The optimization of market entry strategies focused on market entry barriers in China

  Table of Contents  I

  List of Abbreviations  IV

  List of Figures  V

  List of Tables  VI

1  Introduction  1

1  Executive Summary  1

1  Scope of work  3

2  Problem definition and Research methods  4

2  Definition of Problem  4

2  Reasoning and Motivation  5

2  Research methods  6

  Primary Research  8

  Secondary Research  9

  Methods used in Thesis  10

3  Theories  11

3  Relevant theories for market entry strategies  11

  Indirect Export  13

  Direct Export  14

  Licensing  15

  International Franchising  17

  Joint Ventures  18

  Overseas branches and factories  19

3  Selected theory for market entry strategy  21

  Definition of joint ventures  22

  Types of joint ventures  22

  Equity joint ventures  23

  Contractual joint ventures  23

  X joint ventures and Y joint ventures  24

  Critical comment on joint ventures  24

3  Relevant theories for market entry barriers  26

  Porters Industry Analysis  27

  The SWOT analysis  29

  Hofstedes cultural value dimensions  30

3  Selected theory elements for market entry barriers  32

  Elements of SWOT analysis  32

  Weaknesses  33

  Threats according to Porter  34

  Use of SWOT analysis  36

  Critical comment on SWOT analysis  36

  Elements of Hofstedes cultural value dimensions  37

  Power Distance  37

  Uncertainty Avoidance  38

  Individualism versus Collectivism  39

  Long term orientation versus short term orientation  40

  Critical view on Hofstedes cultural value dimensions  41

4  Case  42

4  a framework  42

  Geographical Factors  42

  Social Factors  42

  Cultural and religious structure  44

  Legal factors  44

  Political Circumstances  44

  Economic System  45

  Description of the Chinese market  46

  Market Development  46

  Purchasing Power  48

  Trends of the energy market  48

4  Application of Relevant Theory elements onto Case  49

  Definition  49

  Joint Ventures in China as market entry strategy  49

  Elements of SWOT analysis  50

  Weaknesses  51

  Threats according to Porter  51

  Elements of Hofstedes cultural value dimensions  54

  Power Distance  54

  Uncertainty Avoidance  55

  Individualism versus Collectivism  56

  Long term orientation versus short term orientation  57

5  Outlook and critical Comment  58

5  Conclusion  58

5  Outlook  59

5  Critical Comment  60

  Bibliography  VII

  Literature  VII

  Internet  XV

  Others  XIX

for example  from Latin  exempli gratia

  The People  s Republic of China

Satisfactory  Fault  Threat

Strength  Opportunities  Threats

Figure 1  The marketing research process  7

Figure 2  Dimensions of the Internationalisation mode  11

Figure 3  Differentiation of Internationalisation modes  12

Figure 4  Indirect Export  13

Figure 5  Direct Export  15

Figure 6  Joint Venture  19

Figure 7  Forces Driving Industry Competition  28

Figure 8  The SWOT analysis  30

Figure 9  World FDI Inflow to China  46

Figure 10  1991 2003  47

Figure 11  The Most Problematic Factors for Doing Business  56

Figure 12  The Geert Hofstede analysis of China  57

Figure 13  Comparison Germany China Power Distance Index  58

Figure 14  Comparison Germany China Uncertainty Avoidance Index  58

Figure 15  Comparison Germany China Individualism Index  59

Figure 16  Comparison Germany China Long term orientation Index  60

Table 1  The marketing research process of the present paper  10

Table 2  Key Differences between Short and Long Term Orientation Societies  40

Table 3  Changing sectoral composition of output  46

1. Introduction

Which possibilities does a company have to go abroad?

What kinds of barriers have to be taken into consideration when entering foreign

These are major questions that affect enterprises when they plan the expansion of their business into a foreign environment.

This present paper is concerned with market entry barriers that have an impact on the chosen market entry strategy of a company. It wants to help sensitizing for potential problems that can occur when entering a foreign market and show which barriers have to be heeded even if the chosen market offers respectable growth as the chosen Chinese economy does. 1 From this examination of potential market barriers it is the objective of this thesis to help identifying improvements for market entry strategies and thereby increase the likelihood of a successful venture.

1.1. Executive Summary

Globalization leads to new technological, economical, political and social dimensions and therefore to new challenges. 2 Through inventions in the microelectronic and telecommunication sectors, exchange of information and the approach of new communication methods have become faster and cheaper. 3 Politically, strong alliances such as the European Union advanced and have led to fallen state borders. This development has led to the opening of foreign markets and to new potentials for the economy. 4 In business terms, we talk about globalization when companies “decide to take part in the emerging global economy” 5 and enter foreign markets. This expansion changes the requirements of management, employees and strategies, as different

1 See Kaufmann et al. (2005), p. 17.

2 See Bergemann, Bergemann (2005), p. 8.

3 See Welge, Holtbrügge (2003), p. 25.

4 See Welge, Holtbrügge (2003), p. 26.

5 Globalization.com (2006), p. 1.

frameworks are still present in different countries: 6 the foreign legal structure has to be adopted on business partners and customers.

When going abroad, a company can choose between several types of market entries. These can be managed by trade, as affected in Export, Licensing and Franchising or by Foreign Direct Investment when forming joint ventures, overseas offices and subsidiaries in the host country. 7 Entering business areas with divergent business cultures can be eased by choosing the market entry strategy of a joint venture with a local partner. 8 This venture bears valuable market know-how, established distribution channels and networks. Nevertheless, problems can appear due to different goals and management comprehension of the foreign partner.

“(...) in China it is the right "Guanxi" that makes all the difference in ensuring that business will be successful.” 9

As this statement outlines the business environment in China differs from the European business world.

In-depth preparation and awareness of all kinds of barriers in the foreign market are essential to support the success of exploring new markets. This paper uses SWOT analysis to assess the elements weaknesses and threats to understand the internal and external factors that constrain a successful appearance. Additionally, it uses Hofstedes cultural value dimensions to identify potential intercultural conflicts in international business.

As will be outlined in chapter 4, the rapidly growing market of the People’s Republic of China affords many appeals but also bears certain barriers that are faced by companies entering this market.

This paper will describe the optimization of a market entry in such a complex legal and cultural area by outlining the market entry barriers.

6 See Kumar, Graf (2000), p. 22.

7 See Kutschker, Schmid (2004), p. 823.

8 See Dülfer (2001), p.187.

9 Agribusiness.org (2006), p. 1.

1.2. Scope of work

The introduction of this paper as well as the summary and the scope of work are drawn in the first chapter. Chapter 2 deals with the definition and relevance of the problem and outlines the research methods that are applied in this work.

The third chapter is composed of the theoretical background for the subsequent case. For this reason chapter 3.1 gives an overview of the relevant market entry strategies. Afterwards an analysis of the selected market entry strategy that is relevant for the case – the joint venture - is given in chapter 3.2. This analysis is subdivided in three areas: a definition (3.2.1), the explanation of different variations of this market strategy (3.2.2.) and finally a critical comment in chapter 3.2.3 which includes a comparison of its advantages and disadvantages.

In chapter 3.3 relevant theories for market entry barriers will be introduced. Porters Industry analysis will be described in chapter 3.3.1. Afterwards, the SWOT- analysis, its origin and elements will be explained generally in chapter 3.3.2 and Hofstedes cultural value dimensions will be outlined in chapter 3.3.3.

Out of these theories the selected elements for the case part will be illustrated in chapter 3.4. First, the SWOT analysis will be explained in detail in chapter 3.4.1. For this reason the selected market entry barrier elements will be outlined. Again this chapter is sectioned into three parts: a detailed definition of the SWOT elements weaknesses (3.4.1.1) and threats (3.4.1.2) is given, its use is clarified afterwards (3.4.1.3) and a critical comment is drawn finally (3.4.1.4).

The elements of Hofstedes cultural value dimension are analysed the same way as the theoretical elements of the market entry strategy and elements of the SWOT analysis. First, all selected dimensions will be defined. Chapter 3.4.2.1 is concerned with Power Distance, followed by the dimensions of Uncertainty avoidance (3.4.2.2) and Individualism versus Collectivism (3.4.2.3.). This definition will be closed with the last dimension: Long-Term orientation in chapter 3.4.2.4. In the following there will given be a critical comment on Hofstedes theory in chapter

After the theoretical background is outlined in chapter 3, chapter 4 is concentrated on the case part and the application of the discussed theories and methodologies into a practical environment.

As the selected business environment is China there will be given a framework of this country and its economy in chapter 4.1 sectioned into geographical factors

(4.1.1.), social factors (4.1.2), legal factors (4.1.3) and a description of the Chinese market (4.1.4).

Chapter 4.2 is concerned with the application of the selected theory elements onto the case. Therefore it will be given a definition in chapter 4.2.1 and the joint venture in China will be described afterwards. The examination of market entry barriers will be drawn in chapter 4.2.3 on the basis of the SWOT analysis and according to Hofstedes cultural value dimensions in chapter 4.2.4.

Finally, the present paper will be brought to an end in chapter 5 with a conclusion, outlook and critical comment.

2. Problem definition and Research methods

This chapter is concerned with the definition and the relevance of the problem underlying this paper. Afterwards it will describe the research methods in general and with regard to the application onto the case in chapter 4.

2.1. Definition of Problem

In consequence of rising competition within the established markets, major enterprises search for new sales markets. Due to this reason companies seek to enter unsaturated markets that bear potential growth and cheap but skilled labour as it can be found in certain emerging nations. 10 But different cultural values between Western Europe and foreign countries as well as uncertainty in the legal situation in several emerging nations may lead also to failure of market entries in these regions: 11 “(..) to reach out and capture the opportunity is complex, if not at times downright depressing.” 12 When a company decides to go international, it has to prepare itself carefully for this challenge. This means choosing a market entry strategy that serves the abilities of the company and the selected market best is indispensable. But also another aspect has to be taken into consideration. According to

10 See Hummel, Zander (2005), p. 25.

11 See Baron (2005a), p. 88f.

12 Gibbons (1996), p. 1.

Backhaus/Büschken/Voeth a company must not only look at the market attractiveness of country markets when planning a market entry. Also the market entry barriers have to be taken into consideration in detail 13 as they mean the totality of all conditions whose compliance are necessary for a successful entry. 14 When companies want to act successfully in auspicious markets they have to prepare themselves and be aware of these barriers.

2.2. Reasoning and Motivation

“Nowadays, nobody can afford to simply ignore China.” 15 The Chinese economic miracle is today in the centre of interest of the western business world and for a few years has attracted many companies to invest in this booming area. 16 China is one of the fastest-paced moving economic areas in world with about €43,5 billion direct investments only in 2003 17 and promise growth rates and earnings which can not be achieved in the saturated western markets. 18 This is why companies surge into China.

But as the above statement says as well, companies cannot afford not entering this economic area. They are even forced to counterfeit the market entry of their competitors to stay competitive.

This can often lead to too fast and unsophisticated market entry strategies, to an overestimation of the revenues and underestimation of the threats and barriers that occur in this business area. 19 Referring to Holtbrügge/Puck, the number of companies complaining about depressed authorization procedures, problems with local distributors and intercultural management conflicts is as high as the one of success reports. 20 Especially medium-sized businesses are not able to financially resist missing success, as their capital availability is scarce. But even large-scale enterprises can be confronted with significant barriers such as cultural differences and a dissimilar management style. 21

13 See Backhaus et al. (2001), p. 118.

14 See Backhaus et al. (2001), p. 122.

15 Whu.edu (2006), p. 4.

16 See Kaufmann et al. (2005), p. 7.

17 See Kaufmann et al. (2005), p. 7.

18 See Zhang (1997), p. 17.

19 See Williamson (2004), p. 4.

20 See Holtbrügge, Puck (2005), p. 1.

21 See Baron (2005a), p. 88f.

A careful analysis of the best market entry strategy for the particular business, the awareness of the legal and economical circumstances and the examination of the different culture are therefore necessary in order to mitigate potential evident and hidden barriers in the front end.

2.3. Research methods

“Research is an organized and systematic way of finding answers to questions.” 22 According to this definition there are four signal words for successful research: 23

• It must be done organized because it is a planned procedure.

• It is a systematic work that comprised continuous steps of work that are defined for the specific research methods.

• The target of research is to find an answer concerning the analysed item. Whether the answer is positive, negative or unsettled does not restrict the success of a research.

• Questions are the centre of any research. Without basis questions which shall be analysed by research, the guideline for a specific work is missing and the research “has no focus, drive, or purpose.” 24

The research process consists of four steps, which are shown in the following

22 Linguistics.edu (2006), p. 1.

23 See Linguistics.edu (2006), p. 1.

24 Linguistics.edu (2006), p. 1.

This research process is drawn for a marketing objective but can also be applied generally for the research process.

The first step “is often the hardest step of the research process”. 25 Only if the problem definition is articulated, can it be answered accurate. After the problem is defined the researcher has to set the research objectives. According to Kotler, Armstrong, Saunders and Wong there are three different possibilities: 26

• Exploratory Research where information are gathered to better define problems and suggest hypothesis

• Descriptive Research to describe problems or situations better

• Causal Research to test hypotheses about cause-and-effect relationships.

The research plan that shall be developed in the second step “outlines sources of existing data and explains the specific research approaches” 27 that will be used to gather new information. The difference between secondary and primary data collection is focused in the steps two and three: the data collection is based on different sources, which will be outlined later on in this thesis. Finally, in the fourth step, the findings are interpreted and the previous questions can be answered.

25 Kotler et al. (2002), p. 273.

26 See Kotler et al. (2002), p. 273.

27 Kotler et al. (2002), p. 273.

Generally, there are two kinds of research methods: the primary and secondary research. In the following these will be outlined in detail. Out of these types the methods that are used in the paper will be described subsequently.

Primary Research

Primary research includes the collection of new information for the specific purpose. 28 It can be gathered quantitatively in order to allow statistical analysis e.g. by applying a mass survey or qualitative with individual expert interviews. 29 Primary data collection depends on high initiative of the person who collects this data. Questions for an expert interview or survey have to be prepared carefully because they can normally be asked only one time. It is also the task of researchers to “design the method for collecting information, manage and implement the data collection process, analyse the results and communicate the findings and their implications.” 30 The focus group must be chosen carefully, too in order to avoid a misinformation and failure of the research.

One form of primary research is the personal interview that can be arranged with one person and with groups. Group interviewing consists of inviting several people that talk about a given topic (e.g. a product) accompanied by a trained moderator. 31 Individual interviewing involves talking with only one person preferably in an atmosphere familiar to the interviewee. When choosing expert interviews for primary research, the knowledge of the expert for the analysed item must be given. This is the case when the topic of the interview belongs to the experts work with whom he is concerned every day.

When choosing a survey as primary data collection there has to be a sufficient number of people consulted to allow statistical analysis. 32 Furthermore, the researcher depends highly on the rate of return. Without a high response rate the data interpretation can lead to misinterpretation.

Finally, primary data can be gathered “by observing relevant people, actions and situations.” 33 Especially in the field of marketing this primary data collection is useful, as the observed consumer does not know his habits are observed. This can

28 See Kotler et al. (2002), p. 274.

29 See Leveltendesign.com (2006a), p. 1.

30 Kotler et al. (2002), p. 272.

31 See Kotler et al. (2002), p.278.

32 See Kotler et al. (2002), p.275.

33 See Kotler et al. (2002), p. 275.

be e.g. the case when a “museum checks the popularity of various exhibits by noting the amount of floor wear around them.” 34

Primary research leads therefore on the one hand to individual research findings, which is helpful when searching for findings where secondary data collection is scarce and can be assimilated directly on the searching question. But it is on the other hand time consuming and needs diligent preparation because it can normally not be repeated.

Secondary Research

Secondary Research is based on already existing information such as literature, publications, media or a company’s internal database that have been collected for another purpose. 35 Further information can be gained from organisations such as consulting companies or marketing institutions. Reliable sources for information, especially in international context, are publications from international organisation as the United Nations, World Bank and OECD. Due to advancing importance of new media, the Internet also presents several information from around the world, but, when using this source, it is necessary to select reliable pages out the available ones.

This data collection can usually be done more quickly and cheaply than primary data and it helps to outline large-scale trends. 36 It can also be the only way of gathering information providing historical context such as past trends and information about theories and methodologies.

But this data collection can also lead to problems. The needed information may not even exist which is the case when the researcher wants to analyse completely new areas. The reliability of sources especially when using the Internet can sometimes not be ensured. It must furthermore be taken into consideration that literatural sources may not be up-to-date or may not fit to the defined problem. These reasons may lead to misinterpretations. This is why it has to be checked carefully to ensure the found data is relevant, accurate and current for the analysed object. 37

34 See Kotler et al. (2002), p. 275.

35 See Leveltendesign.com (2006b), p. 1.; see Kotler et al. (2002), p. 274.

36 See Gorard (2003), p. 15.

37 See Kotler et al. (2002), p. 275.