ABC pharmaceutical firm is a small Asian firm in China; the firm has its own factory which 200 workers factory. The company currently developed some valuable new medical products using its unique biotechnology expertise. The top managers of the firm want to expend the market and decide how to best serve the European Community market. The company has three options:
a. Manufacture the product at home and let foreign agents distribute and sell the product in the European market;
b. Manufacture the product at home and set up a wholly owned subsidiary in Europe;
c. Enter into a strategic alliance, that is a joint-venture with a large European pharmaceutical firm. The product would be manufactured in Europe by the 50/50 joint venture and distributed and marketed by the European firm.
Ultimately, they decided the first option, manufacture the product at home and let foreign agents distribute and sell the product in the European market.
As a new expansion company, doing exporting is easy and save cost. Furthermore the company manufacture the product at home can protect its unique biotechnology expertise and using European distributor can enter the market rapidly, save time and cost to build up wholly owned subsidiary.
2. Advantage and disadvantages of three entry modes
The above options are the three entry modes, below list out advantages and disadvantages of three entry modes:
* It avoids the often-substantial costs of establishing manufacturing operations in the host country
* It may help a firm achieve experience curve and location economies
* It may realize substantial scale of economies from its global sales volume
* When there are lower-cost locations for manufacturing the product abroad
* High transportation costs
* Tariff barriers
* The local agent also doing business to another company
* The local agent may selling the high price
* The agent may not do as good a job as the firm would if it managed its marketing himself.
Wholly owned subsidiaries
* Reducing the risk of losing control over the firm's competitive advantages which is based on technological competence
* It gives tight control over operations in different countries.
* It is necessary for engaging in global strategic coordination
* When cost pressures are intense, it may pay a firm to configure its value chain at each stage is maximized.
* Firm must bear the full capital costs and risks of setting up overseas operations
* The risks associated with learning to do business in a new culture are less if the firm acquires an established host country enterprise.
* Acquisition may diverges the corporate culture
Joint Ventures (JV)
* Benefits from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems and business systems.
* The firm might gain by sharing these costs and/or risks with a local partner.
* Risk giving control of its technology to his partner
* The JV does not give a firm tight control over subsidiaries - to realize experience or location economies
* As the foreign firm's knowledge about local conditions increases, it depends less on the expertise of a local partner
* It may lead to conflict for control
From above table we can know although every entry mode have advantages and disadvantages, there is better to use the exporting, as a small firm first start to entry the market. A firm by choosing this entry mode will decrease the risk and having control of its technology.
3. Organizational structure
The ABC structure of selling product to European market as below procedure:
The Asian firm can undertake their own production as to prevent leakage of new technology to competitors, local or foreign. Hence, compared to wholly-owned subsidiary and joint venture, exporting seems to be a more suitable option.
Those new medical products could be exported to the European market via internal export department of the firm or by engaging a local exporting company/agent.
In order to reduce transaction cost and commitment, the firm could get in touch with foreign importers to distribute their products to those respective European distributors.
These foreign distributors would then distribute those medical products to the consumers of the European market.
4. Analysis of European market
The European medical image management market is going through a phase of evolution. The focus seems to be shifting toward communication and clinical involvement since the picture archiving and communication system (PACS) is now considered the way radiology is practiced.
"The next few years will see a very substantial rise in the number of PACS installations as a result of the factors driving the market. The use of PACS in combination with web technology is certainly among the factors that have allowed this technology to be available to mainstream medical products. The PACS market is going through the growth stage of its life cycle; therefore, we find several issues that are influencing the market. Technological trends and their potential impact are among the factors that are gaining a lot of interest in the market", says Baccari
The ABC firm has such technology, that why the manager decided to entry European market. Some people forecast that a few years later, many European local factories will work in this technology. Thus the ABC's manager chose the fastest way to entry the market that is exporting.
5. Analysis of China market.
China's pharmaceutical market is growing at an annual rate of fifteen percent with the ethical drug market valued at over $6 billion. China's over-the-counter drug market is currently valued at over $1.2 billion and is estimated to reach $5 billion by 2010. China's healthcare infrastructure continues to modernize. The State Food and Drug Administration recently announced it would revamp regulations on standards and norms for clinical drug research quality controls. The Chinese government has also authorized increased funding for improved disease prevention. The Ministry of Health recently authorized $100 million for the construction of disease prevention and control centers in western China. Overseas investors continue to demonstrate their commitment to China. In 2002, foreign direct investment reached over $52 billion.
Although there is a lot foreign direct investment in China, the Chinese medical firm still has strength to export its products. By Chinese government support those medical firm, the firm is easier to clearance the export custom and less tariff.
6. Coordination and control.
There are four types of control system: personal controls, bureaucratic controls, output controls and cultural controls. ABC involves personal controls and cultural controls.
6.1 Personal Controls
Personal control is control by personal contact with subordinates. This type of control tends to be most widely used in small firms, where it is seen in the direct supervision of subordinates' actions. However, it also structures the relationships between managers at different levels in multinational enterprises. For example, ABC manager use great deal of personal control to influence the behavior of his immediate European distributors. In turn, these he may use personal control to influence the behavior of its distributors, and so on down through the organization. In doing so, he essentially exercised personal control over these managers and, undoubtedly, over the strategies that they favored.
6.2 Cultural Controls
Cultural controls exist when employees "buy into" the norms and value systems of the firm. When this occurs, employees tend to control their own behavior, which reduces the need for direct supervision. For the ABC firm, the cultural control is not only inside the organization, but also with the foreign distributor. Due to two countries history and culture different, the people also have different norms and values. The manager should pay attention about this control, because the norms and values can influence people working performance and consumer purchasing power.
7. Decentralization vs. Centralization of decision making:
Any firm in existent has a certain approach to its style of decision making. In general, the two ends of the decision making spectrum are centralization and decentralization. Authority is given to the top management for centralized decision making while authority is given to middle management or the front line employees. There are certain advantages and disadvantages in using any of one. Managers of the Asian firm should consider the following factors before finalizing on its approach.
They are, the level of control required, reaction to market changes, capability of distributors and transaction cost.
7.1 Level of control required.
Centralization is suitable if the managers require high level of control. Control can be in the form of policy on marketing strategies. For example, specific marketing strategies could have been planned for this particular medical product for the European market by the firm and it intends to follow through with the plan without any major deviations caused by the distributors. Hence, those Europeans distributors must align the distribution of the product to the firm's strategy as not to affect say the product positioning of the product.
7.2 Reaction to market changes.
On the other hand, decentralization is suitable if the firm does not require high level of control. Market is ever changing and hence, speed is the essence to success to managers that advocate the decentralized decision making approach. For example, managers of the Asian firm are not very knowledgeable about the European market. Hence, these managers need the localize knowledge of the overseas distributors to assist them in adapting to what is acceptable to their market.
In this sense, adopting the decentralized approach gives them an upper hand in terms of speedy reaction to foreign markets.
7.3 Transaction cost.
In any international business, the issue of transaction cost never fails to be considered. Transaction cost includes opportunity cost incurred due to too much time spent on passing of information from the top down or bottom up. Centralized approach will increase transaction cost while decentralization will reduce it. For example, the Asian firm is adopting a centralized approach. The European market is not what they expected and the distributors could not do anything to adapt because they have to get approval from the Asian firm. The time used to pass information could cause the firm to incur huge opportunity cost.
Hence, it is advisable for the managers of the Asian firm to adopt the decentralized decision making model as they are unfamiliar with the European market. They can latch on the localize knowledge of the distributors to further adapt their product for success.
8. Cross cultural analysis.
The importance of cross-cultural analysis is not to be undermined for any firm that plans to expand overseas. To put things into perspective, managers of ABC firm should take the following cultural factors of the European market into serious consideration in their marketing efforts for their new medical products.
The factors are religion, language and education, and the country's demographics.
Religion plays a vital role in any society as it affects the norms, values and beliefs of the people. For example, majority of European countries are mostly comprised of Christians or Catholics. If the function of the newly invented medical product is used to promote safer abortion operation, thus, the introduction of this product would fail severely. The teachings of their faith condemn abortion and hence, it is very difficult for them to accept a product that goes against their values.
Demographics of a country or market include age and gender population. This is very important because the firm's strategy on their target market is directly affected. For example, European countries are facing aging population problem. Hence, if the new medical product is targeted at the aged market, the rate of success there is certainly much highly than a market with small number of old people.
Gender difference plays a part in their appreciation of the visual presentation or packaging of the product. Packaging helps to attract or put off consumers' attention and interest in the product.
8.3 Language and education.
The literacy rate of the market is also very important because it affects the firm's decision on the labeling of the products. Labels are very important because they educate the consumers on the usage of the product. Especially, in this case as the product is medically related. Literacy rate in European countries is high and hence, the firm is able to print more specific instructions on the labels. However, the firm should avoid using medical jargons if the product is targeted at normal consumers. Usage of medical terms is acceptable is the product is targeted at the clinics or hospitals.
With above issues, the ABC firms should consider the recommendation of above factors. In the term, the decision making and culture are very important factors. The firm must seriously consider how to manage these factors to best serve the customers.
As a small Asian firm entry as exporting, there's a lot barriers other than above mentioned, then firm must know how to achieve and solve the situation and environment changed. In modern day, the environment always changed the most important factor that influent environment change is technology. Thus the company must continuously improve its technology to compete with European rivals.
In my opinion, with above mentioned improved and the firm have core competency, also need to tailor the European consumer, ABC can expand the market and increase the market share fast.
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