International Business Strategy: Midea - Essay Example

International Business Strategy: Midea Case Study This paper addresses three issues regarding Midea based on the case materials (IBS, 2000 first, its strengths and weaknesses relative to domestic and multinational competitors; second, to assess the relative attractiveness of the domestic and international markets for air conditioners, with a recommendation on whether Midea should focus on defending its local market or expanding into international markets; and third, what Midea’s international strategy should be if it decides to expand abroad. Strengths and Weaknesses The first step towards crafting any organisational strategy is to conduct an internal assessment, looking at Midea’s strengths and weaknesses, because this allows the firm to build on strengths as a source of competitive advantage over rivals. This includes finding out its weaknesses so these could be remedied or, if not, to see how their negative effects could be minimised, building up on strengths to do so to prevent these weaknesses from becoming an obstacle in achieving its plans. The following are Midea’s organisational strengths: 1. Management competence and quality. This assumes that the company enjoys good governance, which means the Board and management are after maximising long-term shareholder value. An evidence of this is the 1997 reorganisation of Midea into SBUs. 2. Enjoys leadership in growing domestic markets for air conditioners (Midea is number two), and is amongst the biggest manufacturers of fans and compressors in the world. 3. Export experience through international distributors. 4. Well-recognised and trusted brand in domestic markets. 5. High product quality image, not only in China but in Europe, North America, and Southeast Asia. 6. Publicly-listed business enterprise, and therefore more financially flexible. 7. Established national sales and service distribution network. 8. Integrated manufacturing and design capabilities with a network of R&D centres. 9. Profitable and generates cash that can be used to generate future growth. 10. Efficient in operations, cost management, and achieves scale economies. 11. Diversified product range from fans to air conditioners and other white goods. 12. Cost leadership compared to other domestic and international brands. The following are Midea’s weaknesses: 1. Innovative capacity for its products is not geared for foreign markets. 2. Low budgets for advertising and marketing, especially in major cities in China. 3. Lack of managerial talent with experience in international markets. 4. Absence of a strong international brand image. 5. Absence of an international marketing strategy. 6. Image as manufacturer of high-priced, low-cost, and low-margin products. 7. Absence of deep relationships with mass marketers in big markets like America. 8. High inventory (over RMB 1.17 billion) and receivables (more than RMB 1.09 billion) ties up cash that can be used for operational and strategic initiatives. Attack, Defend or Both? Midea executives Chen and Wang have realised the need to defend their strong domestic market position, whilst at the same time seeing the need to craft a strategy that would address its concern to go global. What made them decide could only be the result of an external assessment of opportunities and threats facing the company. These are factors outside the firm – competitors, customers, economic and social climate, international factors such as WTO membership, technology – that impact Midea’s business. Like any other firm in a free market economy, much less one that is globalising fast such as China’s, Midea is not assured of permanent success. Unless it adjusts to these external factors by building up on strengths to overcome weaknesses, taking advantage of realistic opportunities, and protecting itself from threats, Midea will lose in a competitive marketplace. What opportunities are attractive for Midea? 1. Fast growth in domestic and international (Asia and America) markets for its products. China’s economy is booming, whilst other developed markets are increasing their demand for home appliances. 2. China’s membership in the WTO (also a threat) which opens the world to goods and services from China. This allows China to access more markets especially in developing countries where its low-cost products have a competitive advantage. 3. Access to foreign capital: if Midea decides to expand internationally, it will have access to new sources of financial capital that it can use to expand its production base and its marketing and sales distribution networks. 4. Several small appliance manufacturers in China and the interest of foreign competitors to sell to the Chinese market offer an opportunity for Midea to achieve growth and product diversification through acquisitions, mergers, or joint ventures and transfer of technology. On the other hand, there are real threats that exist: 1. China’s membership in the WTO (also an opportunity) because this opens up China to (possibly) stronger competitors from other countries. 2. Environmental standards for clean refrigerants (HCFC): unless Midea conforms to these standards, it would be forced to get out of, and would not even be allowed to enter into, developed markets such as America, Japan, or Europe. 3. Saturation and maturity of the domestic air conditioner market that would affect profits in a few years due to price erosion. 4. Strong domestic competitors and foreign multinationals that are all as hungry for growth and profits as Midea. 5. Integration of technology (such as the Internet) into appliance designs: this is a threat because unless Midea adjusts, it may not have a ready product in developed markets. Given these opportunities and threats in domestic and international markets, what options are open to Midea to maximise shareholder value by maximising turnover and profits? Sitting down and doing nothing, waiting for a competitor, either foreign or domestic, to come around and buy it, can be assumed not to be an option because it is too easy and not in line with the performance to-date of Midea’s management. Midea should do better than that! Given a domestic home air conditioner market that is estimated to grow at 30 percent over the next five years (2001-2005), and an international market growing at a yearly average of 43 percent (Asia excluding Japan growing at 169 percent, Europe at 20 percent, and America at 100 percent), Midea has growth opportunities wherever it decides to focus. However, it can enjoy the benefits of market growth only if it remains independent and develops its own sales and distribution network. As its export experience has shown, it has not been able to take advantage of the growth in international markets because it sold through importers and sold its products under different brands. On the domestic front, its lack of budgets for advertising is getting the company’s products clobbered by more established local and foreign competitors. Given that China represents the market with the greatest opportunity for sales growth, foreign competitors will surely move in, either on their own or by entering into partnerships. The best option for Midea is to take advantage of these opportunities to defend or perhaps even launch an attack on its home turf, and to use these same opportunities to expand globally. This is the most attractive, and most sensible, move for Midea to take: defend its domestic market by being more aggressive, or attacking, in the international markets. This would not happen overnight because of the company’s weaknesses, but if Midea goes about its globalisation strategy and execute its plans in a systematic manner, it can succeed in growing both domestically and internationally and end up a stronger and more profitable company. Proposed Globalisation Strategies Where should Midea start? It should start inside, of course, by consolidating its strengths in people and its products. The effectiveness of any business strategy depends on the quality of its people and its products, so unless Midea works on establishing a more solid foundation where everyone, most importantly its managers down the line in each of its SBUs, is committed to the strategy, it would not succeed. There are several issues that need to be confronted by Midea’s management, and amongst these are those in a few key areas: key global business, human resources, brand, product, and operations. Globalisation: Key Global Business Issue Midea’s key business issue that it has to resolve is how it can expand globally. The best way is to establish its presence in the shortest possible time in markets with the highest potential for growth and success: Asia and America. It can do this by aiming for differentiation in branding and innovation, using the Midea brand’s image as an innovative quality consumer product. Globalisation demands that Midea put up its own sales and distribution network in these markets and terminate its current import and dealer agreements. There are many ways of doing this, such as buying an existing household appliance distribution network, which may be cheaper than putting up their own from nothing, or buying SMC’s distribution system in the U.S. Midea could also enter into a venture with Danby. It should consider whether to buy smaller domestic competitors, buy out some foreign competitors (as had happened to Toshiba and Whirlpool), or begin negotiating joint ventures with other foreign brands wanting to enter China. If Midea succeeds in establishing a joint venture with a company with an American presence, this is a good entry point into the American market as it can include distribution agreements in the venture. Midea can start by licensing its products using its own brand name and setting up a sales subsidiary in America. This way, it can establish its presence and stay close to the market by investing in factories for assembly or storage prior to converting these facilities into production applications in the future. The closeness to American customers would give Midea’s R&D people the inputs needed to design innovative products sold under its brand. It is important that Midea sets up service facilities in America to take care of its products, consistent with the brand image they will develop. Midea’s globalisation strategy would depend on its tolerance for risk, ability to manage complexity, financial resources, and management capabilities, factors that would be determined by the type of people they already or are willing to employ. Human Resource Issues Midea’s 1997 reorganisation is a step in the right direction. By empowering its managers and holding them accountable for profitability and performance, it has set the stage in getting them more involved in the more complex challenge of globalising its operations. Chen and Wang have made the decision to defend and attack, and it can be assumed that the Board has also approved this, so they should get the commitment of other managers to put this decision into practice. The next step should be to get these managers involved in the strategic planning process. The results of the internal and external assessment should be made known to them so they could reflect on whether these apply to their SBUs and functions, and for each one to begin thinking what should be done strategically. Perhaps, some SBUs have strengths or weaknesses that were not known publicly, so bringing these out into the open would be very helpful. Then, the basic strategic issues – brand strengthening, product innovations, financial stability and flexibility, potential people problems, etc. –must be communicated to these managers, so that they can help in the strategic planning process. The whole company must begin searching for people inside or outside who can be trained or promoted to occupy key international positions. Since training and exposure takes time, this has to be done quickly so that when Midea decides to attack international markets, it would have trusted and competent people in place to execute the plans. It can hire overseas Chinese or buy a small company to help supply the expertise in international marketing. Lastly, managers can be motivated to perform beyond the ordinary by giving them a stake in the company through stock options or performance incentives. Midea has the ownership and financial flexibility to do this, so top management has to decide beforehand the share of the company that it can allow its managers to own. Global Brand Issues Midea has to develop a brand image that is domestically and internationally consistent. Whilst it is well-known in China and parts of Asia as a highly-priced and by extension a quality brand, it is virtually unknown anywhere else. Midea’s brand strategy has to be consistent with its business strategy of establishing a presence in America, Asia, and Europe. One of its initial tasks is to define its brand perception in these markets and develop a brand proposition consistent with the marketing environment. One decision Midea must make is whether to gamble by using its brand name or to use another brand name whilst establishing its global presence. Either option has costs and risks and benefits, which it may not be able to afford. Among the costs is the probability of failure, from which recovery may be difficult, if not impossible. On the other hand, launching a separate brand may be too expensive given its present resources. This is a tough decision, but it has to be made now. If management is confident that it has enough resources to succeed, and that failure is not an option and its appetite for risk is high, then by all means it should be ready to launch the Midea brand as an innovative consumer brand. Should Midea have sufficient resources, it should be able to draft and execute strategies for endorsements, product placements, marketing campaigns, and sponsorships in global events that would give the brand a high level of recognition. As a suggestion, it must decide whether its brand is pronounced “My Dear” or “My Idea” and then design a campaign around it, using well-known celebrities to associate with the brand. Product Issues Its strength in innovation can be leveraged and extended to other products for global markets. This is the main reason Midea must establish its presence in these markets so it could capture consumer needs and wants, and then design products that meet those needs. Other Operational Issues Two important issues are supply chain management (SCM) and financial management. Midea has built-in advantages, such as its low-cost manufacturing base in China and other parts of Asia, and its innovative capability to develop products. It should exploit these to the fullest by adopting world-class SCM systems. Lastly, its financial management has to improve to provide it the resources needed to pursue its globalisation strategy. It must clean up its balance sheet and explore global financial markets and learn how to tap these sources of capital so it would be able to execute its plans without running short of cash. Concluding Notes Midea is in a position to pursue a globalisation strategy because it has developed strong brand and innovative capabilities in a growing domestic market where it is one of the leaders. Given these basic strengths, if Midea addresses key issues related to human resources, marketing and distribution, brand and product positioning, and in its operations, it can overcome its weaknesses, take advantage of opportunities, and prevent or minimise the negative effects external threats as it transforms itself into a high-growth, profitable, innovative, and well-known global player in the industry. Bibliography Dawar, N. and Yuan, P. (2000) Midea: Globalization challenge for a leading Chinese home appliance manufacturer. Richard Ivey School of Business Case No. 9B00A031. Eiteman, D.K., Stonehill, A.I., and Moffett, M.H. (2004) Multinational business finance, 10th ed. New York: Addison-Wesley. Hill, C. (2006) International business: Competing in a global market place (6th Ed.). New York: McGraw-Hill/Irwin. Porter, M.E. (1990) The competitive advantage of nations. New York: Macmillan. Schell, C. (2006) Study guide unit 1: The international business environment. Gwynned: Business and Management Education, Ltd. Schell, C. (2006) Study guide unit 2: Political and business risk. Gwynedd: Business and Management Education, Ltd. Schell, C. (2006) Study guide unit 4: Global competitive strategy. Gwynedd: Business and Management Education, Ltd. Read More