Nike reveals that Nike’s supply chain begins with materials that are used in the production of its products. They include rubbers, plastic compounds, foams, nylon, leather, canvas, polyurethane films, and cushioning materials. The company majorly gets these materials at the locational sports of their manufacturing place. Table 1: The Geographical Breakdown of Nike’s Footwear Sale Market % of Nike Footwear Revenues by Region (Fiscal 2012) Annual Growth in Footwear Revenue (excluding currency impact) Fiscal 2012 First nine months of 2013 North America 44% 15% 16% Western Europe 19% 5% 10% Greater China 11% 25% -4% Emerging Markets 18% 27% 15% Central and Eastern Europe 5% 13% 9% Japan 3% 3% 3% (Wong 2013, pg54) The company focuses more on designing, developing, and marketing globally its footwear. The company uses contract manufacturers to make its products. Generally, almost all shoe-manufacturing activities take place outside of the United States with the exception of the proprietary air bag. Apparel and equipment manufacturing take place in both the United States and around the world. Nike is known to be an industry leader in developing innovative new products. Nike draws its strength from its brand image globally (Wong 2013, pg43). Nike has effectively marketed its products and in addition understands the importance of a quality product. They are continually improving their shoes through new technologies that are developed by their research teams. Nike's important sustainable competitive advantage is their intangible assets, such as brand image and organizational culture. PART II Internationalization is the process of increasing the firm’s investment in international markets. It arguably true to claim that, within the frame of economic and business factors, the characteristics if this process influence the pattern and pace of internationalization of firms (Segal-Horn & Faulkner 1999, pg11). Most firms opt to go international as a way of seeking opportunities for growth through market diversification. In addition, internationalization by firms enable them to earn higher margins and profits; gain new ideas about products, services, and business methods; be closer to supply sources, gain flexibility in the sourcing of products, or benefit from global sourcing advantages; and better serve key customers that are located abroad (Segal-Horn & Faulkner 1999, pg59). By appreciating and understanding different values, beliefs, behaviors and business strategies of different companies within other countries, firms will be able to successfully go international. Therefore, internationalization will enable a firm to-among other things-gain access to lower-cost or better-value factors of production. Firms that venture into international market is definitely expanding its network hence might benefit from a potentially rewarding relationship with a foreign partner. Many firms in the contemporary business environment take the steps to establish themselves abroad. There are several motives that underlie the process of internationalization. Maybe the home market is characterized by saturation, presence in a certain country grants access to strategic resources or to some extent the firm has identified some opportunities to be exploited (Perkins, Shortland & Perkins 2006, pg66). Internationalization is a complex process that requires decision makers to have relevant experience in different situations and consider different motives before venturing into the international market (Segal-Horn & Faulkner 1999, pg28). Most firms start operations domestically with value adding activities conducted within the borders of the home country only. By exploring the Chinese Market, the Nike will be able to participate in the global market share and gain a piece of their share from the large international marketplace. There is always an increased production whenever a firm captures an additional foreign market (Wong 2013, pg87). This is necessary to meet the increased demand. In this regard, increased production will enable the firm to lower it’s per unit costs and hence resulting to greater use of existing capacities. Venturing into international market can yield valuable ideas and information about foreign competitors and marketing techniques (Wong 2013, pg69). This might be helpful in gaining domestic as well as foreign businesses. In addition, venturing into the global market is one way that a firm will diversify its business and spread the risk. The target market Being the largest country in the world, China’s population is over 1344 million according to the 2010 census China is definitely a target market that every company wants to exploit. Its population growth is 0.47% with its population generally being described as young population (Wong 2013, pg15). The age structure of China is: 0-14 years (17.4%), 15-24 years (16.1%), 25-54 years (46.5%), 55-64 years (10.9%), 65 years and over (9.1%) making it a good market for the company’s products (Wong 2013, pg17). In addition, the country is developed in terms of infrastructure hence the company will not to invest more on infrastructure before starting to operate. The GDP stands at $5.6 trillion while per capital income are U.S. $1,398. The inflation rate stands at 8% and its exchange rate is determined freely. China has experienced development in infrastructure; ranging from communication and transport systems (Segal-Horn & Faulkner 1999, pg91). The political system is very stable hence a more favorable environment for business. There is also freedom in trade with ease in tariffs and duties. One aspect of the Chinese market that is encouraging is its stable financial structures that will enable the company to sell its products at ease and convenience. China’s rapid economic expansion has impressed the world. The beginning of the 21st Century has seen China become the 3rd largest importing as well as exporting country, the 4th largest economy in the world, and one of the top three preferable destinations for foreign direct investment (Wong 2013, pg91). The impressive growth of China is currently a key economic and political issue. The country’s high rate of economic expansion is based on a development model that combines regulation and state-led economic organization with a gradual and steady, well managed neo-liberalization whereby (foreign) transnational companies play a central role. In this regard, China has developed a successful model of mixing public and private roles and investment that will enable it realize growth through economic integration in the globally (Wong 2013, pg97). Recently midsized sport equipment companies have entered the Chinese market segment. Though the market is still fairly mature, it should be natured to grow since it poses great potential. This can be a good venture to take up and Nike can use its global dominance to capture the market (Froot 1993, pg9). This offers a lot of opportunity for Nike since the demographics of China offer great chance of increased operations. Research shows that there are over seventy sports disciplines competitively done in China. This has made it necessary for the country to import over thirty percent of its sports apparel and equipment. The report also stresses that the market is fast growing and this means that it remains a viable option for the expansion of Nike (Wong 2013, pg121). Since about eighty five percent of Chinese are literate and live in the urban set up they become the primary target for Nike in the Chinese market segment. Records of the United States congress also show that certain American goods are not subjected to manufacturing tariffs in Chinese and this will give Nike about five percent advantage of price over its non- American competitors (Perkins, Shortland & Perkins 2006, pg93). China’s economic growth is becoming a world class, characterized by high consumption thanks to a middle class of 200-300 million people (Froot 1993, pg18). This consumption is also extended in the sports industry that Nike mainly focuses on. Because Nike’s main focus in this market is in the sportswear, there is need for a significant urban population that will be able to by the company’s products. This is viable through major urbanization and development of new cities that are emerging in less developed inland provinces in China (Froot 1993, pg37). In addition, there are several international games activities that have taken place in the country and are planned to take place in the country presenting the opportunity to market and produce sportswear. STRATEGIES FOR VENTURING THE CHINESE MARKET Value chain Many companies often use value chain as the actors and/or stages that are needed to bring their products or services to the market and thus to the final consumer of their products (Perkins, Shortland & Perkins 2006, pg3). Nike, just as these other companies use value chain as the means to bring their valued and inspiring sportswear to sportsmen and sportswomen. Not only does the company target sport personalities in China, but the company has a vast number of customers beyond the sporting community. Value chain is a strategy that will ensure a direct connection and drive to decision making (Bititci, U. S., & International Conference of the Manufacturing Value Chain 1998, pg21). Recycling has worked effectively for Nike as the firm has majorly inclined to recycling as a way of reducing wastes as a means of improving, gaining and advancing on their technical design of products. This product concept is very inevitable if the company has to survive in its quest to expand in the Chinese market (Froot 1993, pg85). The performance rates of the workers are improved as well through value chain. Notably, as argued earlier, choosing the right partner is among the best ways of moving Nike’s products and its capacity to track and gather relevant information on transportation issues and distributing the products to expected positions within the Chinese markets (Perkins, Shortland & Perkins 2006, pg6). It is worth noting that right partners mainly are the suppliers, financial partners, and any other relevant stakeholder. Value chain analysis plays an important role in Nike’s business operations. In this case, through critique of the activities of the company in relation to past and modern trends, the company is able to determine which activities that will create great value products to its customers. As much as Nike focuses on marketing and designing elements of its value chain, the performance of the company and its competitive efforts has not been based entirely on the production and outsourcing strategies. In addition, the production in the new market will be supported by the creation of sustained profitability, value production, better pricing strategies and cost a minimization mechanism that works best over its competitors (Perkins, Shortland & Perkins 2006, pg19). This reputation of value chain will be enhanced by Nike’s brand name, image, and its utilized tangible and intangible resources. Adaptation Adaptation strategy seeks to increase Nike’s revenues and market share through tailoring one or more components of the company’s business model to suit requirements in the Chinese customers’ preferences (Lymbersky 2008, pg23). Adaptation will involve creating global value through changing the Nike’s offer to meet the local requirements of the Chinese markets. For Nike to fully operate and survive in the industry, it has to adapt to the financial rules and production regulations that govern the industry (Froot 1993, pg22). Nike’s main objective of expanding its Chinese market is to boost its volume and market share; and to do that, Nike has to reposition itself to a lower margin-higher volume strategy that include lowering price points, expanding distribution and reducing costs. In using the adaptation strategy, Nike will ensure that it differentiates its products into different market segments-as a sure means of reducing the impact of differences across the country (Lymbersky 2008, pg37). For effective operation in China, Nike will develop a business model that effectively combines elements of adaptation and arbitrage strategies. In addition, the company will use the arbitrage strategy to adapt lower prices that will ensure that its sportswear become preferred by its customers across the country. Direct selling of the company’s products and also massive advertisement and also capitalizing on the past successes as a platform to market the products offered. Due to the high volume of media outlets information about the company will be easily distributed throughout the expanse of the market (Lymbersky 2008, pg46). Alongside the above strategies discounting will also be employed as a market entry strategy. The figure below shows adaptation strategy that the company will use. Global Aggregation/Local Adaptation Matrix (PENG 2009, pg51) Implementation of expansion Nike can also apply the Uppsala mode of entry to these new markets. This model simply states that the firm must develop from experience gathered from past activities. By stretching their operations to countries like China, Nike will gain a considerable amount of experience in international business and the required strategies to capture other business environments. Online marketing and social media will become vital in promoting the brand. It is estimated that nearly half of the Chinese population utilize social media and this makes it a good platform for brand visibility. Using a diamond model is another method of expanding into the Chinese market. According to porter, there are six factors which work together to create competitiveness and innovation (Wong 2013, pg77). These factors include political, economic, social factors, demand and micro environment of the company. When applying this model it is important for the firm to first carry out an effective analysis of the business environment so as to clearly outline an entry strategy that fits the environment. Marketing strategies Keeping prices low is a very common method of customer attraction. Nike in their attempt to cushion their customers from overwhelming pricing constraints designed an elaborate strategy to outsource the labor and raw materials for the production of their products to countries where labor and materials are cheap. It should be noted that Nike produces all its sports foot-wear from outside the United States of America (Wong 2013, pg139). Considering their overall production of sports equipment, Nike produces about eighty six percent of its products in Taiwan and Indonesia. This has a net effect on the pricing of their products. While keeping the production costs low, a company benefits from cost advantage over its rivals. The Chinese market offers similar advantages such as Taiwan and Indonesia hence the need to expand the company in the market (Griffin 2007, pg71). However according to Nike this does not only influence their pricing, a greater percentage of the revenue saved from production is channeled towards the promotion budget. It should be noted that in the recent past Nike has spent a substantially huge amount towards its promotion as compared to other competitors (Froot 1993, pg07). The effect of this expenditure is a sustained attraction of top class athletes to the firm which in most cases result in larger volume of sales. With increasing number of athletes and sports activities in the country, China is effectively becoming a market that Nike is worth investing in. It is worth noting that the company will also utilize environmental sustainability campaigns to appeal to its customers (Froot 1993, pg55). Nike initiated an international campaign to collect old sport shoes with the main target countries being China and European market segment. Promotional tools The most notable marketing strategies that will be used by the company include: celebrity endorsement, price strategy, media advertisement, advertisement and sales promotion, and social media and promotions. Media tool Digital media: Facebook, Twitter and YouTube Print- newspaper and magazine Broadcasting: television Online advertising: mobiles ads Human resource strategy In this category, the company adapts the ‘flat and flexible’ and ‘subsidiary and headquarters’ organization structure (Froot 1993, pg49). With a flat and flexible structure, Nike will be assured of a horizontal and flexible system hence no complex and rigid hierarchical structure. Proper implementation of headquarter and subsidiary interface will ensure smooth communication and interaction between Nike’s headquarter and its subsidiaries in China (PENG 2014, pg17). The headquarter leaders will participate in some decision making process of the subsidiaries to bring that closeness and integration in the entire company. The management of subsidiary will be selected based on integrity, self-realization and supportiveness. The main role of the subsidiary leaders is to identify opportunities within the industry, break the barriers that exist in the industry, and embrace good judgment so as to make valuable decisions in the ever changing Chinese business environment. CHALLENGES OF VENTURING INTO THE NEW MARKET Despite potential opportunities that exhibit the Chinese sportswear industry, there are several challenges that Nike has to overcome for it to succeed in expanding its operation in the country. Some of the challenges that the company has to deal with include: The Chinese government is always in the control and will block any attempt by foreign company to take over assets that it considers to have a national importance (PENG 2014, pg34). This is vital since Nike aims at establishing its production branches in the country. Export licenses and documentation: Even though the US-China trade ties is working towards less trade licensing requirements, the fact that Nike still has to acquire some export license to export its products limits its competition in the Chinese market. Because China is a potential market that every foreign firm wants to venture in, there could be over-capacity in the future as a result of these investments hence re-emergence of deflationary pressures and sportswear industry instability. China being a communist state, there is always a close relation between local businesses and provincial leaders resulting to corrupt deeds, making to harder for the central government to implement its policies (Lymbersky 2008, pg64). There is poor protection of intellectual property in China. Extra costs: developing an extra market takes time and the payback period is longer. Additionally, the up-front costs for developing new promotional materials, administration costs and allocating personnel to travel to China will train the financial resource of the company (Lymbersky 2008, pg65). Financial risk: collection of payments via methods such as prepayment, open-account, documentary collection, consignment and letter of credit; are not only time-consuming than for domestic sales, but also more complicated. Therefore, our firm must carefully weigh the financial risk involved in exporting the products to China (Lymbersky 2008, pg66). PART III Financial analysis Business start-up costs Source of Funds 000’ Costs Fixed costs Advertising for operating $25,000 Basic website $10,000 Board development $55,000 Building down payment $79,000 Building improvement $56,000 Tools and supplies $89,000 Travel $100,000 Total fixed costs $414,000 Average monthly costs Advertising (print and internet) $25,000 Business insurance $45,000 Business vehicle insurance $15,000 Employees’ salaries and commissions $150,000 Supplies $65,000 Travel $55,000 Telephone $15,000 Website hosting/maintenance $15,000 Total costs $799,000 Break even analysis Projected cash flow analysis of Nike Estimated profit and loss year 1 Projected Cash flow analysis year 1 Conclusion and recommendation There are several motives that underlie the process of internationalization. Maybe the home market is characterized by saturation, presence in a certain country grants access to strategic resources or to some extent the firm has identified some opportunities to be exploited (Lymbersky 2008, pg41). Internationalization is a complex process that requires decision makers to have relevant experience in different situations and consider different motives before venturing into the international market. Most firms start operations domestically with value adding activities conducted within the borders of the home country only. With its large population and the likelihood of expansion, the Chinese market offers a big trading opportunity for Nike. It is a single market developed to make trade between member states as easy as possible. The benefits highlighted above are viable and can be reached with proper planning and strategy. However, it is worth noting that advantages highlighted above do not mean that finding a market and selling products with in the Chinese market is an easy task. Trading in the Chinese market requires a detailed market research, product positioning, pricing and sales. Chinese market offers huge opportunities, but preparation remains crucial to international success. Therefore, before pressing ahead with an export deal, it is vital to have enough finances in place to cover upfront costs and cash flow problems linked with internationalization. Recommendations Research and technical development in a firm has a major impact on whether the firm will remain relevant or not. In delivering quality to the customers, a firm ensures that it grasps the loyalty of its customers maximizes its profits and stays up to date with modern trends. While promotion remains an integral aspect of international business, many international firms should specifically audit the markets that they want to enter to and devise strategies that will give them a competitive advantage. Finally, it is important to note that a business should exploit it strengths to the maximum when facing competition. This will enable the firm achieve a competitive advantage which might just translate to dominance in the field of business it is involved in. References Bititci, U. S., & International Conference of the Manufacturing Value Chain (1998, Troon). (1998). Strategic management of the manufacturing value chain: Proceedings of the International Conference of the Manufacturing Value-Chain, August '98, Troon, Scotland, UK. Boston [u.a.: Kluwer Acad. Publ. Carbasho, T. (2010). Nike. Santa Barbara, Calif: Greenwood. Froot, K. (1993). Foreign direct investment. Chicago: University of Chicago Press. Goldman, R., & Papson, S. (2000). 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