The Siam Gas Industries: Market Entry Strategies - Literature review Example

? The study of Market Entry Strategies of SGP to expand into China Contents Contents 2 Introduction 3 Literature Review 3 PESTLE Analysis for LPG Market in China 9 References 12 Introduction Liquid Petroleum Gas in China is in huge demand in China. An estimate made during 2008 shows that by the end of 2010 the supply of Liquid Petroleum Gas in China would be reduced by around 7.3 million tonnes. The rising demand for Liquid Petroleum Gas in China is mainly observed in the sub-urban regions and in the growing cities. (Mining Exploration News, 2008). The Siam Gas Industries or the SGP which is the one of the largest distributor of Liquid Petroleum Gas products in Thailand is planning its expansion programs to China. During its expansion programs SGP already had bought a stake in China’s Liquid Petroleum Gas market and is looking forward to become the market leader for the product. (Forbes.com, 2010). Literature Review One of the largest Liquid Petroleum Gas distributors, SGP based in Thailand as studied focuses on its strategic move on gaining entry into the Chinese soil. To this end, Levi (2006) states that the strategy devised by a company to make its entrance into a totally new or sub-divided market is better known as the ‘market entry strategy’ for the company. These firms further adopt another strategy to support its expansion to newer markets. This strategy helps the firm to make reasonable allocation of its resources to gain the potential of effectively operating in the newer markets. Levi (2006) further states that through the employment of the ‘market entry strategy’ the firm successfully draws out a plan to tap the newer markets. The plan incorporates an outlook through which the newer market is properly segmented and effective plan of actions are chosen to meet the demands of the target group through acquisition and expansion operations. The central component of the strategy taken by the company to enter into newer markets is constituted by ascertaining the ‘mode of entry’ by the company into the foreign market. Research made along several firms on a global scale confirms that there are mainly five modes through which a firm plans to make a foray into foreign markets. (Levi, 2006, p.34). Levi (2006) states in this regard that entry models like ‘exporting’, ‘licensing’, ‘financing’, ‘building up a joint venture with the foreign firms and establishment of subsidiaries in the foreign land are considered feasible by a firm willing to enter into foreign markets. Each of the several modes of entry has significant advantages and disadvantages which can be underlined as follows. The company through the export mode targets to push the products produced in its own country to the foreign market. Thus the company is not required to set up a new factory in the foreign market. The company through the export mode endeavours to build huge amount of revenues by exporting a large number of products to the foreign nations. Export strategy used by the firm to enter into foreign markets however faces some distinct disadvantages. The company using such strategy may have to face the stringent regulations and market policies of the foreign market which can prove detrimental to its expansion. The cost of transferring products along the borders also tends to impose huge costs to the production firm. Again the foreign market may happen to be non-demanding to the products produced by the exporting firm. The level of obstruction can also result out from the barriers relating to difference of culture between the exporting and the receiving nation. Thus the above reasons may happen to make the export mode unsuccessful for the exporting firm. Levi (2006) further observes that the company can also take help of transferring the license to produce a stated amount of the products and thereby to market the same in the foreign market. In that the company renders a sum to the firm in the foreign nation taking such task. The company operating through the licensing mode gains the advantage of cost for not requiring opening up factory locations in the foreign country for marketing its products. Again the company through the licensing operations can also gain the favour of the regional government of the foreign country. The governments of a nation generally entertain the acquiring of revenues through licensing operations. Companies using the licensing mode can easily penetrate into the regional markets by gaining wider acceptance. However the licensing operations of the company largely delimit the operational parameters for the company in profoundly operating in the foreign markets. The companies fail to open up their own factories in the foreign markets and also cannot take its own business strategies. In licensing activities restriction is imposed over sharing the technological knowledge which can prove highly detrimental for the company. In regards to the third mode, Franchising Levi (2006) states that like the licensing activities the mode of franchising where the foreign company is rendered the right to use the company brand for production and marketing in exchange of a huge amount has also some advantages and disadvantages. In the advantage point the company needs not incur cost in building up newer factories to penetrate into local markets. Through franchising mode the company can gain economical advantage and also can easily gain access to local cultures. However the company taking to franchising modes fail to render significant control over the quality paradigm of the product which in turn distorts the customer perception. Another specific mode of entry that the company endeavours is in forming strategic partnership or joint venture with the foreign firm. The company in order to become hugely competitive in the foreign market can share the technological and operational process knowledge with the foreign firms by forming strategic partnerships with them. Again the company can gain a stake in the equity capital of the foreign firms through the process of joint venturing. The company through this mode gains a faster and wider acceptance in the foreign market and also successfully evades the constitutional and regulatory barriers of the foreign nation. However the company operating through this mode happen to lose ownership of the technological knowledge. Again the foreign company can happen to counter a clash of ideology based on policies and regulatory mechanisms with the expanding company. Finally, Levi (2006) states that the final path of entering into foreign markets by a company is opening up of subsidiary units in foreign locations. This helps the company in bearing control over the technological knowledge and also in easily operating on its strategic base. However the company operating in this mode has to render huge amount of investments and also happens to shoulder larger amount of risks. The company also suffers from lack of local knowledge and culture which hampers its production and marketing operations. (Levi, 2006, p.42-48). Levi (2006) states that the above ‘modes of entry’ are decided by the company depending on some criteria which are both internal and external. The internal parameters refer to the internal potential of the company like policies and structures, the ability to render control, level of resources, and degree of flexibility and risk that that the company can undertake. The external criteria take into account the environmental parameters of the foreign country like the cultural parameters, regulatory and policy paradigms and other production related controls. Diagrammatically it can be represented as follows. (Levi, 2006, pp.52-56). Figure 1 (Source: Levi, 2006, p.57) Levi (2006) further highlights the different steps that a company both in the national and international scale takes to expand itself into foreign markets. The company operating nationally first endeavours to make a feasible study in entering into foreign markets. Secondly the company must aim to study the demographic parameters of the market and devise the operational strategy accordingly. Thirdly the company also endeavours to internationalize its operations by forming a global strategy to expand to newer markets. Fourthly the company must endeavour to make a choice about the most feasible entry mode while entering into foreign markets. In the fifth and sixth step the company aims to devise company and region related strategies to compete with other existing firms in the market. Market penetration and product development strategies constitute this part. Finally in the seventh point the company again conducts a feasible study in understanding of whether their entry into the foreign market was justified enough. Levi (2006) states herein state that for international firms the process is same like the national firms. However the mode of actions taken by the international company tends to reflect higher amount of complexity than the national firms. The above discussion can be diagrammatically shown as under. (Levi, 2006, pp.58-60). Figure 2 (Source: Levi, 2006, p.59) Levi (2006) also states in this regard some potential measurements which help in referring the entry strategies taken by the company as potentially effective. The criteria for effectiveness of the strategy are like the potential of the concern, the potential of the industrial sector chosen, the nature of the firm in evading stringent completion, operates in formulating a general strategy and takes resort in designing the control and governing structure of the concern as would help in fulfilling the objectives of its internationalisation strategy. (Levi, 2006, p.61). Developing economies like China are gradually becoming the potential centres for Liquid Petroleum Gas market to flourish. Tsou (2002) states in this regard that the government of China is looking forward to take resort to a non-pollutant energy resource like natural gas to help the country come out from the grip of pollution. The first natural gas project was launched during 2002 amounting to around $3.6 billion which supply the same to four urban centres. Again observation made shows that the demand for liquid petroleum gas products in China surpasses the realm of supply in the region. Owing to such countries like Australia and of Saudi Arabian region is taking steps to enhance the exports of the same to China. Tsou (2002) states that the Chinese regions pertaining to the Southern and Eastern parts turn out to be the potential areas for gaining imports of liquid petroleum gas. The global market for the product has shown a huge rise of around 3.5 percent during the period 1990 to 2000 in sharp contrast to the 2 percent decline in petroleum sales. Further estimates show that during 2000 the individual consumption of liquid petroleum gas in China amounted to 10 kilograms. However the total consumption of such amounted to 13 million tons estimated during the 2000 period. Tsou (2002) further states that during 2000 around 39 percent of the total consumption of the product in China was met by the growth of imports. This study thereby shows the potential of growth of the LPG market in China. (Tsou, 2002, pp.13-14, 21-22, 24-25). The Center for Energy and Global Development (n.d.) observe that the Xinjiang region in China encompasses major liquid petroleum gas producing companies. Companies like Markor Investment Group and Guanghui Group both in the private sector have the largest share in the production of liquid petroleum gas in the region. Center for Energy and Global Development (n.d.) also observe that the government of the region is focusing on augmenting the exploration and research and development activities to enhance the production of the same in the region. (Center for Energy and Global Development, n.d., p.2). PESTLE Analysis for LPG Market in China The major macro environmental factors studied in PESTEL analysis pertain to Political, Economical, Social, Technological, Legal and Environmental realms. Political Factors The government of China in a bid to control the domestic demand for LPG has resorted to the mechanism of causing price hikes. The price hike which commenced from January during 2008 reached record mark during March distorting the domestic demand for such in the region. (China Business News, 2008). Economic Factors During 2010 the amount of imports for LPG products in China recorded a decline. However the demand for the product has again paced up in a strong manner to surpass the supply for the same. Thus imports are expected to rise from 2 to 10 metric tons annually from 2010 to 2015. (Corkhill, 2010). Social Factors The use of the product in China has scaled up the demand ladder owing to social factors tending to proceed to a pollution free environment and also use of such in domestic fuel purposes. Further the domestic use of LPG in China is also expanded to cooling units which all have led to the growth of demand for the product in China. (Bonello, 2009). Technological Factors The government of China is taking steps to render capital and other investments to help the region in developing its technological base for LPG production. This would help in its dependence over the imports from other countries. (Tsou, 2002, p.31). Environmental Factors Government of China is taking steps to reduce the pollution levels of the country coming from the use of coke and diesel for domestic and commercial use through the introduction of LPG products. (Dolan, 2008). Legal Factors Legal factors shaped in China focus on the legal process of entry of foreign firms in China. The latest amendment made to the law during 2001 only placed requirements for the companies to present their plans for production and operation to successfully operate in the region. (Tsou, 2002, p.30). References Mining Exploration News. (2008). China faces 7.3 million tonne LPG shortfall in 2010. [Online]. Available At: http://paguntaka.org/2008/05/12/china-faces-73-million-tonne-lpg-shortfall-in-2010/. [Accessed on April 5, 2011]. Forbes.com. (2010). #25 Worawit Weeraborwornpong. [Online]. Available At: http://www.forbes.com/lists/2010/85/thailands-richest-10_Worawit-Weeraborwornpong_ZPK6.html. [Accessed on April 5, 2011]. Levi, K. (2006). Entry Strategies of Foreign Companies in Indian Telecommunications Market. Tsou, S. (2002). Strategic Design for Imported Liquefied Petroleum Gas Distribution Systems in East China. [Pdf]. Available At: http://dspace.mit.edu/bitstream/handle/1721.1/47911/50448376.pdf?sequence=1. [Accessed on April 5, 2011]. Center for Energy and Global Development. (No Date). Xinjiang Oil Industry Development. [Pdf]. Available At: http://www.wsichina.org/cs4_7.pdf. [Accessed on April 5, 2011]. China Business News. (2008). Government's cap on LPG prices leaves domestic market with great uncertainties – analyst. [Online]. Available At: http://www.interfax.cn/news/173. [Accessed on April 5, 2011]. Corkhill, M. (2010). Feature: Large LPG carriers ready to sail clear of perfect storm. [Online]. Available At: https://www.bimco.org/en/Members/News/2010/2010/04/28_Feature_Week_17.aspx. [Accessed on April 5, 2011]. Bonello, R. (2009). Increasing Demand of LPG in Domestic Properties. [Online]. Available At: http://www.chinagridforum.org/business-and-industry/increasing-demand-of-lpg-in-domestic-properties.html. [Accessed on April 5, 2011]. Read More