Essay title - Competitive markets and international companies
Abstract
It is becoming more and more important for companies to internationalise or expand into other markets in order to remain competitive. Since many markets are almost saturated, companies are forced to seek and exploit other opportunities which are often found in Asian countries like China for example.
These countries have a huge potential for future growth, but it is difficult, however, to function in due to non-westernised business practices. So the entry mode decision must be carefully evaluated and selected.
This thesis covers the entry mode strategies of companies like Coca Cola entering into the Chinese market. The focus lies on the entry mode decision of a company at the first place, external and internal factors influencing this decision, problems facing companies to enter a new market and finally the cultural influences that affect Coca Cola when entering into the Chinese market as main topics of the dissertation.
The research objectives are related to the above mentioned topics and include the internal and external factors as well as the decision of the entry modes, the cultural influences and which strategy/entry modes were used to enter a foreign market exemplified with Coca Cola´s re-entry in China.
The main results are that Coca Cola entered China with the entry mode exporting in the beginning and then had chosen to make several joint ventures with Chinese firms as the government prevents other ways of entries because it does not want foreign companies to have the power in China or that there will be established monopolies.
The main factors influencing the decision of entry modes with the Coca Cola Company are target country environmental factors, target market country factors, target country environmental factors and target country production factors.
Finally Coca Cola had to rename the name Coca Cola to K´o K´ou K´o Le^ which is the main cultural influence that affected Coca Cola when entering into China.
1. Introduction
1.1 Research background
Since ever people have tried to occupy other countries. When the author looks at the history there were always people who wanted to enter in different markets that were not their own, the old Creeks or Romans, for example. It is obvious that also these nations entered foreign countries to take advantages of them, exploit them and made it their own. Nowadays it is comparable with the way of thinking these nations did. Especially companies enter different foreign markets as they want to take advantage of them, want to expand or just need to enter other countries in order to remain competitive. The author found it interesting to see what different entry strategies do exist and how companies translate it into action. As well the cultural influences that affect these firms are an important issue why the author has chosen this topic. Another feature was that the author was in the library and found books about Coca Cola which gave her the idea to write something about the Company Coca Cola. The author found it also very interesting how Coca Cola remains so competitive all over the world and is even more popular than its biggest rival Pepsi.
Chapter one includes the introduction and research questions and a whole description of the structure of this dissertation.
Chapter two is the literature review. The author will use secondary data and critically access information from different books, articles and Internet in order to answer the following main objectives:
(1) How do internal factors influence the different market entries, (2) How do external factors influence the different market entries, (3) Cultural influences and (4) which strategy/entry modes were used to enter a foreign market exemplified with Coca Cola´s re-entry in China. In general the author talks about the different entry modes like Joint ventures, acquisitions, exporting…etc., about market entry strategies and factors that influenced Company´s decision process about which entry mode to choose to enter foreign markets.
Chapter three is the methodology where no objectives will be answered, but the main topic which will be handled in this chapter is the research question with the conclusion that the author only uses secondary research.
The fourth chapter contains findings and analysis which describes the main findings of this dissertation and analyses it with the help of the literature review. The main findings were that Coca Cola pursuits a product adaption strategy and entered China with nonequity exporting and later on with several Joint ventures with important Chinese firms. Coca Cola had to translate its name as main cultural influence which influenced its advertising and marketing strategy a lot. There are factors that influenced Coca Cola with its decision about the adequate entry mode. These factors are already mentioned in the introduction above.
The last chapter (chapter five) gathers the conclusion as a summery of the whole thesis and limitations and further research. It includes the main results of this dissertation which will be evaluated in this chapter.
It gives ideas about how this topic could have been researched better. One idea is to implement an interview, for example.
1.2 Research questions & aims & objectives
Four main objectives will be answered, as mentioned above:
(1) How do internal factors influence the different market entries, (2) How do external factors influence the different market entries, (3) Cultural influences and (4) which strategy were used to enter a foreign market exemplified with Coca Cola´s re-entry in China. In general these objectives will be discussed firstly in the literature review and then will be analysed in chapter 4 findings and analysis in more detail with the relation to the Coca Cola Company.
2. Literature review
2.1 Introduction
Companies may enter international markets for several reasons. Some go abroad because markets at home are stagnant or foreign markets are growing faster. Or businesses may go abroad in search of greater sales volume in order to reduce the unit costs of manufacturing overheads and thereby strengthen their competitiveness at home as well as in foreign countries.
As the competition is strong and will enter the home market sooner or later no matter a company goes abroad or stays at home, it is better to look ahead and expand in other countries so that a firm can prosper in the future. Therefore they will need to design entry strategies that will make them competitive in a global economy of today and tomorrow.
Of course there are internal and external factors that influence the decision of entry mode strategies and problems that companies might face when entering another country.
The cultural difference can also be a problem but also an opportunity to take advantage of.
2.2 Market entry strategies
An entry strategy is a composite of several individual product/market plans. All markets and products are different, so managers need to plan the entry strategy for each product in each foreign market. Product/market entry strategy requires decisions on (1) the choice of a target product/market (2) the objectives and goals in the target market (3) the choice of an entry mode to penetrate the target country (4) the marketing plan to penetrate the target market and (5) the control system to monitor performance in the target market. No matter how limited company´s resources are there must be the idea of planning entry strategies. Once a plan is made the strategy to enter a foreign market is formulated.
“Entry mode is an institutional arrangement that makes possible the entry of a company´s products, technology, human skills, management or other resources into a foreign country”, Root (1994) stated.
If a company has not entered a country and the market it contains, it needs to decide on an entry mode and a marketing plan for each foreign target country. Furthermore it must be chosen a candidate product with which the company wants to enter the target country first and the target country of course. The most important question is “Which products shall we market abroad and to which markets?”
First it will be chosen a candidate product. If a firm wants to enter the market with a single product the product must have good enough prospects to warrant an investigation of foreign markets. If a company wants to enter a market with two or more products the decision must be made which product is the best one (first one) candidate for expansion abroad. The first step is product screening, which saves time and money and includes the definition of a product profile. It need to have a/an (1) ready market acceptance (2) high profit potential (3) availability from existing production facilities and a (4) suitability for marketing abroad.
Products must have certain advantages such as low price and/or distinctive features like quality, design, technical superiority.
US manufacturers do product differentiation instead of price which is the only way to achieve a competitive position in foreign markets. But the price is also important as it influences the buying decision.
The second step is the product appraisal. The competiveness at home and competitive strength and weaknesses have to be proved. Products must fullfill needs in the target country and the question is if these needs exist in the target market. If they do exist the company must have a look if its product/products meet those needs. If other needs exist the question is if these products serve these needs that do exist in foreign markets. Last but not least the competition must be analysed and questions like “How new is this product/these products to foreign markets?”, “What are our competitive advantages and disadvantages?” have to be answered.
After identifying the candidate product the target country will be selected.
First of all firms search for markets with the highest sales potential.
Figure: Model for selecting a target market
Phase one is the preliminary screening which identifies country markets because of the size which warrants further investigations.
There are two errors that have to be eliminated. The first one is the ignorance of countries which offer good prospects for a company´s generic product (more common). The second one is the investigation in countries with a poor prospects which is a waste of time and money.
To minimize the first error managers should do preliminary screening in all countries, not just in one because there are often assumptions or prejudices that rule out certain countries or regions as possible target markets. The decision of planning only markets in Europe, for example, could lead to inferior target markets.
To minimize the second error managers need to do quick and economical preliminary screening which includes the use of quantitive data from public sources.
Managers normally look for export target markets at the first sight and afterwards investment entry modes. This is a mistake as a country could offer a good market without being perfect for export entry.
Preliminary screening should identify prospective target countries without regard to entry mode.
Normally managers can choose how far to adapt a product to the foreign market. The product does not have to be adapted in all of its different dimensions (service, packaging…). It is more a question of costs and necessity of adjustment.
There are two different strategies to be followed. The product standardisation strategy conceives a global market for the product, adapts consumers and users to the company´s product, keeps down the costs of adjustment but incurs higher costs of promotion and wants national demands on the company´s product.
The product adaption strategy conceives multiple national markets, adapts a product to the preferences of each national market or national submarket and carries higher costs of adaption but incurs lower costs of promotion (informs buyers).
Some adjustment is almost always needed in one or more product dimensions.
Complete product adaption implies a different product for each individual buyer, so companies end up with a hybrid strategy (something in between) because users need and preferences are more similar across national markets for industrial products than for consumer products. Standardisation is for industrial products more common than for consumer products and on the other hand adaption is more suitable for consumer products than for industrial products. Knowledge of the foreign markets must be precise enough to indicate whether or not adaption is necessary with references to the physical, service or packaging dimensions of the product. Some adjustment is nearly always desirable, for example, printing of package material (and sales literature) in a language which is understood by every foreign buyer. The language does not have to be in the buyer´s native tongue. Three mayor languages are enough. It depends on the target country which language to choose, but English is used nearly always, Spanish or Portuguese or Italian, and an Asian language if the company want to place its products in the Asian region or a Scandinavian language if the product will be introduced in western northern Europe…etc.
Companies adapt their products to international markets to gain a desired level of buyer acceptance.
2.3 Entry modes
There are three main entry modes to enter a foreign market, which are export entry modes, contractual and investment entry modes. Export entry modes can be indirect or via a direct agent/distributor or direct branch/subsidiary. Contractual entry modes are franchising and licensing and Co- production agreements. Investment entry modes are A&M, Joint ventures and new establishments (sole venture). The differences between them are as follows. Export entry modes, for example, differ from the other two entry modes because the final product is manufactured outside the target country and exported to the target country.
Contractual entry modes differ from export modes because they are primarily vehicles for the transfer of knowledge and skills. They are distinguished from investment entry modes as there is no equity investment by the international company.
Investment entry modes involve ownership by an international company of manufacturing plants or other production units in the target country.
Entering international markets through export:
Rather minimizing international market and political risks than maximizing control over international marketing operations (situation).
Exporting will be the best entry mode for manufacturers. There are two channels the indirect and direct channel. Exporting through domestic intermediaries is called indirect export. With the indirect channel there is no incremental investment in fixed capital, low start- up costs, few risks and profit on current sales, resulting more success in foreign markets through adding products to the export line, entering new target markets and shifting to direct exporting. Managers that follow an indirect market entry strategy also need to know about the payment arrangements and documentation, but it will be made by the intermediaries, so that Managers from the domestic market just have to comprehend it.
But a company that wants active penetration of foreign markets will look to direct export channels. Direct export has higher startup costs, greater information requirements and higher risks than indirect exporting. Direct exporting has two principal channels: the foreign agent/distributor channel and the foreign branch/subsidiary channel. Direct exporting also requires that the manufacturer learn the process and documentation of export shipments and international payments arrangements (letter of credit, cash in advance… for example).
Managers need to pursuit three steps for determining the direct export channels. First, they need to decide about the performance specification. Second, the channel type must be discovered. Finally, the channel members have to be selected.
To come to the decision about the performance specification, it has to be answered questions like “What geographical market coverage do we want in the target country?”, “What physical supply services do we want from channel agencies?” according to Root (1994).
Determining the channel type, Managers need to decide between two screening steps. The first step is to compare the branch/subsidiary channel against the agency/distributor channel. If a manufacturer decides to use an agent/distributor channel, then a second screening step compares foreign agents against foreign distributors in the target country, involving trade-offs among control, profitability, performance specifications and risks. Managers need to evaluate how closely each alternative channel matches their channel specifications and how alternative channel costs compare over the entry planning period. When a company uses multiple-channel types in the target country, it should take care to define the “jurisdiction” of each channel in its contractual arrangements.
Determining channel members, there must be made an adequate evaluation about who is going to join the process and who is not. It relies on mainly trust in the persons who are contractual partners.
“Exporting can become an international learning experience, a development process that takes the firm toward more and more international sophistication and commitment.”
(Johanson & Vahlne, 1977)
Entering international markets through contractual arrangements:
International licensing includes a variety of contractual arrangements whereby domestic companies (licensors) make available their intangible assets (patents, trade secrets, know-how, trademarks, and company name) to foreign companies (licensees) in return for royalties and/or other form of payment. A company may license abroad for several different reasons. (1) to get incremental income on technology that has already been written off against domestic sales (2) may be used to acquire the research output of a foreign company in return for that of the domestic company (“cross-licensing”) (3) to protect their patents and trademarks in a foreign country against loss and nonuse or against possible infringement (4) to establish their legal ownership of patents and trademarks (rather than ownership by the subsidiaries).
The licensing contract includes points like Technology package, Use conditions, Compensation and other provisions.
Franchising is a form of licensing in which a company (franchisor) licenses a business system as well as property rights to an independent company or person (franchisee).
The franchisee does business under the franchisor´s trade name and follows policies and procedures laid down by the franchisor. Essentially, therefore, the franchisor licenses a way of organizing and carrying on a business under this trade name. In return the franchisor receives fees, running royalties, and other compensation from the franchisee. A lot of sectors in the economy do franchising, for example, fast-food restaurants, car rentals, soft drinks, hotels and motels…etc. But franchising has a distinctly American flavour, as this kind of doing business started in the United States during the 1960s. International franchising is attractive to those companies that have a product which is not made to be exported to a foreign target country, when the company does not want to invest in that country as a producer, and its production process (business system) can be easily adapted by the party of the foreign country. International franchising is most popular in consumer service products that can be created with comparatively low levels of capital and skills. When a company is starting its penetration of a foreign market, it may choose franchising as an entry mode because it means lower risks. The company may replace its franchisees with joint or sole ventures as that gives it more control over the target market when it has gained enough experience. But to start a business abroad in a foreign country the better entry mode is franchising. To switch from franchising to joint or sole ventures is the most common way nowadays to enter a target country, if the company/Manager has chosen contractual agreements as entry mode. It is also the most traditional way to exploit foreign countries. The steps to establish franchising systems abroad is similar to those of traditional licensing. (1) Assessing sales potential in the target market (2) finding suitable franchising partners (3) negotiating the franchise agreement, and (4) building a working partnership with the franchisee (Hackett, 1976). Other contractual entry modes are contract manufacturing, turnkey construction contracts, management contracts and international cooperation agreements. But the most common contractual agreement entry modes are licensing and franchising.
Entering international markets through investment:
Companies invest in foreign production mainly for three basic reasons. (1) To obtain raw materials (2) to acquire manufacturers at a lower cost, and (3) to penetrate local markets Newbould & Buckley & Thurwell (1978) stated.
There are three different types of investors. The extractive investors who establish subsidiaries to exploit natural resources in order to acquire raw materials for their own industrial operations or for sale on world markets. The sourcing investors who establish foreign operations to manufacture products that are entirely or mainly exported to the home country or to the third country. The market investors who account for most manufacturing investments abroad. Their objective is to penetrate a target market from production base inside the target country.
The investment entry decision is a complex process that requires an evaluation of both the investment climate in the target country and the intended investment project. For the first investment experience instructs a company in the information it needs to make good investment decision, develops in-house manager who can better assess the significance of that information, and instills confidence in the company´s ability to manage foreign operations.
It is not said that investment experience in one country is fully transferable to another country. Investment climates, in particular, vary strikingly across countries. Companies should undertake export entry before investment entry.
Figure 13 buch S. 127
The investment entry decision process involves several subdecisions taken over a lengthy period of time, with multiple feedbacks that stimulate the reconsideration of earlier decisions.
The decision to investigate, therefore should be taken only after an appraisal of alternative entry modes and alternative forms of investment entry. Managers agree that the most appropriate way to enter the target country/market is through investment, they should then go on to appraise alternative forms of investment entry: acquisitions versus Greenfield, sole venture versus joint venture. Too commonly, companies respond to an outside investment proposal by setting up an investigation team that thinks only in terms of the proposal and is open to the danger of tunnel vision. The second step is the assessment of both the present and expected investment climates of the target country. Managers have a look on environmental factors and forces – political, economic, and sociocultural – that can have a significant influence on the profitability and safety of the proposed investment project. The present investment climate is fully knowable to managers because it already exists, the future investment climate can be assessed only in profitability terms. The most important question of future investment is the question about political risk.
The third step is the full-scale economic analysis of the proposed project, which includes a redesign of the project, if the earlier designed project fails to meet the profitability. Redesign may raise profitability by reducing plant scale and/or by adapting technology. Redesign also may lower risk by switching from a sole venture to a joint venture. Step four is the profitability/ risk checkpoint which is entry negotiations with the host government. This can contain changes which leads to a new economic/ risk analysis. In practice, the decision process is likely to take many twists and turns. More refined analyses of the investment climate and the project in later phases may confirm or deny these earlier judgements. Thus managers may run through step 2, 3, 4 several times before deciding to proceed to negotiations with the host government.
Investment entry through Acquisitions
An investor may acquire a foreign company for any reasons: product diversification, geographical diversification, the acquisition of specific assets (management, technology, distribution channel), the sourcing of raw materials or other products for sale outside the host country, or financial diversification. There exist horizontal, vertical, concentric and conglomerate acquisitions. The emphasis lies on horizontal acquisitions.
Foreign acquisition is a high – risk entry mode and will require an acquisition strategy. Acquisition investments should be evaluated by checkpoints as shown in figure 13. An acquisition strategy specifies objectives (ranked by importance). The acquisition profile is made by the desired features of an acquisition candidate such as size, product line, quality of management and so on. An acquisition strategy will also include guidelines for pricing and financing. The acquisition profile guides the search for candidates and their subsequent screening to identify the most attractive candidates. Search information may come from several reasons such as the press, trade journals and business contacts etc. Any investment entry project includes a financial analysis of an acquisition investment which contains a discounted cash flow analysis. The cash flow projection finds out perceived opportunities to cut costs or increase sales of the candidate. “In brief, cash flow analysis should answer the question: What net cash flows will be contributed to the investing company by the acquisition candidate under the investor´s control over the planning period?” Root (1994) found out. Past performance (book value of assets or past earnings) of the candidate should be avoided because the candidate`s future prospect may differ from the past performance.
Investment entry through joint ventures
Depending on the equity share of the international company, joint ventures may be classified as majority, minority and 50 – 50 ventures. They may be started from scratch or by the foreign partner´s acquisition of a partial ownership interest in an existing local company. The most common reason for joint – venture entry is the prohibition or discouragement of sole – venture entry by governments in developing countries. China encourages joint ventures. Joint ventures can bring positive benefits to the foreign partner through the local partner: local capital, knowledge of the host country environment and business practices such as personal contacts with local suppliers, customers, banks, and government officials; management, production and marketing skills and local prestige. Managers should start by defining what they want the joint venture to accomplish in the target country/market over the strategic planning period and how the joint venture will fit into their company´s overall international business strategy. They should furthermore know the objectives and strategy of the prospective local partner. The most critical decision in joint – venture entry is the choice of the local partner.
2.4 Internal and external factors influencing the different market entries
There are internal and external factors that influence the choice of entry mode.
Because no single internal or external factor is likely to have a decisive influence on the entry mode for companies in general, the author can only say that such factors encourage or discourage a particular entry mode.
Figure 2 S.9 Factors in the entry mode decision
External factors (market, production and environmental factors)
Target market country factors: The size of a target market/country is an important influence on the entry mode. For example, small markets favour entry modes like licensing, agent/distributor exporting and other contractual arrangements. Conversely, markets with high sales potentials favour entry modes like branch/subsidiary exporting and equity investment in local production. Another feature of a market can be the competitive structure. There exist atomistic, oligopolistic and monopolistic markets. A atomistic market is usually more favourable to export entry than an oligopolistic or monopolistic market. Marketing infrastructure is another dimension of the target market.
Target country production factors: The quality, quantity and cost of raw materials, labor, energy and other productive agents in the target country, as well as the quality and cost of the economic infrastructure have an important influence on the market entry decision. Low production costs in the target country encourage some form of local production as against exporting. High production costs would militate against local manufacturing.
Target country environmental factors: These factors can be political, economic, and sociocultural. The most important one is probably government policies and regulations, for example import policies. If a company is not allowed to import goods there are difficulties because of which they would not favour export entry modes. Another environmental factor is geographical distance. When the distance is great, transportation costs can make it impossible for some export goods to compete with local goods in the target country. This discourages export entry modes in favour of others. The target country´s economy can influence the entry mode decision. The central question is if the economy is a market economy or centrally planned socialist economy. According to Knickerbocker (1973) equity entry modes are usually not possible in the latter, so companies wanting to do business with socialist countries must rely on nonequity exporting, licensing or other contractual modes.
Other features are size of economy (measured by gross national product), its absolute level of performance (gross national product per capita) and the relative importance of its economic sectors (as a percentage of gross national product). Further features are dynamics of the target country´s economy and the external economic relations.
With sociocultural factors the cultural distance is of significance between the home country and the target country´s societies. There can be big differences between the language, cultural values, social structure and ways of life which aggravate the life for managers and make high information costs. Thus a substantial cultural distance favours nonequity entry modes that limit a company´s commitment in the target country. So companies tend to enter target countries that are culturally close to the home country. Another question is the political risk with political instability or the threat of expropriation. For example, low political risks favour equity investment in a target country.
Home country factors: Large companies are more inclined to use equity modes of entry than small companies. Companies in small-market countries encourage exporting as the way to reach optimum size with economies of scale.
Another feature is the competitive structure of the home market. When one company invests abroad, rival firms commonly follow its lead., this is the matter in oligopolistic industries. On the other hand, companies in atomistic industries are more inclined to enter foreign markets as exporters or licensors.
Internal factors:
Product factors: There exist highly differentiated and weakly differentiated products. Highly differentiated products encourage export entry, while weakly differentiated products pushes a company toward local production like contract manufacture or equity investment. Service-intensive manufactured products are biased toward branch/subsidiary exporting and local production modes of entry.
Service cannot be exported to another country. Technologically intensive products give companies an option to license technology in the foreign country rather than use alternative entry modes.
Resource/Commitment factors: The more the company´s resources in management, capital, technology production skills and marketing skills, the more numerous its entry mode options and the other way round. Resources must be joined with a willingness to commit them to foreign market development. Hence a high-commitment company, regardless of its size, is more likely to choose equity entry modes.
2.5 Conclusion
As the author described in this chapter, entry mode decisions depend a lot on the internal and external factors. There are different entry modes like Acquisitions, Joint ventures (Investment entry), Licensing and franchising as a form of licensing (Contractual arrangements) and Export entry modes which include indirect and direct exporting. There exist also different strategies like the product adaption strategy and the product standardisation strategy which a manager should follow after creating an international marketing plan.
Methodology
3.0 Introduction
In this chapter secondary research and primary research will be defined. Qualitative and quatitative research (primary research) was considered inappropriate for this dissertation because the author’s topic of market entry strategies is not made for doing a questionnaire and the interview was cancelled. So it remains to say that the emphasis of this chapter lies on secondary research.
3.1 Secondary research
The author used secondary research as main information source as secondary research is collected by others and is already a full assortment of data which was used in the literature review. She used written materials such as books and journal articles which were mostly available in the University library. Problems arose with the e-journals because most of them could not be opened, so the author did not use many of them.
Secondary research is defined as
3.2 Advantages of secondary research
According to Saunders, Thornhill and Lewis (2007) at least three positive reasons exist for using secondary data in research. Saving money and time is the first reason because secondary data is already collected by others and so no new data had to be gathered.
The next reason is that secondary data is more readily available. In the authors case secondary data was available in the University library and on the internet, for example Googlescholar, Nora, Epschost, Emarald, Nexis, Wiley Inter Science… etc.
Finally, the quality of the data is very good as academics and researchers gathered the data.
3.3 Disadvantages of secondary research
The main disadvantage of secondary data is that it is not always appropriate to the author‟s research question (Saunders, Lewis and Thornhill, 2007). That is because other authors have undertaken primary research corresponding to their own research question. This primary data becomes secondary data to the reader of their book, journal article, thesis, etc. A second disadvantage of secondary data mentioned by Saunders, Lewis and Thornhill (2007) is the fact that secondary data is not always up to date. As time has passed since the research was undertaken and its publishing, results cannot be up to date. This may not be a disadvantage in some research areas as some methods, for example entry modes, remain the same over years. Another disadvantage of secondary research is that a large part of the information is inappropriate and difficult to link to the research’s topic (Burns and Bush, 2006).
The last limitation of secondary data is its reliability and validity. The method chosen can be wrong and therefore influence the research findings‟ validity and the authors may be biased and therefore not reliable. (Saunders, Lewis and Thornhill, 2007) Luckily, the secondary data present in material from academic publishers and journals is reliable as it has passed strict controls and peer-review and the authors often belong to the academic world.
3.3 Limitations of secondary research
The research was limited because a questionnaire was not possible, as mentioned above. An interview was also not possible as the CEO from the Coca Cola Company could not be interviewed because for a student who writes her dissertation it is almost impossible to get an interview with one of the CEOs of, in this case, Coca Cola. Another problem was the distance. The author could do a telephone interview but there arise many problems with telephone interviews because of those the author did not implemented a telephone interview. Problems arose with: reduced personal contact, difficulties recording the interview and loss of possibility to analyse non-verbal behaviour.
So the author restricted her research to secondary research.
3.4 Primary research
There exist two different types of primary research: Qualitative and quatitative research.
According to Bryman (1998) quantitive research can be defined as the process which is “associated with different approaches to data collection”.
The main methods of quantitative research are surveys and experiments. Saunders et al. (2003) stated that the survey is associated with a deductive approach and is trying to test a hypothesis or theories, using a sample of large number of people who represent the wider population.
Gill & Johnson (2002) highlighted that the deductive approach includes “the development of a conceptual and theoretical structure prior to its testing through empirical observation”. On the other hand, qualitative research is associated with the inductive approach which ‘is the reverse of deduction as it involves moving from the ‘plane’ of observation of theempirical world to the construction of explanations and theories about what has been observed’, (Gill & Johnson, 2002).
3.5 Research methodes
According to Jankowicz (2000), the choice of a research method will be determined by the nature and scope of the chosen topic, the data that the researcher is using, the purpose of the selection of data, and how the researcher is prepared to control and analyze the data.
3.6 Ethics
There are no ethical issues as the author did only use secondary research and did not use questionnaires and interviews. Therefore she cannot write that she respected the ethical standard of not interviewing or asking underage individuals, Newcastle Business School Staff or vulnerable individuals.
3.7 Conclusion
The author will only use secondary research as she had problems with the above mentioned issues. The data collected for the literature review (chapter 2) will be connected with analysis and findings in chapter 4. The main data came from the book: “Entry strategies for international markets”, Franklin R. Root because this book contains the main information about the topic and the data included was already collected from journals, newspapers and other sources.
4. Findings and analyses
4.1 Introduction
The Coca-Cola Company is the world's largest beverage company, largest manufacturer, distributor and marketer of non-alcoholic beverage concentrates and syrups in the world, and one of the largest corporations in the United States.
The company was invented by pharmacist John Stith Pemberton in 1886. The Coca-Cola formula and brand was bought in 1889 by Asa Candler who incorporated The Coca-Cola Company in 1892. Besides its namesake Coca-Cola beverage, Coca-Cola currently offers nearly 400 brands in over 200 countries or territories and serves 1.5 billion servings each day. The company operates a franchised distribution system dating back to 1889 and entered China through Joint Ventures with various Chinese companies. The Coca-Cola Company is headquartered in Atlanta, Georgia.
4.2 Company profile
The type of company is public. The Coca Cola Company was founded in 1892. Founder is Asa Griggs Candler. The headquarters is Atlanta, Georgia, USA. It belongs to the industry beverages and the area served is world wide.
|
Market cap |
USD 141.463 Billion (2008) |
Revenue |
USD 28.857 Billion (2007) |
Operating income |
USD 7.252 Billion (2007) |
Net income |
USD 5.981 Billion (2007) |
Total assets |
USD 43.269 Billion (2007) |
Total equity |
USD 21.744 Billion (2007) |
Employees |
90,500 (2008) |
Website |
http://www.thecoca-colacompany.com/ |
4.3 Coke´ re-entry in China (historical background)
In the early 1920s, Coke made its entry into China with bottles imported from its plants in the Phillippines. So Coke used nonequity exporting as first entry mode to enter China as it was already discussed in Chapter 2 the literature review. In an effort to localize production, two bottling plants were opened in 1927. These plants were located in Shanghai and Tianjin, and in 1930 another was opened in Qingdao. Coke faced setbacks during the World War II when the Japanese occupied China and took over its plants. However, in 1946, after the war ended Coke opened a bottling plant in Guangzhou. The Shanghai plant had the distinction of being the most up-to-date and fastest bottling line in China, and in 1948 became the first overseas plant to make annual sales of more than one million cases. This was great progress for Coke, even though the customers in Shanghai were mostly expatriates.
When the People´s Republic of China (PRC) was formed in 1949, all foreign companies were asked to cease operations and leave the country. Coke shut down operations in China and its bottling plants were nationalized by the government. State owned companies were formed to produce beverages and some of these companies used the former Coke plants to produce soft drinks (local production). In case of the Shanghai plant, the equipment was shipped to Beijing to be re-installed in a factory there. For almost 30 years after the PRC was formed, foreign direct investment and direct production activity by a foreign company were not allowed (government regulations). Only the state - owned foreign trade corporations were allowed to have contact with foreign businesses and to carry out exporting and importing of goods.
In December 1978, Deng Xiaoping (Vice-Chairman of the Central Committee of the Communist Party of China) announced the ´open door policy`. This policy was part of Deng´s larger plan for economic reforms of China. An open door policy meant that China would allow foreign trade and investment. December 1978 was an important time for Coke as well. Soon after China made its announcement, Coke initiated discussions with the Chinese government. Coke expressed its commitment to making long-term investments and to economic development in China.
In 1979, Coke began importing cans from California and bottles from Hong Kong to sell in China. Initially, these were sold only to foreigners through hotels and special stores called friendship stores were only foreigners could shop. Even though Coke made its re-entry into the Chinese market with imported products, its intention was to localize every aspect of the business from sourcing inputs and production to sales and distribution, eventually. Establishing the localized Coca-Cola system in China was a difficult and long process. China had opened its doors to foreign companies but at the same time, had set in place policies to control and closely monitor the foreign investments. Most areas of business were heavily regulated and needed approvals from various government officials. Nevertheless, Coke was determined to establish itself in China.
4.3.1 Int. Strategy of Coca Cola adaption in the Chinese market
Long before Coke was given permission to sell its products to the Chinese people, it began developing production capabilities through various joint ventures with the Chinese government. The Joint ventures were implemented as described in the literature review. In sharp contrast to its strategies in the past (in China and other countries as well), initially Coke did not own any bottling plants in China. It imported the concentrate and sold it to bottling plants. The bottling plants (that it sold the concentrate to) had been built by Coke and handed over to the Chinese government. The first of these plants was built in Beijing and was operational in 1981. According to an agreement between Coke and the state-owned China National Cereals, Oils, and Foodstuff Import and Export Corporation (COFCO) in 1980, Coke agreed to build a plant and hand it over to the government in exchange for approval to expand distribution and sales in China. The second bottling plant was built in Guangzhou and was also handed over to the Chinese government in 1982. However, this time it was agreed that both plants would pay for the concentrate supplied to them. This agreement was approved by the Chinese government´s Export Committee.
In 1983, Coke began constructing a bottling plant in the Xiamen Special Economic Zones (SEZ), and on completion in 1984 handed it over to the Ministry of Light Industry. This Ministry later became the State Light Industry Bureau. The year 1984 was a special year for Coca Cola as many significant events took place that year. In 1984, the plant in the Xiamen SEZ, in addition to producing Coca-Cola also started producing Sprite and Fanta. Coke became the first company to air a foreign commercial on China´s Central Television station (CCTV). Even though Coke´s products were not sold to the Chinese at that time, it decided to advertise in order to develop brand recognition. Coke was allowed to air its commercials in exchange for underwriting CCTV´s coverage of Queen of England trip to China. In 1984, Coke signed an agreement with the Ministry of Light Industry to establish its first joint venture in China, a bottling plant in the Zhuhai SEZ. Construction of this plant began in 1984 and it became operational in 1985.
In 1984, the Chinese government signed a letter of cooperation with Coca Cola to set up cooperative bottling plants in China. The proposed locations for these plants were Shanghai, Tianjin and Quingdao. Also in 1984, Coke signed proposals to build a wholly owned concentrate plant in Shanghai, and build a bottling plant as a joint venture close to the proposed concentrate plant. The agreement stated that Coke would be the sole owner of the concentrate plant and the Ministry of Light Industry and the Shanghai Investment and Trust Corporation (SITCO) would own the bottling plant.
Finally, in 1985 the Chinese government gave Coke its approval to sell its products to the Chinese. However, construction work of both plants would not begin until 1986 when President Jiang Zemin gave his approval. Also in 1986, Coke sponsored and organized the first Asian Coca-Cola Cup football tournament in China. In 1988, construction of the Shanghai concentrate plant was completed and began production. The opening of the concentrate plant marked the localization of the inputs of Coke´s production process, as it began producing the concentrate locally using local inputs. The bottling plant in Tianjin was also completed in 1988 and produced local Chinese brands of soft drinks in addition to Coke´s products. Production of local Chinese brands was another feature of Coke´s localization strategy.
By 1993 Coke had established a total of 14 bottling plants in China, and had obtained permission from Ministry of Light Industry and the State Economic and Trade Commission to build 10 more plants. However, the approval to build bottling plants came with certain stipulations. The provinces in which the bottling plants were to be built were specified by the Chinese government, and in addition the plants had to be located in the capital cities of these provinces. Another stipulation was that Coke should, in addition to Coke´s brands, produce local Chinese beverages at these new plants.
Since Coke already had 14 plants and had permission to open 10 more it decided to restructure its bottling operations to form bottling alliances. In 1993, it formed alliances with two Hong Kong – based multinational companies Swire Pacific and Kerry Beverages Group. These two firms became its key partners in China. Coke designed an agreement with Squire to produce and distribute its products in southern China and certain interior provinces. Coke also acquired a 12.5 percent stake in Swire. By the year 2000, Coke and Swire became partners in nine joint ventures in China. Also in 1993, Coke bought 12.5 percent stake in Kerry Bottling Company which is part of the Kerry Beverages Group. Kerry Bottling focused on bottling operations in northern and interior China, and partnered with Coke in ten joint ventures.
In 1995, Coke set up separate production lines for its own products and for the local Chinese brands produced at the Tianjin plant. The existing facility in Tianjin became the Tianjin Jin Mei Beverage Company which produced the beverage base for all domestic brands and also provided training to professionals in the Chinese soft drink industry. In the same year, the Tianjin Coca Cola Bottling Company was built in the Tianjin Economic and Technological Development Zone to produce Coke´s brands.
When Coke realized that many Chinese consumers preferred non-carbonated beverages with Chinese flavours, it decided to enter the domestic non-carbonated beverages market. In 1996, Coke launched a non-carbonated brand (Tian Yu Di) under which the company produced fruit drinks and bottled water. Also in 1996 Coke sponsored the Asian Games in China. In 1997, it also started producing carbonated beverages (Xingmu). Over the years Coke opened several bottling facilities and by 1999, it had 28 bottling plants and 2 concentrate plants; one for Coke´s brands and one for the local brands.
Localizing the Coca-Cola System
The central part of Coca-Cola system comprises of the concentrate plants and bottling enterprises which produce the final product. But many inputs and services go into producing the final product and it also takes a good distribution network to get the product to the consumer. Therefore, the network of suppliers of inputs and services and the distribution network are extensions of the Coca-Cola system.
Localization was not limited to the bottlers and production of the beverages. It extended to the inputs that went into making the final product and the distribution of the product.
Bottlers only accepted inputs that met Coke´s global standards. Initially, Coke could not find suppliers that met its standards so it had to import certain inputs. For example, in the early 1980s it had to import PET bottles. In 1986 Zhong Fu started manufacturing PET bottles, after it received technical advice and training from Coke and became the biggest suppliers of PET bottles of Coke.
Coke had no share of ownership in the companies that supplied inputs for production. 98 percent of the final product consisted of local inputs. Coke also engaged local firms for business services such as legal services, financial services, repair services, accounting services, advertising, design, travel construction..etc.
During the 1980s, demand for Coke´s products far exceeded the supply. However, it had difficulties distributing its products beyond the major cities and towns due to the lack of proper infrastructure, such as roads and railways, at that time. Coca Cola followed a direct store delivery strategy. It ran its own sales centres, trucks, and employed sales and delivery staff to sell and deliver soft drinks directly to retail outlets and restaurants. Coke had to develop a different kind of distribution network in China. Coke based its distribution network on where the demand was and where the consumers could actually buy a Coke product. Coke had to customize its methods of distribution for each market. It used both wholesalers and the direct store delivery system to distribute products in China.
In addition to selling directly to retail outlets, the bottlers also sold the products to the wholesalers who in turn distributed them to the retail outlets. Therefore, Coke was dependent on the local Chinese distributors to get its products to the final consumer. Later in the 1990s, many state-owned distribution companies were privatized and individual private entrepreneurs were also encouraged to set up their own wholesale companies. So, more and more, local Chinese private wholesale companies began to distribute Coke products.
Marketing and Advertising Strategies
Coke believed that it needed to use music, colour, arts, and sports that the Chinese could identify with in order to connect with them. It gave its local managers autonomy over advertising and promotions. In July 2001, when China announced that it would host the 2008 Olympics, Coke immediately introduced a commemorative gold coke can in the market. Other marketing and advertising strategies are involved in cultural influences and will be discussed in Chapter 4.6.
Coke followed a product adaption strategy as it was written in the literature review in chapter 2.
4.4 Internal and external factors influencing Coca Cola and its market entry strategies
As the author described in the literature review no single internal or external factor can influence the decision of choosing an adequate entry mode, but there exist factors that let Coca Cola decide to choose exporting as primary entry mode and Joint Ventures as secondary entry mode.
When China first entered China it decided on exporting entry modes and imported bottles from its Philippines´ plants to China. As shown in the literature review Coca Cola chose nonequity exporting because China´s economy (target country environmental factors) is centrally socialist which … stated.
Coca Cola´s products are highly differentiated which encourages export entry as well. The size of the target market is important (target market country factors).
As China is a big market with high potential it does not fit that Coca Cola chose exporting in the beginning because just small markets encourage exporting…. said. But the beverage market in China was not big in the year when Coca Cola first entered China, so it was more than understandable why Coca Cola first imported its bottles. An atomistic market like China is usually more favourable to export entry than an oligopolistic or monopolistic market.
Later on Coca Cola has chosen Joint ventures as entry mode into China for the simple main reason that the Chinese government policies and regulations did not allow the establishment of foreign companies in China because of the power these companies would have opposite Chinese companies. (Target country environmental factors). So the government encouraged Joint Ventures between foreign firms like the US beverage Company Coca Cola and state- owned Chinese companies. As low production costs favour local production entry modes and in China the production costs are lower than in western countries, Coca Cola decided to enter China through Joint Venture with local production (Target country production factors) as …. commented.
4.5 Cultural influences that affected the marketing and advertising strategy of Coca Cola
Back in 1927 when Coke first entered China, it faced the challenge of communicating with the Chinese. The Company needed to transliterate `Coca- Cola` into Chinese characters if it wanted to reach the millions of Chinese consumers. Not only did the transliteration need to sound like Coca- Cola but it also needed to have an appropriate meaning. Some shopkeepers who made their own transliterations and put up signs, proved how disastrous if the meaning of the characters is not considered. The Chinese language is made up of thousands of characters and out of these only 200 would even remotely sound like Coca- Cola. After extensive research the Company came to the decision of K´o K´ou K´o Le^ because it sound at least a bit like Coca- Cola. It is Mandarin, a dialect understood by most Chinese. This new name can be translated as ´to permit mouth to be able to rejoice` or ´something palatable from which one derives pleasure´.
During the 1996 Chinese New Year aired a television commercial using a Chinese dragon, which is something all Chinese would recognize. In the commercial the dragon was decorated with red Coke cans and danced in a parade.
Recognizing the Chinese people´s love for soccer, Coke designed some of its marketing and promotions around the FIFA World Cup. In January 2001, Coke became the official beverage and a main sponsor of the national Chinese soccer team.
Later in 2002, Coke organized a road show called `Hero Tours` so that soccer fans all over China could meet with the team. It also used special packaging, World Cup star cards, ticket give- aways, flag bearer selections and ´Finger Soccer´ tournaments for school kids. Coke also used SMS to run promotions and increase interaction between the company and its consumers.
4.7 Conclusion
Coke has enjoyed great success in China and in the Asian markets on the whole. According to the 2003 Annual report, Coke´s Asian operating segments boosted its revenues when growth in its US market was slowing down. In terms of volume, China was Coke´s second largest market in Asia in 2003. Encouraged by its success in big cities and towns, Coke wants to reach more customers in rural areas.
Rather than continuing to focus solely on those highly competitive urban areas, Coke must push aggressively into the rest of China, said Patrick Siewert, Coke`s East and South Asian group president. In early 2004, Coke announced plans to build two new bottling plants in China´s western provinces to tap the market potential of China´s rural areas. As one strategy to adapt its products to a foreign market is always needed by a Company as it is stated in the literature review, Coca-Cola pursuits the product adaption strategy instead of the product standardisation strategy. They adjusted their products perfectly to the Chinese market and the Chinese lifestyle.
Also the cultural influences that affected Coca-Cola´s marketing and advertising strategy shows how much Coca- Cola tried to assimilate to the chosen target country, and the Coca- Cola Company succeeded.
5.1 Conclusion
At the beginning of this study, the author has set academic objectives. The first two ones were to find out what internal and external factors influence Companies when entering in a foreign market. Target country environmental factors which look at the economy made Coca Cola choose nonequity exporting because the Chinese economy is centrally socialist which favours exporting entry. That was the right decision which Coca Cola took because in the beginning the Company had no other possibility as export its bottles from other plants that were already established and set into the market, in this case the Philippines. As well highly differentiated products, that Coca Cola has, favour exporting entry.
The size of the target market were another factor that influenced Coca Cola with its decision of choosing exporting (target market country factors). This is in contrast to what is written in the literature review as only small markets favour exporting. But as already said in chapter 4 China was not a big market when Coca Cola entered the Chinese market at the first time.
As the government regulations are high in countries like China, target country environmental factors influenced Coca Cola in choosing Joint ventures as second entry mode. Another factor was the low production cost in China compared to the production costs in Europe or USA, for example. These factors are named target country production factors and were one of the main factors why Coca Cola decided on Joint ventures and did not remain with exporting, which was a good decision.
The next aim of this thesis was to emphasize the cultural differences that especially influenced Coca Cola´s advertising and marketing strategy. Coca Cola adapted its name to the Chinese market as it could not stay Coca Cola and had to be translated into Chinese with the result that Coca Cola was named K´o K´ou K´o Le^ in China. That was the main result of cultural differences. Smaller cultural differences were that Coke adapted its products to the Chinese taste. For example, it is well-known that the Chinese love soccer so Coke did everything to make the brand reflecting a soccer experience. Coca Cola followed a product adaption strategy instead of a product standardization strategy which is already included in the last objective of which strategy were used to enter a foreign market exemplified with Coca Cola´s re-entry in China.
joint ventures with the Chinese government.
The first of these plants was built in Beijing
agreement between Coke and the state-owned China National Cereals, Oils, and Foodstuff Import and Export Corporation (COFCO) in 1980, Coke agreed to build a plant and hand it over to the government in exchange for approval to expand distribution and sales in China. The second bottling plant was built in Guangzhou and was also handed over to the Chinese government
Coke´s re-entry began with several joint ventures with the Chinese government as first step of the strategy. This was the only way for re-entering China because the government restrictions are very strong in China for foreign companies that want to establish factories in the country. Pursuing its strategy Coca Cola built its first plant in Beijing followed by the second bottling plant (Guangzhou) which where both handed over to the Chinese government in order to receive approval to expand distribution and sales in China. This was an important step of Coca Cola´s re- entry into China.
5.2 Limitations
As this topic of market entry strategies is not adequate to do a questionnaire, the author was very limited with the research. She did, for example no primary research as this would include questionnaires and interviews. There was a problem with doing an interview because it is not possible for a student to get an interview with a CEO of a big company like Coca Cola besides she had connections to one person of the chosen company, what she did not have. She could only do secondary research which limited the information of the topic.
Therefore the author did not find as much academic information as she would have liked to.
5.3 Suggestion for further research
The author could have done further research. For example, she could have done interviews and case study analysis. But as there was a lack of time there could not be implemented an interview. She could have analysed the development of the Coca Cola Company in China or how Coca Cola expanded in the world. But as the word count was limited there was no possibility to write about what the author mentioned above.
