Executive Summary
The case study is of Pearl River Piano, a company, based in China. The company is seeking to enter into US market. The move is steered by the desire or the company’s CEO to improve quality of the company’s product and secure a Global market. The company’s CEO, Mr. Tong is convinced that the company’s big goal is achievable only if the company secures US market.
Since the US market is mature and piano brands in it are of high quality, the company senses the possibility of failing to achieving its major goal. The company made some efforts to enter the market to no avail. There exist various alternatives for foreign market entry.
Among them are strategic alliance, assembling, joint venture, licensing, and contract manufacturing. It is recommended for the company to use strategic alliances to make the entry. The experts say that considering the company’s financial position and US market perception of products from China, strategic alliance is the best way.
Background
Pearl Rivers Piano Group (PRPG) was established in 1956, in the southern city of Guangzhou. It emerged from a state-owned enterprise with less than 100 employees. During that time, the company recorded low yearly production units of 13 pianos. The company’s production process involved the use of manual skills (Anne & Lau, 2002).
Later on, the annual production units grew but were still below 1000 pieces annually. The company was located in a strategic place next to a river. It borrowed the name of the river for naming its product. The name of the river was Pearl and from there emerged the company’s name “Pearl River Piano” (Peng, 2011).
In the early 1980s after the Chinese had began the total economic reform process, Pearl River Piano was granted autonomy to import and export. It became the first piano builder in China to import foreign technologies and expatriate experts. In 1996, after merging with few musical instrument companies, Pearl River Piano Group Corporation was formed (Corallo, 2007).
Problem Statement
Pearl River Piano made a great progress in dominating the China market with its products. With Tong as CEO, the progress was not enough. He made relentless efforts to diversify the company’s market. He was particularly interested in the US market.
Tong was encouraged by the level of success the company had attained. However, he was not content with situation and thought about something bigger. With his undying zeal for success, he was motivated to expand the company’s target market. He proposed for an entrance into the US market.
This strategy would have made his dream of building a brand name for the company’s product, a reality. Entrance in the US market would position the company’s product on a Global market spot and build a desired customer perception (Anne & Lau, 2002).
Analysis of the Problem
Pearl River Piano started from a humble background as a state-owned Enterprise with less than 100 employees and a capacity to build only 13 pianos annually. The development stages of the company are characterized by uniqueness in terms of resources and skills (Neely & Pearl, 2009). Its unique location in its country of origin is a resource that cannot be duplicated by any other company.
A skilled and innovative CEO, Mr. Tong, heads the company. With his innovative ideas and experience, he settled for importation of foreign technology and expertise to execute the company’s plans (Corallo, 2007). The company managed to grow very fast in a short span due to availability of resources such as information and skilled employees.
The company had access to updated information about strategies used by his competitors and therefore, managed to formulate counter-strategies for sustainable competition. Mr. Tong made a great input in the company’s success history. He introduced a number of key pillar strategies that guided the company’s performance toward growth and success (International Directory of Company Histories, 1988).
The pillars focused on innovation and quality. The innovation strategy ensured the availability of necessary technology, through importation of expertise, to produce high-standard and quality products. Innovation also ensured of variety production to meet customer needs by offering a range of products to choose from, for example, they developed eight families of pianos.
The second pillar was for quality enhancement. The company, through this pillar introduced a total quality management process by ensuring that there manufacturing processes were certified (Peng, 2011). The music industry was another advantageous platform for fast growth. The level of competition was fair. The company successfully conquered a larger portion of the market thus; its market share was stable.
Mr. Tong’s relationship with employees was motivational. Employees’ time and efforts were focused on achieving the company’s goals (Yoshihara, 2007). Mr. Tong’s rational target-market selection strategy boosted the company’s performance. The company targeted medium and lower-end customers as opposed to its competitor’s upper-end customers. The promotional activities formulated by Mr. Tong, were influential because they directly spoke to the customers (Peng, 2011).
Mr. Tong was so inclined to attempt exploiting the international market. He was interested in the US market. He had information about the US market situation. The market was mature and stiffly competitive. The maturity of the US market was a limiting factor to there entry because, they were still new, and changing consumer loyalty in a mature market like US would take a lot of resources time, and quality.
Another limiting factor to their entry was the perception that US consumers held on China products (Peng, 2011). They perceived products from China as cheap and of inferior quality. Customers who seek for quality would not bend their rights for cheap and low-quality products. Therefore, Pearl River Piano still does not stand a chance of succeeding in the US market.
Labor costs in the US market were so high and manual labor force was rare as opposed to the situation in China (Peng, 2009). In spite of all these limiting factors to the company’s effort to enter into the US market, Mr. Tong’s ambition to make Pearl River Piano a world-class piano-producing company was not swayed. In his bid to expand the company’s market coverage and build a global market for the company’s products, he made futile attempts to enter the US market through traditional direct exports and partnerships (Peng, 2011).
Pearl River Piano is a local company. The Company still relies heavily on its local structure. A local structure is suitable for local operations. Tong needs to understand that US market is an international platform. International trading cannot be successful without an international structure and strategies.
Structures and strategies have two-way relationship. That is strategies drive structures and structures drive strategies. Therefore, it is important for the company to consider formulating international structures and strategies, in order to, successfully penetrate into the US market (Peng, 2011).
Alternatives and Criteria Selection
Apart from the foreign market entry methods tried by the company, below are some alternative methods. The company can access which method is best based on there advantages and disadvantages and how effective and efficient they are.
Contract manufacturing: in this method, a local producer will produce the company’s product in the US. The method is formalized by a contract between the local producer and the company. The contract only covers manufacturing thus; marketing activities will be handled by a sales subsidiary of the company (Nickel, 2000).
This method obviates the need to invest in a plant, cost of transportation, and custom tariff. The company entirely controls the marketing activities. It also enables the company to avoid labor and other problems that may arise from unfamiliarity with the local economy and culture.
The company will only lose profit on production activities, particularly if labor costs are lower in the foreign market. There is also a risk of transferring technological skills to potential competitors (Lüthje, Schumm & Sproll, 2002).
Licensing: the company can also enter the US market through licensing. The method involves a contract between a local producer and the company. The local producer will be licensed with the patents, trademarks, and copyrights by international licensing firm.
The local producer will produce the company’s product using the licensed skills, market the pianos in the market assigned to him, and pay the company royalties based on the sales volume of the product (Tielmann, 2010). The method is beneficial because it is involved with low initial investment costs, it enables the company avoid trade barriers and it is easier to respond to customer needs.
Major drawbacks of the method include lack of control on the local producer (licensee); it presents difficulties in transferring of tacit knowledge and has potential for creating a competitor (Root, 1998).
Joint venture: in this method, Pearl Piano will form a partnership with a local producer. The local producer owns equity shares and possesses management voice. The partnership results onto creation of a third firm with a different name. This partnership is for a short period as agreed between the parties.
This method gives the local producer a better control over the operations (Gilligan & Hird, 1986). It is beneficial because it permits the avoidance of and control problems that other entry strategies present. It leads to creation of synergy, allows sharing of resources, and improves contact with local suppliers and government officials.
It presents the following disadvantages, it could result into lack of trust between Pearl Piano and the local producer and conflicts over matters such as strategies, resource allocation, transfer pricing, ownership of critical assets like technology and brand names (Lymbersky, 2008).
Assembly: in this method, Pearl Company will domestically produce all the components or parts of its product and ship them into US to be put together into finished product (Bach, 2007). The company will be saving a lot of money on transport costs and custom tariffs, which are generally lower on unassembled equipment than on finished products. It also uses the local employment, which facilitates the integration of the firm into the foreign market (John & Allen, 1998).
Strategic alliance: is the process where two or more companies unite to pursue a common goal, while in some way remaining independence. The companies join resources and pursue a goal. In this strategy, the companies must be of different financial strengths (Benjamin, 2006). It helps in the reduction of tax-related costs and eliminates culture-related issues (Blythe & Zimmerman, 2005).
Recommendation
After a complete analysis of various foreign market entry strategies, it is advisable for Pearl River Piano Company to use strategic alliance to penetrate into the US market. Strategic alliance is an alliance between companies of unequal strength (Neelankavil & Rai, 2009).
In the US market, Pearl River Piano is considered as one of the weak companies. If Pearl unite with one of the strong companies based in the United States to pursue a common goal, while at the same time remaining independent, the company could succeed in making an entry into the US market.
Action Plan
The company should set up a team of experts to conduct a market research in the US. A detailed report should be prepared on the following areas: annual piano sales levels for existing companies, available market segments, tastes and preferences of the customers, factors that affect taste and preferences, top performing companies in the US market and the strategies they use.
With all these details, the management board of Pearl River Piano should target a particular section of the market since it is impractical to focus on the entire market. For example, the company should decide whether it would produce Pianos for church choir use. The company should thereafter, formulate international trading strategies and formulate a company structure that has provisions for handling international business issues.
The management should look for an established foreign company that is will agree to the strategic alliance idea. The companies should thereafter, converge on a drawing table to agree on how they will handle the strategic alliance. After all that is done, the alliance is good to kick off.
References
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Yoshihara, M. (2007). Musicians from a different shore: Asians and Asian Americans in classical music. Philadelphia: Temple University Press.