Introduction
Lifeway Foods, Inc. is a US-based company founded in 1986, which is considered one of the country’s leading manufacturers of kefir – a “creamy probiotic dairy beverage” (Lifeway 2010). Located in the US, Lifeway is considering an opportunity to expand internationally with their product into the Chinese market at the moment. China can be considered as an optimal option for expansion, carrying a great significance for international business in terms of opportunities. Such opportunities are mainly based on such factors as the size of the market, the cost of labor, and growth potential (Tian 2007). In that regard, the present paper provides an analysis of market entry strategies, in an attempt to identify an optimal strategy for entry for Lifeway Foods, Inc.
Entry Modes
The first mode of entry in China’s market can be seen through export. Such mode is divided into direct and indirect, based on whether there are intermediaries in the process or not. The requirements of direct export entry mode are the involvement of the company in the international business through agents as well as the capacity to do so. If such capacities are absent, the company might consider an intermediary as a form of indirect export (Sharan 2008: 23). The benefits of such an approach can be seen in that intermediaries assume the trading risks. In that regard, such a method can be seen as suitable in terms of investigating the market prior to entry. In the long term, such method can be seen that in long term such strategy is not suitable for the specific case of Lifeway Inc. Kefir is a perishable product and at the same time, being used on an everyday basis will require significant export costs that might raise the costs of Kefir and make it uncompetitive in a market in which the majority of the population is in poor rural areas. Additionally, the lack of control over the agents or the distributors might be seen as one of the disadvantages in general.
Contractual methods of entry can be seen as more suitable to intangible products, such as technology and patents. Largely, it can be stated that the main value of such a product as Kefir is intangible, which is the technological process of its preparation. The contractual entry mode implies several strategies among which are licensing, franchising, management contracts, and others. Licensing and franchising are similar forms of entry, with the difference being that licensing are involved with one part of the business only, while franchising includes other intellectual property rights. Additionally, franchising grants greater control over the sales in the target market (Sharan 2008). The advantages of licensing can be seen in that little risk is involved and fewer costs are needed. Accordingly, when different licensees operate in different parts of the world, the quality of the product might be reduced, and in the case of such a product as Kefir, the technological know-how might be revealed. Franchising, on the other hand, guarantees consistency in production, although it might be a costly process in monitoring and providing technical assistance end support to control the quality of the product (Sharan 2008). Both methods can be related to such a method as international leasing, which is a form of indirect investment (Tian 2007: 80).
Foreign Direct Investment (FDI) methods are another option for entry, which implies investment in the equity capital of a company abroad to manage the operations locally through branches. Such options can be differentiated based on the corporate structure, the degree of participation, and the core competencies of the company. The main advantages of FDI can be seen through the benefits of differentiating the product according to the market, overcoming transport costs and tariffs associated with exports, and reducing financial risks (Sharan 2008). The main factor can be seen whether to have a local partner in China, i.e. joint venture, or not, wholly foreign-owned enterprise (WFOE). Considering the recent trends in China, it can be stated that WFOE is a better option in terms of transaction costs and the protection of proprietary technology.
Recommendations
It can be stated that in the present case, if the technological process is an important part of the company’s core competencies, then foreign-direct investment can be seen as a suitable solution, in which WFOE is a better option, in terms of costs. If such technological process is not, and considering that such product is popular in Europe, and it is not protected by intellectual rights, namely kefir alone. Then, non-direct investment can be considered as well. In that regard, franchising can be recommended over licensing considering the fact that other elements, such as trademarks, the management systems, and the brand, are involved. Thus, the selection, of whether to choose WFOE or franchising can be based on the degree of control and the available resources in the company. Thus, WFOE can be recommended as a suitable method of entry into the Chinese market.
Conclusion
The present paper provided an analysis of different market entries that the company Lifeway, Inc. can consider when entering the Chinese market. They provided a comparison of different methods in light of the peculiarities of the product in question. The paper recommends having a wholly foreign-owned subsidiary in China as a method of entering the market. China is a market of great size and potential and thus, the method of entry should pay consideration to long-term investments, rather than short-term.
References
Lifeway (2010), ‘Lifeway World – Our Story’, Lifeway Foods, Inc. Web.
Sharan, Vyuptakesh (2008), International Business 2/e, Concepts, Environment And Strategy (Pearson Education).
Tian, Xiaowen (2007), Managing international business in China (1st edn.; Cambridge; New York: Cambridge University Press) xv, 295 p.