Coca-Cola Entry Strategy in China - Case Study Example

International Business Management Assessment; Coca-Cola Entry Strategy in China Professor (Tutor) The Name of the School (University) The City and State Date International Business Management Assessment; Coca-Cola Entry Strategy in China Introduction Multinationals are always looking to expand to new markets through different strategies (Larimo 2007, p. 123). This is especially in terms of emerging markets and developing countries. Nonetheless, multinationals use different entry strategies in new and emerging markets such as acquisitions and mergers, joint ventures, franchising, as well as new start-ups. In this case Coca-Cola is the largest cola manufacturer and one of the largest MNCs in the world (Mok, Xiudian & Yeung 2002, p. 39). The multinational entered the Chinese market since 1979 (Mok, Xiudian & Yeung 2002, p. 39). This has allowed the company to develop its market and achieve a high market share, becoming one of the successful businesses to enter the Chinese market. The following paper aims at analyzing the foreign operations of the Coca-Cola Corporation in the Chinese market. It will focus on the entry strategies used and the reasons behind their use as well as cultural, economic, and political issues faced during its foreign operations. Entry Strategies China has the world’s largest population that has already hit the 1 billion mark. Moreover, the country has witnessed high economic growth rates over the past few decades making it a significant market with great potential for the world’s MNCs including Coca-Cola. To accomplish unparalleled market accessibility, Coca-Cola used different entry strategies over three phases on their operations in China since 1979 (Mok, Xiudian & Yeung 2002, p. 44). Between 1979 and 1984, Coca-Cola relied on franchising by selling concentrate to Chinese-owned bottling companies (Mok, Xiudian & Yeung 2002, p. 45). The Chinese local market agents in the beverage industry were full responsible for Coca-Cola’s production and distribution operations. The Chinese agents were unprincipled in running the bottling operations focusing on their bottom lines. This scenario limited Coca-Cola’s expansion in terms of market share. The second phase of the firm’s operations were between 1986 and 1982 where the company entered a joint venture by purchasing equity share in the bottling industry to minimize the influence of uncertainty and restrict the unprincipled behaviors in terms of the local partners (Mok, Xiudian & Yeung 2002, p. 45). In the third stage, from 1993 to presently Coca-Cola used joint ventures with two foreign companies in the Chinese market including Swire Group and Kerry Group through a franchise agreement. Coca-Cola strategically implemented internalized management control over the companies as well as internalized procurement relations. This enabled the company to integrate itself effectively enabling cost-reducing and revenue-enhancing benefits. Nonetheless, the entry strategy was not all that effective based on fact that most bottling companies that Coca-Cola entered into joint ventures were state-owned corporations, thus limited the ownership of assets. The main firms included Shanghai Shenmei Beverage Co. Ltd. and Shanghai Investment and Trust Company (Mok, Xiudian & Yeung 2002, p. 46). Moreover, the Chinese government continued to gain increased control over the soft drink market, by initially supporting local brands over new entrants such as Coca-Cola. Moreover, Chinese laws and policies in terms of investments were also limited in terms of protecting their local brands against MNCs such as Coca-Cola. This represents one of the main weaknesses for choosing the preferred entry strategies. Coca-Cola failed to recognize the Chinese government’s intent to protect its local brands. This can be illustrated in its recent attempt to acquire one of the Chinese beverage companies Huiyuan Juice in 2009 that was rejected by the government based on monopoly claims. The Chinese laws are a significant aspect for any businesses seeking to enter the Chinese market. For instance, Chinese laws only allow foreign companies to purchase non-majority stakes in successful companies if they have a benefit such as labor provision and revenue collection. Franchising was an appropriate entry strategy given that the Chinese government only allowed joint ventures from 1985 (Mok, Xiudian & Yeung 2002, p. 48). Moreover, the alternative for Coca-Cola was to start-up from scratch in China, which would be more costly. Franchising is an effective way of penetrating the market with effective cost-reduction and revenue-generation activities. Nonetheless, the use of franchising and joint ventures was not the best or did not lack any pitfalls. Coca-Cola initially faced high transactional expenses incurred based on the uncertainty in the new market. Moreover, the lack of control in production and distribution increased opportunistic practices from market agents .These challenges were at most the only basic areas that proved to be weaknesses in Coca-Cola’s entry strategies. However, the company quickly changed tactics by entering an agreement with the government to allow minimal control over production and distribution with market agents in China. This enabled the company to reduce its risk of direct investment (Larimo 2007, p. 144). Overall, Coca-Cola faced increased economic and political challenges that were could have been evaded, but based on these challenges, its use of the franchising and joint ventures as the appropriate strategy based on its cost-reducing and revenue-enhancing benefits. Economic, Political, and Cultural Issues One of the main cultural issues Coca-Cola has faced is in terms of the healthy drinks. Tea is the number one beverage consumed in China. The Chinese population is highly concerned about what they take, and prefer freshness and healthy products. Traditional teas are the biggest selling drinks compared to soft drinks. The company has lost market share to Chinese herbal tea producers such as Wang Lao Ji. According to Mok, Xiudian & Yeung (2002, p. 45), Sprite, which is a subsidiary of Coke, sells more than the mainstream product, which is cola. Moreover, the Chinese consumer is not loyal to one brand and often goes shopping to get out of the house, but not as a regular behavior or trend. Coca-Cola has attempted to acquire Chinese healthy food producers to address the cultural differences as they have no offering that are tailored for the Chinese market. Nonetheless, this was met with political as well as policy issues that found it to be in violation of monopoly in the attempt to acquire fresh beverages producer Huiyuan Juice. Cultural factors play a significant in determining the success of entering a new market. The cultural alignment is not only focused on the customer but also corporate culture. When using different entry strategies, there is need to marry different cultures together, which poses numerous challenges (Larimo 2007, p. 67). In this case, Coca-Cola failed to understand the Chinese consumer culture and alignment to healthier drink offerings (Mok, Xiudian & Yeung 2002, p. 50). By attempting to acquire a company offering healthy drinks, Coca-Cola failed to recognize the political and economic issues surrounding foreign entrants in the company. Nonetheless, Coca-Cola has continued to grow its brands through increased joint ventures and increased win-win strategies such as seeking management and operational control over Chinese market agents. The second main issues Coca-Cola faced is in terms of management. During the first phase of entering the Chinese market, Coca-Cola lacked any control over the production and distribution activities (Mok, Xiudian & Yeung 2002, p. 51). The company only sold concentrate to the companies that handled production and distribution. This included lack of control in making strategic decision, devising strategies, and setting targets or goals. Due to this lack of control, Coca-Cola was not able to expand at the rate they expected. Overall, they never had a sure idea or overview of the market in China in terms of operations to the consumer. The company responded by taking the step to negotiate with the government on minimal managerial and operational control over its Chinese market agents. Although this has improved, the company still lacks the needed control and most its success is due to individual determination from market agents in the Chinese market. A joint venture or franchising is made effective by the ability to have increased control over how franchises or partners conduct their operations (Larimo 2007, p. 212). Nonetheless, the case is different for China and Coca-Cola has struggled to gain increased control that has been problematic over the years. The third challenge Coca-Cola faced related to environmental or sustainability issues. China has a large population, but is faced with increased water scarcity. Sustainability has become a key driver for businesses to access social and legal legitimacy in terms of their operations. Moreover, sustainability is also tied to reducing costs an increasing competitive advantage. With the water scarcity challenge, Coca-Cola had to develop its legitimacy based on its increased use of water in its operations. The response was increased sustainability initiatives environmental and sustainability audits, training, and waste water management plants. The idea of illustrating increased sustainability and concern for the environment is an effective way of winning consumer as well as stakeholders trust (Larimo 2007, p. 155). Through this response, the company has developed its legitimacy in terms of its operations. Conclusion In conclusion, MNCs are faced with high transactional costs when entering new markets. However, there are different market entry strategies that MNCs utilize to achieve the most successful market penetration. Each market entry strategy has its pros and cons based on the difference in new markets. Companies must focus on identifying cultural, political, and economic issues that may hamper entry effectiveness and success. As illustrated in the Coca-Cola entry strategies, these issues do arise and require effective measure to address and enable increased effectiveness in penetrating in the company. Coca-Cola was able to effectively utilize joint ventures and franchising to penetrate the Chinese market illustrating positive or optimal benefits over the disadvantages. Nonetheless, the company has failed to identify the political environment and concern on the Chinese market, which has seen it focus and fail in terms of government permission, negotiation, and asset valuation. References Larimo, J 2007, Market Entry And Operational Decision Making In East-West Business Relationships, Binghamton, NY: International Business Press. 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. Appendices 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