Portofolio #1: International Expansion

QUESTION

Portofolio #1: International Expansion

The task for the Portfolio is to prepare an international expansion strategy for a local American manufacturer, no matter its industry (clothing or food, for example).

You are required to:

• Pick a real product and a target country.

To prepare your final project you must:

• Prepare a broad overview of the target country (market Intelligence).
• Determine key national characteristics that will affect marketing of the product (business environment analysis).
• Analyze market entry options (FDI vs. export vs. joint venture; opportunities for market entry).
• Determine entry strategy on entry mode, management structure, marketing and distribution strategies, management of resources, and human resources or HR (market entry strategy analysis).
• Make your marketing mix decisions.

Instructions:

Your project must incorporate the following elements:

• Company Background: Describe the company and the goods and/or services it provides. (NOTE: The description of the company is submitted during Week 2. This is worth 20 points toward the final Portfolio Project grade.)
• Market Intelligence: Provide a broad overview of the target country. Include here information about its political, legal, cultural, economic, and technological characteristics, and make sure you provide supporting statistics and indicators for each component of the macroenvironment. (NOTE: The description of the company is submitted during Week 3. This is worth 20 points toward the final Portfolio Project grade.)
• Business Environment Analysis: Determine key national characteristics that will affect marketing of the product, SWOT, and ethical implications.
• Market Entry Analysis: Analyze market entry options.
• Market Entry Strategy: Provide entry strategy on entry mode, management structure, marketing mix, management of resources, and human resources (HR).
• Recommendations: Provide your recommended course of action.
• Contingency Plan: Analyze and discuss risks, potential ethical dilemmas, solutions, and an exit strategy in case the company must quit the market.

Paper Requirements

• Your Portfolio Project should be ten to twelve pages long, not including the required title and reference pages, and be formatted according to CSU-Global Guide to Writing and APA.
• Include a minimum of five scholarly sources (the CSU-Global Library is a good place to find these sources).
• Employ in-text citations and references that adhere to APA formatting.

ANSWER

International Expansion Strategy

COMPANY BACKGROUND

An American company producing yogurt and other refined dairy products such as milk beverages and ice cream, SmithFoods, has its capital in Orrville, Ohio. With other large production plants in Richmond, Indiana, and Pacific, Missouri, the dairy producer trades its several dairy products (yogurt, iced tea, cheese, milk, sour cream, punches, juices, dips, and iced cream) using its brand names: Artisa, Ajoyo, Ruggles, and SMITH’S. It also carries out personalized label business and contractual packaging contracts. SmithFoods, in addition, has many business associates and an extremely wide product distribution network, necessitating its production of at least 350,000 liters of milk, each day. The firm’s yearly ice cream sales are always above 15 million liters, and the long life milk and premium quality cheese it produces in its plants have made the company popular all over the United States.

MARKET INTELLIGENCE

SmithFoods wishes to expand its business into Mexico. There is a need to increase the firm’s revenues in sales of their product, SMITH’S Yogurt, and broaden the market for its products. Therefore, a study of the country has to be carried out to ascertain its viability for business. The large Northern American nation borders the Pacific Ocean’s northern part, with a climate varying from tropical climatic conditions to semi-desert conditions. It also has tall mountain ranges and very low-lying plains at its coast. Mexico has a varied range of resources that occur naturally, such as timber, mineral resources such as gold, lead, copper, petroleum, silver, zinc, and natural gas. The country’s population is mostly situated in and around cities, especially Mexico City. Volcanoes in the middle and the south regions of the country, alongside other natural disasters such as tsunamis on the coast of the Pacific Ocean, are common in Mexico.

Agriculture is one of the main industries in Mexico. Therefore, the country produces a variety of agriculture products: maize, cotton, wheat, beans, rice, tropical fruits, coffee, and potatoes. Products from livestock farming include bacon, dairy products, beef, poultry, and poultry produce. The nation is also industrialized, with food industries, tobacco industries, beverage processing industries, chemical manufacturing companies, metal industries (iron and steel), textile industries, the petroleum industry, clothing industries, tourism, and motor vehicle producing industries. Mexico mainly deals in the exportation of finished industrial products, oil and petroleum derivatives, cotton products, vegetables and packaged fruits, refined coffee, and products made from steel and silver. It also imports various metal alloys for industrial use, metal products, agricultural machinery, electrical appliances and electronics, aircraft and aircraft parts, motor vehicle parts for assembly, and dairy products. Most of the country (99%) is served by electricity, primarily produced from coal and other types of fuel.

Mobile phone service and subscription for the public to use in communication is well spread in Mexico. Moreover, a stable, wide spread telephone and fax connection for corporations and small businesses, together with government services are in place. Coaxial cables and Fiber-optic form of data transfer and communication has been properly developed in almost every region of the country. Mexico boasts of its many radio service providers (1400 radio stations), and the several visual television service companies. Transport is not a problem, as the roads in the country are modern, with several air transport providers, airstrips and more than 200 large airports having modern runways. Railways are in place in most of the nation’s regions, together with petroleum, gas, and liquid products’ pipelines (Looney, Frederiksen, 1981).

Investment Capability

The rate of growth of the Mexican economy is very fast. Between 1995 and 2002, Mexico’s economy recorded a growth rate of 5.1% every year. This growth rate was better than that of several developed economies such as the United States, within that period. The Mexican economy remains stabilized and progressive in spite of the several economic and disaster problems that face the country quite frequently. The rate of currency exchange between the United States dollar and the local peso has remained low over the years, ensuring that the citizens of Mexico can afford products from the United States, even when priced in dollar units. The close proximity of the nation to the USA means that firms from the US, (such as SmithFoods) are able to open up new companies and even franchises in Mexico and have the ability to run and manage them from their headquarters in the USA. Opening companies in foreign countries that are far from the home country is usually expensive because management has to contract one or a few local employees as managers, to coordinate the operations of the business in the new market.

The economy of Mexico, besides being agricultural driven, is also supported by the country’s many exports. The country is internationally recognized for its export products, and has demand from the entire world market. For example, three of the largest world automobile and aircraft producers are located in Mexico. Mexico offers quite cheap and readily available workforce, which consists of mid-aged, hardworking individuals. Notably, wages are substantially low because of the country’s huge population around major cities (Pacheco‐López, 2005). Mexico has the advantage of an unending development potential because a lot of the naturally occurring resources have not been used, and are incredibly cheap. Besides, the large country offers adequate land for industrial development. Most of the industries in the country are situated around the developed cities at the central part of the country, especially in Mexico City. The rest of the nation is fairly unindustrialized.

Mexico’s economy is mainly run and influenced by the private sector. Privately owned companies are many, and the Mexican government has put in place favorable and investor-friendly business laws. One example of these regulations is, after the election of president Nieto in the year 2012, he passed laws which led to the reduction of corporate taxes. He also liberalized the power and energy industries, and formulated laws which disbanded existing monopolies in Mexico. The formalities for corporations and firms registration has been largely simplified, where it is even possible to complete all the registration processes online, therefore, minimizing the total time period required for establishment of businesses, and registration costs.

Investment Challenges

As shown in this study, the Mexican market is favorable for foreign investors. However, labor laws and regulations in the country are not favorable for business. The Mexican government has crafted labor protection laws for local employees, to protect them against exploitation and control by foreign employers. For instance, a foreign employer sacking a local employer is required to pay the employee an equivalent of three months’ salary in addition to a premium cash amount dictated by the number of years that that employee has been working for him, unless he can provide a clear reason for dismissal to the labor court, i.e. prove that the employee in question was involved in an illegal act (Sassen, 1990). This is the main reason why investors entering the Mexican market choose to employ independent contractors in their businesses. The nation’s economy suffers from a high rate of crime, especially drug wars and other crimes that are related to drug gangs (Shelley, 2001). These problems are very discouraging and frustrating for investors. Vices such as corruption and bribery exist among businesses and also in the government dealings with companies. Problems such as fraud are approximated to constitute up to 10% of businesses’ costs, resulting in an increase in the cost of consumer goods in the Mexican market.

Waste disposal facilities are not many, and those that exist are not efficient to handle hazardous industrial and factory wastes, and effluent from industries. Sewage together with thick industrial effluent are spread all around the streets of cities, contaminating rivers and drainage systems. Deforestation, desertification, and rampant soil erosion have led to landscape and environmental problems in Mexico. The country is burdened by thousands of jobless immigrants from Guatemala and America, who are involved in social evils and crimes. Most of them cross the country’s borders searching for employment, and lack of jobs pushes them to criminal activities to obtain a livelihood.

Conclusion

Mexico is a very viable country for SmithFoods’ investment, providing a large market and favorable business regulations. However, the market is not free of challenges, which require proper consideration and various ways of countering them consolidated, and also constituted in the setup cost of the business.

BUSINESS ENVIRONMENT ANALYSIS

Mexico’s population is largely concentrated around the urban areas in the middle of the country. Marketing of SMITH’S Yogurt shall, therefore, require media that can reach as many people as possible, especially around the densely populated cities. Billboard advertisements and print media can be very successful in urban areas. Internet connection is also widespread throughout the country. The internet is a popular way of marketing in the current business world. Competition exists, as Mexico produces dairy products already. SmithFoods will, therefore, need to appeal to consumers in the new market, that their yogurt is better than that from its competitors. They may consider penetration or predatory pricing, to attract more consumers who will go for their cheaper product.

A SWOT analysis of SmithFoods and Mexico’s business environment reveals the following

Strengths: SmithFoods, being a firm that has been in the American dairy industry for a long time, has the advantage of having a wide market experience and industrial connections. The company has over 450 business associates and a vast product distribution network. The firm has loyal workers, who are very efficient and hardworking. The company also has the right equipment and machines for yogurt production in large scale.

Weaknesses: dairy processing equipment and machinery are quite expensive. Setting up a dairy processing plant is capital intensive, which does not play well with the fact that SmithFoods is not a large international company. Transportation is also costly, and dairy products, being highly perishable, require investment in refrigeration. Refrigerated transport and storage of bulk products are very expensive.

Opportunities: Mexico, being highly populated, provides an excellent market for SmithFoods’ products. Moreover, the fast-growing economy and its rapidly growing population that cannot be sustained by the local dairy farms provides SmithFoods with high demand for its products. Mexico practices dairy farming, mostly in the temperate climate regions. This can provide SmithFoods with the raw milk for SMITH’S Yogurt production, at a low price.

Threats: the high crime rate in Mexico poses a threat to SmithFoods. Break-ins may occur, resulting in huge company loses. Transportation of products also faces the threat of carjacking. The security of the company’s workforce is also a concern for SmithFoods. There is also rampant corruption and bribery, which will result in an increase in the production and transaction costs of the company. The strict labor laws imposed by the Mexican government also pose a threat of a high unmanageable wage bill, for the company (Pacheco‐López, 2005).

STRATEGY FOR MARKET ENTRY

Venturing into a new market is not always an easy task. Businesses require skillful methods of penetrating into the market and establishing themselves as players in it. Various market strategies exist. Below are a few market entry options available for SmithFoods:

• Direct exporting: this involves the direct sale of commodities into a new foreign market, using agents (Kamau, 2011). SmithFoods could manufacture their yogurt in the United States then export it into Mexico. The sales personnel and distributors in Mexico shall represent the firm in Mexico, working closely with the firm’s management in the US. The salespeople and distributors must be hired professionally and must be qualified, as they become the company’s face in the new market.
• Licensing: SmithFoods could license another dairy company in Mexico to either market or produce their product (brand), especially where the firm in Mexico already has a large market share.
• Partnering with a foreign firm: SmithFoods may also consider forming a partnership with a local firm in Mexico. This could be a company well-familiar with the dairy business in Mexico, having a large market share, or an advantage in the distribution of products.
• Joint venture: besides forming a partnership with another firm, SmithFoods may also partner with an existing Mexican firm, but to create a new third company. This company will be independently managed and run, with its own office and team, and any risks and losses shall be shared equally.
• Greenfield investment: this way of market entry is the most involving and costly. It involves the normal form of putting up a new plant: buying a piece of land, constructing the company from scratch, and running the new firm on an ongoing basis ((Kamau, 2011). This is an extremely risky way of entering a foreign market, though it may be necessary due to government regulations in many countries, and the freedom and benefits it may come with.

SmithFoods, being a large producer of dairy products, has the capability of producing enough yogurt for the US market, and the Mexican market. I would recommend direct exporting form of entry strategy, as it involves minimal risk, and the company may employ other forms of entry (such as greenfield investment) after the success of direct exporting.

Management Structure and Marketing

The ‘4P’s’ in business marketing, price, place, product, and promotion, are the most successful market mix components in any foreign market (Goi, 2009). SmithFoods will perform a study on the current market prices of competitors’ yogurt products in Mexico, then use penetration pricing to attract consumers to SMITH’S Yogurt. The company’s yogurt product is of premium quality and value. This shall play well with the consumers, and boost the sales of the yogurt in Mexico. Consumers are willing to pay even an extra coin just to enjoy a product of higher quality. The place also determines the success of a product’s sales. The sale points of the product have to be appealing to consumers. Moreover, product retailers pay a premium for a good location, and this shall boost sales (Constantinides, 2006).

Promotion efforts for every new product have to be done in an excellent way, to ensure that consumers are aware of the product, its attractive price, its benefits, and where to get it. SmithFoods should invest highly in advertisements of SMITH’S Yogurt, as it is an unknown product in Mexico. Billboard in the major cities with large populations, advertisements on social media and print media, and adverts on local television stations and the internet would be very beneficial.

To achieve success in direct exporting, a functional management structure is a vital part of the product’s introduction into the new market (Miles, Snow, Meyer, Coleman, 1978). The structure should be one that has direct control on the sales agents and representatives in the Mexican market. The following management structure has the highest chances of ensuring success in the introduction of SMITH’S Yogurt in the Mexican market:

The field sales manager, located in the United States, shall work closely with the sales and distribution supervisor in Mexico, and his team. He shall also collaborate closely with the sales promotion and advertisement team, to ensure success in the introduction and sales of SMITH’S Yogurt in the Mexican market.

ETHICAL ISSUES AND CONTINGENCY PLAN

Every business management team expects returns from each venture it undertakes. Contingency plans exist as proper exit strategies to achieve returns and pay back investors and the management for an investment (Zsidisin, Panelli, Upton, 2000). As previously identified, SmithFoods’ investment in Mexico is not risk-free. Risks occur in that the new investment may not be a success, as predicted by the market study carried out. The existing competition may prove too difficult to beat. Government regulations and costs involved in business licensing may rise above the foreseen levels. There is also the threat of the business’ security, with the high crime rate in the country. Insecurity may lead to incredible business loses, which will necessitate an exit strategy. Corruption in Mexico’s business environment may raise the production and transactional costs of SMITH’S Yogurt. If the costs rise to unmanageable levels, the company will have to use a contingency plan to save the business.

Any business entering a new foreign market is faced with various ethical issues (Beauchamp, Bowie, Arnold, 2004). SmithFoods, not being an exception, will be faced with ethical issues such as:

• Operational issues: the dilemma of whether to perform certain operations in the new market, which may be illegal in the home country, United States. These include paying living wages, adhering to contractual terms, or even environmental conservation, all which may affect the foreign investment’s profitability.
• Bribery and corruption: the American business regulations do not accept bribery. However, in the investment in the foreign country, SmithFoods may be faced with the decision on whether to uphold their morality by refusing to offer tokens or gifts to government officials and traders, which may be considered as bribery in the US, especially if such tokens are expected in Mexico, to achieve smooth business operations.
• Taxation and transfer pricing: where the foreign market may offer lower taxation compared to the US, the company may avoid taxes through transfer pricing. The foreign investment makes a huge profit but pays little taxes, while the company in the home country quotes very high costs and a low profit. This is from time to time considered illegal and poses an ethical issue.

These are some of the ethical business issues that SmithFoods may face, and therefore, logical business decisions require to be made on the direction to be taken when faced with such issues. The investment should seek minimal ethical compromise while making sure that it does not affect its success or profitability.

Various exit strategies are available in the business world. An example of one is offering an IPO (initial public offer), where the company may sell part of its business to the public, in the form of company shares. This is beneficial especially if any investors in the new business venture demands their returns on the investment, or even a refund, in the early stages of the business (Bayar, Chemmanur, 2006). When cash or liquidity problems arise during the investment in the foreign market, SmithFoods may also consider a merger. This involves merging with another successful company in Mexico, therefore, selling the company to another, to acquire funds to pay back investors.

An IPO would be the best option for a business such as SmithFoods, intending to enter a new foreign market, as this shall ensure the benefit of liquidity access, and at the same time ensure that the introduction of SMITH’S Yogurt is successful due to public involvement in its production and sale. SmithFoods may also consider mergers with large well-established dairy companies in Mexico, such as Alpura, in the event of business difficulties during entry into the new market.

References

The CIA World Factbook-Mexico.

Pacheco‐López, P. (2005). Foreign direct investment, exports and imports in Mexico. The World Economy, 28(8), 1157-1172.

Sassen, S. (1990). The mobility of labor and capital: A study in international investment and labor flow. Cambridge University Press.

Looney, R., & Frederiksen, P. (1981). The regional impact of infrastructure investment in  Mexico. Regional Studies, 15(4), 285-296.

Shelley, L. (2001). Corruption and organized crime in Mexico in the post-PRI transition. Journal of Contemporary Criminal Justice, 17(3), 213-231.

Kamau, A. (2011). Market entry strategy.

Goi, C. L. (2009). A review of marketing mix: 4Ps or more?. International journal of marketing studies, 1(1), 2.

Constantinides, E. (2006). The marketing mix revisited: towards the 21st century marketing. Journal of marketing management, 22(3-4), 407-438.

Miles, R. E., Snow, C. C., Meyer, A. D., & Coleman, H. J. (1978). Organizational strategy, structure, and process. Academy of management review, 3(3), 546-562.

Zsidisin, G. A., Panelli, A., & Upton, R. (2000). Purchasing organization involvement in risk  assessments, contingency plans, and risk management: an exploratory study. Supply Chain  Management: An International Journal, 5(4), 187-198.

Beauchamp, T. L., Bowie, N. E., & Arnold, D. G. (Eds.). (2004). Ethical theory and business.

Bayar, O., & Chemmanur, T. (2006). IPOs or acquisitions? A theory of the choice of exit strategy by entrepreneurs and venture capitalists. Unpublished working thesis, Boston College.