Chapter 4 industry and Case Analysis
4.3 Case Analysis:
國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
71
the spirit of electronic and computer products in lighting equipments. On the other hand, despite having its own research and development team, Chance Good continuously work with professional design companies to gain innovative product ideas and to constantly create new brand image.
4.3 Case Analysis:
This section conducts an analysis of the two case companies by comparing and analyzing the similarities and differences found while addressing the following questions:
1. What are the motivations behind an SME’s internationalization?
2. What are the factors that affect an SME’s internationalization decisions?
3. What are the factors that influence the host country selection of an SME?
4. Which entry strategy was selected by an SME?
5. What is the entry process of an SME?
6. How do resources and capabilities of an SME affect its internationalization?
7. How does an SME manage its internationalization?
1) What are the motivations behind an SME’s internationalization?
Both of the companies’ founders had a vision to internationalize in order to expand their market share. The other main reason was that Taiwan is a comparatively small market in bicycle good consumption, and hence firm would need to increase foreign market demand and attain economies of scale. King Sword internationalize was also due to the need to seek for product and technology ideas from advanced foreign market. Meanwhile, Chance Good has won several design awards from Germany, and increased its brand recognition, and hence it was a good opportunity for Chance Good to introduce their INFINI brand into the European market. A summary of the motives behind internationalization for both firms is listed in Table 4.3‐1.
Table 4.3‐1 Motives to Internationalize for SME
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Firm King Sword Chance Good
Factors Founder’s ambition
Small home market demand Technology Seeking
Lower production cost
Founder’s ambition
Restricted home market demand Transferrable marketing skills Lower production cost
Observation 1: We see that the founder’s ambition and the structure of home market play an important role in motivating the internationalization of SME.
Resource seeking such as technology skills may also come into effect when deciding on internationalization. Most importantly, cost was a major reason for SME to internationalize by outsourcing production to low‐cost countries such as China.
2) What are the factors that affect an SME’s internationalization decisions?
In the early 1980s, there was low demand for lighting equipments in Taiwan, but on the other side of the globe, the demand for lighting products were increasing due to Road Traffic Regulation in Europe. In the late 1990s, there were already more than ten suppliers of bicycle lighting products in Taiwan, and the competitors in mainland china were also growing at a fast rate. There were intense price war and increasing number of customers demanding for low price items. Many Taiwanese bicycle firms have established their own brands and started marketing in order to differentiate from low price items and preserve their profit margin. The environmental factors affecting decision to internationalize are summarized in Table 4.3‐2
Table 4.3‐2 Environmental factors affecting decision to internationalize
Firm King Sword Chance Good
Factors Small demand in home country European Road Traffic Regulation
Small demand in home country European Road Traffic Regulation
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
73
Observation 2: The environmental factors that affect internationalize decision includes the relative demand in home country from other host country, and the intensity of competition in home country and also from other foreign market.
Customer request for lower price product would affect firm’s decision to outsource production to low‐cost market. Meanwhile, the actions of other competitors in the market could also affect SME decision to internationalize. Host country government intervention is also a key factor driving demand and affecting internationalization location.
3) What are the factors that influence the host country selection of an SME?
When King Sword and Chance Good choose their target country to enter, they followed Root’s process in host country selection by looking at the market size and sales potential through observing the channel structure and evaluating the market potential. In fact, government intervention is a critical factor affecting the consumption of the product in the market, and hence is a factor considered by Chance Good during host country selection. The other factor that firm looked into was the resource or innovative ideas that the company could gain from the host country. Table 4.3‐3 provides a summary of the factors affecting host country selection from sales perspective, while table 4.3‐4 is presented from production perspective.
Table 4.3‐3 Choosing market to enter and entry strategy from sales perspective
Firm King Sword Chance Good
Sales Country Entry Mode Country Entry Mode United States Direct Export Germany Direct Export Factors 1. Market with highest sales
potential
2. Advanced technology and demanding customers 3. Large wholesale channels
1. Market of major bicycle dealers 2. Place of high‐tech innovation
with demanding customers 3. government strongly enforces
regulation for using bicycle equipments
‧
Meanwhile, as for the production both companies look at location attractiveness, if the place offers any immobile endowments such as low labor, and environment issues that can influence communication between suppliers. The other factor that firms evaluate while selecting host country for production is the consideration from a long term or short term perspective when selecting the host country. Chance Good have selected China mainly because it offers plenty of resources such as materials and cheap labor, meanwhile, assembly process can be outsource immediately without long training period.
Table 4.3‐4 Choosing market to enter and entry strategy from production perspective
Firm King Sword Chance Good
Production Country Entry Mode Country Entry Mode
China Outsourcing China Outsourcing
Factors 1.Low Labor host country demands. The existence of immobile and unique resource (i.e. low labor cost, technology) in host country can influence firms selection. Finally, the environment, for example language, culture of host country and firm’s long‐term and short‐term strategic goal was also considered during host country selection.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
75
bulk. Meanwhile, Germany is characterized by large amount of small individual bicycle dealers, Chance Good exports directly to a distributor in each region.
The two main factors for choosing an export strategy were:
1. Resource required to commit in FDI is significantly greater
2. SME observe industry peers’ experience and follows the same internationalization process.
Both of the companies had selected export strategy upon considering that the company would need to commit significant amount of resources including capital and human resources to invest directly in host country channels, and the cost would be too high for the firm to manage. The other main factor for choosing an export strategy was because the firm observes industrial partners who had successfully internationalized and followed the footsteps of those by first participating in joint exhibition trade shows, and then move into export.
Both firms had selected an outsourcing strategy for its production because the function that they are outsourcing has low asset specificity and the firm does not need to retain control through FDI, moreover, the cost for foreign direct investment is too high. Other factors outlined in Table 4‐3‐4 are that the government was unstable, and the economy was uncertain of possible inflation in the next decade, hence both firms had decided that an outsourcing solution would served as a short term solution for increasing labor cost since the low labor cost assembly line complements the higher labor cost in Taiwan.
Observation 4: Firm carefully weighed the amount of resource committed to the amount of control and technology risk when selecting entry strategy. Company with low asset specificity has low technology risk and hence requires less control over the asset. On the other hand, the cost for the amount of resources committed for FDI is carefully evaluated. Industry peers experience could also influence the entry strategy as company are more risk‐averse. The environmental factors such as political and economical stability would also affect firms’ entry strategy.
5) What is the entry process of an SME?
Both companies followed an incremental approach during internationalization.
‧
market knowledge and experience, and hired sales personnel to participate in international trade shows to begin direct export to distributors/wholesalers (Fig 4.3‐5).Observation 5: The SME seemed to follow a similar pattern in the process of internationalization, usually started with indirect export and gradually shifted to direct export to foreign market, on an incremental approach. The pattern corresponds to Uppsala model of internationalization whereby firms increase their international involvement gradually through knowledge acquisition and experience.
6) How do resources and capabilities of SME affect its internationalization?
During internationalization, when SME had constructed a strong distribution network, the firms would choose a risk‐averse approach by maintaining a direct export relationship with customers rather than investing in direct subsidiaries/channels. On the other hand, both companies chose to retain their core capabilities such as design, research and development (R&D), and marketing functions in‐house (Table 4.3‐6).
Table 4.3‐6 Resources and Capabilities affecting entry mode and management
Company Resources/ Goal Decision/Management
Home country Sales
Hire sales personnel
‧
Observation 6: SME have relatively less resources such as human or financial resources than large enterprises and hence often more risk‐averse. When SME have collaborated with consumers through indirect export and have built network with the customers, the SME would often choose to increase their involvement with the customers through direct export rather investing directly at end‐user channels.
On the other hand, SME tend to retain resource with high specificity in‐house and only outsource routine work.
7) How do SME manage its internationalization?
SME had different management strategy in responding to changing economic environment during internationalization. For King Sword, the company expected rising labor cost, and hence expanded production to Indonesia, and outsourced to China. King Sword is more cost‐oriented in managing internationalization by providing low‐cost competitive product. On the other hand, Chance Good is more product and market oriented by investing in marketing activities through cooperation with design companies and establishment of its brand “INFINI” in host country market. Fig 4.3‐7 provides a summary of the key event of both companies in a timeline. Both companies outsourced and established their own brands at different timing. King Sword outsourced production before establishing their brand, Chance
‧
Incident Chance
Good
Low home country demand
Approval of European Road traffic Regulation
High Foreign Demand
Increase in Mainland Chinese Suppliers
Increase in Price competition, and low profit margin
Increase in Taiwan bicycle Direct export
Deign LED light to sell to Europe
Move production to Indonesia
Outsource to China
Closed Indonesia and expand Sales office to Canada
Establish Brand (Valiente)
Obtain ISO Certification
Design company, Establish Brand Receive German design award
Outsource to More than 15
ODM Taiwanese Brands
‧
Both of the SME corporate structures are relatively simple, and hence only the human resource and marketing management were examined in the case studies.
King Sword’s financial management was briefly discussed in the case. In human resource management, both of the companies were more ethnocentric in managing trade personnel, because both companies’ sales personnel have strong experience and knowledge of the market. However, King Sword was polycentric when it directly invested a sales office in Canada. On the marketing management, SME product and pricing strategy were rather homogeneous; however, the distribution channel and promotion management differed in each different host country. Table 4.3‐8 provides a summary of the marketing mix of both firms in international market.
King Sword used all four kinds of channels depending on the host country market structure. Meanwhile, for Chance Good, its OEM brand D‐light and INFINI used different kind of channels. On the other hand, Chance Good had dedicated a lot of
King Sword Chance Good
Product Homogeneous product
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Promotion International Trade Shows D‐light: Trade Show
INFINI: International Trade Shows, Participating in Design Awards, Sponsoring bicycle events,
Observation 7: In response to rapid changing environment for small and medium manufacturers during internationalization, the firms would seek ways to reduce their production cost either through foreign direct investment in plants or outsource high cost assembly lines. The other strategy that small and medium manufacturers would engage in is to establish their own brand and perform marketing plans to increase their competiveness and market share. With regards to human resource management, SME are more ethnocentric. During marketing management, SME product and pricing strategy are rather homogeneous; however, the distribution channel and promotion management differ depending on the characteristics of the channel, product and market structure. Finally, firms’ resources and capabilities such as goodwill and strong sales teams affect international management of the SME in human resource arrangement and marketing plans.
4.3‐1 Implication for different internationalization strategies
Although both case studies SME performed similar entry strategies such as exporting and outsourcing, the timing and management for both SME differs significantly. This section discusses about the difference between the case companies and evaluates the reason and implication behind the differences.
To begin, a close observation on the timeline for events and strategy of both firms in figure 4.3‐7 is required, and we would notice that King Sword and Chance Good reacted differently in changing economic times. When the market is booming due to increasing foreign demand, King Sword and Chance Good had
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
81
However, distributors to individual bicycle stores (IBD) are less price‐sensitive as IBD are more concern about quality over price.
In the late 1990s, when there were tremedous price competitions, King Sword’s intuitively invested in Indonesia for lower production in order to satisfy their price‐sensitive wholesale customers. When management of production function in Indonesia failed, King Sword disinvested and started outsourcing its assembly functions to China instead. It was till 2004 that King Sword noticed that no matter how it seeks ways to reduce production cost through outsourcing, they still could not beat the prices in mainland China, and hence decided to establish their own channels in North America when their American wholesalers started to withdraw orders. However, the sales subsidiaries operation was unsuccessful due to problem in human resource management. King Sword was more polycentric for hiring sales, but was not able to construct decent reward programs to retain sales personnel.
Unlike King Sword, Chance Good understands that it would not sacrifice quality for cost, and hence undertook a different approach by first restructuring its company internal operation through ISO certification, and cooperating with design companies to strengthen their company core resources and capabilities‐goodwill. Unlike King Sword who was more cost‐oriented, Chance Good only started to outsource its assembly productions in China to reduce cost after they had successful built their brand ‘INFINI”. When Chance Good started to established their own brand INFINI in 2004, it received many design awards the following year, which had significantly increased brand awareness in a short period of time. As Chance Good has worked with distributors in Europe for more than a decade, they have strong networks to distribute their INFINI brand to IBD. Unlike wholesalers in North America who were not willing to carry other brands, IBD stores accepts all kind of different product lines.
Initially, both firms were driven by many similar factors to internationalize, but they undertook different international strategies at different point of time, which later influenced their management. Chance Good has successfully established their brand INFINI, and hence on the marketing perspective, Chance Good’s INFINI brand differs significantly from King Sword in product packaging, pricing, channels and
‧
promotion. The INFINI brand products have consistent brand packaging, and distributed only to IBD and online stores. However, King Sword’s products are vastly distributed in all kinds of channels under private brand or their own “Valiente” brand.
Table 4.3‐9 provides a comparison chart and implication for the difference in internationalization strategies of two case companies.
Table 4.3‐9 Implication for difference in internationalization strategies
Firm King Sword Chance Good Implication
Motives to internationalize
‧
Country Entry Mode Country Entry Mode Implication
China Outsourcing China Outsourcing
Factors 1.Low Labor