1. Describe and discuss different strategies of multinational enterprises when expanding into emerging markets. Comment on the pros and cons of Carlsberg’s acquisition strategy in China.
An emerging market is one that has high growth or growth potential with an infrastructure that is under-developed. The focus of internationalization is shifting from developed countries to emerging countries as developed markets are becoming saturated. As multinational enterprises are turning to emerging markets for resource, future growth, and outsourcing, appropriate market strategies and execution in these markets have become crucial to global success. Therefore, when a multinational enterprise considers entering an emerging market, it should be clear about which strategy it should perform. When a corporation decides to expand its market into the emerging market, it has to choose between exporting or licensing, fully owned or shared ownership. Our team focused on the strategies in terms of ownership. There are two strategies of expanding into emerging markets in terms of ownership, which are joint ventures and wholly owned subsidiaries.
Joint venture is an attractive method of sharing risks and saving money through capital and resource sharing that companies with high uncertainty avoidance would prefer. Joint venture in emerging markets is a crucial strategy as some countries, such as China, will not allow outside companies to own the majority of a domestic business unless they establish a joint venture with them. Forming a joint venture with a company from the emerging economy has its benefits as the locally-based domestic corporation has access to a wide network of local contacts at company management level as well as local market intelligence, making it easier for them to spot good investment opportunities. For the emerging economy domestic companies’ view, joint venture provides them the chance to work with larger companies and learn from them in many aspects. They gain access to wider markets, opportunity to increase sales and enhance their technological capabilities. However, joint ventures can accompany potential financial losses and conflict between partners.
Wholly owned subsidiaries
Wholly owned subsidiaries is having 100% control of the company. Therefore, enterprises that implement this strategy hardly provide any technology transfer or other benefits to local economies. As wholly owned subsidiaries operate independently and without the control of local partners, they can exercise complete control and autonomy. However they may not be allowed to invest and operate in certain sectors in the emerging countries’ economy as they are possibly a huge threat to fragile domestic industries. Also, they can be more easily exposed to criticism concerning economic sovereignty. To address this problem, managers of the wholly owned subsidiaries can hire local managers, acquire local resources from local suppliers, as an effort to localize the production. The decision to enter the emerging market as a wholly owned subsidiary should be made very carefully as it requires significant amount of resource commitment of the multinational enterprise. Carlsberg aggressively acquired or make joint venture about 20 local brewery plants in Western China until 2007 and we can call its strategy as multiple-acquisition because they did many acquisitions in a short-term. In this strategy, there are some pros and cons. Basically, acquisition strategy gives company some advantages and disadvantages like ‘knowledge from local partners’, ‘conflicts with local firms’ and so on. In this situation, we should think about some characteristics of Chinese market (immensely fragmented and highly regionalized) By multiple-acquisition strategy in China, Carlsberg could get some pros and cons in addition to basic pros and cons of acquisition.
First, Carlsberg could build its market positions in China. Because of multiple-acquisition, Carlsberg could gain significant market share within the Chinese brewery market and became more profitable compared to the other multinational enterprises. Second, by local partners in China, Carlsberg could get easy access to resources in the foreign market. Third, the volatility of emerging Chinese market leaded the company to set more flexible strategies in the market. Flexible strategies mean that company can choose proper strategy to do positioning (separating Premium and Non-premium). Last, Carlsberg could make cost reduction in their process compared with the domestic and developed market. The biggest factor of cost reduction was cheap labor cost in the Chinese emerging market.
First, because of doing multiple-acquisition, Carlsberg needed huge amount of capital and it led the company to suffer huge financial loss. Second, while restructuring within the local company, there were strikes and fights against Carlsberg by local employees because of sudden change in the environment. Third, there can be unwilling knowledge transfer because of shared ownership. Last, local breweries’ capabilities to suit the specific situation in China may create some barriers to Carlsberg.
2-1. What are the key marketing challenges when entering an emerging market? In order to figure out “key marketing challenges” when entering an emerging market(which belongs to the developing countries that achieving rapid economic growth and industrialization), we decided to consider two possible situations in terms of entering timing; First mover & followers. At first, first mover can take market advantages and technological leaderships as well as the market leading position without fierce competition. However, in general, rapid growth indicates possible volatility and uncertainty and also its essential for a MNC to invest tons of money to analyze the market itself and to start up because general infrastructure and supporting systems are very weak. For the followers, it can be really hard to catch up with those first movers and they may have to compete with those market leaders as well. It can be the major problem. However, by benchmarking those first movers, they can save a lot of costs in terms of gathering information and learning from others. Like this, key advantages and challenges are truly different depending on the entering timing. So its very crucial for the MNC to consider seriously about “when to enter” and “what should be done after joining the market”. First of all, entering timing decisions can be made based on the competiveness of the company. When the emerging market is very attractive and has a lot of potential, MNC can directly join(as a first mover) if the company has very strong brand power. Otherwise, MNC should join a market as a follower. In the first mover case, company should consolidate the market and retain a lot of loyal customers by utilizing its powerful brands as fast as possible. On the other case, companies should focus on the niche market to achieve certain level of market power rather than competing existing MNCs which have huge market share and big amount of loyal customers. After focusing on niche market, companies can try more aggressive ways to increase its market share.
2-2. How is entering an emerging market different from entering a Western market? Western market is a market that already industrialized and stabilized compared with emerging market. Almost all of the MNCs were born and grew in this market. Currently, they are now focusing on the emerging market because there are not many rooms to generate more profits and competitions became so severe. But as the market characteristics are so different from the Western market, MNCs will be a trouble if they enter emerging market using same way as entering Western market. There are 3 distinctive characteristic of emerging market. The first one is economical uncertainty. Because emerging market is growing rapidly, there are high possibilities of economical risks such as economiy crisis and credit crunch. So managing risks related to the finance is really important part that most of the MNCs should focus on. Second one is strong power of existing local brands. High customer loyalty and big market share in the Western market will not guarantee success in emerging market. In many cases, some local brands that fits well with cultural and geological characteristic have strong power in market. So it’s very important for MNCs who want to get in the market to be more flexible and they should pay more attention to the cultural, geological perspectives to compete with existing local brands. The last one is government policy and regulations. There are some government regulations in emerging market. In Western market, fair competition are guaranteed by lowering regulations and utilizing market system. However, some kind of regulations and policies that protecting local brand or key industries can exist. So MNCs should use their resources in lobby to the government and they also keep their eyes on the government policies.
3-1. What is Carlsberg’s conpetitive environment in China?
The competitive environment of a business is the part of a company’s external environment that consists of other firms trying to win customers in the same market. It is the segment of the industry that includes all immediate rivals.
The competitive condition of Chinese brewing industry is tough. That’s because the Chinese beer industry is still in the formation stage. As peoples’ incomes increase, beer, as a beverage, is being consumed in increasing amounts. This will bring an ever-increasing market and should ensure a long life for the beer industry. China offers a much larger market than any of the other countries, yet this market is highly fragmented regionally, specially in the brewing industry. Thus, customer loyalty to local tastes and brands creates barriers to entry for international brands. Moreover, beer’s short shelf life, high transport costs, as well as tariffs and national quality standards used to limit the internationalization of the industry. These characteristics of the industry suggest that, traditionally, local brands would dominate in this industry. Nearly every province has more than 10 breweries. So, most foreign countries chose acquisition strategy. A few global players emerged, expanding by acquisitions and global mergers such as Ambev-Interbrew and SAB-Miller. They combine local, global and multi-tier strategies. Competition Strategy
China cannot be regarded as a single country because of the distances, differing levels of wealth and sophistication, weather patterns and fierce parochialism. Consumption in the north-east, additionally a beer-drinking region, is amongst the highest in China. In addition, most Chinese reside in the eastern provinces, making it a highly concentrated market. With a birth rate higher than those of Western nations, the country has a relatively younger population. So, Carlsberg’s competitors chose their target market to the north east provinces as did acquisition local beer company in the eastern region of China. Anheuser-Busch and InBev have merged to promote increased growth. In so doing they have created the global leader in the beer industry, as well as one of the world’s top five consumer product companies. Merger and acquisition is necessary to foreign beer companies that want to enter the Chinese beer market. The unique features of Chinese market, it is difficult to understand Chinese marketing channels and promotion. So, part of the new company’s explanation of that claim speaks to one of the above-discussed motivations for mergers and acquisitions: gaining access to new local markets.
The companies are careful to point out that there had been “limited geographic overlap” between the two companies as separate entities. The particular details of the Anheuser-InBev merger have been an asset in avoiding the government interference that has been identified as the major obstacle to M&A. The merger significantly expands the geographic diversity of each of the companies individually, making it an industry leader in the top five world markets. In China, the presence of each company complements the other, with InBev strong in the southeast of the country and Anheuser-Busch in the northeast. As one company, then, they may be in a position to somewhat circumvent would-be resistance to foreign brands in the Chinese market generally. Also, the ten markets where InBev is the local leader in the beer industry are markets where Anheuser-Busch’s Budweiser brand is weak. The eastern part of China customers usually have high income. So, competitors of Carlsberg have sophisticated strategy whereas Carlsberg have cost leader strategy.
3-2. How well is Carlsberg positioned vis-a-vis its competitors? After analyzing Carlsberg’s competitive environment in China, it is possible for our group to predict that the competiveness of Carlsberg compare with other competitors is not that bright. We found two main problems through the article that explain why Carlsberg is not able to position itself superior than other rival corporations. First problem was that Chinese market that Carlsberg entered had different environment characteristics that contradict Carlsberg’s vision. As the fifth-largest brewing company in the world, Carlsberg vision was “our brands will be the consumer’s first choice, and we will lead our industry in profitability and growth through a culture of quality, innovation and continuous improvement” This vision shows that Carlsberg prefer making high quality premium products that could constantly surprise the consumers. However, in order to survive from Chinese market required different approaches. The Chinese beer market was massively fragmented and extremely regionalized with no truly national brewery. Local and regional non-premium brands dominated and price was often the determining factor.
Those beers took care of over 95% of total beer sales. This controvert questions the fundamental idea of Carlsberg which would act negatively toward the existence of the company in Chinese market. Second problem was that the failure of joint venture with the Thai company Chang Beverages Pte Ltd, caused relentless financial losses and also failed to use three strategically important years to adapt itself in the Eastern Chinese regions and Asia beer markets. This slow start, especially in the emerging market, significantly challenged the company because the advantage of first mover is critical. This situation made Carlsberg to necessarily change their strategy to focus on achieving leadership and first mover advantages in Western China, while avoiding the fierce competition in the southeast. However, this strategy fundamentally based its roots on the ‘expectation’ of living standards and beer consumption to rapidly rise to give the company maximum profits. It is known that there are huge gap between amount of beer consumed in western and eastern parts of China. Therefore rivals that well started their business in eastern region would experience tremendous amount of advantages to acquire the emerging market. How well could Carlsberg position itself from other competitive rivals’ well prepared strategies, when it hurriedly pursues long term alternative strategy? It would be easy to guess the answer.