International strategy is a strategy or business plan composed by a company that allows its business in international markets and is very important for all business organisations operating in the global market (MBA Skool-Study.Learn.Share., 2020). When a company is to hire foreign employees or to search for new markets overseas, implementing an international strategy can help to expand and diversify the business. The most beneficial strategy for Müller in this case would be licensing but however, exporting could be just as useful for the company. Therefore, this essay will critically analyse the most helpful strategy Müller should implement when going into a foreign country such as China, as well as the implications this may cause.
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Müller & Co is a German, family-owned mid-sized company founded in 1908 that designs, manufactures and markets high-end office furniture. Now Müller employs over 600 people and generates 50% of its 70 million EUR in revenue outside Germany. In 2001, Europe’s diminishing market for office furniture had driven down Müller’s sales and profit marketing by 10-15% annually, and Müller’s directors see expansion as importance to Muller’s survival in China and other parts of Asia. As Chinese office furniture industry grows at an average 23% per year that is estimated to reach 20 billion EUR. As a result of a recent broad initiative, Müller has an assembly and national marketing headquarters in Sydney. The directors should now take into consideration whether and how Müller will be able to tap into China’s phenomenal, either from the current Australian base or the establishing operations in China (Grosse and White, 2008a).
Successful international expansion provides promising opportunities but needs preparation and planning. There are many essential approaches to reaching new foreign customers and expanding internationally; one of the strategies that have been decided for Müller to pursue is licensing. Licensing is a transfer-related market entry strategy, which is a business arrangement in which one company (known as the licensor) gives another company in another country permission to use its intellectual property for a defined period of time and a specified payment (Hyatt, 2016). The resources that are included for intellectual property are patents, trademarks, managerial skills, technology and many more. Müller has a strategic goal of increasing market share and should consider licensing if they have a patented product which can be produced easily at a foreign location. After more than 20 years of rapid growth in its furniture industry, China has now become the world’s most extensive furniture production base and exporter.
With Müller being an office furniture company, this is an excellent reason for them to expand into China because of the “rapid development of local office space rather than exports” (Grosse and White, 2008a). Müller’s high-end furniture would easily be manufactured in a foreign country such as China, seeing as they are producing types of furniture rapidly than any other country would. Therefore, building an assembly plant in China that would produce office furniture for Muller would be more efficient, seeing as China is already a producer in the furniture industry. The fact that the Chinese market is enormous; Chinese customers still expect their delivery to be delivered fast. Having to deliver products from their factory in Australia would be very time-consuming for many customers, so expanding into China might be useful in helping to fasten the production and delivery process. But in doing so, having whatever products or designs they produce in China licensed in regard to intellectual property. Even though there have been problems with IP regulations, an agreement for six-month protection on furniture designed had been reached and so is still methodical in approaching the licensing strategy when going internationally.
Corresponding to licensing, it enables a company to enter a market that has restrictions on foreign companies. With the preparations for a meeting with the directors, on how Müller would engage with the Chinese market, the options regarding the production and as a market were discussed (Grosse and White, 2008b). Licensing provides an opportunity to increase the sales volume of a product rapidly, and one of the options was to manufacture the office parts in China, which would reduce the production costs. On the other hand, there are some disadvantages to expanding into China and building an assembly plant. Many were worried about the lack of copyright protection, and this can be very significant as Müller is well-known thanks to their designs. So without licencing their products while expanding abroad, there could be a chance that someone would copy the models that are similar to Müller and identify it as their own. Even with the lack of copyright protection that is in China, the licensing strategy is still as effective with the other advantages that it has that would help the company internationally. However, this increase does not result in substantial profits because the returns are limited to a percentage of each product unit sold.
The other strategy that could be considered for Müller is exporting. Exporting is the most traditional and well-established form of operating in markets abroad. Exports are the goods and services that are produced in one country, and customers from another country are purchasing them. No matter what the good or service is or how it is sent, it can be shipped, sent by email, etc. (Amadeo, 2020). Importing products may help a business to reduce costs; however, one reason as to why Müller should pursue exporting is that it can ensure an increase in sales and sales potential in general. Müller should focus on exporting to expand their visions markets locally, international or even globally. Instead of generating money by selling what they have to offer in the local market, this would help Müller to focus on discovering new ways in which to become more noticeable as well as present their products abroad. Müller itself is essentially a medium-sized company and exporting product is deemed to be useful, especially for those that have expanded into the domestic market. Once they have dominated the market in their home country, exporting their products overseas is an excellent opportunity for Müller to increase their sales potential. Furthermore, exporting is a unique way of screening prospects for foreign franchising or production.
Another benefit of Müller using exporting is cost reductions, by reducing the costs of matching domestic firms with foreign buyers/sellers would boost trade. The barriers small-medium sized businesses like Müller itself must overcome when beginning to trade internationally are often so large that they are high-priced. When Müller should look to start exporting is first to find foreign customers to sell to those who will buy their products, know how to create a successful trading relationship and understand the regulations that Müller has to work with. Müller should take into consideration that Atkins (2017) allows small-medium companies to exports by directly matching them with buyers in the country that the company has decided to start exporting to. “Matching frictions” is referred to as the cost of matching sellers with buyers, and they constitute up to half of the total trade costs (Allen, 2014). Therefore, reducing these costs should be a key goal for governments and export agencies that hope to increase the growth of small-medium sized companies and push them into global value chains. Müller could benefit from using an agency like this when deciding to pursue the exporting strategy when going into China because of the likely chance of finding buyers in the new market so that as soon as they have set up in China, they could start generating sales and profit. However, seeing as Müller is already located in Asia, there is a chance they are already recognised in that region and might take the opportunity to avoid making unnecessary payment to agencies to reduce their costs.
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Moreover, over the years, Müller has slowing become a well-known company within the office furniture industry with the recognition rate of 25% through being environmentally friendly, making high-quality furniture and creating unique designs (Grosse and White, 2008a). With pursuing the exporting strategy, Müller’s four core values have given the company the chance of becoming successful and recognised internationally. Nevertheless, the core value will not be abandoned or altered due to the management and the way that the company is controlled. Similar to what was previously said for licensing, one thing that Müller should take attention to would be that the customers in China typically demands their orders be delivered quickly. Still, the process of exporting into china is very time-consuming and can; therefore, cause delays that result in disappointment with Müller’s customers. Müller sees one of its core strength to be customer service, and this would possibly ruin their reputation.
In conclusion, China is one of the fastest growing manufacturing industries in the office furniture industry. So this gives Müller the great opportunity to move into China and start manufacturing their products there. With both market entry strategies discussed in this essay, they both share some advantages and disadvantages that help to understand which strategy would be more effective for Müller to pursue. Of course, the one with the advantages that Müller feel will be appropriate in helping them achieve their desired goals and become successful in the foreign location is the one the company should go for.
List of references:
- Allen, T. (2014). Information Frictions in Trade. Econometrica, 82(6), pp.2041-2083.
- Amadeo, K. (2020). 3 Ways Countries Increase Exports.. [online] The Balance. Available at: https://www.thebalance.com/exports-definition-examples-effect-on-economy-3305838 [Accessed 1 Mar. 2020].
- Atkin, D., Khandelwal, A. and Osman, A. (2017). Exporting and Firm Performance: Evidence from a Randomized Experiment. Quarterly Journal of Economics, 132(2), 551–615.
- Grosse, H. and White, S. (2008a) MÜLLER: China-Bound? (A)
- Grosse, H. and White, S. (2008b) MÜLLER: China-Bound? (B). Grunter Hahne
- Grosse, H. and White, S. (2008c) MÜLLER: China-Bound? (C). Marc Schmidt
- Hyatt, P. (2016). Have a great product or service? Licensing could be the right market entry strategy for you - Trade Ready. [online] Trade Ready. Available at: http://www.tradeready.ca/2016/topics/market-entry-strategies/have-a-great-product-or-service-licensing-could-be-the-right-market-entry-strategy-for-you/ [Accessed 1 Mar. 2020].
- International Strategy Definition, Importance, Steps & Overview | Marketing Dictionary | MBA Skool-Study.Learn.Share. (2020). Available at: https://www.mbaskool.com/business-concepts/marketing-and-strategy-terms/7476-international-strategy.html [Accessed: 15 February 2020].
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