A Case Study on Shiseido and Nec Going Into Emergent Market
Business and Management
Submitted By biotite78
Emerging markets are more important than ever in nowadays international businesses, they are increasingly making up a large share of many multinationals’ revenues and growths. Many multinationals believe their future success depends on how well they can master and win in these markets, they project share in their business based in emerging markets will increase 20-50% more in the next decade (Choudhary et. al., 2012). This study aims to reveal the motivations behind the multinationals and how multinationals succeed and fail in emerging markets with reference to relevant theories and examples.
Theory of Multinational
There are many theories analyzing why firms start to engage in foreign direct investments, the Eclectic Paradigm is a more integrated and general approach amongst the various, it explains how the multinational firms make their decisions and strategies by considering the Ownership Advantages (O), Location Advantages (L) and Internalizations factors (I). The theory incorporates ideas of market failure, location advantages and industrial organizations and is thus more holistic approach. The “O” paradigm explains why firms decide to start investing abroad because of possessing ownership-specific advantages relative to domestic firms, and the benefits can outweigh the transaction costs of operating in foreign markets and overcome the competitions of domestic firms, which lead to higher profitability with reduced costs. Examples of ownership-specific advantages are monopoly power of accessing markets through ownership of limited resources, patents and trademarks; technologies in relation to all forms of innovations; marketing; and economies of large size such as economies of scales, scopes, learning and greater access to financial capitals. The “L” paradigm explains the location-specific advantages of host countries in order to make the firms to use their “O” advantages to operate there. The specific advantages of a location can be categorized into economic benefits consist of both qualitative and quantitative factors of production, costs of transportation, telecommunication and size etc.; political advantages include government policies and institutional framework that affect and control foreign investments; social advantages include languages, cultural diversity and home to home countries distances. The “I” paradigm describes how firms can exploit their powers from sales of goods and services to various agreements with other firms. The internalization advantage exists when a firm can reduce cross-border transaction and coordination costs as well as can increase efficiency through transforming its external arm’s length arrangements into in-house link or internal hierarchies in the exchange of, such as, intermediate products, information, technology, marketing techniques etc., it will pay a firm to engage in foreign direct investment (Denisia, 2010, Dunning, 2000)
Successful MNE case in Emerging Markets
Shiseido in China
Shiseido acted as an early mover in China during 1980s, with an experimental effort to export products from Japan at high-class hotels in Beijing in 1981. Two years later, the company offered technological cooperation agreement to produce toiletries in China under the brand HuaZi, Subsequently, the success of HuaZi led to establishment of Shiseido Liyuan Cosmetics Co., Ltd. (SLC) as a joint venture with state-owned enterprise Liyuan Co., Ltd., which solidified Shieido’s relationship with Beijing Government, and in 1994 SLC produced Aupres, a brand which is exclusive to China. The advertisement featured Chinese models only to highlight that Aupres is specifically for Chinese, being focus on core target group of 20-30 years old female professionals and positioning as high quality/medium price range product, the brand became a huge success in China. Sales of the Aupres reached 80% of SLC’s sales in 2003, which accounted for 60% of Shiseido’s total sales in China in that year of 20 billion RMB. The operating margin of Chinese operations was approximately 20%. In 1998, Shiseido added a second plant Shanghai Zotos CITIC Cosmetics Co., Ltd. (SZC), a joint venture with China International Trust and Investment Corporation, to e3`9manufacture and market brands such as Za, Pure & Mild, which extended its brand portfolio downward to reach the middle and mass markets, and split the production from SLC which mainly concentrated on the premium segments. SLC also marketed and imported brands from Japan like Shiseido brands included Revital, The Skincare, and UV White and later on the Cle de Peau Beaut in addition to the Aupres, to compete with other global brands like L’Oréal’s, Lancôme and Procter & Gamble’s SK-II in the top-of-the-range cosmetics in China. In 2002, the firm set up a research center engages in product formulation development, research on Chinese skin and tastes in cosmetics, and also adaptation requirements and potentials in the market. In 2003, it established Shiseido China Co., Ltd. (SCH) in Shanghai as a wholly-owned holding company to serve as parent company to oversee all the operations and coordinate all of the company’s activities in China, including integrating the marketing efforts of all Shiseido products, to handle the fast-moving market, compliance issues and to maintain relationships with the local government officials. There is also a strong link between Shiseido with local subsidiaries, SCH is responsible for bridging the dialog between local subsidiaries and headquarter, autonomy in decision making is given to local subsidiaries for all China-related issues and is endorsed by headquarter. Although Shiseido held most of the senior management positions, Shiseido also employed local talents to hold the middle management in local subsidiaries. Shiseido used to sell its Aupres in department stores in China. For the middle and mass segments, it basically targeted open channels like specialty stores, supermarkets and drug stores. In order to maintain its exclusive image and to cope with expanding market, Shiseido adopted voluntary chain store strategy in 2003, they selected and screened high quality stores and applicants, Shiseido spent lot of resources to provide marketing support and train the beauty consultants in stores with their established know-how. The relationship between Shiseido and the cosmetic stores was governed by a trust-based sales contract which set out the minimum sales target and standards for stores to commit and the severe penalty for counterfeit products. The strategy proceeded rapidly, the number of stores increased from 300 to 1700 from 2003 to 2007 in 29 provinces, and further contracts were signed, and this also meant the key success of Shiseido in China (Buckley and Horn, 2009, IIST World Forum, 2001, Jones et. al., 2008).
Analyzing Shiseido’s success factors from the Eclectic Paradigm Perspective
1. Ownership Advantages:
The company’s reputation for its world-class R & D in dermatology enables the company to exploit its technological expertise through setting up factories and research center in China to study Chinese’ skin and consumer behavior and to create customized products to serve local needs. Shiseido’s brand and communication management and strategy have been innovative in China, using Aupres as umbrella brand and extends to other brands produced and imported in China; Aupres advertising is fine-tuned to gain local appeal; the brand as perceived as high quality and services and better understand of “Asianness”, and this image is strengthened by educating the marketing staffs and focusing on the individualized consulting services in retail chains. Furthermore, Shiseido’s strong global brand and international experience are critical reasons for its great success in China.
2. Location Advantages:
Increasing fashion and beauty awareness in China presents a huge market potential and growth in the cosmetic industry. Shiseido’s early entry and its longstanding relationship with the City of Beijing government gave the company a competitive advantage in the Chinese market. Also, because the products are manufactured in China, this allows Shiseido access to vast talents and cheap labour pools and thus making its business more profitable than importing brands in China. More importantly, Shiseido can outpace other western brands is due to the fact that Chinese believe Japanese skin is close to theirs since both are Asians and that Shiseido has the best understanding of their skin care needs.
3. Internalization Advantages
Shiseido has been demonstrating its ability to organize their internal activities so as to develop specific advantages and exploit them in operating all physical presences in China. For example, its home-host orientation and capability to drawn from substantial international experience enable the firm to engage in foreign production in China, to coordinate and integrate the inter-firm co-operations and activities between headquarter and subsidiaries in China, and to augment the distribution network in China through its wise voluntary chain store strategy.
Failure MNE case in Emerging Markets NEC in China
China’s mobile phone market has been one of the most promising and fast-growing market in the world. The country’s share has accounted for 14 % of the world’s total in 2006 and represented the largest mobile phone market. However, Japanese mobile phone manufacturers have performed poorly in China over the course of 2005 and 2006; NEC was one of those which withdrew from China market. From its entry into China, NEC followed highly centralized operations, with absolute control on strategic resources, assets and decisions making from headquarter and internalized all R & D and innovation processes, the firm could only offered few models a year and could not react to the rapidly changing market and adapt to local demand conditions. NEC heavily invested in R & D and production planning process and 3G technology, but could not recoup investment due to delayed introduction of 3G in China. The entry barrier was low, there were Western brands like Motorola, Nokia and Samsung, Chinese brands like Birds and TCL and also numerous local producers crowded in the market. NEC produced mainly medium to high end mobile phones at prices which had been above the comfortable price-point for the consumers, accompanied by poor marketing, lack of strong image and underdeveloped distribution channels, which made it very difficult to compete and reach the top tiers of the market. NEC China was a major contributor to the NEC’s total corporate loss of 7.4 billion Yen in 2006; as a result, they ceased the mobile manufacturing at Wuhan plant and launch of new models in China (Myers and Yuan).
Analyzing NEC’s failure factors from the Eclectic Paradigm Perspective
4. Ownership Advantages:
Although Japanese manufacturers have been leaders in mobile phone innovation for many years, such as the first in the world to install LCD, cameras, internet browsers, electronic money services and television receivers on mobile handsets. However, such a competence could not capitalize in China and was lying to the fact that product development processes and capability required in the two different markets are different. Japanese typically devote 14 months from product planning to new model release, which is doubled that of Chinese. This is because in Japan, mobile service operators play significant involvement in product planning and design, and Japanese spend lots of effort in software development, component customization and quality certification. On the contrary, product development in China is conducted independently by manufacturers without involvement of service operators. Chinese tend to adopt standardized technology and component as to shorten the time to market to recover investment as soon as possible. Another difference is mobile phones are sold as commodities in China market but are treated as technology–intensive products in Japan. As a result, Japanese could just introduce few models a year and completely lagged behind the radically changing demand conditions in China. Furthermore, the lengthy effort inevitably resulted in technology spillover, the mature and well developed technology were being utilized by other European, Korean and local Chinese manufacturer at much lower costs than Japanese (Marukawa, 2009).
5. Location Advantages:
The market was huge and there were lots of components, IC chips, software development and designs suppliers existing in China, but Japanese often managed the entire manufacturing process from planning to mass production and rarely outsourced to local suppliers. The supplier relationships with Japanese firms were under strict control by Japan headquarters and were relatively fixed and exclusive, thus making the Japanese handsets very costly to produce in China. There was also significant disparity in the sales system of Japanese and Chinese handsets because handsets in Japan were sold in bundle with mobile service operator’s services and their release was strictly limited to service operators’ plans. On the contrary, handsets releases in China were detached from services operators’ plans and sold freely and randomly in the extensive wholesalers and retail shops network. Moreover, the Chinese service operator adopted the GSM standard in the past, the technology feature of GSM was that the subscriber identity module (sim card) was separated from handset, which made consumers can switch their service operators easily, and further causing the bundled sales system unsustainable in China and small market share of Japanese mobile phones (Marukawa, 2009).
6. Internalization Advantages:
It was undoubted that NEC’s centralized organization, innovation process, internalized manufacturing strategy and the handset-services bundled sales system unsuitable for China. Although NEC has tried to adopt a more decentralized approach and enabled their subsidiaries to manage innovation independently from headquarter in Japan, and to learn from Chinese manufacturers to increase product line-up and to outsource the development and production to local design houses in order to introduce handsets models faster and gain more appeal to Chinese consumers. Japanese finally recognized the cost of increasing the market share in China was substantial. And they understood that they could not afford the opportunity cost of vertically integration with key component production, due to their relatively small sales volume in China (Marukawa, 2009; Myers and Yuan).
Conclusion Having studied two Japanese multinationals’ cases in China, both were well renowned global brands but performances were completely varied. The Eclectic paradigm was used to reason why Shiseido and NEC decide to invest abroad, based on firm-specific advantage: product innovations and quality. China was a developing country complemented with low labour and production costs, such locational advantages attracted the two multinationals to make further use of their “O” advantages to grow their technologies, brands and businesses in there. In view of NEC, the two preconditions were not met and ultimately failed in China, while Shiseido fulfilled both conditions and eventually won in China. This study suggested the parameters under the Eclectic paradigm could vary firm to firm. The profitability and success of one firm’s investment in foreign country depends on the whole context of the host country’s economic, political, social conditions, as well as the opportunities and threats posed by the host country, and therefore the objectives and strategies of the firm.
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