Contents Why Expand? ................................................................................................................................................ 2 External Environment Analysis ..................................................................................................................... 2 Porter 5 forces .......................................................................................................................................... 2 Kingdom of Saudi Arabia (KSA) ............................................................................................................. 2 China- .................................................................................................................................................... 3 Modes of Entry .............................................................................................................................................. 3 Decision Criteria for entry mode............................................................................................................... 3 Organizational Objectives- .................................................................................................................... 3 Need for Control- .................................................................................................................................. 3 Internal Resources & Constraints ......................................................................................................... 3 Recommendation- .................................................................................................................................... 4 Lessons .......................................................................................................................................................... 4 Culture ...................................................................................................................................................... 4 Political and legal environment: ............................................................................................................... 4 Economic and Trade polices: .................................................................................................................... 4 Entry Mode: .............................................................................................................................................. 5 International Marketing: ........................................................................................................................... 5 Restructure ............................................................................................................................................... 5
Why Expand? There were 4 key issues with Jabwood in Lebanon 1) Limited revenue: Revenue streams have taken a steep decline over recent years and will take an even further hit with the loss of being the exclusive supplier of TANITA. Limited funds are available for any expansion, capped at 100,000 CBM to any single market. 2) Managerial constraints: It is required that management have full control of operations for any new market. Furthermore, only family members are employed in managerial positions. There are only two family members available with the required knowledge and expertise to take on new positions. 3) Political unrest: Recent uprising in the Middle East, especially in Syria. This has led to a closing of all borders between Lebanon and Syria. 4) Loss of Exclusivity of TANITA: Jabwood served as the exclusive supplier of TANITA for 20 years in the Middle East, a highly recognized softwood brand from Russia. TANITA has accounted for nearly 70 percent of the company‟s revenue. Due to Jabwood‟s loss in market share and sales, the rights to sell the product were extended to another timber trading company, leading to the potential for increased competition and loss in market position.
External Environment Analysis Porter 5 forces Kingdom of Saudi Arabia (KSA) – Saudi timber market has moderate entry barriers. The most important is that existing timber importers are major corporate houses with incredible wealth and influences. Given that, entry can be highly influenced by the incumbent importers such as Al Khalaf and Sattra National trade. This also means that there could be expected retaliation against new entrants if they challenge the sales and market share of existing and well established traders. The small timeframe required to start a business and to import further heighten the competition On the other hand, local regulations allow imports of wood products, duty free thus fuelling supply of timber and other wood products. As noted before, Saudi Arabia is a very lucrative market with expected investment in infrastructure to go beyond 1000 Billion USD. Saudi Arabia is the biggest market in the Middle East with local consumption est. to be 1 million CBM/year. No capital restriction on mobility of funds makes is a very attractive market for new entrants. Additionally- favorable capital regulations where capital can be 100% foreign. Looking at the expected and current demand of timber and construction material and economies of scale: buyer concentration to trader concentration ratio is very low. In other words, there are less firms for number of buyers for such wood products. This means, suppliers have an upper hand in determining prices and lacks a general ability to put the firm under pressure. Therefore, Saudi customer is less sensitive to price change. Opposite is true in case of suppliers. There are far less suppliers of raw materials and very few substitutes. As a result, customer has to agree to the prices set by these firms. This is especially attractive for any new entrant since they can establish themselves as cost/price leaders gaining a competitive advantage.
Due to concentration of suppliers, each has to fight hard to maintain their market share. With increasing industry growth, this competition becomes more intense. With diversified operations in different areas, a new entrant will have to work hard to capture market share. Nonetheless, wood remains the primary material for furniture making and construction in KSA. The locals lack experience in working with steels and concrete making it favorable for Jabwood to enter.
ChinaStringent product requirement in the China market are favored by the suppliers which are able to charge higher price for the lack of alternatives. Few suppliers fulfilling unique market demand of specialized wood and quality thus reducing bargaining power of buyers. High demand and consumption for wood in China together with limited supply produced locally, China has to depend on foreign export to meet its needs. However, the timber industry still faces a high intensity of rivalry despite the Chinese preferring other materials such as steel and concrete and lacks the skills with wood work. In deciding the country for expansion, Jabwood will have to consider the competitive opportunities and the risk involve in each country. While both China and Saudi Arabia offers great opportunities to Jabwood , the level of risk involve in each country differ. With its prior experience in Saudi Arabia, Jabwood faces lesser risk. China, although offers high growth opportunity, being a “culturally distant” country as compared to home country, poses a higher risk to Jabwood . Therefore it will be an “offensive strategy to expand to China vs . defensive move to move to KSA to stop the bleeding of depleting sales in Lebanon. However, High risk means high returns and if Jabwood moves to China, it is poised to take advantage of high growth and can make high returns, if the strategic move is successful. To solve its declining sale (that leads to TANITA pulling out from the exclusivity deal), it is highly recommended that Jabwood expand to Saudi Arabia given the lower risk and shorter time required to start the business going. In the long run, with proper restructuring of the management, trainings, and marketing, Jabwood should consider a joint venture with another Chines company facilitating expansion into China. Recommendation-
Modes of Entry Decision Criteria for entry mode Organizational ObjectivesTo secure and save TANITA exclusivity contract, Jabwood would require quick penetration into the foreign market to boost its sales. The time pressure and mobility of funds will affect the mode of entry and choice of market.
Need for ControlAs stated in the case, Fayez and Imad stresses on relevance and control as the primary factor when deciding the mode of entry. Additionally, management has to have full control of all administrative and operational tasks in the chosen country.
Internal Resources & Constraints Financial resources required for the expansion is a major constraint for Jabwood . With declining sales and the loss of the exclusivity deal, Jabwood will face difficulty in having to invest heavily in the new market. -
RecommendationIn my opinion, although the team differed, having considered the advantages and disadvantages of each entry modes in the presentation, together with Jabwood‟s objectives, motivation and resources available; exporting will be the best option for it to expand to the new market. With a low intensity of investment and high control, it is just what Jabwood is looking for when entering the new market. Moreover, having the ability to ship global orders almost immediately, Jabwood can leverage on this core competency to serve the market as soon as it enters.
Lessons This case has allowed me to understand the importance of careful analysis of complex factors affecting international business. In order to successfully manage and run international business one must ask- Why engage in international business- expand sales, acquire resources and/or reduce risk? Identify the objective/motivation for engaging in international business. Once a business decides to go international, it has many external factors to take care of:
Culture: In order to expand to another country a business has to understand and appreciate the culture of the host country. Some of the primary strategic questions are: should I locate to “similar culture” which will allow me to market my products easily or locate to “distant culture” which might give me more opportunity to diversify but with high risk. For example, Jabwood had to make a decision to either move to KSA, which is culturally similar and poses low risk vs moving to China- which is culturally distant and poses high risk but high growth opportunity. Since Jabwood wanted to make a less risky decision owing to its limitations and company objective it chose to locate to a country with similar culture to its own. Another question is- if we do locate to a culturally distant country how do we restructure or management and company orientation to adapt to local market and customs. If Jabwood moves to China- they would have to learn how to do business from scratch since they are new to Chinese business customs. In my opinion, you can get all the data you want to understand the economy and market size, but it‟s an entirely different ball game to learn behavioral practices of a different country. For example- Japanese don‟t like physical contact during business meetings, but Indians like to emphasize on a point by touching the shoulder.
Political and legal environment: Another important point to consider is the lack of or existence of sound legal framework and political stability. It‟s important to understand if the country is based on informal institutions where „who you know‟ is more important like in KSA or where the government is too involved in corporate affairs like in China.
Economic and Trade polices: Following from the above point, company needs to perform economic analysis of the target country. What is the rate of inflation, poverty, budget constraint of target population and economic growth? Most developing countries have great economic growth indicators- but does that make launching a product tenable? In case of Jabwood - economic indicators of China such as consumption rate, economic growth make it a great market to enter. But its culturally distant nature and lack of familiarity makes it a high risk
environment for Jabwood . Similarly- trade policies such as import duties, free trade agreements, and tariffs are important considerations when considering cost of doing business. According to this parameter KSA is more favorable because there is no import duties on processed wood products.
Entry Mode: After considering various factors to evaluate entry into a country, a company needs to figure out what is the best entry mode. Without going into detail on pros and cons of each method- a company needs to align entry mode with organizational objectives- i.e. do we want immediate penetration in a foreign market or we have time to set up operations from scratch? Do we have enough capital to start operations and which is the least capital intensive exercise? Can I bring back my money after Invest in a country? Do we need a local partner or can we go alone and learn from mistakes like Amazon? What kind of control on production or service needs to be there? Are there any internal constraints preventing us from going global such as lack of management or capital? All these questions have to be answered before we can evaluate a viable entry mode.
International Marketing: After selecting a country and a viable entry mode- selling products is a different ball game. One has to understand local market factors, limitations of local infrastructure and culture. Do we standardize the product or adapt to local markets? Will my brand image be lost in translation?
Restructure I think the most important consideration in International Business is an ability of a firm to maintain operations abroad and important aspect of that is management. One of the key factors that prevents Jabwood’s move to China is lack of management personnel who know issues of challenging international business and can effectively handle international business issues outlined above. So if an organization is new to this area- they must take immediate steps to equip local and home office operations with qualified managers (depending upon the strategy a company follows) For example. If Jabwood were to expand to China they would have to adapt their products to local standards and hence would need to follow multidomestic strategy. For that they would need people who can adapt strategic decisions of home office to local standards. Therefore they would need to use polycentric framework to staffing.
