17
IV
Module 1a
International Business Economics, Aalborg University
Tomas Sedivy, Martin Hansen, Melanie Ihlenfeld, Cristian Costea, Marina Larsen, Carolin Staller, Dimitrios Zygolanis - 23 Sep 2015
MSc in International Business Economics
1st semester
Aalborg University
Internalization of Jabwood International
The report has been prepared by: Group 17
Tomas Sedivy _____________________
Martin Hansen _____________________
Melanie Ihlenfeld _____________________
Cristian Costea _____________________
Marina Larsen _____________________
Carolin Staller _____________________
Dimitrios Zygolanis _____________________
Delivery Date: 23-09-2015
Number of words: 8647
Executive summary
Jabwood International, a well-known wood trading company in the Middle East faces a serious crisis. Due to the unstable political climate in the region, Jabwood's sales have decreased dramatically, with an overall drop of 20%. To further complicate the situation its main supplier informs Jabwood to share their exclusivity rights for one of their most important products, TANITA, with other distributors.
It is not a fortunate situation for Jabwood, but what can they do? A decision has to be made, as the family-owned company needs to act immediately for holding and broadening its market position. Therefore they discuss entering new markets, in this case Saudi Arabian and Chinese market. As both markets offer different opportunities, risks and the success in the new market is essential for the company's surviving, the decision really matters.
In this project we are working as consultants to give Jabwood several recommendations, they could follow for overcoming the crisis.
First the country's attractiveness is evaluated. This analysis has a great focus on all possible factors, which act upon the firm in its business environment. Therefore the firm itself is evaluated with regard to all internal and external factors, while there is a special focus on the two potential markets itself. Employing the CSA/FSA matrix, we outline the international competitiveness of Jabwood and the proprietary elements it can use to its advantage. Consequently, the competition in each country is analyzed with a special focus on the competitive advantages Jabwood possesses for succeeding in the potential environment.
For evaluating the country`s attractiveness the analysis continues with calculation and assumptions in regards to the potential market share, Jabwood could reach when engaging in Saudi Arabia or Chinese market. Considering the experiential knowledge that Jabwood has gathered in all the years, they can successfully enter a market if they would be willing to make the necessary adjustments.
As both markets differ in opportunities and risks, the analysis goes on with a discussion of the possible entry modes Jabwood could choose. By applying theories and frameworks from international business we find the most suitable modes of entry for Jabwood in both Saudi Arabia and China. Considering our analysis, the most appropriate entry modes would be an acquisition, greenfield investment or joint venture on the Saudi Arabian market, while Jabwood should consider a joint venture in China on the long term.
The result of the project represents final recommendations for Jabwood. The firm should focus their efforts and resources on the Saudi Arabian market on which they have previous knowledge and where the firm could successfully re-enter through an acquisition that would not only offer them an increased market share but also the possibility of having full control over its operations. Additionally, our recommendations also anticipate the possibility of entering the Chinese market. Given the larger psychic distance that separates them and the need for Jabwood to act in a fast manner, we advise them to consider entering the Chinese market just on a long-term expansion plan via joint venture.
Table of Contents
Introduction 1
1. Country Attractiveness 2
1.1 Internal and external factors 2
1.2 Relevant factors for the company 8
1.3 Competition 9
1.4 Market Share 13
2. Entry modes 18
2.1 Identification of possible Entry Modes 18
2.2. Identification of most suitable Entry Mode 22
3. Discussion and Conclusion 27
List of Tables
Table 1: External Factor Scoring for China and Saudi Arabia 6
Table 2: Identification of FSAs (Jabwood) and CSAs (Lebanon) 11
Table 3: Estimated Market Share in Saudi Arabia and China 14
Table 4: Iconic income after taxes 15
Table 5: Alternative Routes of Services Markets 25
List of Figures
Figure 1: Project Design 1
Figure 2: Business Model Canvas Source 3
Figure 3: Internationalization of the firm – a step by step approach Source 23
Figure 4: The Uppsala model – Stages of international market expansion 24
Introduction
Jabwood, a family owned wood trading company, is contemplating expanding abroad and have settled on two options: Saudi Arabia and China. This comes in a period of crisis, seeing as since 2009 sales growth dropped and the company is about to lose its exclusivity as supplier for a well-recognized brand of softwood.
In this paper we will assume the position of consultants, with the purpose in finding an adequate solution for the company's crisis. This will enable us to provide a well thought through suggestion to a proceeding plan for the company, based on relevant theories and methods, which will be debated throughout the paper. Both pro's and con's of these theories will be looked at in order to provide an optimal solution. Furthermore, the conclusion will be based on the opinion of the researchers after debating the value of each country opted for.
The following report aims to explore Jabwood's internal and external environment. The project begins with this introductory chapter, which has the aim to introduce to the reader the company and to present an overview of the entire paper, as illustrated in figure 1.
Figure 1: Project Design
1. Country Attractiveness
While facing the risk of losing a significant amount of sales volume, due to a potential loss of exclusive selling rights for its most important product, TANITA, Jabwood is searching for new markets to hold and broaden its current market position.
As the business environment contains both internal and external factors with an impact on the investigated company, it is important to identify the state of the firm before starting to evaluate the suitability of the markets.
1.1 Internal and external factors
Internal Factors
Business model of the company
First, the Business Model Canvas will be used to assess the important information about the workings of Jabwood in one place, as well as in a transparent manner. The group has decided to use this model, because it provides a more comprehensive overview of the ownership and localization advantages of the company.
Internalization advantages will be discussed in the chapter "External factors".
Figure 2: Business Model Canvas
Source: Examination Case text
Strategyzer " Resource Index (Canvas), https://strategyzer.com/canvas (access 12 September 2015)
By looking at the business model canvas, a strong connection between the important pillars of the company's business model and its operation localities, can be observed. As the table shows, the storage facility, located in Lebanon, belongs among the key company assets and ownership advantages. This object allows Jabwood to purchase goods in large quantities, gain the advantage of economy of scale, which enables it to provide its customers with cheaper wood than its competitors.
The ability to offer high quality products, which are also suitable for the local market, is ensured by a long company history in the industry, and the knowledge of local (Middle Eastern) preferences.
Organization and culture of the company
Jabwood is a family owned, and managed company, which is organized hierarchically from its headquarters in Lebanon. The company's vision is to: supply virtually every country in the Middle East with products and services that have earned recognition..."
From the information above information, it can be understood that Jabwood values hard work, knowledge and family, and has an ambition to expand in the region.
The communication with customers is seen as a partnership, rather than the classical relationship of a supplier and client. The company possesses a unique knowledge of the local tastes, which enables it to act as a consultant for the Middle Eastern market, when combined with a high level of professional skills in the industry.
Only the family members are considered as candidates for managerial positions, which provides the company with a very limited source of human capital, with only two currently available.
All the managers are fluent in Arabic, English and French.
The company has a strong focus on healthy cash flow, which is ensured by making payments in cash, immediately following the completion of a trade favorable.
The motives of the company
There are various motives for companies to go international. In general it can be distinguished into market-seeking, efficiency-seeking, resource-seeking and strategic asset seeking motives. The motives of Jabwood can be classified as market-seeking motives, since the companies strives to find new customers with the main goal of keeping its sales volumes. This highlights the importance of considering market related factors to evaluate the country's attractiveness.
International experiences
Over the years, Jabwood has expanded to a number of markets, in the Middle East. Originated, and still based in Lebanon, it had exclusive distributors in Saudi Arabia, Syria and Iraq in 2009. Before the company left the Saudi Arabian market in 2009, the sales in Saudi Arabia accounted for approximately half of the company's total annual revenue.
Conclusion of the internal factors
A distinct local embeddedness of the company in the Middle Eastern region can be identified. The following factors limit the company, and cause a lower mobility of its value chain:
Need of a well-working logistics network
Among the key values that the company delivers to its customers, is a fast and reliable delivery. These qualities are difficult to reach in places where the company does not have a well-developed logistics network, and where its managers lack knowledge of the environment.
Know-how tied to the market
The know-how of Jabwood is tied to the complex knowledge of the Middle Eastern markets' taste, networks and channels.
It can be assumed that this know-how cannot be fully implemented in non-Middle Eastern market.
Strong connection on one supplier
60-70 percent of the company's revenue comes from selling the products of TANITA. Jabwood has the exclusive rights to sell the products of this company in the Middle East.
When expanding outside the Middle East, the company could find itself in competition with more companies, which also have the rights to sell products of TANITA in the market.
Limited human resources
The fact that only a family member can become a manager can limit the company, when entering fields and markets that the family members are not familiar with.
Company's vision to supply the Middle East
The company specifies in its vision that it aims to supply "every country in the Middle East…" Therefore, the company faces the threat of missing a business opportunity in a more attractive country, while focusing solely on the Middle Eastern market.
External factors
General characteristics of both countries are going to be benchmarked in a table inspired by the Business Environment Risk Index (BERI). This approach has been chosen, because it enables us to compare a number of factors that the company has to consider, when deciding whether to expand in China or Saudi Arabia, and allows for a quantification of the varying importance of these categories as well.
The process of evaluation of the external factors, will continue with assessing and commenting on characteristics, which have a low degree of measurability (such as the culture or liability of foreignness).
At the very end, the overall connection of internal and external factors will be discussed.
General characteristics benchmarking
Table 1: External Factor Scoring for China and Saudi Arabia
First of all, it is important to remember that the method that has been used, has a limitation in terms of not considering the actual difference in size of the compared categories – in other words, it only reflects whether one country is better than the other, but not by how much.
Having this in mind, there are several categories that are interesting to notice, even despite the fact that both countries scored the same result.
One number is the notable difference in the market size, as China imports 100x more CBM of wood than Saudi Arabia, which will be further discussed in section 1d.
A considerable distinction can be observed in the category of infrastructure investments planned for the upcoming 15 years. While the Chinese institutions plan to invest less than 500 billion USD, Saudi Arabia will invest more than 1,000 billion USD in the infrastructure. Considering the better rated conditions for doing business in Saudi Arabia, which indicates that the local institutions have a more favorable attitude towards entrepreneurs, it can be assumed that the politics of institutions is better disposed to wood trading companies in Saudi Arabia, than in China.
Specific characteristics description
Beside the general characteristics, which have a high degree of measurability, specific characteristics also exist. These are harder to quantify, but can have a high impact on the success in a chosen market.
In the Jabwood case, these specific characteristics are especially represented as cultural characteristics and attitudes. While in the Saudi Arabian market, wood is the favored material for construction and furniture making, the Chinese are more hesitant to build with wood and generally prefer metal or concrete. Therefore, it is harder to convince the Chinese people to use wood as a construction material.
Furthermore, the Chinese administrative procedures are very bureaucratic and the business environment differs significantly from the environment in the Middle East.
Evaluation of the external factors
As both markets get the same score in the attractiveness of their general characteristics, the specific characteristics have an even higher and more important impact on evaluating the country's attractiveness.
The Chinese hesitant attitude to build with wood, diminishes the country's attractiveness, even at a first glance. Implying other factors, like complicated administrative procedures and the Communist system, the Chinese market seems less attractive than the Saudi Arabian market.
1.2 Relevant factors for the company
When entering a new market, the firm faces cultural, economic and political differences, which lead to information disadvantages.
To overcome this liability of foreignness, the firm has to search for specific competitive advantages, in order to succeed in the foreign market.
Furthermore, the firm should be aware of the costs, which arise due to the inexperience of the new market. Especially in the beginning, the firm faces added costs of network-building and coordination over distances and across time zones.
Depending on the country the firm chooses for its internationalization, the competitive advantages and the costs vary.
Considering the business model of Jabwood, as well as the differences in language and culture, the level of liability of foreignness, and following threats, seem to be substantially higher in China than in Saudi Arabia.
The transaction costs of establishing a new subsidiary of the company in China would be increased, particularly due to the higher uncertainty about the environment and the asset specificity of the country. Keeping in mind, the limited human resources of the company, the attempt to manage potential Chinese employees without knowing their language, might cause substantial transaction costs. Other transaction costs could be brought by the institutions, which seem to be less favorably disposed to the entrepreneurs in China, than in Saudi Arabia. They could also be brought by the bounded rationality of the company's management, which lacks experiences with managing employees that are not Arabian. The managers of the company have to pay strong attention to the specifics of the culture that they are going to work with.
At first glance, it can be assumed, that the costs for entering the Saudi Arabian Market, which is psychically and physically closer, and has already been entered successfully once by Jabwood, are lower than costs of establishing a business in China, which would probably require a considerable level of coordination, and high establishing costs.
However, as the company prefers a high level of control over its foreign operations no matter where they are located, it is plausible to expect that a re-entry into the Saudi Arabian market would require major investments.
Jabwood also has to pay strong attention to whether its most important supplier, TANITA, already has a distributor in the market they are entering. Thus, if the company is unable to trade with them in the new market (e.g. due to an exclusive contract between TANITA and a local distributor), the competitive strength of Jabwood, would substantially decrease.
The company has to be aware of a very strong bargaining power of this supplier, and be prepared in case TANITA acts opportunistically.
At least it is important for Jabwood to uncover its own position as a late starter in the two markets, which makes it even more important to figure out the firm-specific advantages, also with regard to its competitors.
1.3 Competition
Competition in Saudi Arabia
The Saudi Arabian wood trading industry can be described as highly competitive and is characterized by a high buyer bargaining power, which causes lower profit margins of the companies operating in it.
The wholesalers face an intense pricing competition, while the market is still attractive for new entrants, due to the exemption of wood products from import duties.
Jabwood's competitors are mainly powerful and wealthy families, which are embedded in local relationships. This implies, that there is a strong focus on relationship and trust, and that those factors are crucial in order to succeed. These companies own warehouses and branches throughout the country. Most of them are a part of larger corporate groups and are, therefore, highly diversified. This diversification makes the companies more stable, as well as more resistant to the market changes, and facilitates their internalization. It can be argued that the broad network resulting from this diversification, is one of their main competitive advantages. Furthermore, those companies gain advantage from not being dependent on selling only one product.
Competition in China
The Chinese market is the second largest wood importer in the world, and the demand for wood is still increasing. The main competitors in the Chinese market are major wood brands from countries like New Zealand, Australia, the United States and Russia. This means, that the competitors are mainly MNEs which are globally active. It can be assumed that those companies possess significantly higher experiential knowledge than Jabwood.
Furthermore, it is noteworthy that those competitors have exclusive distributors in the country. This implicates the significance of finding partners for distribution in China.
Jabwood's position within the competitive environment
Jabwood faces the liability of foreignness in both countries. This means that Jabwood has some disadvantages, when compared to the local competitors in terms of a lack of knowledge about certain local customs, markets, the unfamiliar legal systems or missing networks.
However, in China, the liability of foreignness for Jabwood, seems to be much higher than in Saudi Arabia, since Jabwood does not have the necessary knowledge about the Chinese culture, the Chinese customers, their wants and needs, or their way of communicating and doing business. In Saudi Arabia, Jabwood can exhibit experiential knowledge, seeing as the company has already been active in the country. For that reason, the liability of foreignness in Saudi Arabia, for Jabwood, is significantly smaller in comparison to the competitors, especially the domestic ones.
In view of the fact that Jabwood faces liability of foreignness in China and Saudi Arabia, it is necessary to find out, which firm-specific advantages (FSA), can help the company outweigh this liability. Here, the Resource-based View of the firm can be applied, since it aims to explain the competitive advantages of firms compared to its competitors through both tangible and intangible assets. Advantageous resources and capabilities need to be unique and difficult to duplicate by competition. However, it is necessary to take the context of the firm into account, and for that reason, the country-specific determinants (CSA) of the firm's home country, need to be contemplated. The CSA / FSA matrix, suggested by Rugman (1981), constitutes a suitable framework to outline the international competitiveness of a firm.
Table 2: Identification of FSAs (Jabwood) and CSAs (Lebanon)
Jabwood possesses a different FSA, which can help the company entering new markets. However, Jabwood's home country, Lebanon, cannot reveal strong CSA. The environment in Lebanon supported the improvement of Jabwood, in terms of gaining knowledge over the years, but nowadays, there are no CSAs, which could help Jabwood succeed in international markets. This means that differentiation of the firm, is the key to success for entering new markets.
Furthermore, some of the firm-specific advantages only apply for some countries and not for others, for example cultural similarities. Because of this, it is necessary to consider which firm-specific advantages can be transferred to the investigated countries and which advantages can help Jabwood get into a better position, compared to both the domestic competitors, as well as the international competitors, and to outweigh the liability of foreignness.
Jabwood can transfer the previously mentioned FSAs to the Saudi Arabian market. However, there are additional FSAs, which only apply to the Saudi Arabian market. Jabwood possesses experiential knowledge in the market, which means that knowledge about the customers, their needs and wants, the competitors, the business procedures, or rules and regulations, already exists.
Since the psychic distance between Lebanon and Saudi Arabia is rather small, Jabwood possesses further advantages compared to other international companies. Additionally Jabwood has a good reputation in the Middle Eastern market, with recognition of its high quality products and reliability, and is known as one of the biggest companies in the region. In Saudi Arabia, Jabwood had close customer relationships and a well-established network. A possible reactivation of these relationships could present a significant advantage for Jabwood. Furthermore, Jabwood owns a fleet of transportation trucks to deliver to the Middle East, due to a re-entry to the market could be conducted, without high additional costs for transportation. It should be noted that another FSA of Jabwood could emerge, assuming that Jabwood manages to maintain the exclusive rights to sell TANITA.
Jabwood can utilize most of its FSAs, such as the high product quality, the expertise, the wide product portfolio, or the economies of scale, to the Chinese market. However, in comparison to the Saudi-Arabian market, Jabwood has some disadvantages in China. The favorable reputation in Saudi-Arabia, for example, cannot apply in China, since Jabwood is new to the market, and most customers won't know the company. Furthermore, Jabwood has no knowledge about the Chinese market, and the psychic distance from Lebanon is considerably larger. It will be a significant challenge to figure out the needs and wants of the customers and to adapt to the Chinese market. Moreover, Jabwood will not be the only seller, of TANITA if they expand to China. As previously mentioned, a crucial determinant for success in China, is to find a suitable partner. This, however, would mean a loss of control for Jabwood.
Having a look at the prevalent competition in China and Saudi Arabia, it can be concluded, that the attractiveness to enter the Saudi Arabian market is higher compared to the Chinese. Jabwood faces liability of foreignness in both countries. However, Jabwood is able to overcome those liabilities much better in the Saudi Arabian market, due to its firm-specific advantages, especially the already existing market knowledge.
1.4 Market Share
Generally defined as the percentage that a company has of the total sales for a particular product (either in units or revenue), market share represents one of the main indicators of a firm's position, in regards to its competitors, or its own position in the market. As explained by Farris, although market share constitutes one of the most important metrics available, we have no one method that is generally acknowledged as the best for calculating it. The many different methods of calculation can yield different results, which sometimes make it difficult to assess the real position of a firm in a certain market.
In calculating the maximum potential market share for Jabwood in China and Saudi Arabia, we have used all the available information, along with the given assumptions. This provides us with relevant information regarding the potential market share, as well as the eventual direction in which Jabwood should go.
The estimated market share for new entrants in both countries is at 5% of the total markets, equivalent of 5,000,000 CBM in China and 50,000 CBM in Saudi Arabia. Out of these Jabwood has the potential of gaining 2% in a new market (China) or 10% in a familiar market (Saudi Arabia), which can be seen calculated in the following table.
Table 3: Estimated Market Share in Saudi Arabia and China
According to Table 1 the market share potentially available to Jabwood in China reaches their supply limit of 100,000cbm in the first year, compared to an available market share of merely 5,000cbm in Saudi Arabia. For the second year sales, the new market entry cannot assume to raise sales and thus the Chinese market share will remain at 100,000cbm. However, in Saudi Arabia, the familiar market, a doubling can be expected, thus reaching 10,000cbm.
In the third year, statistics show that Jabwood's market share in China can potentially be doubled, despite their inability to supply more than 100,000cbm. In Saudi Arabia, the third year sales potentially increase to 15,000cbm, reaching 30% of new market entry share.
The maximum sales profit entering China's market cannot exceed $30.000.000 per year for the estimated three years, due to the limited supply power of Jabwood. This suggests that there may be a deficiency in the company development and potential growth in market share. On the other side, the Saudi Arabian market share profits may not be as high as the Chinese, but has the potential of growing together with the market share, generating $1.500.000 the first year, $3.000.000 the second year and $4.500.000 the third year.
Tariffs on lumber and Taxes on foreign corporations vary in both countries. The lowest overall that Jabwood can expect in Saudi Arabia is 12% tariff and 20% taxes, compared to China's 3% tariffs and 30% taxes.
In contrast, the highest overall Jabwood can expect is 12% tariffs and 30% taxes in China, unlike Saudi Arabia with 12% tariffs and 45% taxes. But without a specific knowledge of when and how the tariffs and taxes are going to be paid, Jabwood cannot have a specific view of expenses of exporting.
Table 4: Iconic income after taxes
If Jabwood had the knowledge of which circumstances would require a certain amount of tariffs and taxes in both countries, it could calculate with, more accuracy, the profit of the potential market share.
In order to provide an overview of the income Jabwood will have, Table 3 shows, that in both countries, the maximum profit that can earned is coming out of the equalizations of the "Corporate Tax foreign" line. However, without a detailed analysis of the expenses, the tax fees and the tariffs, Jabwood cannot at the moment calculate with accuracy the net profit.
Furthermore, although we have calculated the potential market share that Jabwood can reach both in Saudi Arabia and China, these results can easily be altered with influences from specific advantages illustrated previously in this paper:
At the moment they are still the sole supplier of TANITA products in the Middle East. TANITA has highly sought-after products which distinguish themselves through their quality.
The technical knowledge of Jabwood's human capital is superior to other firms, they can easily benefit from this higher knowledge.
Through their culture they have high skills in creating and maintaining working relationships.
They have a good reputation on the market in regards to the way they conduct business. A high quality of their products and a good management of customer relationships have created this image and there is a high degree of probability they could replicate this model in other countries, especially in the Saudi Arabian market given the similarities in culture and the fact they have previously been active on the market with significant results.
Through a well maintained and organized fleet and well supplied warehouses they have the ability to ship global orders immediately.
Over time they have managed to build economy of scale, meaning they have lower costs of wood, which gives them a cost advantage over the other companies in the market.
In the future, Jabwood also intends to reposition itself as a single product specialist, focusing only on sawn timber, which could have a positive effect on the company as they will develop into a product specialist company.
Most of these factors would influence the potential market share of Jabwood in both China and Saudi Arabia, although there are a series of factors that could only be translated into an advantage in the Saudi Arabian market, given the cultural similarities and geopolitical closeness.
There are also global factors that will influence the wood market as both the Chinese and the Saudi Arabian markets are subject to influence from these global trends.
As presented, the market in Saudi Arabia encountered decline in 2010 but recovered. On the other hand, the Chinese market has been rising since 2010. For both countries, the increasing number of construction projects can translate into a higher sales volume for the timber industry. However, businesses have to be aware that a new international crisis can lower sales.
In addition, other sets of variables will influence the development in both markets. In China there is an increased usage of steel and cement, however if the Chinese get used to working more with wood, then the volume of sales would increase, translating into a bigger market. The Saudi Arabian constraint comes in terms of technical knowledge. At present there is an extensive usage of wood, however, a gain of technical knowledge in working with steel and cement would signify a decrease in the sales volume for the timber industry.
Analysing the situation from a global point of view, Kotler gives us nine megatrends for the 2013 – 2023 interval, which can influence the market, amongst which we find:
global redistribution of wealth and economic power: Economic powers have shifted towards Japan, Middle East, India and China;
Continued urbanization and growing infrastructure needs: Major cities have reached 20 million in size, including Beijing and Shanghai. Furthermore, China is planning on creating new cities in order to absorb urbanization growth. As these cities grow, they require investments in roads and buildings.
Growing cooperation between private and public sectors: Partnerships between local and state governments and private enterprises can strengthen infrastructure and economic development.
Furthermore, Jabwood can also use some of Kotler's eight pathways to sustainable growth, to further strengthen its position in the market and increase our market share. This increase has to be achieved having in mind profitable and sustainable growth in the long run, not only in the short run.
The potential market share that Jabwood can achieve in China and Saudi Arabia will also be strongly influenced by the mode of entry into each market. Further explanations are available in Chapter 2.
Conclusion: Country Attractiveness
In order to enter new markets, Jabwood has to follow the Business model Canvas exploiting the facilities the company owns and the quality of products it can offer. Focusing in the market seeking motives, Jabwoods goal is to evaluate the individual country's attractiveness. By eliminating the logistics network, market knowledge, supplier connection, human resources and expand beyond the Middle East, Jabwood can achieve a successful entrance in new markets.
When rating the importance of the two target countries, Saudi Arabia and China, through specific factors, the result comes out even. When entering new markets Jabwood is going to face economic, cultural and political differences. Because of this the Saudi Arabian market is the easiest to enter. Compared to China's markets required specialized staff and knowledge of the market.
Local competition is also a problem for Jabwood, because of the advantages local companies have based on trust and relationship in both Saudi Arabia and in China. Of course Jabwood can take advantage of the knowledge it has earned in Saudi Arabia from previous years. Although Jabwood has the right FSA to help the entrance to new markets, Lebanon's CSA can't help the company. However, the FSA's to enter the Saudi Arabian market and the Chinese market are different. On one hand Jabwood has knowledge of the needs for the Saudi Arabian market, but on the other hand Jabwood can offer the quality, the expertise and the variety of products the Chinese market demands.
The volume of the Chinese market share will potentially be larger, but comes with greater risk, whereas the Saudi Arabian market is easier to enter, but will yield a lower sales volume compared to the Chinese market.
2. Entry modes
The aim of this chapter, is to identify the most suitable entry modes for Jabwood by utilizing two internationalization theories, namely the Eclectic Paradigm by Dunning and the Uppsala Internationalization Model. Descriptions and explanations of different possible entry modes will build a foundation for discussion and will therefore be the first step to answer this question. Moreover, we will discuss the suitability of those entry modes for Jabwood. The reasons for choosing the mentioned theories will be provided as well.
2.1 Identification of possible Entry Modes
Licensing/franchising
Licensing/franchising are two methods of international expansion that require only a low amount of investment from the expanding company. In both cases the owner of the business concept gives permission to another subject to use the know-how and brand for establishing a new local subsidiary.
The intermediate mode of franchising has vast similarities with licensing. The difference, however, is in the marketing activities, which are a part of the licensee's responsibilities in case of licensing, but in case of franchising, the franchisor organizes them on an international basis.
Seeing as Jabwood defines one of their main advantages as their tacit knowledge it will be hard to do licensing/franchising since tacit knowledge is difficult to transfer to the future franchisee/licensee.
Joint ventures
This mode of entering market is based on creating strategic alliances with one or more partner companies. Afterwards, these partners share the costs of the market entry as well as their specific resources such as production facilities, knowledge or distribution channels.
According to Porter and Fuller, there are two basic types of firms' coalitions:
Y-coalitions – where the partners share the actual performance of one or more value chain activities" and which comprise upstream (R&D and/or production) and downstream (marketing, distribution, sales and/or service) based collaborations.
X-coalitions – where the partners divide the value chain between themselves". This type of collaboration is beneficial especially when the partners are experts only in some activities but lack knowledge in the other parts of the value chain (e.g. expert in R&D with limited sales skills).
While entering the Chinese market, creating an X-coalition with a Chinese partner could allow Jabwood to lower the liability of foreignness as well as eliminate the disadvantage of not knowing the Chinese culture and the local managerial practices. When entering the Saudi Arabian market, Jabwood could potentially profit from a membership in a coalition of type Y, as contacts are important in the Saudi Arabian culture, a local based company could extend its network, help with the distribution of goods and, therefore, enhance the sales of Jabwood.
The con of this mode of entry is the limited level of control over the business activities, which could most probably be a problem for the current management of the company.
Exporting
Export is a possibility when internationalizing, we will first go through the basic pros and cons of exporting and afterwards we will relate it to how it might work with the Chinese and Saudi Arabian markets, after that we will compare these individual advantages to the company's goals themselves.
Exporting, rather than FDI, is low in costs and will not require much investment from Jabwood, which directly means a lower risk and a lower impact on Jabwood's capital.
On the other hand, export will often be slower than e.g. opening a subsidiary in the new country and thus the growth in the country will take longer time.
China is a huge, but also a rather complicated market to join. Most of the world is trying to sell in China, but because of the communist system and a very strict administrative procedure, many of the suppliers have chosen to open offices in China instead of just exporting. This means that if Jabwood wants to enter the Chinese market, we can assume they will have to open an office as well, in order to compete.
Saudi Arabia is much smaller than the Chinese market, but still the biggest market in the Middle East, where it is important to have good relations in order to do business. When Jabwood left the market in 2007 and only used indirect exporting they lost their market share in Saudi Arabia, thus leading to the conclusion that pure export is not the best idea for Jabwood.
Foreign direct investment (FDI)
As part of the hierarchical modes of market entry, where the firm owns and controls the foreign entry mode, we find the foreign direct investment (FDI). Historically, the two main categories of FDIs are greenfield investments and mergers and acquisitions (M&A), which will, therefore, be the main focus of the following discussion, although the suitability of other forms of FDIs will also be investigated.
As researched by Lee and Lieberman, when faced with the decision of entering a new market, a firm must take into account several factors, amongst the most important ones being cost, risk and speed of entry. A short analysis will be provided in regards to advantages and disadvantages of the two entry modes in correlation with the above factors.
Cost of entry
An acquisition will most likely incur higher costs than a greenfield investment, given that they involve acquisition costs, transaction costs and integration costs, which can represent a considerable fraction of business value. In the case of a greenfield investment, building everything from the ground up would also incur costs that can achieve a significant value.
Risk of entry
Although both modes of entry present risks, it is generally believed that the higher risk is presented by acquisitions. Greenfield investments are done using incremental investments that are spread across multiple transactions in a project, whilst acquisitions typically involve a large one time sum. Risks for greenfield investments, are in the form of not achieving significant market share in terms of revenue, so that the investment is profitable and sustainable. In a market that is highly competitive, with many different competitors, Chatterjee and Singh found a tendency for firms to enter concentrated markets by acquisition.
Speed of entry
When speed is important, there is no doubt that acquisition represents the fastest entry mode available. Most acquisitions can be fulfilled in a short timeframe, whilst greenfield investments might take several months or years to be profitable. Acquisitions also allow the firm to realize revenue earlier, achieve scope economies faster and capture a larger market share.
Greenfield investments
Greenfield investments represent the expansion of a firm's activity on a foreign market from the ground up. A greenfield investment could infer high costs, as the infrastructure needs to be built from scratch.
Shimizu K. et al. found that firms that engage in FDIs, such as greenfield and mergers and acquisitions (M&As) are commonly faced with either "liability of foreignness" or "double-layered acculturation", which could jeopardize the success of a FDI. But taking into consideration the somewhat familiarity that Jabwood already has with the Saudi Arabian market, since they were previously active in it, and the cultural similarities between Lebanon and Saudi Arabia, the liability of foreignness and the double-layered acculturation lose their strength as arguments against penetrating the market through an acquisition. Greenfield investment or acquisition in China, are going to be difficult given the cultural and geopolitical differences between China and Lebanon.
The motives for which Jabwood might consider a greenfield investment lie in the high degree of control that such an investment has. Nevertheless, entering the market through a greenfield investment also requires that Jabwood has the time and means needed for the success of this investment.
Acquisitions
Another mode of entry that Jabwood could employ is through an acquisition. This particular mode of entry, at the current moment, would be suitable only for the Saudi Arabian market. As shown above, the knowledge Jabwood possess in this market would eliminate to some extent the liability of foreignness and the double-layered acculturation. Entering the Chinese market through an acquisition would not be viable at this point given the high cultural and geopolitical differences between Lebanon and China and also the non-existent knowledge base that Jabwood has on the Chinese market.
M&As have been a popular mode of strategic expansion for a long time. They can be used in accessing new and lucrative markets, as well as in expanding the market for a firm's current goods.
Qiu and Zhou argue that one of the incentives for an M&A a firm might have, is closely related to the familiarity that the acquired firm has on the foreign market. Compared to a foreign firm, a local firm has better information about local consumer tastes, rules and regulations, effective advertising and network liaisons. In other words, although Jabwood possesses knowledge about the Saudi Arabian market, its knowledge base is undoubtedly lower than that of a local firm.
Touching on benefits, the acquisition of a company that meets specific criteria relevant to Jabwood might be a long process, but a rewarding one, seeing as Jabwood will then have access to an extended knowledge base and gain further access to the market. The company should be situated in the same branch of the industry so that it becomes a market extension for Jabwood. The size of the company and the assets it possesses are relevant, but also have to fit Jabwood's current capabilities. Through warehouses and processing equipment Jabwood can have products shipped straight to their new Saudi Arabian warehouses to be processed and stored, thus further reducing costs. In respect to control, which is of extreme relevance to Jabwood's management, it provides a high degree of control. Following the thinking of Haynes and Thompson, the most desired outcome will be an obvious growth in terms of sales, and significant increases in terms of net market share.
Foreign sales branch/foreign sales subsidiary
These represent other forms of FDIs, although the value of the investment is much lower compared to greenfields or acquisitions. According to Hollensen, a firm might find it relevant to establish foreign branches that are an extension and a legal part of the firm. Or foreign subsidiaries that are companies located in the host country, but are owned and operated by a foreign company, under the laws of the host country, to which resident salespersons can be assigned. If the sales are going in the right direction, then a subsidiary will be formed. Since these two types of small scale FDIs are not adding a significant value to the host country, there will promptly be local demands for a manufacturing or production base. If the firm's products have a long-term market potential in a country that is relatively stable politically, and there are signs for a market share increase, then the firm will seek full ownership of sales and production in order to meet the firm's strategic objectives fully.
2.2. Identification of most suitable entry mode
The Uppsala internationalization model
For identifying the most suitable entry mode for Jabwood, we decided to apply the Uppsala model and the eclectic paradigm. While the Uppsala model provides a general idea on a company's internationalization process, the eclectic paradigm is more specific in identifying the suitable mode of entry according to the firm-specific and localization advantages, the internationalization offers. Both theories are essential for understanding and identifying the suitable mode of entry for Jabwood.
The Uppsala model addresses the internationalization process of MNCs and SMEs as a time dependent process, developed through an incremental and gradual approach, firms starting their operations abroad in fairly nearby markets with similar cultures and institutional conditions and only gradually penetrating more distant markets.
Figure 3: Internationalization of the firm – a step by step approach
Source: S. Hollensen, Global marketing, 2011, p. 75
Johanson and Vahlne explain that this gradual process is intended to allow firms to learn from the experience they acquire in their initial operations, and further use this experiential knowledge to reduce the uncertainty they would face in subsequent internationalization efforts, through which they gradually increase their market commitments abroad. Market-specific knowledge is assumed to be gained through market experience. Meanwhile, knowledge of the operations can be transferred from one country to another.
According to the Uppsala framework after engaging in export, the firm will try to increase its market reach by investing in FDI. These four stages of entering an international market, where the successive stages represent higher degrees of international involvement or market commitment were identified by Johanson and Wiedersheim-Paul.
Stage 1: no regular export activities (sporadic export)Stage 2: export via independent representatives (export modes)Stage 3: establishment of a foreign sales subsidiaryStage 4: foreign production/manufacturing unitsStage 1: no regular export activities (sporadic export)Stage 2: export via independent representatives (export modes)Stage 3: establishment of a foreign sales subsidiaryStage 4: foreign production/manufacturing units
Stage 1: no regular export activities (sporadic export)
Stage 2: export via independent representatives (export modes)
Stage 3: establishment of a foreign sales subsidiary
Stage 4: foreign production/manufacturing units
Stage 1: no regular export activities (sporadic export)
Stage 2: export via independent representatives (export modes)
Stage 3: establishment of a foreign sales subsidiary
Stage 4: foreign production/manufacturing units
Figure 4: The Uppsala model – Stages of international market expansion
Source: J. Johanson, F. Wiedersheim-Paul, 'The internationalization of the firm: Four Swedish cases', Journal of Management, vol. 12, no. 03, 1975, pp. 305-322
In 2009, Johanson and Vahlne revised the original Uppsala model by also accounting for the importance of trust-building and knowledge creation in local networks. In the revised model, it is not the liability of foreignness that matters, but it is now the liability of outsidership, which can be broadly defined as being an outsider to the relevant business networks. Given the easy transfer of knowledge from one country to another, smaller perceived psychic distances, a more homogenous world, quicker and easier access to knowledge about doing business abroad and the increasing number of experienced personnel, it is not the liability of foreignness that affects a firm's internationalization, it is the difficulty of becoming an insider in local networks.
Trying to transpose the Uppsala model to the Saudi Arabian market would be inefficient for Jabwood, as it was already proved that exporting and indirect dealing with the Saudi Arabian market is not a viable way of conducting business. The relatively small psychic distance and their previous knowledge of the market, as well as remembering that firms that internationalize through the Uppsala framework do that over a long period of time, are further indicators that the framework would not be suitable for an expansion on the Saudi Arabian market.
On the other hand, the higher psychic distance and the lack of knowledge of the Chinese market would favor Jabwood in employing the Uppsala framework for the start of internationalization in China.
While the general internationalization patterns have been pointed out via the Uppsala model, the eclectic paradigm defines appropriate entry modes by regarding ownership, localization and internalization advantages altogether.
Table 5: Alternative Routes of Services Markets
Source: J.H. Dunning, 'Explaining the International Direct Investment Position of Countries: Towards a Dynamic or Developmental Approach', Review of the World Economics, Weltwirtschaftliches Archiv, vol. 117, issue 01, 1981, Dunning, p. 32
A firm has ownership advantages when its firm-specific advantages outweigh the disadvantages, it experiences when entering a new market, facing liability of foreignness. As it has unique capital, for example knowledge, this immaterial capital can be transferred across borders by keeping its value without causing high transaction costs. In Jabwood's case this unique capital can be identified as the high and unique expertise, good reputation, and their using of economies of scale for achieving high quality products at affordable prices. As they are already one of the leading companies in Lebanon and the Middle East, it can be assumed that they could overcome the liability of foreignness in the new markets due to their existing experience and knowledge.
According to Dunning, ownership advantages are the foundation for engaging in contractual resource transfers, for example licensing. If the firm possesses internalization advantages beyond their ownership advantages, it would probably engage in exporting. Internalization advantages are achieved, when it is more profitable for the firm to use their firm specific advantages themselves, than externalizing them via licensing, etc. In Jabwoods case they would rather use their valuable expertise and knowledge themselves, than risk losing control via sharing their key success factors with another firm. As a result licensing/franchising is not a possible entry mode for them. Due to the physical presence which is needed in both markets for succeeding, exporting is not a suitable entry mode for Jabwood either.
If additional localization advantages exist, the firm will engage in FDI. Localization advantages can be identified as market size and growth, economic advantages and other specific business environment indicators. Via FDI the firm tries to maximize its advantages, by combining ownership, internalization and localization advantages. As the ownership and internalization advantages are more firm-specific, the localization advantages are determined by the location the firm chooses. As the localization advantages of Saudi Arabia and China have been discussed before, it can be summarized that Saudi Arabia, at the moment, offers more localization advantages than China.
According to the eclectic paradigm, Jabwood should focus on FDI in Saudi Market.
Conclusion: Entry modes
Incorporating the previous discussed entry modes, the most suitable entry mode for Saudi Arabia can be identified as acquisition. Although it implies risks and high costs, it offers a fast market entry, which is needed at the moment. As Jabwood has proved its success on the Saudi Arabian Market before, this decreases the risks, because they are not entering a total unknown market. A greenfield investment would also be a reasonable possibility, but given the current circumstances it would be a time consuming entry mode.
For entering the Chinese market, Jabwood could engage in a Joint-Venture on the long-term, for decreasing its liability of foreignness, while also profiting of this fast-growing, profitable market.
Due to several reasons pointed out before, exporting and licensing are not suitable entry modes for Jabwood International.
3. Discussion and Conclusion
"The years ahead will be best for those who learn to balance dreams and discipline.
The future will belong to those who embrace the potential of wider opportunities…"
Rosabeth Moss Kanter
Jabwood is in need of a fast growth in their sales in order to keep their exclusivity with TANITA. Jabwood themselves are considering either expanding to China or to Saudi Arabia. In order to determine the future course of action for Jabwood we have to consider which possibilities they have and what incremental repercussions those options cause. The answers we provide came from analyzing Jabwood International with a special focus on the firm's specific advantages followed by an analysis of the individual market of China and Saudi Arabia.
On one hand we have China, a thriving and massive market with 100 million m³ wood imported each year and a prospect of very high sales. Taking into account only the numbers, any wood wholesaler should consider expanding to China. However, expanding to China can be costly, specific factors such as high selling requirements and fierce competition, decisively influencing their decision to enter the market, on account of potential local investments. The psychic distance between Lebanon and China is also high and with Jabwood´s inclination to be in control and having key managerial positions held by family members, does not provide a safe environment for entering a foreign market with special characteristics such as China.
On the other hand, Saudi Arabia presents a smaller market in terms of unit consumption, whilst having a lower psychic distance and higher previous knowledge of the market. This should unquestionably provide them with an advantage if they should choose to enter the Saudi Arabian market. Both markets require close connections between Jabwood and the customer, thus exporting does not seem advisable. This leaves several other possible entry modes for both markets.
Through careful consideration of our in-depth analysis, our position is that the best possible outcome for Jabwood would come if the expansion of their operations will start in Saudi Arabia, under the form of an acquisition, greenfield investment or a joint venture with a local partner. These three options are best suited since they will all give them a local presence with focus on the specific market, high degree of control over investments and a favorable pathway to growth. However acquisition and greenfield are both quite capital intensive, whilst joint venture will offer them a lesser degree of control.
The main drawback of the explored options would be represented by the unfamiliarity that Jabwood has in using forms of market control, other than exporting, thus initial failures might have to be expected.
As initial steps, the company should scan the Saudi Arabian market and seek for a suitable company it can acquire for a reasonable price. The advantage of this approach is the speed of gaining market share, knowledge and network of contacts. The downside is the demanding character of acquiring an already established company, which, depending on their current financial health, could theoretically force Jabwood International to look for alternative financing options, such as banks willing to finance its expansion. If the company cannot find a suitable firm to acquire, it should look for a partner willing to form a Joint Venture with it. Jabwood International can offer knowledge as well as exclusive right to sell TANITA products and the partner will contribute with a local market knowledge and an already existing market share. Even though this solution goes against Jabwood's idea of having complete control, it is an efficient way to solve potential problems such as liability of foreignness or lack of financial capacity.
Additionally, the company should keep monitoring the Chinese market. Despite the fact that it is not ready for an expansion to China at this specific moment, Jabwood International should consider entering this market in future. The Chinese market presents itself as very attractive primarily due to its size and potential for a very fast growth; therefore, there is a big opportunity for the company as long as they increase their knowledge of aforementioned market and its specific ways of transacting.
However, another significant aspect that the company should re-evaluate, is represented by their work with human resources. Because of the fact that only a family member has a chance to become a manager, the company has a very limited source of human resources and might be missing some interesting opportunities for internalization because of this aspect. If it continues in the same direction and does not allow inside access to well-prepared and capable people outside the firm, the current company's management has a difficult mission in achieving success in its future endeavors.
With its current strengths Jabwood has the potential of transforming itself into a major competitor in the wood trading market. Improving the current way of conducting business and a constant openness to innovation should be paths to be followed. Potential does not always translate into success so Jabwood has to overcome current inside weaknesses and transform them into factors that would ultimately contribute to their overall development and prosperity.
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