Emerging Market Economy - Sanpower Group - Case Study Example

Research a Firm from an Emerging Market Economy That Has Entered a Foreign Market within the Last Five Years Executive Summary The paper discusses the ways though which, Sanpower Group Co. Ltd., a Chinese conglomerate company that has made sustainable acquisitions of companies located in the UK, the US, and Israel. Hence, the paper aims to discuss the entry mode adopted by Sanpower in order to enter the foreign markets, and further converses regarding the entry modes by illustrating several related theories. The report also intends to discuss the motives of the company on entering the foreign markets and the subsequent issues that it experienced through such moves. Subsequent findings revealed that Sanpower has considered number of factors, such as factor conditions, demand conditions, related and supporting industries, firm strategy, structure and rivalry. The motives behind the expansion in foreign markets were found to be resource, market, efficiency and strategic assets seeking. In addition, a number of issues were disclosed in the report, such as language barriers and taxation systems of foreign nations. It is thus recommended that the company should gain understandings of the foreign market situations, customer demands and competitors’ assessment, prior to entering the business. Table of Contents Executive Summary 2 Introduction 5 Market Entry Strategy 5 Firms’ Choice of Entry Mode 6 Evaluation of the Mode of Entry 7 The Competitive Advantage of Nations (Porter’s Diamond) 7 Motives for the Company to Enter the Foreign Market 11 Resource Seeking 11 Market Seeking 12 Efficiency Seeking 12 Strategic Asset Seeking 13 Issues 13 Language and Culture 13 Different Financial, Taxation and Legal Systems 13 Enforcing Contracts and Protecting Intellectual Property (IP) 14 Governments in the Host Country 14 Human Resources: Recruitment, Payment and Motivation 14 Control 14 Market Knowledge and Advertising 15 Competitors and their Networks 15 Conclusion 15 Recommendations 16 References 17 Introduction With the rise in the global economy, several nations around the world have witnessed positive fluctuations in their economies, which are prominently notable among the developing nations. The reason behind the economic rise of developing nations is principally related to the increasing number of firms in such nations those are attempting to pursue a wider market by entering foreign nations. Sanpower Group Co. Ltd., is one such Chinese conglomerate firm, which has entered the foreign market through numerous acquisitions. Since its inception, the company has attempted to expand its business in the foreign markets. In this regard, the company has indulged itself into several purchases, which are evident from House of Fraser in the UK, Brookstone based in the US and Natali in Israel. Notably, Sanpower had purchased these companies, in order to acquire the foreign market and expand its existing business operations (Franco & et. al., 2008). Market Entry Strategy Companies around the world have adopted several strategies in order to access foreign markets. The commonly used market entry strategies include acquisitions, mergers and partnerships, amongst others. Formulation of a market entry strategy enables a company to access the foreign markets in a systematic manner, which further ensures that the company is able to expand its business in those markets. It is therefore considered as a planned mechanism under which, a company attempts to establish itself in foreign nations by serving the needs and requirements of the customers of foreign nations (Antell, 2012). In the current context, Sanpower has used acquisition strategy, which is regarded as one of the prominent modes of entering any foreign market. Acquisition strategy has numerous advantages while entering foreign market and establishing business operations in such locations, wherein the use of acquisition further enabled the company to minimize costs and time associated with marketing and to take an immediate hold of the market share of the acquired companies. Apart from acting as a major mode of entry, acquisition supports the company to face challenges such as market competitions, while attempting larger markets (Forbes, 2011). Firms’ Choice of Entry Mode There are a number of entry mode strategies those are used by companies to gain adequate understandings of the international business and thereby, expand it in the foreign markets. The Chinese conglomerate firm, Sanpower has specifically made use of acquisition as a tool to develop and establish its market in the foreign nations. By using the acquisition strategy, Sanpower has acquired House of Fraser, which is a retail chain based organisation in the UK. The company has also made several investments and held majority of the shares of House of Frazer, after which, the acquisition deal was finalized at £480 million (Evans, 2014). In the US, Sanpower made another major acquisition by acquiring Brookstone, wherein the bid was finalized at $173 million (Randazzo, 2014). Apart from making major acquisitions in the UK and the US, Sanpower attempted to gain market entry in Israel. In this context, Natali, a leading Healthcare Service Provider in Israel was acquired through a deal of $70 million (Kell, 2014). Sanpower had also acquired the companies established in the foreign markets through acquisition and setting up its business operations in such nations. In this context, there is a need to gain better understandings of the entry mode of the company through the support of several theories, which were implemented by Sanpower in order to achieve a substantial market share in the international business. Evaluation of the Mode of Entry There are a number of theories supportive in gaining better understandings and assessment to the various entry modes, which can be used by Sanpower in order to grab a substantial market share in foreign markets. However, as deemed suitable for this paper, Porter’s Diamond model has been selected for this paper. The Competitive Advantage of Nations (Porter’s Diamond) Michael Porter, who illuminated competitive advantages of nations as well as the firms, first introduced the theory of competitive advantage of nations. The theory of competitive advantage can be understood in terms of advantages to the nations as well as for the firms. The competitive advantage of nations herein depend upon the firm strategy, its structure and rivalry, which are apart from demand conditions as well as factor conditions. The competitive advantages gained by Sanpower, with attempts to enter the international business, can be identified as cost leadership division, market differentiation, and focused marketing strategies. The proper implementation of these would enable Sanpower to gain a hold in the foreign market operations (Lee & Lieberman, 2010.). The aforementioned theory can thus be understood with the help of Porter’s Diamond Model, which has been diagrammatized below. Figure 1: Porter’s Diamond Model with Relevance to Sanpower Factor conditions are regarded as endowment of functions. Porter has explained factor conditions as those elements necessary for the production, including basic factors as well as advanced factors. Basic factors include the natural resources, climate along with location and demography of a nation, where business operations are conducted. On the other hand, advanced factors comprise of the communication infrastructural framework and availability of skilled workers in the nation, where firms seek to establish their business operations. Moreover, it also includes the technical expertise and research facilities in the nations, where the company operates (Smit, 2010). In relation to Sanpower, the company has acquired House of Fraser, which was considered as a major retail chain organisation in the UK (The Sanpower Group, 2012). Acquisition is also considered as the best possible mode of entering the foreign market, since the UK is a developed economy and majority of the factor conditions are stable enough to open up a new business. In the UK, there is abundance of natural resources such as mines and ores. The nation also possesses the raw materials required to manufacture essential goods. Furthermore, the acquisition ensured that Sanpower is able to secure the products and raw materials already produced by the acquired company. In addition to the above context, acquisition played a major role for Sanpower to enter the international business. The reason behind such a move was related to the basic factors of climate and locations were appropriate in the UK (The Sanpower Group, 2012). Concerning the UK, the US and Israel, acquisition enabled Sanpower to expand its business operations in these nations effectively. This is largely because these nations have a strong location settings and population demographics, wherein, a majority of the population is educated and have access to the basic amenities. Furthermore, the people of such nations have the capability to purchase the products sold by Sanpower. Apart from the basic factors, nations such as the UK, the US and Israel, also have the necessary advanced factors, which enabled Sanpower to effectively penetrate and expand in these nations. All these three nations possess quality communication as well as infrastructural facilities along with sophisticated and skilled workforce. Such factors attracted Sanpower to acquire the companies and establish its business in the foreign markets. In addition, these locations have favourable research facilities and technological advancements that enabled Sanpower to widen its existing business and exploit the favourable market conditions of such nations (Meyer & Wit, 2004). Demand Conditions is another important factor portrayed by Porter in his diamond model. The demand conditions are fuelled by the availability of large and sophisticated domestic consumer base. Moreover, there exists an emphasis upon the demand of the customers in the home nations, which act as a competitive tool for gaining competitive advantages by Sanpower. Furthermore, the characteristics of the demand shapes and attributes of the products made domestically led to the expansion of business owing to the demand of the customers. In the current context, the availability of sophisticated customers, who are willing to purchase retail store products are attracted to the attention of Sanpower and hence, play a major role in the acquisition of companies in foreign markets. Furthermore, increased demand of the customers towards the latest products and their willingness to purchase new products attracted the attention of Sanpower as well. This is also considered as another potential reason behind the acquisition of foreign companies (Harzing, 2001). Related and Supporting industries are another factor of Porter’s diamond model, which focuses on the fact that the emergence of a particular industry plays a key role in enhancing the customer demands and development of local suppliers. The concept of relating and supporting industries is also influenced by the presence of internationally competitive suppliers and similar industries. Conceptually, the successfully established industries are subsequently grouped into similar segments, which are then categorized as related industries. In this context, Sanpower has focussed on acquisition, since in nations, where Sanpower has acquired companies have a presence of internationally competitive suppliers. These suppliers take considerable steps towards the development of national economy and the society. Availability of suppliers for providing required goods and services is an important reason behind the acquisition of foreign companies by Sanpower and thereby, gaining competitive advantages (Forbes, 2011). Firms Strategy, Structure and Rivalry is another factor in Diamond model, which focuses on the business environment and attempts to correlate the domestic market with that of the international market. Notably, the domestic environment wherein the firm competes, decides its ability to compete in the foreign markets. Several nations are thus categorized based on their own management ideologies, which enables the company to ensure that it is able to exploit the available resources effectively. Moreover, the strong bonding amongst the domestic rivalries, apart from the establishment and persistence of competitive advantage within an industry, induces the firms to generate new ideas for improving the overall efficiency. This encourages the manufacturing of new products, make investments, cost reductions and improvement of quality standards. This can further be associated with Sanpower, which has established a strong business within its domestic environment. This shapes the ability of Sanpower to compete in the international market and capture a larger market share. In addition, Sanpower has also focused upon refining management ideologies of the nations, where it has attempted to achieve market share and has made acquisitions. This led to the increase in the competitive advantages of the industry, and has largely encouraged Sanpower to strive towards innovation, and quality improvement in the foreign markets. Moreover, with the help of its past knowledge, the company has gained competitive advantages in its home market, i.e., China. Hence, firms’ structure, strategy and rivalry must be considered as another important factor, liable as the reason behind Sanpower adopting the strategy of acquisition as an entry mode in order to access to the foreign markets (Smit, 2010). Motives for the Company to Enter the Foreign Market Resource Seeking Resource seeking refers to a company’s search for resources in the foreign nations, where it seeks to establish its business operations. One of the motives behind Sanpower’s acquisition of foreign companies in markets of the US, the UK and Israel, is the wide and easy availability of required resources in these nations. Sanpower, owing to its business expansion, attempted to manipulate the available human resources such as skilled labour in the foreign nations. In addition, Sanpower also took steps to reduce its costs associated with conducting business in foreign nations (Cho & Moon, 2000). Market Seeking Market Seeking is another decisive reason behind Sanpower attempting international markets. The reason behind market seeking is thus to exploit the available opportunities in foreign nations and gain substantial market share in those nations. In addition, Sanpower was engaged in market seeking, owing to the establishment of production facilities in the foreign market. It also has the objective of manufacturing and selling products as per the requirements of the customers and reduce the costs involved in providing goods and services to the customers from a foreign nation. In addition, market seeking enabled Sanpower to establish a physical presence in the foreign nations and expand its business operations by eliminating competition (Chung & Smith, 2007). Efficiency Seeking Efficiency seeking refers to the organization’s requirement to enable efficiency in operations. In efficiency seeking, Sanpower has made extensive use of acquisition in order to “gain benefit of the differences in the availability and costs associated with traditional factor endowments” in the UK, the US and Israel. Furthermore, another motive of the company is to ensure efficiency and to gain benefit of the differences in consumer tastes, supply capabilities as well as economies of scales in these nations (Hubbard, 1999). Strategic Asset Seeking Strategic asset seeking is regarded as another motive of Sanpower behind its expansion in international business. Through strategic asset seeking, Sanpower attempted to gain access to the technological advancements available in the foreign markets of Israel, the UK and the US. Furthermore, the motive of seeking strategic asset ensured that Sanpower could exploit technological capabilities in developed nations, wherein, the company has made acquisitions, rather than making use of the available resources to the company (Antell, 2012). Issues Language and Culture Language and culture of the foreign nations, wherein Sanpower has intended to establish its business operations, act as a potential issue leading to losses for the company. Sanpower, prior to entering international markets through acquisitions, has considered the impact of language as a potential barrier and has ensured that business operations are performed in a manner to respect the language and cultural barriers of each of its foreign markets (Tielmann, 2010). Different Financial, Taxation and Legal Systems The different financial, taxation and legal systems of a nation is another important factor considered while entering international markets. Every nation, where Sanpower has made acquisitions, is having its own country–specific financial mechanism, apart from taxation and legal systems. Furthermore, the tax system of the US is different from that of Israel and the UK. Hence, there is a need to ensure that such policies are properly adhered by the company while expanding its business operations in the foreign markets (Porter, 2011). Enforcing Contracts and Protecting Intellectual Property (IP) Sanpower, in order to sustain in the foreign markets, must enforce the contracts and protect the Intellectual Property rights through using copyrights and patents. In addition, it must ensure that there does not exist unfair trade and violation of IP properties in relation to other firms conducting business in those nations. Moreover, it must ensure that the process of acquisition takes into consideration the proper transfer of the IP rights (Evans, 2014). Governments in the Host Country The government laws and regulations can either restrict or allow the conduct of business in foreign market. Sanpower must therefore ensure that it conducts its business operations in accordance to the government guidelines of the respective nations (Randazzo, 2014). Human Resources: Recruitment, Payment and Motivation The availability of human resources, inclusive of recruiting employees, making payments and motivating them to perform better is another issue that must be considered while entering the foreign business. Hence, Sanpower must ensure that in foreign nations, the company is able to follow the pre-determined guidelines associated with human resources (Bloomberg L.P., 2015). Control Lack of effective control is another issue for Sanpower, since it has to manage successful relationships amongst its various dimensions and the agents. It should also ensure that the demands of both the concerned parties are fulfilled, which would lead to successful expansion in the foreign business (Shenzhen Securities Information CO. LTD, n.d.). Market Knowledge and Advertising Effective knowledge of market conditions, such as inflation prices, price set by competitors, and customers’ demands amongst others, must be considered by Sanpower in order to attain success in the foreign markets. In addition, advertisement of latest products sold by the company is another critical issue to be considered by Sanpower (Clark, 2014). Competitors and their Networks Knowledge of competitors and their networks is another significant factor that must be considered by Sanpower. Analysis of the competitor prices, market share and demands, would further enable Sanpower to gain success in foreign markets (Weinreb, 2014). Conclusion The aforementioned study provides a clear understanding on the manner through which Sanpower entered the foreign market by numerous acquisitions. The company has since then made effective use of acquisitions as an entry mode to foreign markets. The overall entry mode strategy, i.e., acquisition, used by the company, was evaluated with the help of Porter’s Diamond model, which gave an analysis of the various factors that played a key role in determining the success of Sanpower in foreign nations. The company has also made effective use of resources and exploited the technological advancement occupied by foreign nations. Furthermore, Sanpower has engaged in resource and market seeking, apart from efficiency and strategic objectives, which is regarded as its principle motives behind the entering the foreign market by the company. Finally, a number of issues were drawn, which must be considered by Sanpower prior to expanding its business operations in foreign markets. Recommendations Sanpower, in order to ensure success in the US, the UK and Israeli markets, must ensure that it is able to implement and maintain adequate standards of operations. Correspondingly, Sanpower needs to have an idea of the market situation of the foreign nation where it is operating its business, particularly concerning the demands of customers. In addition, the acquisition must take place after ensuring that pertinent data has been gathered regarding the market situation and evaluation of the customer techniques has been conducted effectively. References Antell, F., 2012. The Strategic Decision of Foreign Market Entry by Service Firms, Foreign Market Entry, pp. 1-73. Bloomberg L.P., 2015. Company Overview. Company Overview of Sanpower Group Co., Ltd. [Online] Available at: http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=32680604 [Accessed April 10, 2015]. Cho, D. & Moon, H., 2000. From Adam Smith to Michael Porter: Evolution of Competitiveness Theory. World Scientific. Chung, M. & Smith, W., 2007. 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