International Management Strategy of Mattel & Tyco - Essay Example

Part Tyco – Company Background Tyco was ranked 22nd amongst the US toy industry and by 1990 rose to 4th place as a result of several acquisitions. This resulted in revenues of $ 769 million and a profit of $14 million by 1992 with just 13% share contributed by export sales. Around that time the domestic markets were maturing and the top two US companies Mattel and Hasbro were expanding overseas in a big way. Tyco also thought that going International was the right strategy and perused a course of foreign acquisitions and opening of overseas subsidiaries to augment its sales as well as position. Consequently it bought out Matchbox, a Hong Kong rival manufacturing toy vehicles and opened branches in Germany, Belgium, Spain and Italy expecting each of them to become profit centres within 12 month. Tyco also believed that by 1996 the international business would contribute 50% of the sales revenues. But by 1995 the company had lower annual revenues of $ 709 million and suffered a high loss of $30 million. Its domestic sales were down as new products were not being introduced and the older product lines like Little Mermaids and Crash Dummies showed declining sales. Acquisition of Matchbox was a disaster as there was a clash of cultures. Tyco had a domestic approach to marketing and Matchbox worked on principles of international marketing strategies. Disillusioned, the Matchbox management team, that had joined Tyco with great enthusiasm and expectation, left en masse within a year of takeover. The later attempt to merge Matchbox with the UK subsidiary too failed to lift sales. In yet another attempt to revive, Tyco made a fatal blunder in ignoring ground realities in the European market that operated largely through small retail stores as against the US operations that were dominated by few large retailers who had a national presence. It logistics and fiscal policies failed to impress the Italians and Germans as a result its operations in these countries had to close down in 1994. In search of competence and competitive edge and frustrated by its failed strategies in the international markets Tyco decided to return to its core activity of production and product development. It became a takeover target of Mattel which eventually acquired it in 1996. Mattel – Company Background As against Tyco, Mattel had always realized that its core competency lay in producing products inexpensively to survive the maturing US market and to gain a presence in foreign countries which offered huge but cost conscious markets. It also believed in a strong and effective supply chain for sourcing its requirements on a world scale. Further it located its manufacturing activity in the emerging markets that offered it both cost effective solutions and FDI opportunities. Mattel was very adept at marketing and spread itself in a worldwide distribution set up with strong logistic support. By 1990 it already had a presence in 140 countries with production tie ups though several Licensees in numerous countries. China was a leading manufacturing base and the Licensee there was kept in tight check with alternate facilities available in Malaysia and Indonesia. The manufacturing too kept shifting from Japan to Philippines to present day China in search of cheaper labour and favourable conditions. Mattel’s mainstay was its Barbie Doll range that commanded great market worldwide due to its relentless campaign and brand imaging. Almost 60% of Barbie sales were in the US while it was entirely sourced and manufactured outside the US. Mattel had a hierarchical management structure with all units reporting to the CEO. Apart from this it also created two Strategic Business Units (SBU), Fisher-Price and Tyco, that also reported to the CEO at the Head Office. Mattel Worldwide retained the activities of product development, distribution advertising and promotion with itself. Among the products Barbie was sold as a standard product worldwide, whereas the local managers had authority to suitably alter other products to their local markets to suit cultural requirements. Country/Region Analysis It is interesting to note that Tyco chose Europe as its target market for internationalization, while Mattel preferred to go to the Asian markets. There are many theories about what the target market for international business. International business differs from domestic ventures in several ways an even marketing strategies are quite different. A successful company in home country cannot necessarily claim success in other foreign countries. The biggest disadvantage they face in overseas destination is the clash of cultures, whether in context of opportunities or human resources or even the customers. Foreign market characteristics, such as economic and industrial development, marketing and communications infrastructure, technical requirements, and legal regulations influence export performance (Balabanis & Katsikea, 2003; OCass & Julian, 2003; Baldauf, Cravens, & Wagner, 2000; White, Griffith, & Ryans, 1998). Furthermore, uncertainty arises when a firm attempts to export to countries not deemed similar to the home country (Erramilli & Rao, 1993) since the difficulty of obtaining and interpreting information increases (Boyacigiller, 1990). Without adequate information, many firms may encounter difficulties in predicting the consequences of their strategic decisions (Achrol & Stern, 1988). This uncertainty and lack of information about the foreign market may also increase the possibility of making wrong decisions and thereby reduce the performance of the firm abroad (Lee, 1998). Addressing this possibility, Johanson and Vahlne (1977, 1990) and Wiedersheim-Paul, Olson, and Welch (1978) suggest that, to enhance their chances of success, exporters should select countries that are perceived to be similar to the home market. The reasoning behind this advice is that similarities are easier to manage than dissimilarities, thereby making it more likely for the firm to succeed in similar markets. It can indeed be said that environmental differences between the home and foreign markets negatively affect the export performance of the firm. Strategy for Successful International Marketing There are many uncertainties when a company plans to exports to another country where conditions differ from the home country. Conflicting data and its interpretation make it difficult to arrive at decisions. In absence of adequate information it is impossible for companies to project consequences of their strategic decisions. According to Doole and Lowe (2004), there are many companies with export prospects that keep away from doing business beyond their home market. Often the reason is apprehension. They are afraid of failure on account of the challenges of competence and cultural factors. Protectionism By its very nature International Marketing is fraught with vested interests of both nations and its own industry. Almost everywhere there is some element of Protectionism that is overtly or covertly practiced. Most countries, led by US declare that they favour Open Market policies but indeed protect their own home industries with some form of duties, tariffs or taxations that discourage or at least restrict outsiders from invading their home territories. Unfortunately this is as true for developed and wealthy nations as for the developing and poorer nations. The Importance of Communication Doole and Lowe (2004) opine that the international reputation of a company depends upon the good relationships of the customers and stakeholders. The internal relationship depends on the awareness of the marketing strategies. Communications at different levels have to be addressed with finesse and expertise to achieve a correct image of the company and its products. Internal competencies of a company will not be sufficient to guarantee success. External stakeholders like the distributors have to be fully aware of the marketing policies. The Economic Aspects of International Marketing Organizations are also dependant on their external environment for resources (Pfeffer and Salanick 1978), as a result the environmental factors will determine the economics of the international venture of a company. This must be considered when selecting the target country. But it has been explained by Hofer & Schendel (1978) that organizations are able to overcome the environmental challenges through marketing strategies. The International Marketing Strategy The reason for going to the international market will determine the marketing strategy to be adopted. The Home market may be reaching saturation, there maybe intense competition that is stifling market or there maybe an opportunity to exploit a product or idea whose time has come. In all cases the common factors will be careful planning, allocation of adequate resources, organizing contingencies and having an implementation schedule. A careful monitoring of the implementation process with measurable performances is a must to make the whole exercise meaningful and productive. International Marketing Research It is also prudent to make a careful research of the target market. The data for this research is often available at government data collection agencies of the market as well as private agencies that collect data with different objectives. It is important to be able to ask for and obtain the right data as this can sometime be misleading as perspectives differ. This is the secondary data and primary data can be collected through talking directly to various distribution channels. A good way for deciding on choice of market is the twelve point framework known as the 12C framework for analyzing international marketing Country – Check PESTEL Analysis of the potential market Currency – Check for currency stability or fluctuations Culture - Check for cultural differences that will affect Product/Advertising/Brand Equity Control & Co-ordination - Check for Organising and Monitoring after sales service possibilities Concentration (of markets) - Check for market segmentation Commitment – Check resources/time/skills required and plan for a minimum period for investments. Communication - Check for language/communication problems both inter-personal and media Choices (of consumers) – Check out competition with other foreign/local brands. Channels of distribution – Check for Logistic support and transport problems of area Contractual obligations – Check out for Legal issues while contracting with different stakeholders Capacity to pay – Check out the ability to pay factor of consumer as well as regulations like local taxes/tariffs. Caveats (laws) - Check out for local restrictive laws and regulations The Modes of Entry There are three general modes of entry to a potential export market. The first is by exporting the products directly to them to large customers or buyers who then independently decide on their sales strategies. The second is by having a contractual agreement with a distributor or franchisee that is bound by terms and conditions for sales and marketing. The third is by making investments in the designated country either by opening own property like showrooms or even setting up own factories to assemble or manufacture the product and then sell it locally. “The secret is to select that alternative that is most appropriate for the firm within a particular foreign market setting.” (Darling & Seristö, 2004, p.33). The mode is however determined by the marketing strategies that may be decided. International Pricing Policy A specific Pricing Policy is required by companies according to their situation. Regulation of Tariffs, Taxes and Duties all affect the prices in a given country (Cavusgil et al., 1993). In reality no single strategy in any given condition and Global marketing decisions on Price, Promotion and Distribution depends entirely upon the local environment. (Jain 1989). Although standardization brings in homogeneity across markets as well as customer satisfaction and cost savings in many ways, it has been argued that it also causes economies of scale and offers a low-cost competitive position in the global market (Cavusgil et al., 1993). However this is a very simplistic view and as explained elsewhere an adaptive view of pricing which takes local factors into account is more practical. (Douglas & Wind 1987; Wind 1986). This calls for a PESTEL Analysis of the target country. Choice of Country With maturing markets companies turn to the international arena in search of new markets for their increasing production and quest for competitive advantage. Some even do it for survival but mostly the intention is expansion and consolidation. The advantage in Europe lay in it being more similar to the US market in terms of culture and to some extent in language, although there is a spate of languages there. The affinity was more in attitudes and the way of life and Tyco was under the impression that it will have an easy passage in this market. Another reason was the affluence of the population and the general awareness of using toys for both entertainment as well as education. In case of Mattel, the prime consideration was costs and it was careful to choose countries that could offer it cost effectiveness in manufacturing. That the same countries and others in the region also provided it a market was important but secondary. It therefore first selected Japan as its manufacturing base, but with cost escalation in labour transferred to Philippines and later to China. It even chose to close down operations in Philippines when it faced troubles there. The underlying idea was to use the most cost effective base. Even now it is prepared to move out of China into countries like Malaysia and Indonesia should the Chinese attempt to raise costs. The other thing it did was to for Licensing out the manufacturing instead of owning it. This gave it the advantage of shifting the burden of investment and employment to its partners so that it could concentrate more on its core activities of product development and marketing. Tyco took on too much burden on itself and failed. In contrast, Mattel went for division of activities, concentrating on its core competencies, and succeeded. Part 2 Literature Review - International Trade Theories There are several theories on International Trade. Mercantilism is a 16th century theory that symbolizes gold as wealth and propagates that exports should be subsidized to meet competition and imports should be penalized with tariffs to protect home industry. This severely limits the benefits and is a zero sum game. The Absolute advantage theory was originated by Adam Smith, the father of modern Economics, and he proposed that one should produce in a place where one can be most efficient and should trade where production is marked by inefficiency. By and large this theory is in practice today. The Comparative Advantage theory states that production should be decided on basis of relative advantage and if advantage is unavailable one should import rather than produce even if efficiency is more than that of the exporting nation. The limitation of all the classical theories is that they ignore other factors like incomes, prices government regulations, and policies which can and will effect the business decisions. In contrast Heckcher (1919) and Ohlin (1933) theorized that one should produce and export goods from locally abundant factors of inputs and import those goods for which these factors are costly locally. This theory too ignores other factors that can influence relevant matters. Wassily Leontief (1953) developed his Paradox theory that states that Government policies affect availability of input factors as well as capital and labour. This theory suffers from the fact that it is too totalitarian in approach. The Country Similarity theory advocated by Linder in the 1961 extended the previous theories by adding that nations with similar demand pattern trade with each other and this gives rise to international trade. The Product Life Cycle theory by Raymond Vernon in 1960 concluded that there are four stages of lifecycle of a product and international trade is related to them. In the first innovation stage the product is developed in its home country; in the second when it reaches its growth level it is produced in another developed country; later on, when it is in maturity it is produced in a developing country and finally in the last stage where it reaches the declining stage of its life it may be produced just anywhere. This is how international trade in a product takes place. This theory finds wide acceptance even today. Paul Krgman and Kevin Lancaster (1980) projected that in their Market Imperfection theory the nation gains from its vantage point of specialization and economies of scale and having the first mover advantage takes centre stage with the assistance of the government. Here the use and need of the government factor is the limiting factor. Michael Porter (1990) put forward the Diamond Theory in which he stated that Basic Factors like natural resources, climate/location, and demographics when added to Advanced Factors like communications, skilled labour and technologies help in efficient production. This product is in high demand by sophisticated consumers looking for quality and innovations and firms cater to them and each feeds on the other to create International trade. There are other factors in the Diamond like related support industries, strategies in marketing, international, and domestic competition that either hinder or help in promotion of trade. These factors contribute to a company’s competitiveness. This theory has its pros and cons and needs further expansions. The diamond needs re-enforcement by adding two layers of International Trade and Global Trade with further factors built in. But this is a good base to start from. Internationalization of Trade Internationally production is increasingly dominated by MNC’s looking for greater market share. They make strategic decisions for their target markets that have important implications for business, home and host country employment, transfer of knowledge and technological improvements. In turn their choices are affected by domestic and international trade policies in ways that are not covered by in traditional trade models that focus on competitive markets and the role of comparative advantage. It is thought that when a firm chooses FDI as a means to enter overseas markets it becomes a multinational enterprise and is then defined as a firm that holds significant controlling interest by way of majority share or by setting up a subsidiary in a foreign country (Markusen, 1995). Innovation has been said to be another reason why firms invest abroad. The eclectic paradigm of Dunning (1981, 1988, 1993, 2000) and the internalization perspective also point to the fact that while internationalizing their activity firms heavily depend on innovations of products. Finding skilled labour for research and development as well as production is a good incentive for FDI in host countries. In recent times there is agreement on the fact that investments are made abroad not only in pursuit of innovative capability but in order to enhance such capabilities (Cantwell, 1989; Cantwell and Janne, 1999; Kuemmerle, 1999; Peng and Wang, 2000). Sullivan and Bauerschmidt (1990) also found that innovative capacity creates a positive influence on internationalization, product development capacity and classification; while (Leonidou, 1995) opined that it may provide specific advantages that can be exploited at the international level. Motives for FDI FDI is sought after for the benefits that accrue to the host country by way of resource transfers that brings in this scarce resource for the benefit of the industry, consumers, and the labour force. FDI is the cause of increase in capital, upgrading technology and improvement in management. It creates direct employment by augmenting manufacturing capacities and indirect employment by assisting growth of ancillary industries and additional suppliers for new raw materials. Finally it improves the balance of payment of the host country and brings in more foreign currency to meet import and payment obligations. Motives for FDI may be summarized in a categorization formulated by Behrman (1972) and Dunning (1993) who introduced a model of internationalization including four different categories of motives. These categories are market seeking, resource seeking, efficiency seeking and strategic resource seeking motives. To this a fifth category, network seeking motives (Dimitratos & Plakoyiannaki, 2003) has been added for recognizing networks as a significant part of internationalization corresponding to recent research. Market and Resource seeking motives have been the two most recognized categories of motives (Dunning 2000). These two are the main reasons for most first time internationalization attempts by firms. Yet, efficiency seeking and strategic asset seeking motives increase in importance and are more common as motives for those companies who are already engaged in multinational activity. Dunning also confirms that closer relations with customers and durable relations with suppliers were equally important motives. Besides, he suggests that internationalization was driven by opportunities abroad rather than threats at home. Opportunity has been described in a different vein by Williamson (1975). He states that incomplete contracts and missing markets gave rise to opportunistic behaviour and to fill the void companies chose to face the challenge by replacing external contracts by direct ownership and internal hierarchy. This has been confirmed by Dunning’s eclectic paradigm and internalization theory of Rugman (1984). The eclectic paradigm suggests that three conditions determine FDI. First, the firm must possess specific, ownership advantages not available to other firms. These advantages can be tangible like a superior technology or patent; or firm size that can generate transferable economies of scale and scope. Or the advantages can be intangible, may even be embodied in a brand name, trademark or other indication of product quality, or derived from the fact that the firm’s is having favored access to particular customers. Secondly, the foreign market should offer some locational advantage. It should be profitable to serve the overseas market by local production rather than by exporting. Important factors in this case are market size, tariff and non-tariff barriers or rigorous anti-dumping regulations that restrain the firm’s ability to price its exports and offers opportunity to locate itself within the market. Thirdly, there should be an internalization advantage. Ownership advantages are best exploited internally rather than offered to other firms through some contractual arrangement such as licensing, a joint venture or management contracting. The problems of unenforceable and uncontrollable contracts with overseas partners can be overcome with direct ownership. The eclectic paradigm shares much in common with Rugman’s internalization theory in this respect. The main difference between the two paradigms has been described by Dunning himself stating that his eclectic paradigm is different from Rugman’s internalization theory in that it treats the competitive (so-called O-specific) advantages as endogenous or internal rather than as exogenous external variables (Dunning, 1995) Modes of Entry Various factors may account for the choice of a particular mode for entry into a foreign market. It may depend on product features such as degree of differentiation, importance, age, and technological content (Gatignon and Anderson, 1987; Goodnow, 1985; Stopford and Wells, 1972). It may also be determined by external environmental factors like host country trade and investment restrictions, market size, geographic and cultural distance, and its exchange rate fluctuations (Baek and Kwok, 2002; Bauershmidt, et al. 1985; Goodnow and Hansz, 1972). Besides, a number of cultural and behavioural practices affect decisions in international marketing involvement, choice of markets and choice of foreign market entry modes (Aharoni, 1966; Cavusgil, 1980; Erramilli and Rao, 1990; Johanson and Vahlne, 1977). Yet again, the original mode of entry may not be related to subsequent sequential entries (Chang and Rosenzweig, 2001). Many an entry into a foreign market has been through an agency office in the early stage. This gives the opportunity to feel the terrain. But as contractual failures and missed market opportunities rise, as explained earlier, firms feel more confident to go for wholly owned subsidiaries (WOS) or contractual joint ventures (CJV). Most companies prefer WOS where advantages like knowledge of the local market have been built up or understood. Yet problems can be noticed in such ventures due to differences in management style, culture, facilities and training. The issues involving the bureaucracy, administrative procedures and inefficiencies in the co-ordination with government departments; unclear or contradictory laws, and unpredictability of legal and other processes also pose roadblocks along the way. Conclusions A comparative study of both Tyco and Mattel in their attempts to internationalize their operation reveals several disparities. Tyco’s attempts were neither based on research of the markets nor did they have any clear goals and objectives. They simply went ahead because the competition was perusing these strategies. Had they observed more carefully, they would have realized that competitive advantage lies in doing the same things but doing them differently (Porter M.E. 1996). Global marketing decisions in context of product manufacture and prices are always different between home and host markets as each country has an environment that is unique to it (Jain 1989). It is imperative to take these into consideration before making decision to internationalising operations. Another error made by Tyco was in the mode of entry. Instead of first testing the market through Agency arrangements, it went straight into opening offices by itself. They were unfamiliar with the culture of the countries they ventured into hence could not cope with local requirements. Mattel’s success, on the other hand, was based on factors described on the International theories and other environmental factors described above. 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