Marketing homework help
Sample Assignment # 2
Sheridan College
BUSM30002D
Contents
Xxxxxxxxxx and China: Mode of Entry. Error! Bookmark not defined.
Porter’s Five Forces Analysis. 4
Threat of Potential Entrants. 6
Summary of Five Force Analysis. 7
Initial Cost of Capital Investment 9
Potential Market Penetration. 9
Ease of Entry into Industry. 9
After utilizing the PEST (EL) analytical model to select China as the next destination for Xxxxxxxxxx to expand, the next logical step is to decide upon which modes of entry would be most appropriate. This report will discuss the timing and scale of the entry as well as identify and examine the appropriate strategy in the approach to which Xxxxxxxxxx will move into the country in question.
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This report will do a comprehensive analysis to determine the appropriate mode of entries that Xxxxxxxxxx should consider when expanding into their new location in China. A key benefit that Xxxxxxxxxx is the fact as a first mover in their industry they hold and advantage due to their ability to pre-empt rivals by establishing a strong brand as well as their ability to build up sales volume ahead of any potential rivals and gain a cost advantage over any future entrants. Marketing homework help
The analysis will be based on Porter’s five forces analytical model which takes into account; threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threats of substitutes and potential rivalries among existing companies. This analysis provides all the information needed to select the criteria for the decision matrix which in turn will provide a recommendation amongst the modes of entry under consideration.
By using the decision matrix with the criteria set out by the analysis, this report recommends that Xxxxxxxxxx use the Joint Venture mode of entry. Although Joint Ventures are rather costly, it would allow for Xxxxxxxxxx to attain the benefits that would be associated with pairing with a company that has already established themselves in the country. While joint ventures may require a lot of starting capital, the potential benefits would more than outweigh the costs.
Porter’s Five Forces Analysis
In order to properly analyse the industry that Xxxxxxxxxx will be entering, we will conduct an analysis based on Porter’s five forces analytical model. By using this model we can better understand the buyer power, supplier power, threat of potential entrants, threat of substitutes, and industry rivalry; with this information, we can better form appropriate criteria for our specific modes of entry into the Chinese market.
It is important to note that industry rivalry has been modified for Xxxxxxxxxx in relation to their entry because of the relatively new market segment Xxxxxxxxxx is taking part in.
Buyer Power
In determining the bargaining power of buyers within the industry, one must look into several factors including the size of the buyers, nature of the industry, number of suppliers in relation to buyers, the types of buyers (B-B or B-C), size of transactions, and the current regulations in place impacting the buyers. Each of these forces in turn will highlight the “buyer’s” role in determining the prices of our products and determining our product quality expectations. (Chen, Zhao, Lewis, & Squire, 2016)
Xxxxxxxxxx’s current product line will aim to target the construction and infrastructure firms currently within China, which would be an entirely B-B based model. Since the government of china has a strong foothold in most of the construction firms in china (SASAC, 2016), it shows that the magnitude of the construction firms within china are massive undertakings. It would also be expected that with the magnitude of the construction business, that the expected size of transactions will also be large in scale in order to meet the expected demand for the product. Since the firms are controlled by the government, it is also expected that there will be an overall preference for Chinese firms to source their products from a Chinese based company. This however may not be an option given the nature and differentiation of Xxxxxxxxxx’s product line. It is also important to note that the ratio of buyers to suppliers of these kind of products is heavily stacked in the number of buyers comparatively.Marketing homework help
All of these factors tend to lean the bargaining power in favour of the buyers. With higher buyer bargaining power evident, this industry becomes less attractive for entrants (Wilkinson, 2015a), and also allows for the buyer to make a larger impact when determining the prices of our products and determining our product quality expectations.
Supplier Power
In determining the bargaining power of the suppliers within the industry, one must look into several factors including whether the suppliers are domestic or international, size of the suppliers, nature of the industry, number of suppliers in relation to buyers, size and frequency of transactions, and the current regulations in place impacting the suppliers. Each of these forces in turn will highlight the “supplier’s” role in influencing the quality, price, and availability of the input materials needed for our industry.
Xxxxxxxxxx’s primary supplier needs will likely be satisfied by China’s recycling industry. As most of Xxxxxxxxxx’s products are manufactured in and upcycling process using hard to recycle post-consumer waste-plastics. With China’s overabundance of post-consumer waste plastics available, with regulations even being put in place to reduce the waste plastics coming into the country (Tremblay & Tullo, 2018), there will be no need to source any of the raw materials internationally. Xxxxxxxxxx will likely work with any of the large conglomerate recycling firms, such as China Recycling Development Co. Similarly to the buyer power analysis, the size of the supplier firms far exceed that of Xxxxxxxxxx themselves. However, the size and frequency of purchase from said suppliers will entirely rely on the demand that we receive for our own product line. The overall culture change in the country for creating a more circular will also benefit Xxxxxxxxxx.
All of these factors tend to lean the bargaining power away from the suppliers and into the hand of Xxxxxxxxxx. This will in turn, give Xxxxxxxxxx the upper hand when sourcing their raw materials, as well as ensure a constant and steady flow of raw materials.
Threat of Substitutes
In determining the potential threat of substitute products or services, it will be important to take into account the current Substitutes already present within the market. We must gain an understanding of the possible effects that switching costs, product price, product quality, product performance, and overall availability of substitutes in determining the risk of market displacement by existing or potential substitutes in the industry.
The major substitutes for the industry are the pre-existing asphalt, shingle, and construction technologies currently in place. It will be important to be able to convince the businesses of the possible value that Xxxxxxxxxx’s product offers. Xxxxxxxxxx does not directly compete with construction firms, rather it provides a product that can be used as an additive in the manufacturing of construction firms’ products. This means that there may be some switching costs associated with construction firms adopted our product and working them into their product lines. This deterrent will hopefully seem negligible compared to the potential gains that our in terms of pricing, quality, and performance.
An example of this can be seen with xxxxxxx Roofing, where with the use of Xxxxxxxxxx’s products, they were able to effective create a lineup of high-performance roofing tiles (Xxxxx, 2017) which contain properties that improve performance, while simultaneously making product application easier and more cost effective (Xxxxx, 2018).
With this information in mind, the threat of substitutes only seems to become an issue with the primary switching costs from currently used products, but with the introduction of our product line into the market, we can focus promoting the benefits that switching to our products will bring.
Industry Rivalry
In determining the rivalry amongst existing competitors within the industry, one must first gather information about the existing competitors within the industry. This information will take into account all of the competitors characteristics such as market share, consumer loyalty, comparative advantages or disadvantages in order to better understand the intensity of the competition within the industry.
Due to Xxxxxxxxxx being a first mover into the industry in China there are no direct rivals for them to be wary of; rather the main pressures of rivalry would come from those companies that offer alternatives to the high grade synthetic polymer additives that Xxxxxxxxxx currently produces. Another advantage that Xxxxxxxxxx would have due to the lack of direct rivalry is their ability to pre-empt rivals by establishing a strong market presence before any future entrants come in. Furthermore Xxxxxxxxxx would be able to build up sales volume and customer loyalty at a steady pace with no outside pressures coming from any direct competitors as there would not be any companies vying for the same market share; this would allow them to attain an early cost advantage over any later entrants as well as create switching costs that would deter any present customers from switching over to any later entrants.
Due to the lack of Direct Industry Rivals, Xxxxxxxxxx looks to have ample opportunities to establish themselves in a relatively infant market. With less focus needed to secure their position in the market Xxxxxxxxxx should be able to focus their capital on other areas in expansion.
Threat of Potential Entrants
Since economic reforms began in China in 1978, there has been a real transformation of the economic system in the country, due to its progressive liberalisation and the opening towards foreign markets (Fung, Iizaka, & Tong, 2008). In determining the threat of new entrants into the industry, one must first determine whether our company will be an early or late entrant into the industry. In the process we will understand the amount of current entry barriers that are established within the industry. To successfully enter into the Chinese market, foreign SMEs are compelled to find an intermediary either from the home country or in the market who may help them to find a way to deal with the paradoxes and dilemmas associated with operating in new business networks, and overcome network entry barriers (Gao et al., 2012.)Moreover, this information will help to determine the level of which companies in the industry can benefit from economies of scale, use of proprietary technology, and product differentiation. Each of these factors will help to determine the change in capacity, pricing, and profitability for the industry. (Wilkinson, 2015)
Since Xxxxxxxxxx is a relatively early entrant into the market segment, not many industry barriers have been set up by competition. This means that there is a huge amount of market share and potential profits to be gained by anyone who makes their way into this market segment. With the use of Xxxxxxxxxx’s proprietary technology, we can establish ourselves as a competitive and cost-effective brand name product that companies can trust and rely on, potentially reducing the threat of future entrants. With early entrant advantage, we can also reap the benefits of economies of scale by gaining an advantage with improving our efficiency, and making it more difficult for future competitors to replicate the process.
Overall the current threat of entry is high in the market segment. However, with the right steps taken, Xxxxxxxxxx can effectively reduce the threat of new entrants into the market by focusing on ways to make it more difficult for future competition. However, being one of the first entrants into the industry with a brand new technology developed within Canada, it will be important to regard the level at which entrants are able to duplicate or replicate our patented product.
Summary of Five Force Analysis
The fact that the ratio of buyers to suppliers of the products that Xxxxxxxxxx offers is disproportionately stacking in favour of the buyers a significant portion of the bargaining power in China resides with the Buyers. This would signify that this industry would be less enticing for future entrants as it allows for the buyers to have more leverage in negotiations regarding the product.
With China’s overabundance of post-consumer waste plastics, as well as the recent focus being placed by the government to reduce the waste plastics will no shortage of materials needed to make the synthetic polymers that Xxxxxxxxxx is focusing on. Coinciding with the Buyer analysis, much of the bargaining power lies away from suppliers which in turn works out well for Xxxxxxxxxx as when they are obtaining the waste plastics they will be in a favourable position.
The primary substitutes to the polymers that Xxxxxxxxxx produces are the pre-existing asphalt, shingle technologies that are currently commonplace in the world. Although there may be some switching costs associated to moving over to Xxxxxxxxxx the potential savings that come with the polymers; such as lower price, higher quality, would no doubt be render those costs negligible. Although the aforementioned asphalt and shingle technologies pose as substitutes they cannot be considered direct alternatives to Xxxxxxxxxx’s synthetic polymer additives as they are entirely a different substance. This should give Xxxxxxxxxx an advantage as they would be able to establish a strong market presence prior to future entrants. Although the current threat of entry is relatively high in this market, with the right measures taken, Xxxxxxxxxx can effectively reduce the damage a new entrant can do by focusing on ways to make it more difficult for them when they enter.
With these five forces in mind, Xxxxxxxxxx should focus on a smaller scale of expansion to start off and make a gradual growth once a steady platform is formed. The modes of Entries they would focus on would center on those of a small scale as to keep it to a cost effective scope. They should also focus on options that allow them to have total or a majority control over all of the technology as although China’s Intellectual Property protection has always been a strength (Li & Yu, 2014) Xxxxxxxxxx should try to stay in complete control of as much as possible as expanding internationally is always volatile, yet still allowing for them to capture a decent amount of market share to make the entry into China worth the expense.
Modes of Entry
There will never be a perfect approach to enter into an industry because each mode of entry boasts both advantages and disadvantages within their specific implementations. What we will attempt to do is generate four unique modes of entry that will tackle the entry into china from different angles.
Wholly owned Subsidiary
A wholly owned subsidiary entry can allow for Xxxxxxxxxx to maintain a high level of managerial control, and will also allow for increased flexibility in business decisions as they will not have to rely on the input of a second party (Hedley, 2018). When profits are made, those profits can then be converted into CAD and used to help fund expansion in Canada and vice-versa. There will also be the chance to better protect Xxxxxxxxxx’s current IP. However, the initial capital investment of this type of venture is very high, especially in relation to Xxxxxxxxxx’s overall available capital. We also will not benefit from having partners within the industry who can aid in the growth of Xxxxxxxxxx with industry knowledge and potential funding.
Joint Venture
A joint venture entry into china can allow for Xxxxxxxxxx to reap the benefits associated with having the industry experience and extra capital that a china based company would be willing to offer. One potential partner for Xxxxxxxxxx would be China Recycling Development Co. with this partnership, Xxxxxxxxxx will be able have a steady stream of resources to manufacture their goods, while keeping their options open for more businesses to buy products from them. The downsides however, would be that Xxxxxxxxxx would have less managerial control and would risks losing their IP to the company that join ventures with.
Representative Office
By far the least initial upfront costs for the modes of entry, a Representative office would allow for Xxxxxxxxxx to gain relevant industry knowledge and experience, while maintaining complete control over the business functioning’s in china and over their IP(Gong Shang Wai Qi, 2018). The downside of this option is that a Representative office would become solely a cost center for Xxxxxxxxxx, and does not allow for as early of an entry into the market.
Upstream Hybrid Strategy
The upstream hybrid strategy is unique in the way it attempts to enter the industry. By joining the industry as a wholly owned subsidiary, which purpose is to purchase and export post-consumer waste products back to Canada, the hybrid would allow for Xxxxxxxxxx to start generating revenue to cover the upfront costs that WOS’s have. Then Xxxxxxxxxx can conduct market research within the industry and determine the appropriate time to start implementing wholly owned subsidiary approach with this extra industry knowledge. This strategy however would end up costing Xxxxxxxxxx a huge amount of up front capital as well as more down the line when business change occurs.
Decision Criteria
Now that each mode of entry has been established, it makes sense to weigh each alternative against specific criteria in order to measure their validity ad determine if they are the best option for Xxxxxxxxxx to take.
Initial Cost of Capital Investment
This Criterion is important because it focuses on Xxxxxxxxxx total fiscal ability when pursuing each of the modes of entry. Xxxxxxxxxx is still a relatively small company attempting to join a huge market. Therefore we have given this criterion a weighting of 35% because we don’t want Xxxxxxxxxx to spread its funding too thin, possibly risking venture both in Canada and China.
Ability to protect IP
This Criterion aims to evaluate the level to which Xxxxxxxxxx can protect their IP when entering into China. Xxxxxxxxxx Product line is unique and patented in Canada, for good reason. Therefore, we have given this criterion a weighting of 25% because any attempt to protect our IP will benefit Xxxxxxxxxx’s ability to differentiate themselves in the industry.
Potential Market Penetration
This Criterion looks at the potential that each mode of entry has for penetrating the market. An early and encompassing grasp of the market can help to solidify Xxxxxxxxxx’s presence within the industry and allow for them to begin putting up barriers for other competitors to enter the industry. This criterion has been given a weighting of 25% because of the long term benefits that market penetration will have on Xxxxxxxxxx.
Ease of Entry into Industry
This Criterion looks at the level of barriers that Xxxxxxxxxx will have to face if they proceed with that specific mode of entry. Any barrier to entry will increase costs and lead-times for the entry into China. Therefore, we have given this criterion a weighting of 15% because we need to ensure the efficiency of our approach into China.
Decision Matrix
| Decision Matrix (1 = low impact in favor, 5 = high impact in favor) | |||||
| Modes of Entry | |||||
|
Decision Criteria |
Weight |
Wholly Foreign Owned Enterprise |
Joint Venture
|
Representative Office
|
Upstream Hybrid Strategy
|
| Initial Cost of Capital Investment |
35% |
2(0.7)
High initial costs associated with creating the proper infrastructure and offices, etc. |
5(1.4)
This option is most favorable in terms of upfront costs due to the fiscal assistance that a joint venture brings. |
4(1.4)
A representative office is a low upfront cost option because very little infrastructure is needed for this entry. |
1(0.35)
Highest initial costs, associated with creating the proper infrastructure and offices, supply chain development etc. |
| Potential Market Penetration
|
25% |
3(0.75)
Allows for the penetration of the market, however does not have the knowledge and expertise of existing industry members. |
4(1)
With the industry knowledge and expertise, Xxxxxxxxxx can acquire market share more swiftly and effectively. |
1(0.25)
With this option, Xxxxxxxxxx cannot gain any market share until they decide to move the full business into China. |
2(0.5)
This option allows for the creation of industry connections but still fails to penetrate core market. |
| Ability to Protect IP
|
25% |
4(1)
The IP will be effectively protected because they won’t have to disclose any of their practices with joint venture companies. |
2(0.5)
Xxxxxxxxxx’s IP is at risk because of the joint venture, however steps can be taken to help further protect IP. |
5(1.25)
Xxxxxxxxxx will be able to protect their IP the most with this alternative because there is no way for the industry to access that information. |
4(1)
The IP will be effectively protected because they won’t have to disclose any of their practices with joint venture companies. |
| Ease of Entry into Industry
|
15% |
3(0.45)
It is harder to establish a firm in a new industry in China when not participating in a joint venture. |
4(0.6)
China is much more willing to accept market entry when foreign companies enter into a joint venture with local firms. |
4(0.6)
A Rep office is an easier way to enter into china because less steps need to be taken in order to establish them, as well as less red tape. |
3(0.45)
It is harder to establish a firm in a new industry in China when not participating in a joint venture. |
| Total | 100% | 2.9/5 | 3.85/5 | 3.5/5 | 2.3/5 |
Recommendation
Based on the analysis done on each of the modes of entry, a joint venture seems to be the most viable option for Xxxxxxxxxx when entering into the Chinese market. The reasons for this is that it aligns most with the decision criteria put forth.
Xxxxxxxxxx is still a relatively small company, and cannot risk spreading itself too thin by entering China’s market alone. Subsequently, the benefits that come with entering into a joint venture, which include an increase in the potential to penetrate the market as well as reducing the number of barriers that that have to face, seem to outweigh the potential risks of IP.
China is a massive growing industry that is daunting to trek for any business wishing to enter into its markets. As a Western based organization, Xxxxxxxxxx will be on the forefront of innovation within China’s upcycling and infrastructure industries.
Implementation Plan
A proper implementation plan must be outlined in order to better attack this market, and maximize potential gains while reducing potential risks. This outline will include recommendations for pursuing this current mode of entry; including the timing, scale, and human resource strategy.
Timing
Since Xxxxxxxxxx will be primarily an early entrant into the industry it will benefit from a lot of the advantages of an early mover, such as low level of competition. However, with this in mind, through the implementation of this mode of entry, Xxxxxxxxxx should do its best to decrease the risk of other entrants into the industry by focusing on properly establishing their name and brand presence. This alongside a focus on increasing their economies of scale will help to ensure that Xxxxxxxxxx can prosper even when new entrants decide to enter into the industry with a similar product.
Scale
The scale to which Xxxxxxxxxx will enter the industry is heavily reliant on their size as a company as well as their dependence on the joint venture. Since we can rely somewhat on our joint venture company, we will attempt to function at least at the same scale of which we manage our Canadian operations. As the business grows and gains popularity, Xxxxxxxxxx China division will expand with demand.
Human Resource Strategy
Xxxxxxxxxx will focus mainly on a “Polycentric” human resource strategy in order to reduce costs associated with bring large amount of staff into China and training them to function within China’s unique market. Another benefit will be that they can rely on the staff hired in China to already understand the regular business practices completed in China.
References
Chen, J., Zhao, X., Lewis, M., & Squire, B. (2016). A Multi-Method Investigation of Buyer Power and Supplier Motivation to Share Knowledge. Production and Operations Management, 25(3), 417–431. https://doi.org/10.1111/poms.12421
Fung, K. C., Iizaka, H., & Tong, S. Y. (2008). Foreign direct investment in China: Policy, recent trend and impact. Global Economic Review, 33(2), 99–130. https://doi.org/10.1080/12265080408449850
Gao, H., Knight, J.G., Yang, Z. and Ballantyne, D. (2014), “Toward a gatekeeping perspective of
insider-outsider relationship development in China”, Journal of World Business, 49 (3), pp. 312-320.
Gong Shang Wai Qi. (2018). Representative Office registration in China. Retrieved from http://www.pathtochina.com/reg_ro.htm
Hedley, M. (2018). Entering Chinese Business-to-Business Markets : The Challenges & Opportunities. B2B Iternational, 14.
Li, W., & Yu, X. (2014). China ’ s intellectual property protection strength and its evaluation – based on the accession to TRIPS Agreement ( Agreement On Trade-related Aspects of Intellectual Property Rights ), 1–14.
Tremblay, J.-F., & Tullo, A. (2018). China restricts imports of plastic trash. C&EN Global Enterprise, 96(2), 3–3. https://doi.org/10.1021/cen-09602-notw1
Wilkinson, J. (2015a). Buyer Power – Determining Factors: Buyer Power Analysis. Retrieved from https://strategiccfo.com/buyer-bargaining-power-one-of-porters-five-forces/
Wilkinson, J. (2015b). Threat of New Entrants Defini on Threat of New Entrants Explanation. Retrieved April 7, 2018, from https://strategiccfo.com/threat-of-new-entrants-one-of-porters-five-forces/
List of Central SOEs. Official website of SASAC (in Chinese). 20 December 2016.
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