Module Code Module Leader UB Number

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XXXXXXXXX MAN4063M XXXXXXXXX June 08, 2011

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I certify that this assignment is the result of my own work and does not exceed the word count noted below. Number of Words: 2500. (Excluding Table of Content/Appendices/References, the Title page, table data and graphs, figure captions, header and footer notes)

MBA Course Work: International Marketing

UB: XXXXXXX

Table of Contents
Abbreviation ................................................................................................................................................. 3 Introduction .................................................................................................................................................. 4 Factors Influencing the Choise of Entry Mode.............................................................................................. 5 Internal Factors ......................................................................................................................................... 5 Firms Size .............................................................................................................................................. 5 International Experience ....................................................................................................................... 5 Product Complexity and Differentiation Advantage ............................................................................. 5 External Factors ........................................................................................................................................ 6 Social Cultural Distance......................................................................................................................... 6 Country Risk .......................................................................................................................................... 6 Market Size and Growth ....................................................................................................................... 7 Intensity of Comeptetion ...................................................................................................................... 7 Direct and Indirect Trade Barriers......................................................................................................... 8 Types of entry mode in International markets: ............................................................................................ 8 Exporting ................................................................................................................................................. 10 Joint Venture (JV) .................................................................................................................................... 10 Foregin Direct Investment (FDI) .............................................................................................................. 11 Reccomendation ......................................................................................................................................... 12 Reference: ................................................................................................................................................... 13

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List of Figures
Figure 1: Market Entry Mode (Source: Hollensen, 2008, pp.312) ................................................................ 9 Figure 2: Market Entry Mode (Source: Hollensen, 2008, pp.331) ................................................................ 9

List of Tables
Table 1: Market size ...................................................................................................................................... 7

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Abbreviation
VAT FMCG U.S.A CAGR FDI JV ND : : : : : : : Value Added Tax Fast Moving Consumers Goods United States of America Compound Annual gGrowth Rate Forgein Direct Investment Joint Venture No Date

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Choosing an Entry Strategy in the International Market

Considering the Internal and External Factors affecting the choice

Introduction
One of the reasons for organizations to go International is to satisfy the market needs, which transcend national boundaries and exist in many countries. Cost, which is always in the focus of organizations, is another driving force. Economies of scale deriving from sales from more than just domestic market can significantly drive down research, design, production and operation costs (Burca et al, 2004). Organizations could choose to go International to achieve economics of scales, if market regulators in domestic country, such as in the U.K, restricts a cap on market share (Soloman, 2008). Therefore, going international could sometimes be a deliberate or an emergent stratergies for organziations (Johnson et al, 2008). By having a well designed global market, a firm can achieve competative advantage through one or more factors mentioned below. (Hollensen, 2007) Efficiency: o o o By achieving economics of scales Expoliting resources of other countries Extending product life cycle

Strategic: o o First movers advantage Exchange price profitibility

Brand recognition Learning This assignment is about chosing an entry strategy for Ellas Kitchen ready to eat baby food product named Salmon Ristto into Chinese market. The assignment begins with a breif introduction stating why firms go international, followed by the factors that influence the entry strategy. The internal and

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external factors are very concisely discussed with the focus on its effects on the entry strategy. This is followed by short but critical introduction of entry strategy and its suitability for Salmon Ristto based on the Internal and external factors. Finally, one of the discussed strategy is recommended based on a qualitative judgment.

Factors Influencing the Choise of Entry Mode

A firms choice of its entry mode for a given product in a target country is an attribute of several factors. These factors can be divided into two catogeries, Internal and external factors (Hollensen, 2007).

Internal Factors
Firms Size Ellas Kitchen is the fastest growing baby food brand in the U.K. The Business was started in 2006 and in the year 2010, it has generated a turnover of 15.5 million. The aim is to achieve a turnover in the next two years. (rhamar.com, 2010) International Experience Ellas Kitchen has international operations in Norge, Sverige, United Kingdom and United States of American. The company is also planning to introduce its product range in Canada. Ellas Kitchen claims that, it uses resources of only that country in which it is operating (as established firms, FDIs), hence the product range differes between any two countries (Ella's Kitchen, 2011). This shows, Ellas Kitchen experience in building relation with its suppliers in the international market, and the growing sales in each country is the evidence for Ellas Kitchens flexibility to adapt culture. Product Complexity and Differentiation Advantage Ellas Kitchen sophisticated meal Salmon Ristto is first of its kind in the industry to produce organic baby food, with a promise of great taste to infants. The sales of this product have doubled since 2009, each year. Although the product is in the U.K market for an year, no compititor has launched similar kind

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of product yet. The Ready-To-Eat type packing is also first of its it kind in the industry and proved innovative, as it does not requires addition of milk or water.(Passport GMDI, 2011). Other internal factors such as Risk Averse, control and flexibility are discussed within type respective types of entry mode.

External Factors
Social Cultural Distance Sociocultural differences between a firms home country and its host country can create internal uncertainty for the firm, which influences the mode of entry desired by that firm (Hollensen, 2007). The countries in which Ellas Kitchen is currently operating has relatively similar life style and business practise when compared with China. It is believed that Chinese do not prefere to do business with companies that they dont know, therefore, working through an intermediary is essential. In general, Chinese are a collective society (collectivism) with a need for group affliation, be it in family or in Business (China-Language, Culture, Customs and Etiquette, ND). On the other side, Ellas Kitchen operating countries are relatively Individualistic, which if not adapted, can be a serious concern for suppliers-business relation, as well as for establishing distribution network. This implies that the pyschi socio-cultural distance between the base country (Ellas Eitchen) and China (host country) is very long. Country Risk Foreign investments have been a driving force in Chinas rapid economic growth. The Chinese government is expected to initiate measures to ensure that the country remains a favorable destination for FDI. According to the Doing Business survey undertaken by the World Bank, the processes of doing business in China have improved substantially, with the country seeing an overall improvement in the rankings. The 2010 survey showed that the number of days required to start a business in China was 38, compared to the East Asia and Pacific areas average of 39 days. The government is intending to free the

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market further and streamline investment processes to make the foregin investment climate more attractive. (Datamonitor, 2010). Market Size and Growth The Chinese baby food market generated total revenues of $109.3 million in 2009, representing a compound annual growth rate (CAGR) of 7.1% for the period spanning 2005-2009. The performance of the market is forecast to accelerate, with an anticipated CAGR of 7.2% for the five year period 20092014, which is expected to drive the market to a value of $154.6 million by the end of 2014. The Chinese baby food market grew by 2.7% in 2009 to reach a volume of 26.3 million kilograms. Baby cereals sales proved the most lucrative for the Chinese baby food market in 2009, generating total revenues of $97 million, equivalent to 88.8% of the market's overall value. In comparison, sales of baby snacks generated revenues of $8.5 million in 2009, equating to 7.8% of the market's aggregate revenues (Datamonitor, 2010).
Table 1: Market size (Source: Data Monitor)

China Baby Food Market Value: $ Million, 2005-2009 Year $ Million CNY million % Growth 2005 83.1 568.3 n/a 2006 88.9 607.9 7 2007 95.1 650.7 7 2008 101.9 697.1 7.1 2009 109.3 747.5 7.2

Intensity of Comeptetion Nestle S.A. is the leading player in the Chinese baby food market, generating 45.9% share of the market's value. H.J. Heinz Company accounts for a further 24.5% of the market. The Chinese baby food industry is highly concentrated, with leading players such as Nestle, H.J. Heinz and Hangzhou Beingmate Group. Supermarkets/hypermarkets form the most significant distribution channel in the market. Industry players are reliant on suppliers for raw materials which must be of a certain quality to ensure

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consistency in products and therefore brand loyalty. The healthy growth in the baby food market serves to entice new entrants and ease rivalry between players. (Datamonitor, 2010).

19% Nestle S.A 46% 11% Hangzhou Beingmate Group Co., Ltd Others 24% H.J. Heinz Company

Direct and Indirect Trade Barriers The impact of both direct and indirect trade barriers is likely to be a shift towards performing various functions such as sourcing, production and developing marketing tactics in the local market (Hollensen, 2007). China imposes a direct tax of 130% custom duty on imported goods, making them 2.3 (product price + 1.3 times product price) times costiler in host country than in the base country. In addition, an indirect tax of 17% as Value Added Tax (VAT), is imposed on retail purchase (China Custom Duty on Baby Food, ND).

Types of entry mode in International markets:

Depending on the international experience, organization size and motivation, an organization can choose one of the following ways to enter into International market. Exporting o o Direct Exporting Indirect Exporting

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Contract Manufacture Licencing Frinchising Joint Ventures Forgien Direct Investement

Figure 1: Market Entry Mode (Source: Hollensen, 2008, pp.312)

Figure 2: Market Entry Mode (Source: Hollensen, 2008, pp.331)

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Exporting
Exporting is a strategy in which an organization exports a product from its base country without any marketing or production in the overseas (host) country. The main advantage of exporting strategy is the ease of implementing it. Risks are minimal because the organization simply exports its excess production (Onkvisit & Shaw, 2004). This mode of entry is sutiable for organization that is rookie in the international market. A major risk in this entry mode is that, the organization has no or little control over the maketing, sales and services in the host country, which, if done with poor commitment, can jeprodize organizations reputation in the long run. In addition, such entry mode of operation can poorly funcation when the home countrys currency is strong when compared with host country. (Hollensen, 2007) Considering the concept of Relative Purchasing Powers Parity (rPPP), U.K goods look 4.2 times (on an average) costiler to Chinese consumers when compared with domesticlly produced goods (Bryant, 2008). Ellas Kitchens Salmon Ristto, if exports to chinese market through direct or indirect methods, would be priced no less than 9.66 times (4.2 (rPPP)*2.3 (tax) = 9.66) costiler than, if produced and marketed domestically. The government imposes high taxation on imported goods as an attempt to save domestic manufacturers. The Intensity of the Competition sections summaries the concentration of established firm in baby food which are domestically manufactured. It is therefore, highly unlikely for Ellas Kitchen to compete Salmon Ristto with alternate competative products, inspite the ease of implementing this strategy.

Joint Venture (JV)

Joint venture or strategic alliance is a partnership between two or more business parties. In International JV these parties could be based in different country, thereby complicating mangement of such an arrangement. A JV can be established for many reasons, few are stated below. (Hollensen, 2007) Complementry technology or managenment skills provide by invloved praties. Speed of market entry, instrumental by partner in the host country.

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Few studies have concluded that firms tend to use joint ventures when they enter markets that are characterized by high legal restrictions or high levels of investment risks. Partners commitment to a joint venture is a function of the perceived benefits (satisfaction and economic performance) of the relationship. Conflict, which can arise due to culture difference (Mathur, 2008), on the other hand, reduces efficiency and thus adversely affects satisfaction (Onkvisit & Shaw, 2004). As summaried in the Intensity of Competition, Nestle S.A accounts 46% market share followed by H.J. Heinz with 21%. It appears resonabilly good for Ellas Kitchen to collaborate with any of these two market leaders to venture into the Chinese market. Comparing the size of the these firms with Ellas Kitchen, Salmon Ristto is likely to be market with their (H.J Heinz or Nestle) brand names, however, this depends on the agreement between the two companies. Nevertheless, Ellas Ketchin could not take the full advantage of the populus economy in a joint venture. The huge large market share of Nestle and H.J Heinz (which is seen as forigen nation brands) could be an attribute of chinese consumers trustlessness in the domestic baby food manfacturers after the Melamine Scandel, which killed 13 babies and hospitalized thousands of infants across china (Ramzy & Yang, 2008). Therefore, to save the brand reputation, it is advisable for Ellas Kitchen not to associate with any other domestic organization. Finally, considering the pyschic socio-culture distance, association with Hangzhou Beingmate Group could be kept as an alternative option.

Foregin Direct Investment (FDI)

FDIs allows organizations to invest directly in host country that welcome foregin companies. Unlike JV, through FDIs organization can retain majority of shares (ownership) even upto 100%, as in countries such as in India and China. FDIs are perhaps the last step, considred by organizations after understanding the host countries market and after well established (Mathur, 2008).

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Complete ownership provides organizations very high degree of control on operational activities and the ability to know the competative environment and consumers, however, this require very high degree of comittment and high level of resources. Another disadvantage of FDIs is the danger of under valuation during dilution (high exit barriers) this can be an attribute of political, legal or economical changes. The populos economy, the size of the baby food market and the support by the chinese government favour Ellas Kitchen to introduce FDI in China. The divers climate, from tropical in the south to sub-artic in the north, favours the avaliablity of resources needed for production. The 7.6 million graduate students across various disciple and at all levels (Datamoniots, 2011) also ease the avaliability of human resources. The direct corporate tax by the Chinese government (25%) is the lowest, when compared with emerging economies such as India (34%), and Industrized nations such as U.S.A (40%), Canada (31%) and U.K (28%), making China a huge profit center by all means.

Reccomendation
Although, each entry strategy has its positives and negatives, Ellas Kitchen can choose depending on the limit of control it wish to have. By carefully considering all the external and internal factors contributing to make a choice of Entry Strategy, Foreign Direct Investment (greenfield, more precisely)is recommended for Ellas Kitchen to enter Chinese market. It should however, consider the socio-culture distance, to understand the market environment and product portfolio, which could be easily accessable in a Joint Venture, which is always an alternative option.

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Reference:
Burca, S., Fletcher, R., and Brown, L. (2004). International Marketing: An SME Perspective. Harlow: FT Prentice Hall, pp. 6 Hollensen, S. (2007). Global Marketing, 4th edition. Harlow: FT Prentice Hall. Johnson, G., Scholes, K., and Whittington, R. (2008). Exploring Corporate Strategy, 8th edition. Harlow: FT Prentice Hall. Mathur, U. C. (2008). International Marketing Management: Text and Cases. London: Sage Publications. Onkvisit, S., & Shaw, J. J. (2004). International Marketing: Analysis and Strategy, 4th edition. New York: Routledge. Soloman, J. (2008). Economic, 6th edition. Harlow: FT Prentice Hall, pp. 362

Online Reference
Bryant, C. (2008). China beats Japan in purchasing power. Available on FT.Com: http://www.ft.com/cms/s/0/a900cad8-07ef-11dd-a922-0000779fd2ac.html#axzz1OczN8aLc [Accessed on June 07, 2011] China Custom Duty on Baby Food. (n.d.). Available on ETCN: http://tariff.e-to-china.com/tariffbaby+food+po-d_3-t_1.html [Accessed on June 07, 2011] China-Language, Culture, Customs and Etiquette. (n.d.). Available on Kwintessential: http://www.kwintessential.co.uk/resources/global-etiquette/china-country-profile.html [Accessed on June 06, 2011] Ella's Kitchen. (2011, June 6). Our Story: Ella's Kitchen. http://www.ellaskitchen.co.uk/our-story/ [Accessed June 6, 2011] Available on Ella's Kitchen:

Passport GMID. (2011). Baby Food in the United Kingdom. Available on Global Market Information Database: http://www.portal.euromonitor.com/Portal/Pages/Search/SearchResultsList.aspx [Accessed on June 6, 2011] Ramzy, A., & Yang, L. (2008, Sept Tuesday). Tainted Baby Milk Scandal in China. Available on TIME: http://www.time.com/time/world/article/0,8599,1841535,00.html [Accessed on June 6, 2011] Rhamar.com (2010), Ellas Kitchen brings new category to our portfolio, Available on http://www.rhamar.com/News/tabid/67/mid/450/newsid450/46/Default.aspx [Accessed on June 08, 2011

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