The Process of Insertion into the Market - Essay Example

Acomb Tyres Internationalisation Introduction Ever since Acomb Tyres was founded by Dave and Crag Robson it has blazed a brilliant trail of success. That success was built on the solid bedrock of innovation and solid execution. This is a company whose founders understood well both their products and the local market. A realization has come that the company growth will slow down unless other markets are opened for the products. The new developed tyres with their patented technology offer the greatest opportunity this time to enter other markets with momentum and quickly gain market share. Objective of report The objective of this report, which is the culmination of a painstaking study of Acomb Tyres' current business and opportunities, is to provide realistic strategies for entering foreign markets. Internationalisation of SMEs. Acomb Tyres is by definition of the European Commission (2003) a medium enterprise because its turnover is less than 50 million and it employs less than 250 people. To put our study into context we need to understand issues that affect an SME enterprise when it attempts to internationalise. There have been many studies done on challenges of internationalising SMEs. We shall go over these challenges for Acomb Tyres to clearly understand what the issues are and then go on to show how internationalisation can be achieved at a lower risk. Szabo (2002) of the United Nations Economic Commission for Europe (UNECE) identifies five critical success factors (csf) for SMEs that internationalise. The first factor is managerial skills. The management style and skills required in managing an international entity are different from a national operating entity. It is those SMEs that acquire and apply the right kind of managerial skills that survive. Structured approach to management is very important and this entails a degree of formalisation of management processes. Szabo (2002) observes that SMEs that succeed"have a well-structured management, which concentrates on core activities." The second factor is good planning. These SMEs need to plan thoroughly for entry into an international market and generate realistic sales forecast figures for the market. The third factor is to link up with appropriate partners and/or agents in the market. The presence of a local agent or partner is indispensable in navigating the unfamiliar waters of the new market. The ever present threat of bad debts can be ameliorated by linking with a knowledgeable local partner who can screen off suspect customers. Sometimes governments provide incentives to companies that can be accessed by companies who are using a local partner. A local partner can share the risk with the internationalising SME. The fourth factor is technical ability and knowledge. Foreign markets may have standards that are different from the SME's home market. Equipment may need to be certified to meet specified national standards and in the process the product may have to be modified. The final factor is the ability to respond quickly and decisively to enter a market. Decisions to enter a market should be made and acted upon on time. Opportunities do not last; only those enterprises that seize opportunities stand to gain. Acomb Tyres measure well on most of these critical factors. The area that needs attention concerns the issue of management. The company will have to train its managers for international business operations. In fact to strengthen management recruitment of skilled international managers is required. The business planning needs to be more structured than it is now. A clear documented long term strategic plan needs to be compiled to guide all the company's activities. How does an SME enterprise enter a foreign market Liu and Lu (2004) summarise the popular four stage Uppsala model for internationalisation as: Stage 1: No regular Export activities Stage 2: Export by independent Representatives Stage 3: Establishment of foreign satellite affiliates Stage 4: Installation of foreign production facilities This model enables the SME to gradually understand the foreign market. It is a low risk strategy for internationalisation. Ahongas (1998) has indicated that the Uppsala model needs to be modulated with other models such as the network and resource models for internationalisation. For our purposes the Uppsala model is adequate because it clearly shows how Acomb Tyres can approach the internationalisation process at a lower risk. Acomb Tyres should understand that there is significant work that needs to be done in qualifying the market which we want to enter before we commit resources. Graham (1999) has written some good articles on the importance of qualifying leads in era of a glut of information coming from internet source. He further (Graham, 2004) argues for the need of an SME that is globalising to engage either an international business expert or a consultancy firm. Having examined the need to internationalize and how we can achieve it we turn our attention first to selection of a market that we can penetrate. It is not difficult to see that with liberation of Eastern Europe there are a lot of opportunities there. The second factor one has to look at is those countries in Eastern Europe that have gained membership of European Union offer less restrictions on import and export. Acomb Tyres being new to the export business would do well to choose a country where import and export rules are easier to understand and implement. The Czech Republic is a country that has been in the forefront of modernisation in Europe. Our long term objective is to eventually set up manufacturing plant in this country. The Czech Republic is reputed as one of the countries with lowest labour costs in Europe (Gitter and Scheuer, 1998). Analysis of Far Environment Our analysis is based on the STEP method. The STEP/PEST method evaluates in terms of Socio-Cultural, Technological, Economic and Political/Legal factors. Socio-cultural Environment The Czech Republic emerged from Eastern Bloc and pursued an aggressive strategy converting to capitalism. The population of the country is 10.2 million (Czech-real-estate.com, 2003). The same site indicates that most of the people in this country speak either English or German. This removes the language communication barrier which can be encountered in other countries. The Czech Republic is a member of the European Union. This removes a lot of trade barriers for importing equipment into the country as well as exporting to other EU countries. The country ranks highly in the Human Development Index (No.31) and the Index of Economic Freedom (No.33) (Wikipedia, 2005). This means that the country has a highly educated worker force and the conditions are good for conducting business. Technology Environment Although farming was not an important part of the Czech Republic during the communist times things have drastically changed. The country has taken into organic farming in a big way. The Organic Consumers Association (2005) reports that: The Czech Republic continues to lead the way among new member states after converting six per cent (255,000 hectares) of its agricultural land to organic; a higher ratio than the UK, Europe's second largest market for organic food but with only around 4.5 per cent of farming certified organic. This growth in organic agriculture will drive significant sustained growth in demand for agricultural tools. The environmental friendly technology of our tyres will resonate well with this organic movement. It seems more and more acreage will be used for organic agriculture. The Czech Republic has aggressively targeted technology growth in certain sectors as key for the growth of their economy. Agriculture and Information Technology are two of the identified sectors where Research and Development support will be provided. Since the Agriculture Industry is still in its infancy and growing this country will experience growth in agriculture related tool sales for many years to come. Acomb Tyres' entrance at this time will capture the growth phase. Slaisova and Vanicek (2002) show how e-commerce is rapidly penetrating the agriculture industry. Economic Environment The vital statistics of the country Sobicek (2005) are shown in Figure 1 below. Figure 1. These figures show a healthy economy which "appears to be at the top of the cycle" (Sobicek, 2005)1. Inflation is low and stable, GDP is roaring and the balance of payments are very positive and good. Sobicek (2005) points out that there is a problem with the fiscal structure and cautions that the social burden is too big. The government has to look into reduction of this social burden possibly after the 2006 elections. The vital statistics show that the country is very stable economically and investment in this country is relatively safe. The Political/Legal Environment The Czech Republic has been hailed as an example of a good democracy for countries that emerged from communism. It seems that this democracy has divided the country through the middle between social democrats and the communists. The ruling coalition has a majority of one. In the past year they have had three Prime Ministers. This in itself is not indicative of instability since there are countries like Italy and Japan that frequently change their governments without being considered unstable. The risk factor here is that the opposition party are the communists. Would they take the country back into communism That seems highly unlikely since the country is already tethered into EU with a transition period that lasts until 2011 by which time it should have met all EU requirements for full integration. Corruption, in other former communist countries, is still rampant. Mikule (2004) explains the origins of corruption thus: Another reason for corruption in the Czech Republic is the country's communist past. The communist system didn't provide clear and fair rules for competition. In the absence of a market economy, people looked for other ways to get scarce commodities. The country is trying to weed out corruption by introducing legislation to fight corruption and forming a Police Anti-Corruption Team that is tackling this scourge. There seems to be political will to do something about it but it will take time before corruption falls to levels seen in the Western Countries. Corruption is indeed a cost to doing business in a country. Although the corruption levels are still high in the Czech Republic, it is still possible to operate cleanly in this environment. In due course the government will bring corruption under control. Our assessment of the corruption risk is that it is not that high. Indeed there are many Western Companies that are setting up shop in this country. The government has privatised many industries but it retained certain industries that it termed "strategic" businesses. These include "electricity distribution, petrochemicals, coal mines, steelworks, aerospace, pharmaceuticals and the rails system" (Gitter and Scheuer, 1998)2. After its accession to the EU the Czech Republic removed all customs control at its borders because they are internal to the EU. Only the Prague International Airport remains an external border. The EU relevant laws (Brtnikova, 2004) apply as flows: Council Regulation (EEC) no. 2454/93 of 12 October 1992, establishing the Community Customs Code, as amended, Commission Regulation (EEC) no. 2913/92 of 2 July 1993, laying down provisions for the implementation of Council Regulation (EEC) no. 2913/92. Council Regulation (EEC) no. 918/83 of 28 March 1983, setting up a Community system of reliefs from customs duty, as amended, Council Regulations (EEC) no. 2658/87 of 23 July 1987 on customs and statistical nomenclature and the Common Customs Tariff, as amended. Brtnikova (2004) notes that the Czech Republic has harmonized its requirements with other EU members. Any products that are licensed or certified in any EU are accepted as certified in the country. For Acomb Tyres it means that our tyres which are already certified here in the UK do not need to be re-certified in the Czech Republic. These tyres can be sold immediately to customers in the Czech Republic. Czech Tyre Industries Analysis The major suppliers of agricultural tyres in the Czech Republic are Barum Continental and Nokiam. The latter has a manufacturing plant in Poland while the former manufactures within the Czech Republic. Many other brands are imported. The rivalry among the incumbents is not high since the industry is still expanding. There is no viable threat of substitute at the moment. This force of competition is not important for this industry. The threat of entry is always there that is why Acomb Tyres intends to enter the market. The entry barriers are not high especially for an EU manufacturer. The buyers have considerable power due to available choices. In a global environment the buyers have a choice from companies as far as India and China. There is no supplier power because the raw materials can be sourced any where in the world. Acomb Tyres' current suppliers are very price supportive. Recommendations Acomb Tyres should indeed internationalise its business operations because that is the only realistic chance to increase the company's growth. The current globalisation forces offer the best opportunity to expand to other markets. The Czech market has been chosen because it offers several advantages. Firstly no manufacturer is dominating this market. Secondly Acomb Tyres' product is the only environment friendly product. Thirdly, the agriculture in this country is leaned towards organic production which is an environmental approach to food production. Therefore the newly developed environment friendly tyre from Acomb Tyres offers a best fit to the whole organic agricultural movement. The strategy that will be used by Acomb Tyres is product differentiation taking full advantage of our tyres' unique environment friendly features and fuel efficiency. None of our rivals offer a similar product. We need to take into account the critical success factors as discussed earlier. This calls for engagement of a few managers that have experience in international business. The strategic planning process must now be formalised and a strategic plan document formalised. We need to look for and select suitable local agents in the Czech Republic to market our products. The process of insertion into the market shall follow the Uppsala four-stage model. We shall start from step two by recruiting local distributors and agents for our products. Once we have sufficiently developed the market we will look to set up our own branch offices over there. Finally we will start manufacturing in the Czech Republic for local market as well as for export. In this we will exploit the low labour wages, high productivity and cheap inputs such as electricity and water. Our short term target markets shall be the EU countries of Germany, Poland and Hungary. In the long term we want to break into the Ukrainian market which has a very big market. It will be advisable to seek a dominant tractor manufacturer who is willing to use tyres for all new tractors sales. Conclusion Acomb Tyres has an opportunity to expand into Eastern Europe by entering the Czech Republic market. The Uppsala model of internationalisation should be used. A choice of good local agents will enable a low risk entry into the market. References Ahongas, P. (1998). Internationalisation And Resources [Online] Available at: http://www.tritonia.fi/vanha/ov/acta64/2_1.html [Accessed on January 12 2006] Brtnikova, P. (2004). Czech Republic: Trade Regulations, Customs, And Standards, STAT-USA Market Research Reports [Online]. Available at: http://strategis.ic.gc.ca/epic/internet/inimr-ri.nsf/en/gr125876e.html [Accessed January 12, 2006] czech-real-estate.com (2003): Czech Republic Demographics [Online]. Available at: http://www.czech-real-estate.com/czech-demographic-info.html [Accessed January 12, 2006] European Union (2003). The new SME definition: User guide and model declaration, European Commission p.36 [Online]. Available at: http://www.europa.eu.int/comm/enterprise/enterprise_policy/sme_definition/sme_user_guide.pdf [Accessed January 11 2006] Gitter, R.J. and Scheuer, M. (1998). Low unemployment in the Czech Republic: miracle. or mirage [Online]. Available at: http://www.bls.gov/opub/mlr/1998/08/art3full.pdf [Accessed January 12, 2006] Graham, J.P. (1999). Qualifying Leads for Web Success [Online]. Available at: http://www.going-global.com/articles/qualifying_leads_for_web_success.htm [Accessed January 12, 2006] Graham, J.P. (2004). The Globalization of the Small Enterprise [Online]. Available at http://www.going-global.com/articles/globalization_of-the-small_enterprise.htm [Accessed January 12, 2006] Liu, L. and Lu, S. (2004): The Internet and SME Internationalization: Case Studies of Swedish Manufacturing SMEs, Masters Thesis. [Online]. Available at: http://epubl.luth.se/1404-5508/2004/053/LTU-SHU-EX-04053-SE.pdf [Accessed on January 12, 2006] Organic Consumers Association (2005). Organic Food Booming in Eastern Europe [Online]. Available at: http://www.organicconsumers.org/organic/boom031605.cfm [Accessed January 12, 2006] Slaisova and Vanicek (2002). E-commerce in the Czech Agriculture. Research Institute of Agricultural Economics, Manesova [online]. Available at: http://www.jsai.or.jp/afita/afita-conf/2002/part8/p559.pdf [Accessed January 12, 2006] Sobicek, P. (2005). Czech Economic Update: GDP GROWTH AT 5.1%: IS THAT A PEAK [Online]. Available at: http://www.hvb.cz/cz/documents/publikace/hlavni-ekonom/ekonom_0905.pdf [Accessed January 12, 2006]. Szabo, A (2002). UNECE (2002) Internationalisation Of SMEs: The UNECE Approach, [Online]. Available at: http://www.unece.org/indust/sme/internat.htm [Accessed on January 11 2006]. Wikipedia (2005). Czech Republic, [Online]. Available at: http://en.wikipedia.org/wiki/Czech_Republic#Demographics [Accessed January 12, 2006] Read More