International Business Management - Coca-Cola Entry Strategy in China - Case Study Example

International Business Management Final Report; Coca-Cola Entry Strategy in China Unisa Date Student Name International Business Management Final Report; Coca-Cola Entry Strategy in China Background of the study The international market is very competitive due to globalization and the rapid information and communication technology development. Therefore, international organizations opt to operate within an environment with competitors and different players. International firms have increased business volume by liberalizing foreign markets. Therefore, international business is any business entity (governmental, private or a mixture of both) or activity that crosses national boundaries. Foreign trade, portfolio investments, direct investments, and trade in services are types of international business. Companies like Coca-Cola are drawn to international markets because they need a larger customer base in order to achieve economic of scales. Moreover, they want to reduce their dependency on one market and want to counter attack their global competitors present in their home markets. Lastly, in the international market, there are those global customers who want to enjoy international service (Kotler, Armstrong, Saunders and Wong, 2008). Introduction Coca-Cola Company founded by George Pemberton (Atlanta, Georgia) in 1886, was, and still is a beverage-based in the United States of America. The initial recipe of the company was soda water, certain shrubs, lime and cinnamon. Nonetheless, it majors now in soft drinks. Today, the company has footprints globally in more than 200 countries, and it sells more 400 brands. In its product category, it has become a global leader, and the estimated market dominance is 45% as at 2010. Moreover, the customer loyalty share of the market is 90%. Coca-cola has continued to make profits despite harsh market changes and economic instability. This is due to its swiftness in adopting new market strategies and continues to embrace new technologies that include its solid presence in social media (MySpace, Facebook and Twitter online sites among others). According to Ghemawat, the market entry strategies employed by Coca-Cola parent company include Franchising, the Greenfield strategy, licensing, Alliances, strategic alliances and exporting strategy (2007, p. 13). Coca-Cola used the licensing approach in order to minimize their initial capital investment with regard to putting up a manufacturing plant. Moreover, they were avoiding the market entry constraints that were unfavorable. For multinational corporations (MNCs), government or trade regulations prohibit foreign company’s localized entry and make it difficult for them, but licensing approach is appropriate for MNCs. Moreover, Coca-Cola managed to take advantage of local expertise, existing business portfolio and secured their future markets with higher political immunity since the licensee were local companies. The disadvantage ascribed to the licensing approach is the degradation of products by the licensee due to the loss of control over processes. The licensee also brings in lower profitability after sale of the product. The other entry strategy applied by Coca-Cola parent Company is franchising, which it has done from 1889. Franchising pro is that it is treated as a distribution system. Hence, more incentive or liability is given to the franchisee. Exporting is the other strategy of Coca-Cola that gives them better protection of intellectual properties. Moreover, higher safety of products in cases where market collapse is bound to occur due to political mayhem (Ghemawat, 2007, p. 1). The company also has greater control over processes and little financial commitment during the process of exporting (indirect) products. They also had faster market access and risks lowered. As compared to direct exportation, the disadvantage of indirect export is poor market exposure, lower sales volumes, lower control over market processes and making the wrong choice of markets. Coca-Cola Company also used alliances strategy where it enjoyed the sharing of technological advancements. More so, the unity they formed was an advantage to global competition and thus, convergence of industry led to the advancement of products. Furthermore, harmonized standards or routines for the various company sectors made them succeed (Rothacher, 2004, p. 34). Nevertheless, the strategy had disadvantages that encompassed unhealthy competition and alliances made it easy for other companies to take over other firms in the process (Yeung, 2001, p. 406). Joint venture is also another strategy applied by Coca-Cola, and the promotion of convergent goals that are strategic is evident, but not divergent competitive goals. The joint venture also gave the company an edge in a highly competitive environment and enabled them learn from each other. At the same time, Coca-Cola retained their secrecy of operations. The challenge with joint ventures is the conflicting interest in relation to cultural competencies and mistrust even though there is sensitivity in the needed balance balancing of maintenance. However, the sensitivity results in higher outcomes for the company. For Coca-Cola Company, their timing of entry was based on the waterfall strategy where it first opened a business in Atlanta, which is its native state and later managed to progress to other states in America. Thereafter, it ventured the international markets and managed to follow a sequential strategy in marketing its products for expansion purposes. In particular, reference is after the reforms of 1979 that took place in China. Coca-Cola’s Market Entry Strategies in China The investment of Coca-Cola into the Chinese market is strategically important for the company in achieving their Visionary goals of 2020. It is also attributed to the partnership formed with bottling companies like COFCO. In China, Coca-Cola chose the joint venture where it used the bottling equipment and one of the three corporations owned by the government, China National Cereals and Foodstuffs Corporation (COFCO), or Oil Export and Import, or China International Trust and Investment Corporation. Coca-Cola later became their most used partner, and smaller Chinese companies are largely involved with operations of Coca-Cola bottling. Xishan Coal and Electricity Company and Dalian Fruits Company are examples. Coca-Cola in China is the world’s largest producer of soft beverage drinks and the biggest MNCs. The entry of Coca-Cola into Chinese market dates back to 1979 and since then, it has invested more than US$ 5 billion in the local market. This is inclusive of investments made between 2009 and 2011 worth US$ 3 billion. In terms of local employment opportunities, Coca-Cola has managed to hire more than 50,000 people, which is virtually 99 percent of the population of China. Additionally, Coca-Cola Company has continued to promote sustainability in the environment. Likewise, it is involved in various sustainable projects and local community development. This has been possible because they have done it through cooperative public-private endeavors and education that contributes a total of over RMB 200,000,000. Finally, it is the only MNC sponsoring China’s Olympic Games, EXPO, Paralympics’ Games, Special Olympics and Universiade. The other reason for cola entering the Chinese market is its ability, success and experience to capture a large market share. Its close competitors that included Pepsi-Cola and their unfamiliar environment that is highly versatile contributed to their ability to establish equity of joint ventures. Lastly, the business system o cola has positive impacts on the development of capital, labor and product markets. Shanghai and Tianjin are the two bottling production plants opened in 1927 and; in 1930, another one opened in Qingdao. However, due to the World War II, it faced major setback because China was invaded by Japan, which took over the plants. However, in 1946, after the War, it managed to open a plant in Guangzhou. Although, in 1949, the People’s Republic of China ceased all foreign countries operating, and cola withdrew all its plants and handed them over to the government. Nevertheless, in 1979 Cola re-entered the Chinese market due to the ‘open door policy’ that allowed foreign trade and investment (ICMR, 2004). Since 1990, the company has been making huge profits and the beverage has captured 50% of the market. The approach that made Coca-Cola succeeds and capture market in China is “Think local, act local.” In China, Coca-Cola headquarters is in Shanghai and here concentrates for soft drinks export are produced. For its local market, the ingredients are produced in Tianjin in the joint venture with Tianjin Jin Mei. In China, the company’s direct employees are 14000 and 400,000 people play different roles like doing distribution, supplies, wholesale and retailing. In capturing the Chinese market, cola opted to use the basic strategy of product ‘localization,’ which proved to be a success. Coke endured restrictive government policies and achieved eminence. With the high costs of transacting business in China for foreign investors, Coca-Cola went through different stages that enabled them adapt successfully into a market environment that was unique. According to Mok et al., market imperfections raise transaction costs due to market uncertainty, small numbers of agents available in the market, bounded rationality and or opportunism (2002, p. 41). The franchising strategy employed by Coca-Cola in China helped them form relations with various companies like Hong Kong Swire and Malaysia Kerry Groups, who made distribution easy. This reduced existing Coke problems and Swire group majored in the production and distribution of the product in Central and Southern China; whereas, Kerry group worked at the interior and northern China. Swire and Kerry groups shared the same goal with cola and their strong relations with the government enabled them penetrate the market easily. Hence, cola upgraded its local industries and managed to lose previous restrictions. According to Mok et al., the beverage market share that cola attained in 2000 was 40% (2002, p. 51). More so, legal burdens were eased, and they managed to maintain their dominance in the market (Yeung, 2001, p. 413). The company also used internalization strategy, which increased their sales, and their brand became popular considering that, in the world, China is the third largest country. China made cola brand popular from the preferred Chinese tea by using compatible packaging. This implies that the products became recognized locally and incorporated Chinese culture and procedures of advertisement identified with target groups. Apart from the above strategies, Coca-Cola went into a joint venture with Tianjin Jinmei Beverage Co. Ltd. It should be noted that cola had undergone localization strategy hence, produced a variety of local brands for the Chinese market that included carbonated and non-carbonated drinks, which best suited their taste. Localization in this case was linked to inputs in manufacturing end products and distribution methods. Notwithstanding, localizing the beverage production and bottlers hence, a glocal strategy emphasized because it comprised between domestic and global strategies of marketing. Coca-Cola managed to develop a glocal strategy since they utilized their global experiences positively by customizing and tailoring their products and services to appeal the local Chinese market. Coca-Cola looked into their product communications, designs and branding among other variables in the marketing mix. Economic, Political, and Cultural Issues Presently, Coca-Cola has more than 36 bottling plants, and their significant plan of investing in infrastructure is a worthy investment despite all the obstacles they faced in the quest for growth in markets that emerged. According to the OECD, China suffers from an uneven distribution of water reserves and low water resources per capita (2007). For Coca-Cola, water is a global challenge in the Chinese market, and they faced the challenge of maintaining their legal and social license of operation. Therefore, they engaged the local communities in order to ensure long-term availability of their raw material, water. They started an initiative that included the conducting of wide-reaching research on international levels in the form of ‘water risk survey’. The stress experienced was due to competition of resources, ecological concerns and issues with community water. Water efficiency in China improved between 2005 and 2006 and over two-thirds of the plants implemented recovery projects and water reuse that reduced consumption levels. Furthermore, bottling plants in China fitted on-site wastewater treatment facilities and operators employed trained in management issues. The managers ensured that the wastewater was treated before discharging to levels capable of supporting the life of fish. As such, the response to the water problem increased sustainability initiatives, environmental, worked on sustainable audits, training and wastewater management plants. Accordingly, Coca-Cola managed to win consumers by increasing their sustainability measures and environmental concern. Through these activities, the company, developed legitimacy in terms of conducting its operations and stakeholders trust, was gained (Larimo, 2007, p. 155). For MNCs, China is a valuable land for foreign investors and its access to World Trade Organization (WTO) in 2001 provided numerous opportunities for foreigners. In international business, HRM is an issue that has gained popularity and for cola, the same problem emerged. Coca-Cola is among the MNCs that adopted HRM standardization since they believed in coordinate practice and coherence strategy leading to operational efficiency and effectiveness. The popularity of international business made it difficult for MNCs to operate in foreign markets due to their conception and culture difference on organization behavior. Strategy conflicts resulted due to diversity, cross-culture and cross-nation complexity and this was reduced by introducing localized employment in host countries. Thereby, reducing costs and created employment opportunities for locals. Economically, MNCs like Coca-Cola in China discovered the rising difficulty in recruiting and retaining qualified managerial staff. Moreover, hiring qualified managerial staff was a challenge or MNCs operating in the Chinese market due to talent shortage. Reason being the high prevalence of arts in universities made diploma students lose their competitive advantage. Coca-Cola was looking to attract specific talent with advanced skills in the technical sector plus a deep understanding in techniques used in international management. As such, a qualified manager was expected to be competent and set up organization culture. The second economic issue is the rapid increase in inflation rates in China, which could hurt the country’s economy. This factor directly affects cola because a bigger portion of the company has its operations based in China. The deterioration of China’s economy would ultimately affect the company, but the consumer prices are bound to go higher meaning that people are willing to pay a higher price for their cola product. The best strategy that cola can employ in this case is to consider reducing their prices to be at par with other beverage sellers in the country (Business Week). As such, they will generate profit regardless of the rising inflation. Another strategy is the creation of sales promotion for all Coca-Cola beverages hence, differentiation the product from other competitors. As a result, more consumers will buy the product and implies that they are satisfied as an alternative that is beneficial to them in terms of their ‘pocket-friendly’ nature. Having different social environment also contributed to economic issues of MNCs operating in China. Aspects present in this category include differences in labor markets, culture and systems of employment. Additionally, compensation and benefits in China is dependent on the performance of individuals yet the economy of China has risen tremendously. As such, increased numbers of job dissatisfaction is evident in China. Lastly, expatriate failure is experienced among MNCs operating in China due to culture shock from the different cultural norms, values and unfamiliar situations. Hence, efficiency and productivity was abated, which let many expatriates feeling enthusiastic. During the re-entry phase of Coca-Cola to China, the company lacked control over production and distribution activities. The management was not designed in a way that favored aspects like strategic decision-making, setting of goals and targets, and devising of strategies in the host country. As such, the management lacked control and was limited to expansion because they had minimal overview of China’s market in relation of consumers and operations (Larimo, 2007, p. 211). However, negations enabled them acquire minimal control of managerial and company operations over agents present in Chinese market, but they still lacked the needed control. Nonetheless, the joint venture and franchising strategies employed would have helped them be effective in meeting their operational goals. But this is not the case and, therefore, Coca-Cola is still struggling with this issue of control to-date. In the political arena, the government of China still plays a vital role in business operations. As such, the government takes part in the economy of China and its business operations. Strict business procedures and behaviors have been placed for MNCs conducting business in China leading to strict laws and regulations by the government. Therefore, Coca-Cola managed to surpass this by building close and good relations with the government. The other political aspect is the fact that the Chinese government is not fully satisfied with the food safety measures and quality for its people. Consequently, the government created a new superministry that will look into MNCs quality of foods and drugs. This would mean restructuring and re-evaluating various factories doing production in China like Coca-Cola. The political aspect of this factor is that the Chinese government is involved. As such, the new regulation impacts heavily on Coca-Cola in terms of their production segments since assessment is a requirement for a company to continue operating in China. In lieu to preventing complications, Coca-Cola will need to re-evaluate its factory practices and conditions in order to be prepared for the Chinese government assessor. Moreover, they can also improve on their conditions and practices in the factory so as to minimize chances of having the plant shutdown. As such, this is an opportunity for Coca-Cola because the prompt allows cola to revise its factories based in China (Business Week). China is still developing, and rapid growth is taking place in the country. Therefore, it is facing many changes concerning demography. The numbers of people living in the city has grown to the extent of outnumbering the rural population. Hence, it is one of the world’s fastest growing economies, which is beneficial because more people live in the city. As such, they are earning more income to enable them live in the city and not in their rural areas. For Coca-Cola, this is a plus because the range of customers willing to buy their products has widened. More so, an opportunity is created to increase the beverage’s price as more customers can afford to buy the product. This sociocultural aspect created a good ground for cola to prosper in China and relied heavily on maintaining a good customer base to enable them increase their market share. The other cultural aspect faced by Coca-Cola is with regard to healthy drinks considering that traditional herbal tea is their most consumed beverage. The preference of Chinese people is freshness and products that add health and Coca-Cola has lost its market share to the company of herbal tea producers like Wang Lao Ji. Sprite, a subsidiary of Coke, has managed to sell more than the mainstream product, cola (Mok, Xiudian & Yeung, 2002, p. 45). However, since the Chinese people are not loyal to only one brand, they often go shopping and buy other products. In an attempt to acquire Chinese healthy food producers like Huiyuan Juice to address cultural differences, Coca-Cola was met with political and policy issues. Cultural aspects play a major role for MNCs success in new markets and hence, the strategies they employ should marry different cultures together (Larimo, 2007, p. 67). Coca-Cola failed to understand the cultural aspects of MNCs in new markets, but its continual growth in brands has been successful through joint ventures and increased strategies that provide the company a win-win situation. For example, Coca-Cola Company has managed to seek managerial and operational control over agents in the Chinese market. The financing aspect of Coca-Cola is that their primary source is long term loans and between 2008 and 2009, new issuance of loans amounted to $10,352,000. However, growth of the company is experienced through purchase of other investing activities. Therefore, the more it gains access to international markets, the more the company grows. The following tables give an overview of Coca-Cola’s financial projections and sources. $A million 2012 2011 $ Change Working capital 842.7 856.7 (14.0) Property, plant & equipment 1,993.8 1,772.1 221.7 IBAs & intangible assets 1,533.9 1,507.2 26.7 Deferred tax liabilities (157.7) (153.8) (3.9) Derivatives – non-debt (63.9) (45.3) (18.6) Other net assets/(liabilities) (437.7) (159.7) (278.0) Capital employed 3,711.1 3,777.2 (66.1) ROIC2 % 17.1% 17.1% 0.0 pts 2010 SOURCES OF OPERATING INCOME £’000 Contributions 16,640 Interest income 271 Other income 58 Revenue of publications and related activities 5,804 TOTAL 22,773 Salaries, wages and benefits 15,089 Trustees’ fees 639 Cost of meetings, associated travel and accommodation 2,629 Accommodation 1,319 Other costs 1,221 Direct cost of publications and related activities 3,246 TOTAL 24,143 Conclusion For MNCs, the high transaction costs imposed on them when entering new markets possess to be a big challenge considering the political, economic and cultural issues they are bound to face during their operation in the host country. In dealing with these issues, Coca-Cola applied different entry strategies that included joint ventures and franchising to promote effectiveness and efficiency in penetrating the new markets. The only concern that has not been addressed by Coca-Cola is the political aspect that has hindered them from having control over operations in their Chinese based plants. The failure in focus to cola in China is with regard to acquiring government permission, asset valuation and negotiations with agents in the market. The other hindrance is finances because their primary source as a company is loans, which has interests that are growing by the day. Lack of managerial skills, training and needed requirements have prevented the company from meeting their desired goals within the specified time frame. References List Ajami, R. A., Cool, K., Goddard, G. J. & Khambata, D 2006, International business: Theory and practice, New York: ME Sharpe Inc. Business Week N.p., n.d, ‘China’s inflation fight starts to squeeze consumers,’ Web. 15 Nov. 2014 Ghemawat, P 2007, "Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter (Hardcover)", Harvard Business School Press Books, vol. 2, pp. 1-30. Kotler, P., Armstrong, G., Wong, V. & Saunders, J 2008, Principles of Marketing: 5th European Edition, New York: FT/Prentice Hall International/Pearson Education Limited. Larimo, J 2007, Market Entry and Operational Decision Making In East-West Business Relationships, Binghamton, NY: International Business Press. ICMR, Center for Management Research 2004, “Coca-Cola's Re-Entry and Growth Strategies in China,” Case code: BSTR140. Available at: http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy2/CocaCola%20ent ry%20and%20Growth%20Strategies%20in%20China.htm. (Accessed: 19 March 2010). Mok, V, Xiudian, D, & Yeung, G 2002, 'An Internalization Approach to Joint Ventures: Coca- Cola in China', Asia Pacific Business Review, vol. 9, no. 1, pp. 39-58. OECD (The Organisation for economic Co-Operation and Development) 2007, ‘OECD Environmental performance Reviews: China’, 2007. Rothacher, A 2004, Corporate Cultures and Global Brands, Singapore: World Scientific Publishing Co. Pte. Ltd. Yeung, H 2001, “The dynamics of Asian business systems in a globalizing era,” Review of International Political Economy, vol. 7, pp. 399-433. Zhang, A 2011, Problems in Following EU Competition Law: A Case Study of Coca- Cola/Huiyuan. Peking University Journal of Legal Studies, vol. 3, pp. 96-118. Appendices Figure 1: The formation of Glocalization Figure 2: Financial supporters (amounts translated into sterling on 2010) Country Organisation CHINA £725,992 Through system created by the Ministry of Finance £50,000+ China Ministry of Finance Shanghai Stock Exchange Shenzhen Stock Exchange £25,000 + China Development Bank China Petroleum & Chemical Corporation PetroChina Company Limited Less than £25,000 Air China Limited China Shipping Development Co. Ltd Aluminium Corporation of China Limited China Telecom Corporation Limited Anhui Conch Cement Company Limited China Unicom Corporation Limited Bank of China Limited China Vanke Co Ltd Bank of Communications Co Ltd Donfeng Motor Corporation Beijing Capital Co Ltd Guangzhou R&F Properties Co Limited Beijing North Star Company Ltd Huaneng Power International Inc China Construction Bank Limited Industrial and Commercial Bank of China China COSCO Holdings Company Limited Jingwei Textile Machinery Co Ltd China International Marine Containers (Group) Ltd PICC Property and Casualty Company Limited China Life Assurance Company Limited Ping An Insurance (Group) Company of China Ltd China Merchants Bank Co Limited Tsingtao Brewery Co Ltd China Mobile Limited Yanzhou Coal Mining Company Ltd China National Offshore Oil Corporation ZTE Corporation China Shipping Container Lines Co Ltd Table 1: Entry Strategies and FDI Utilization in China (1979 –2001). Mode of FDI Number of Firms Percentage of Total Firms Actual Utilization of FDI (US$100 million) Percentage of Total Utilization of FDI Equity Joint Ventures 213,780 55.59 1,717.64 44.64 Co-operative Joint Ventures 51,046 13.27 761.69 19.79 Joint R&D Ventures 180 0.05 70.78 1.84 Wholly-Owned Subsidiaries 119,589 31.09 1,297.73 33.73 Total 384,595 100 3,847.84 100 Table 2: Coca-Cola’s Joint Venture Bottling Plants in China, 2000 Read More