Chapter 4 industry and Case Analysis
4.2 Case Description
Under Fig 4.1‐4, assembly companies are able to distribute to various kinds of channels because they have segregated the high end product line from the low end product line, and distributes goods accordingly. For example, Giant Bicycle distributes low end city bike and accessories to wholesaler, while high‐end racing bicycles and accessories are only distributed via IBD stores or their own branded stores.
4.2 Case Description
Our two case companies are selected based on the samples representativeness.
In order to ensure that the case companies would correspond to our research
Buy original designed Branded bike Companies
Individual brand store Wholesale
IBD/ Retail Stores
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
39
Table 4.2‐1 Case description and analysis by timeline
Section Timeline
A. Company Introduction Current period
B. Company Product Current period
C. Environmental Factors Initial period of
internationalization to early 2000s.
D. Core Resources and Capabilities Initial period of internationalization to current period
E. Internationalization Strategy During
internationalization a. Motives to Internationalize
b. Entry mode Strategies and Internationalize Process F. Resources and Capabilities affecting entry strategies and
host country selection
During
internationalization G. Internationalize Management on Operational Strategy Internationalization
to current period
4.2‐1 King Sword Case Description A. Company Introduction
I. Company background/milestone
King Sword is established in 1976, and is the first bicycle lighting equipment manufacturing company. The company currently operates in China and Taiwan, and export to companies worldwide. King Sword first started out as a molding company, which manufactured plastic toys and water bottles, and eventually moved into bicycle lighting equipment in 1984 with the assistance of the owner’s business friend who advised him to expand into the untapped niche market. King Sword internationalized in the early stage of 1985 through trading companies by exporting, and gradually expanded its international network to direct export to wholesalers like K‐mart ( Table 4‐2‐2 provides the milestone of King Sword Manufacturer).
Unlike most factories in Taiwan which started out as suppliers to original equipment manufacturers, King Sword started out as original design manufacturer (ODM), who designs, produces products distributed under King Sword’s name or
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
client’s brand, and eventually accept customized project, so called contracting for branded customers. King Sword’s derives most of its revenue source from ODM product lines with 80% revenue from ODM after‐market products, and only 20%
from customized projects.
Clients from Europe and United States remain to be the biggest account for King Sword, with 30% sales in Europe, 50% sales in North America, and 20% in Asia Pacific.
Revenue weigh for different customers are 20% for assembly customers, 30% whole bicycle companies, 30% parts and accessories companies, and 20% to retailers. Some of the famous assembly and whole bicycle companies are Giant, Shimano and Raleigh United Kingdom, for parts and accessories companies are Serfas and Ravx.
King Sword used to have big wholesale customers account such as K‐mart and Decathlon who purchased in large quantities, but was gradually replaced by low‐cost Chinese manufacturers in 1995.
Table 4.2‐2 King Sword Milestone Year Key Events
1976 Established King Sword Manufacturer in Changhua County, with 3 employees and capital of NTD 500,000. King Sword was a mold company producing plastic goods ranging from plastic bottles to children’s plastic toys.
1977 Developed the first Arm Light with traditional light bulbs.
Started indirect export through trading companies
1980 Developed first Directional Light with cable connected to bike’s braking system.
1982 Developed Halogen and Krypton Bulb front Light
1984 Started direct export to wholesalers in United States such as K‐mart.
Employees reached 60 employees, with sales revenue of NTD 100,000,000
1990 KingSword developed first bicycle light that incorporate LEDs into the lighting system instead of using regular light bulbs in Taiwan.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
41
1996 Expanded manufacturing site in Indonesia, starting with 20 employees 1999 Started sourcing from mainland china, and outsourcing high labor
assembly processes to Zhejiang, China
2001 Closed manufacturing operation in Indonesia due to management issue caused by cultural indifference
2003 Established sales branch office in Vancouver Canada called, IMX Trading. Sales office is responsible for operations with retail stores in North America.
2004 Established brand called Valiente, started brand advertising through trade show, packaging design
2007 Closed sales branch office in Vancouver Canada due to poor sales performance and high administrative cost.
2008 Successfully adopted Enterprise Information System (ERP) into company functions including warehousing, purchasing, sales and accounting.
Innovated first patented design front LED light
Giant ran bicycling campaign to promote cycling in Taiwan. Sales in Asian market doubled.
2009 Introduced tool‐free silicone light series
2010 Incorporated USB rechargeable system into LED lights to support green reusable energy
2011 Extended into Bluetooth technology by integrating wireless technology to bicycle headset
II. Operation Strategy
King Sword’s operation strategy can be viewed from three different perspectives: current, short‐term and long‐term.
i. Current operation strategy
King Sword was the first bicycle lighting supplier in Taiwan, and once enjoyed monopoly market, but as more competitors entered, market share and profit margin both declined. In the late 1990s, in order to maintain its profit margin, King Sword (KS) decided to outsource its labor intensive assembly process to China. The decision to outsource other than foreign direct investment was mainly caused by the unsuccessful experience in Indonesia operation, and political instability in Mainland China. King Sword keeps its design and quality control in house, mold making and product
‧
ii. Future operation strategyIn the short term, the company would be expanding into new product categories such as Bluetooth and cycling computer to produce a total complete solution of aftermarket electronic parts for bikers on the road.
King Sword would constantly be innovating new bicycle lighting products every year and also be expanding its product lines to strengthen its brand image in the bicycle industry. The company is planning on obtaining an ISO 9001 quality management system by restructuring organizational functions,
Design Source Assembly Quality
Control
Prior In-house management
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
43
Fig 4.2‐4 King Sword future operation strategy
In the long run King Sword would be utilizing its existing resources and capabilities to diversify its product portfolio to other sports and decorative lighting products. King Sword would strengthen its in‐house research and development (R&D) competency focusing on both functionality and design of products. The short and long term operation strategy of King Sword can be summarized in Ansoff Matrix, with concentration on new product development and diversification into household and other sports lighting industry (Fig 4.2‐5).
Fig 4.2‐5 King Sword Short and Long Term Operation Strategy
Present New Product
Present
New
Market
Short term:
Innovating new product and design
Long term:
Outdoor sports and decorative lighting
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
B. Company Product
King Sword first started as a mold company, and possessed a wide range of plastic products, but gradually discontinued its low profit margin product lines, and keeps the more competitive categories till now (Table4.2‐6).
Table 4.2‐6 Summary of King Sword product lines Product Category Purpose
Front LED Light For night time bike riders to increase visibility of the road
Rear LED Light For night and day time bike riders to increase their visibility to others on the road
USB Rechargeable Light Front and Rear bicycle LED lights that can be recharged through computer USB port. A move forward for the company to promote the use of renewable energy
Outdoor LED Light LED lantern, camping light and head light for Safety Signal light Small and portable LED lights that can be attached
onto bags, clothes and helmets
Bluetooth headphone Wireless headphone that enables riders to listen to music and also pick up phones while riding
Mirrors Rear mirror for cyclist to observe traffic before turning or changing lanes
Flag poles Fiberglass flag poles that can be attached to bikes, trailers to increase visibility to others on the road.
Other than the products mentioned in the above category, King Sword is constantly expanding its product category from lighting accessories to other electronic devices for the bicycle aftermarket. King Sword is also planning on
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
45
internationalization are summarized as below:
1. Low demand in home country: In days of 1980s, Taiwan was still industrialized country undergoing development. There were relatively low amount of cyclist in the market demanding for bicycle lights.
2. Road traffic regulation approved: It was stipulated in International Vienna Convention on Road Traffic of the United Nation that bicycle should be equipped with a red reflecting device. Countries like Germany, Netherlands and the Scandinavian countries strictly enforced cycling with head and tail‐light equipment.
In 1989, United Kingdom further amended their Road Vehicles Lighting Regulation requiring a red front light and a red rear light for bicycles on road.
3. Higher demand in foreign market: Due to strict enforcement on regulation for bicycle lighting equipment, the demand of bicycle lighting equipment in Germany, northern European countries and United States were comparatively higher than any other countries in south of Europe and Asia.
4. High amount of competition: During the late 1990s, there were more than ten firms producing similar/substitute kind of bicycle lighting products. The competition was tremendous. When a lot of firms started introducing products that could satisfy same customer needs, firms begun competing on price.
5. Increasing number of mainland Chinese suppliers: Beginning in late 1990s, some Taiwanese suppliers like Smart and Cateye shifted their production site to China. Customers were offered lower price product of the same quality. Moreover, there were increasing numbers of mainland Chinese competitors in the market. Price competition for lighting product in the market was severe.
6. Customer request for lower price items: Many customers enquired about the possibility for King Sword to start a production site in China in order to lower the cost for future project and items.
D. Core Resources and Capabilities
The core resources possessed by King Sword are human capital resources and organizational capital resources which are patent, talented managers, experienced molding and tooling employees.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
1. Intellectual Property Rights: King Sword was the founding manufacturer of bicycle lights in Taiwan, however, it did not seize the opportunity to file patent for its bicycle lights design. It was until 2008, facing with tremendous price competition from imitated design from China, King Sword begun applying design and technical patent for its lighting products. Currently, King Sword holds one technical patent for its Front LED light and four design patent for its Rechargeable and Safety light series. The technical patent that King Sword currently holds is the ability to produce a strong focus light beam. The company is continuously working with its research and development team in designing unique and advanced products.
2. Talented managers and sales personnel: Founder and director of King Sword has been in the LED lighting industry for more than thirty years, knows the market inside‐out, built strong connection with Taiwanese agents, and is a strong trend‐spotter who is the one to discover the future trend in LED lighting and to replace traditional light bulb with LED lights in early 1990s.
The sales manager has been in the bicycle market industry for more than seven years, and comes from a diverse background. The manager had stayed in North America for more than ten years, and had traveled to many European countries such as Germany, Italy, and Scandinavia for trade shows and market research, therefore, is familiar with markets and customers from different areas. The sales manager determines different pricing and marketing strategy for customers from different area to expand to untapped areas and avoid price‐war in overly concentrated market.
3. Experienced molding and tooling employees: King Sword started out as a plastic injection molding companies and hence still have highly skilled molding and tooling masters who are able to produce quality mold products, and are
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
47
In order to maintain low cost production, King Sword sources their own materials such as LEDs, PCB boards, steel accessories, switches and other small electronic parts to their assembly suppliers. After assembly, goods will be shipped back to Taiwan for final quality inspection and product packaging before they are sold to end‐users. King Sword’s capabilities to coordinate and manage its supply chain in China increase its competitive advantage in providing quality products at a competitive price.
E. Internationalization Strategy
King Sword internationalized as early as 1977 through agent by indirect export to foreign countries. An analysis of the reasons for King Sword to internationalize and how it was done is conducted below:
a. Motives to Internationalize
The motives behind King Sword’s internationalization are as below:
i. Founder’s ambitionl: King Sword commenced indirect export through agents was first driven by the founder’s will to expand sales to foreign countries other than home market.
ii. Low home market demand: On other hand, the demand for bicycle lighting in early 1980s was relatively low compare to developed countries in North America and Europe, King Sword had to increase sales to foreign markets in order to attain economies of scale.
iii. Technology Seeking: Germany and United States are the lead countries with biggest bicycle lighting market and demanding consumers where innovative products were usually found; therefore, it would be necessary for King Sword to gain a share in these markets to obtain updated news on technology advancement.
iv. Lower production cost: King Sword production was originally located in Changhua, Taiwan; however, in the face of strong price competition from Mainland Chinese rivalries, King Sword had decided to shift its production to China. Unlike most Taiwanese companies who adopted a foreign direct investment strategy for establishing production sites in China, King Sword had
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
decided to outsource (contracting) its production, considering the political instability in Mainland China. King Sword preserves design and quality control functions in Taiwan, whereas contractors in China are only responsible for the labor‐intensive assembly processes.
b. Entry mode Strategies and Internationalize Process
King Sword commenced indirect export through trading companies as early as 1977, it was until 1984 when the company started direct export to wholesale companies like K‐mart and Wal‐mart. Little market knowledge was known back in the early days when the company first started, and hence sales was through trading companies in Taiwan. On the other hand, King Sword did not have the human capital resource to deal directly with foreign customers.
In the early 1980s, King Sword hired foreign sales team and applied for trade shows in United States and Europe. The founder and sales would perform market research in the area after the tradeshow. The first trade show that King Sword participated in was in Cologne, Germany. It was through gradual cooperation with trading companies and participation in trade shows that King Sword begun to gain experiential knowledge incrementally and hence commenced direct sales to wholesalers in United States and Europe.
The first market King Sword selected for internationalization through direct export was United States, based on two reasons:
1) it was evaluated as the country with highest local sales potential
2) it was the place where most innovation occurs driven by demanding customers
King sword gradually transfers the experience and market knowledge to other rather homogeneous market in Canada, and further extends its distribution to Europe.
‧
was its location advantage for relatively cheap labor cost, but the presence of competitive advantages like resource ownership and internalization were non‐existent to support for foreign direct investment decision. The decision‐making
F. Resources and Capabilities affecting entry strategies and host country selection King Sword has the two main motives to internationalize
FDI Complimentary
activities to fit value chain
Fit with activities of value chain participant
Develop local capabilities:
Outsource Yes
No
Yes Increase price
competition and cost pressure
China
FDI advantages:
1.resource ownership:
2.location attractiveness:
3.internalization:
4.resource specificity Host country
candidate
No
Where?
Location with vast number of SME suppliers Zhejiang, China
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
a) To build and strengthen company value: King Sword outsourced its production function to China was a strategy to gain cheaper human resources to increase company competiveness in pricing.
b) To augment resources: one of King Sword’s decisions to expand to United States was to match competitors in gaining first‐hand technology information from the market.
From table 4.2‐7 is the decision process of selecting outsourcing strategy to China. China was selected as the host country since the structure and characteristic, for example language and culture, are similar to Taiwan, and communication with local suppliers would not be difficult. Secondly, other than the cheaper labor cost found in China, small and medium enterprises is highly condensed in the Zhejiang area where most people prefers running their own businesses, King Sword can find supplier of different raw material resources easily at a competitive price. An outsourcing strategy was selected for China instead of a FDI was mainly because King Sword does not possess any specific assets or innovation that requires direct investment to safeguard such specific resources. Meanwhile, no complimentary resources fits the value chain of King Sword, and the cheap labor production fits and replaces King Sword’s high cost assembly line; hence King Sword can simply develop local capabilities through outsourcing.
G. International Management on Operational Strategy
In order to expand its sales and production, King Sword has made several big attempts to internationalize through foreign direct investment; and however, some didn’t turn out successfully. This section would analyze both the successful and unsuccessful internationalization moves by King Sword, and how management was performed under each different international operational strategy.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
51
Indonesia. King Sword hired locals to work on the production line, but the management team was comprised of Taiwanese expatriates. On managing expatriate, the company was more ethnocentric, since Taiwanese management team has more experience and knowledge with production processes and workflow.
However, the plant was later closed down due to human resource management and cultural issues. Workers in Indonesia are mostly Muslims, and had to perform religious conduct three times a day which significantly affected the production efficiency as assembly lines were frequently interrupted or stopped during praying period. On the other hand, language barrier and political instability posed significant threat to management. Due to language barrier, the learning curve for workers in Indonesia was doubled the time in Taiwan. It took on average six hours for workers to familiarize themselves with the new production protocol, and it took at least twelve hours for workers in Indonesia to first understand the instructions and finally pick up production efficiency. There were also frequent riots on the street threatening the Chinese race in Indonesia, which increased the difficulty for King Sword to retain Taiwanese expatriates working in Indonesia.
Despite its unsuccessful operation in Indonesia, King Sword later chose to shift
Despite its unsuccessful operation in Indonesia, King Sword later chose to shift