Dick Smith Overseas Market Expansion - Case Study Example

Dick Smith Overseas Market Expansion 1. a) Analytical Introduction Dick Smith is an international retailer dealing in electronics. The company was formerly known as Dick Smith Electronics. It started in 1968 with Richard Dick Smith as the founder. It was formerly under the ownership of Woolworths Limited. Currently, it is owned by a private Equity form called Anchorage Capital Partners. This company began as a car radio installation business based in Artamaton, Sydney. Currently Dick Smith is located in the same place in Sydney but it has a number of branches in other places. b) Interact with theory, (IPLC) The products of the company will have to pass through 4 stages of marketing. These include introduction, growth, maturity and decline. Growth and introduction will however constitute one stage while the other stages become the effects of outsourcing and foreign production (Wagner 2009, 27). c) Nature of company Dick Smith is a multinational Enterprise (MNE) because it has its base in Australia but also hasother branches in foreign countries. However, its U.S branch was sold off. IB transactions, types of local firms and foreign-market-entry strategies There are many ways through which a company can gain entry into a foreign market. There is no one particular strategy that can work for all international markets. The most appropriate strategy in a certain market may be direct exporting but in another market it may be necessary to set up a joint venture and in a different market the most appropriate strategy may be licensing the manufacturing process (Pecht 2006, 19). There are factors that have influence on the choice of strategy such as tariff rate, transportation and marketing costs. Other strategies for market entry include partnering, franchising, joint ventures, purchasing a company, Greenfield investments, piggybacking and Turnkey projects. Market analysis (country and sector your business in) 1.      What market features of industry, growth and opportunities / challenges? The electronic information industry for China has grown at a rate that is three times higher than the growth rate of the GDP and has also grown at a higher rate than the metallurgy and machinery manufacturing industries. In 2005 the electronic information industry made an increase in total sales by 28.4% from 2004 to 3.8 trillion yuan. This was about US$475 billion. The Chinese electronic information industry has an added value base of approximately 900 billion yuan or US $ 112 billion (Xiaojuan, 2004, pp. 46. The industry has a value added ratio of only 23.4 percent compared to the national average of the country which is 27.1%.This shows that China is an assembly base that relies on parts and components from overseas as well as capital goods and intermediary goods from the same places. There are opportunities for investment as seen from the number of companies related to the electronic information industry which rose from 7, 500 in the year 2001 to 17,600 in the year 2003. In 2005 the number had risen to 67,000. 56,000 of these companies were manufacturing companies. The industry has been growing in the amount of employees from 3.01 million in the years 2001 to 4.08 million people in 2003 and 7.61 million employees in 2005. Of these, 5.51 million have jobs in the manufacturing industry (Xiaojuan, 2004, 67). 2.       Market Demand etc The economy of China is rapidly expanding and this means the market demand in is increasing. Therefore it has a huge demand for technology, infrastructure and resources. Business is becoming easier because most of its regions have started encouraging foreign investors to set camp in China byway of tax incentives and also by removing previous legal restrictions. The costs of labor are low throughout the year and a business can be started any time. China has good roads and buildings, communication infrastructure and power supply. 3.      GDP of country and why it present opportunities. The GDP of China grew 7.7 percent every year in the 1st quarter from about 7.9% in the fourth quarter of the years 2012. It was lower compared to what many economists had forecasted. The growth rate of the economy of China went down in the first quarter. This raised concerns that an economic recovery that began in the second half of 2012 may not continue (Xiaojuan, 2004, 76). 4. Industry Specific Restrictions The electronics industry in China is registering very fast growth. Industrial upgrading via FDI is being felt in more sectors including the electronics industry. An attractive industry should have more foreign direct investment of FDI through the removal of restrictions and prohibitive regulations. The electronics industry in China is set to have more FDI because the environment for this is becoming conducive. 5. Spiky Growth of industry opportunities The growth of the whole electronics industry means there so many opportunities being created. This type of growth means the most appropriate entry strategy should be used. The implication is that some strategies should be avoided while others are preferred over others. Sourcing for resource capital has been made easier because other industries are also churning out products (Yadong 1999, 35). 6. Outward FDI and Inward FDI trends for the country Pull factors include a ready market for products because the population of China is very high. Companies are also pulled by the need to provide a stable supply of products. Other pull factors include economic and political stability, competitiveness and the openness of China to global and regional trade. A major push factor is the rising cost of wages in China. This means companies have production costs going high all the time. Energy prices also make shipping very expensive. The problem of IP leakage is also pushing companies away. Many companies find their customers buying counterfeit products instead of the originals. 7.     Outward FDI and inward FDI trends for the country There has been a rapid growth in China’s FDI since 1992. In 1992 and 1993 there was a near double in actual investment. In the 1993 peak year there was an increased in contractual investment of nine times the amount in 1991. Starting in 1993, China became the biggest recipient of FDI in all developing countries. This rising trend dropped in 1995 but it resumes in 2000 (Xiaojuan, 2004, 83). 8.    Comparative Advantage China has a huge comparative advantage. It has land and natural resources such as minerals, water and good climate that other countries do not have. It also has the largest population in the world which provides a big market. Based on the strategic trade theory, companies in China are bound to make profits because of the interventions made by government. 9.      Oli variables for country Oli variables indicate that China’s FDI has been very high in the last more than 10 years. However, the trend of economic growth is going down and this could mean lower FDI (Xiaojuan, 2004, 56). 10.     Why international expansion? Dick Smith seeks to expand into the international market because of various purposes. The company has the need of expanding its sales and reaching a wider market. China is suitable because of the big market it will provide. The company also seeks to utilize the resources found in China. Both the natural, human and acquired resources in China will heavily benefit the company. By use of these resources it will be easier to increase the efficiency of the company. Diversification is another goal of the company. Diversification will definitely increase company profits and stability. It will largely reduce the risk of the company having to lose its capital. Diversification is a good strategy for reducing investment risks (Yadong 1999, 45). Risk minimization is possible through acquisition of more customers, access to a bigger talent pool, higher profitability and efficiency, and the creation of better products and faster iteration. International expansion also increases the potential for the growth of a company’s market size. Expanding into a new market means the company is widening its global market share. This market is bound to grow depending on how the company will do its business. International expansion for Dick Smith is bound to reduce costs for the outsourcing production of products. These include transaction costs, costs of coordination, contracting costs and the costs of research. All these costs are important in decision making. Identifying international opportunities for expansion should be based on the profitability trends of the new markets, infrastructure availability and legal restrictions to FDI. An opportunity can well be identified based on the competitiveness of a market of country (Yadong 1999, 56). Company Competency 1.      How to get economic momentum or competitive advantages The company can gain economic momentum and competitive advantages by improving the quality of its products. It can also consider giving discounts on its products so that its prices can be slightly lower than those of the other companies. The company should source for cheaper raw materials and other inputs so that its production costs can be lower. 2.      Business specific care competencies The electronics company can benefit from care competencies such as research in new products, technological improvement of existing products and proper study of the marketing trends. Proper HR and marketing skills are necessary. Research can reveal the type and quality of products that the market needs. 3.      Company weakness and liability of outsidership Dick Smith is a strong company in many areas. However the liability of outsidership is bound to affect its operations most in the area of culture. The culture that the company has been operating in is totally different from that of China. This difference in culture could be a reason for the problems that the company may face. The company must therefore seek to adjust its operations properly to fit in the Chinese culture. 4.      Dynamic capabilities development In the area of technological and entrepreneurial innovation, Dick Smith is a head. It has capable employees with the technological expertise and entrepreneurial skills needed to steer the company to greater heights. The company is also in the business of recruiting new employee with expertise in specific areas of innovation. 5.      How to acquire knowledge and utilization Knowledge is acquired through research and product development. The company has a research department in which workers seek to learn. They also collaborate with experts in the same industry but from other companies within and outside the country. Technology is easily borrowed from other countries such as the U.S and China itself. This technology must be used to produce products that suit the specific market needs of China (White 2012, 65). 6.      Building resources for IB The company must have strong links and collaboration with other players in the industry. This can enable it to build resources and pool together with its partners. 7.      Risks and process plans to manage the risks Risks include unusual attitudes from international customers, international trade negotiation risks such as conflicts and embargos, depending on one supplier, and financial risks. Management of risks should include proper study of the new market. This helps to understand customer attitudes and the quality they prefer. The company should ensure compliance with all international laws and regulations as well as international negotiations (Wagner, 2009, 12). Mode of entry 1.      Characteristics of entry mode In the licensing entry mode a foreign firm can be allowed by an international licensing agreement to manufacture the products of Dick Smith in China. This entry mode can be used when the expenses are high and the conditions of setting up a new outlet in the new market are tight. It benefits are that the company can get extra income for services and technical know how. It can also access new market not reachable through exports. It can now expand without much risk and investing a lot of capital. It also paves way for investments in the same market in the future (Pecht, 2006, 89). 2.      Suitability of entry mode to business model and Globalization strategy. Licensing is suitable to the business because the Chinese market has certain hindrances such as high capital investment and regulations or restrictions. The company also deals in products whose technology is constantly changing. Therefore it needs to test the market first. The global strategy of the company is to produce unique products that fit the taste of unique customers. Innovation is therefore the backbone of this strategy. 3.      Suitable of entry mode to host country environment a) Cultural & institution distance The culture of China is different from that of Australia and the distance is also far. Licensing will help the company to make a gradual entry with precautions being taken about the culture and institutional distance (Newman). b) Market attractiveness The market is attractive and licensing can ensure that the company starts business immediately without having to establish a new branch in the new market. b) Uncertainty of host country environment The environment of China is uncertain especially in terms of the slowing economic growth, counterfeit products and the attitude of customers. Licensing entry mode can ensure that the company learns and adapts to these challenges slowly before full operations begin. c) Legal environment of the host country (trade barriers) Although China is reducing trade barriers to international firms, the way is not fully clear. Licensing is suitable because the company will not need to content with such restrictions to its operations. It will enter indirectly through another company (Meyer and Kirby 2012). d) Competitive situation Competition can suffocate a newly established company. To avoid this, licensing should be used. It will ensure that the company grips the market with its products before it plans for full entry into the market. e) Culture of home country The culture of Australia may not be much of a hindrance to the company. However, entering the new culture will mean that the company sheds its home country culture and adopts the new one. This may need time. Licensing provides for this time allowance (Lloyd-Reason, & Sear, 2007). 4.      Building blocks of entry strategy The licensing mode of entry includes market study, agreement with licensee, agreement with government, compliance with international agreements and knowledge transfer. All these must be worked out before operations begin in the new market. 5.      Comparison & justification Licensing is better that other modes of entry because of various advantages. It is better than direct exportation because it can also for production of bigger volumes of products. Exporting such volumes is not advisable (Doole, Lowe, 2008, 34). Franchising may create competitors for the company in future that licensing cannot create. Franchises can also ruin the reputation and name of the company. A turnkey project may cause a host country to take over the project and it may also spill the secrets of the company. Licensing does not have these problems. Joint ventures may escalate cultural clashes awhile wholly owned subsidiaries may not be good when the market is uncertain (Dixon, J. & Newman, 1998, 34). 7.      Match with opportunities Licensing may have lower income, may result in loss of quality due to loss of licensee, an incompetent partner can ruin the reputation and the trademark, and the partner can also turn into a competitor. The mode of entry needs resource such as patents, managerial skills and technology. For these to be availed there must be a transfer of knowledge between the licensor and the licensee. The licensor, licensee and the host government should make honest agreements. 8.      Weakness or difficulties The licensing mode may not present any problems because the company is not going for direct ownership of an outlet in China. Working with a partner will help it evade the restrictions placed in the way of companies that want to establish new operations in China. 9.      Mode of entry matched with prerequisites of country China requires that licensing be done based on all the international agreements and the laid down rules and regulations for international businesses in the country. 10.     What type of business prospers under which type of mode of entry? Large scale manufacturing operations can prosper under wholly owned subsidiaries, turnkey projects, strategic alliance and licensing. The others such as direct exportation and franchising require smaller scale operations (Yadong 1999, pp. 56). 11.     Competitive advantage gain from certain modes of entry Licensing offers a competitive advantage because entry into the new market is quick and cheap. It also does not need a lot of bureaucracy. Other modes of entry may require a lot of expenses or they face many restrictions. 12.     Ability for transfer Transferring between modes of entry is possible. This would require that a company terminates or waits for the maturity of a particular contract signed with a partner, and engages in a new agreement or different mode of entry. Direct exportation provides the company with control on distribution activities. Franchising helps the company to incur lower costs. Turkey projects alos have lower costs (Lloyd-Reason, & Sear, 2007, 90). Develop operational strategies 1.      Organization structure The decisions of the company will be made by the CEO and the board of directors. These will do the governance. The company will have the rules by which it operates and a distribution of work. 2.      The management board will work in partnership with the heads of various departments to ensure that the company is managed in the right way. 3.      HRM Policies & Human Capital The company must develop the human resource policies for the licensee. This will ensure that there is harmony in the dealings of the two outfits. The company might also need to allow some of its employee to join the licensee in order to provide it with technological knowledge and expertise (Dunning). 4.      Supply Chain & Logistic Network Management The management of logistics and the supply chain will be under the control of the licensee. This is so because the host country is home to the licensee who happens to know it better than the licensor (Lloyd-Reason, & Sear, 2007, 87). Conclusion and exit plan Dick Smith may begin its operations in China but the company must do market research and learn the culture of the new market and all legal requirements before the implementation of its plan. China is a promising country in terms of business. Its population is very high and this provides an attractive market. After entry exiting may be easily done by selling off the assets of the company to an interested part or partner. Bibliography Dixon, J. & Newman, D. 1998. Entering the Chinese Market: The risks and Discounted Rewards. Greenwood Publishing Group. Doole, I., Lowe, R. 2008. International Marketing Strategy.  International Marketing Strategy. Analysis, Development and Implementation. Cengage Learning. Dunning. Alliance Capitalism. Lloyd-Reason, L. & Sear, L. 2007. Trading Places –SMEs in the Global Economy: A critical Research Handbook. Edward Elgar Publishing. Meyer C. and Kirby J. (2012) When the Wrong Measures of Success Drive Decisions Strengths can Mutate into Serious Liabilities. Just look at the Peacock. Harvard Business Review, January to February 2012. Newman A. International Business Theory and Practice. Pecht, M. 2006. China’s Electronics Industry: A definitive Guide for Companies. Elsevier. Wagner, T. 2009. Foreign Market Entry and Culture. GRIN Verlag. White H. 2012. The China Choice: Why America Should Share Power. Black Inc. Xiaojuan, J. 2004. FDI in China: Contributions to Growth. Nova Publishers.  Yadong L. 1999. Entry and Cooperative Strategies in International Business Expansion. Greenwood Publishing Group. Read More