Mode of Global Market Entry. ‘. Goldendrops’

Executive Summary

Success in business in the current economic climate requires a company to diversify its operations through venturing into various territories in the global market. The global market has become so complicated and advanced that only strong and competitive firms are able to survive. There is very stiff competition, not only in terms of products quality, but also in how the firms position themselves.

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Goldendrops is a family-owned wine-producing company based in Melbourne, Australia (Golden Drops, n.d). Established in 1992, the company uses mangoes to manufacture various types of wines. Among its products are the dry, sweet and spackling mango wines. The company has a large mango plantation that has been a scene of tourist attraction in the Australian Queensland area. With a large, well-trained workforce, the company ensures production of high-quality and hygienic products. The company uses modern technology to manufacture and market its products.

In realization of the global competition, Goldendrops has embarked on a campaign to establish itself in the global wine industry by penetrating overseas markets. In addition, the company enjoys strength in having a unique type of wine from other wines mostly made of wineberries. Moreover, the company has advantage of having its own mango plantation, making accessibility of raw materials easy. Marketing of the wines has also been made easy and convenient by embracing information technology to market the products online. Since the wine market is still expanding, there are a lot of opportunities in future for the company to exploit, with moving to Germany as the number one priority.

Newmarket entry is always a challenging task for many companies especially where the target market is controlled by other competing products. It is therefore important to analyze various market entry options and adopt the most efficient and effective mode of entry. Goldendrops plans to enter the German market in the year 2009 but is unsure on which mode of entry to employ. In that regard, the company has approached Ideas International Consulting firm also based in Melbourne, for assistance in carrying out research of the German market and advice on the suitable mode of entry.

Germany is the fourth largest consumer of wine in the world (New Zealand Trade & Enterprise, 2006). According to Wine to Germany (2009), there is stiff competition in Germany’s wine market with 80% of the wine imports coming from three main European producers; Italy, France and Spain. However, there are a lot of opportunities in the market, with organic wine being in high demand. Moreover, the opportunities for Australian wines are limited due to price rivalry, although there is an agent, Austrade Frankfurt which assists the Australian wineries in marketing their wine in Germany (Wine to Germany, 2009). Wine market regulations, tariffs and customs are not prohibitive, but quality standards are very strict and handled by European Union (EU).

Considering the various mode of entry in the German market, joint venture is the most favorable mode for Goldendrop wine. Due to the competitiveness in the market and limitation of opportunities of Australian wines, a well-established wine marketer in German market can play a crucial role.

Introduction

Goldendrops has been in wine business for over two decades and has established itself well in the Australian market. The company plans to expand its operations to the German market in year 2009 to take advantage of the ever-growing global consumption of wine. Despite the competition in the global wine market and specifically in the German market, a lot of homework needs to be done before embarking on the market penetration. Hill, Hwang and Kim (1990:119) Claim that the mode of market entry is influenced by strategic relationships that the company perceives about operations in various international markets. Most of the wines in the German market come from leading European countries, although 41% of the market is controlled by local wine producers (Wine to Germany, 2009). Although wine consumption in Germany has been decreasing in the recent years, with beer consumption overtaking it, the market remains vibrant with red and spackling wine as well as organic wine is in high demand.

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Although the German wine market is competitive, the major wines imported are produced from wineberries. The Goldendrops wine is made of mangoes, making it unique. Although Australian wineries can have a really difficult time competing with France and Italy, which are the leaders in wine production in the world, there is still opportunity, especially due to the fact that only a few wineries in the world produce mango wines.

There are various modes of market entry available, each of which has its advantages and disadvantages and each of which is favorable in certain situations while unfavorable in other situations. The various entry modes are exporting, licensing, joint ventures, foreign direct investment and franchising. The choice of entry selected should be the one that offers the most benefits as well as convenience to the company. Since Goldendrops is set to join the German market, it has contracted Ideas International for consultation on the most viable mode of entry.

Ideas International Profile

Ideas International is a private consulting firm based in Melbourne Australia. During its existence, the firm has been actively involved in carrying out market research and business consultancy services. It has well-established network and has already conducted research for various internally recognized companies in various industries. Made up of experienced and intelligent workforce, the firm is able to deliver the highest quality of advice on market entry strategies.

Goldendrops Wineries Profile

Goldendrops is a family-owned wine company based in Melbourne Australia, which has been in existence since 1992. Being a brainchild of Nastasi family, the winery is the largest in Australia’s mango wine industry and is constructed amid mango plantations that run along the area of Queensland creating a scenic beauty for tourism. According to Goldendrop (n.d), the initial idea “was to produce a commercially viable wine from mangoes, and to develop a unique 100% solely owned and operated Australian tourism attraction”. Being a unique type of winery in the wine industry, Goldendrops boasts of a variety of wine products including dry wine, sweet wine, sparkling wine, fortified wines and gift packs wines. The company emphasizes a lot on quality and packaging, and therefore has gone even further to recruit the most qualified personnel in wine production, as well as investing in modern most hygienic storage and packaging equipment. The company serves the local market and also exports most of its wines to overseas markets, with orders being made online.

Goldendrops SWOT analysis

Goldendrops has a well-established market in the Australian market due to its uniqueness in production and also being a center for tourism in the Queensland region. The company’s strength lies in its ability to invest in unique projects as well as having a ready supply of raw materials (mangoes). In terms of production, the company is more likely to beat its rivals through efficiency since it has a large plantation of mangoes where it sources its inputs, making the cost of production competitive. On the financial front, the company has alternative sources of income in tourism, where it can raise enough funds to fund its projects. This makes it rise above other firms when it comes to exploiting opportunities. According to Goldendrops (n.d), the company receives tourists from all over the world who come to see the unique mango plantation and to sample the unique mango wine thus raising a lot of income to the company. Strength of the company is availability of wines in all categories; dry, medium, sweet, spackling, gift packs and fortified wines. This means that no order can be made and the company fails to deliver. The company has also invested heavily in human resources by recruiting the most qualified personnel. In addition, the owners have been in mango plantation farming for many years and therefore have a lot of knowledge in mango business – they can produce the most favorable mango for making wine. Quality assurance is strongly emphasized by ensuring hygiene throughout the production process and investing heavily in hygienic equipment as well as ensuring testing is done regularly to confirm standards are met. Lastly but not the least, the company has a good marketing strategy through the use of information technology; orders can be made online and deals can also be settled promptly online.

Despite these strengths, the company is experiencing some weaknesses especially in production. The company has not invested well in equipment as most of the work is done manually. This limits the level of production and may prove costly when competing in the global market. In research and development, the company has also lagged behind as evidenced by its decision to hire an external consultancy for advice on expansion. A company without a well-established research and development division experiences difficulties in exploiting or even identifying opportunities.

The opportunities of the company are enormous. Being a unique company producing unique wines from mangoes, the market for mango wine is yet to be exploited. Most of the world’s wines are made from berries and therefore mango wine has a big opportunity to take its share of the market. Organic wine is in high demand in German wine market and Goldendrops should look forward to exploiting it. In addition, according to Wine to Germany (n.d), there is shortage of closure material cork, which offers an opportunity for Australian wineries, Goldendrops in particular, to invest in innovative wine technology in order to exploit this market. There is also a high demand for spackling wine and Goldendrops can exploit this opportunity by exporting its spackling wine to this market.

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The major threat for Goldendrops comes from the competitive environment. There is a lot of competition in the wine market with over three quarter market share in German wine imports being taken by three leading wine producers. Other wine producers, including Australian wineries have to compete for a share in the remaining a quarter of market share. A lot of competition is also witnessed in terms of prices, with the values of the imports declining in the recent past. Consumption trends in German market show that the value of Australian wine consumed recently has declined although the volumes have not changed. This is also aggravated by the fact that Germany imposes import tax on all wines from outside the European Union nations. Moreover, Australian wine is facing a lot of competition from other New World Wine producers like USA, South Africa and New Zealand. Wine to Germany (n.d) also indicates that the number of Australian wineries exporting wine to Germany is over 200, limiting the opportunities of the Goldendrop to penetrate.

Assessment of the German Wine Market

Being one of the leading wine consumers in the world, German wine market looks very lucrative. According to Harpers (2008), “the per capita wine consumption in Germany is 20.6 liters in the past year”. The wine market is comprised of 41% local production and 59% imported wine. Out of the imported wine, approximately 80% originates from Franc, Italy and Spain with the other countries sharing the remainder (Wine to Germany, n.d).

In the recent past wine, consumption has been declining due to price sensitivity and health concerns. The major players in the wine market are supermarkets and discounters who deal with the distribution of the wine in Germany. The wine market in Germany is regulated by the European Union especially in terms of standards, labeling and ingredient requirements. Although there are no quotas on the quantity of wine that can be exported to German market, the country imposes an import tax on all imported wine from non-European Union nations.

Market Entry Strategy

A number of market entry modes are available and each of them has its merits and demerits. These modes of entry include licensing, exporting, FDI, joint venture and franchise. According to Tallman (2007),.the market entry mode should be evaluated according to not only the net value that the investment would generate but also the option value that the investment could bring about”. The choice of the mode of entry should therefore be carefully analyzed and the most beneficial one selected. Due to the complexity of reversing the decision and the time and cost implication that such a decision would have, it is important to employ all the necessary resources during the time of analysis to avoid any mishap. Fleuren, Hertog and Kort (2005:222) argue that the entry mode chosen should be the one that maximizes the firm’s utility and profitability.

According to Agarwal and Ramaswami (1992), selection of the mode of market entry is always influenced by several factors namely firm ownership, market location and transaction integration/internationalization. The ownership of the firm is important as it shows the strength the form has to diversify to international markets. In addition, the location of the market is a very important factor because not all markets, whether exploited or not can be viable. Moreover, the level of endowment in the firm in terms of resources is important as it will indicate whether the firm can support the expanded business or not.

The choice of entry will also depend on whether the firm intends to go alone or seek external partners either through licensing, franchise or joint venture Chi and (McGuire, 1996). Whatever decision is made, one thing must always be clear, the potential to succeed and the opportunity to achieve a competitive advantage over the rivals.

Exporting is one mode of entry that allows a company to export its products to the foreign market directly without having to invest in facilities. This is the easiest mode of entry but is always hampered by other technicalities. For instance, Goldendrops can export its wines directly to Germany without having to employ a lot of resources. There being other Australian wines in the German market and an agent who has been assisting Australian firms to market their products, it won’t take long for Goldendrops wines to establish themselves in the market. However, as discussed earlier, the German wine market is very competitive and therefore it may prove difficult for a new product to flex muscles against the brands that have existed in the market for long.

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Golndendrops could also license a local firm to produce and distribute its wine products in the German market. However, since licensing will mean renting out rights and patents to the licensee who will be involved in producing and marketing the products, the firm may lose potential returns, and also the licensee may misuse the rights.

Foreign direct investment may be a viable option considering that it will involve the firm establishing plant in the German market and doing all the work including manufacturing and marketing. It involves ownership of technology, personnel and capital, and may be done by establishing a brand new plant or acquiring an existing firm in the target market. According to Foley (2007), the FDI is important as it will give the firm control, the acquired firm has the knowledge of the local market and the firm has the freedom to hire skilled labor. However, there are limitations related to the high resource requirement and may be very risky especially when introducing a very new product.

Joint venture is the most effective mode of entry into the foreign market. According to Lane, Distefano and Maznevski (2000:195), a joint venture “involves creating a new entity owned jointly by two or more organizations to enter a market where at least one of them is a non-resident”. It involves joining forces with a foreign market company where one firm will provide expertise in production and the other firm will provide expertise in marketing. According to Tallman (2007:107), empirical evidence has shown that joint ventures are the most successful business establishments in the international market. The merits of these joint ventures are sharing risks or rewards, sharing technology, and sharing expertise and knowledge. The ventures thrive well when the two firms have common and non-conflicting goals, their market power is below that of market leader, and they are capable of learning from each other (Foley, 2007). Empirical evidence also shows that joint ventures will be favorable where the target market currency is highly valued such that it may not be favorable for exports. In addition, Chi and McGuire (1996:107) claim that the value of the joint venture will be high when the joint ventures have different expectations in the valuation of the assets of the joint venture.

When Goldendrops gets into a joint venture with another firm, then its wine may have an easy time getting into the market since the other co-venture will have a clear understanding of the German wine market and will have the facilities to market the products. In addition, the company in Germany will be viewed as a local company since it has been in existence for long in the country and therefore it will already have goodwill to market the products.

Despite these merits of joint venture, there are some noted weaknesses, one being that Goldendrops will lose control of its products to the co-venture who may take advantage to enrich himself, considering that there is a spillover of knowledge in the venture. In addition, where the venture enjoys synergy of resources one of the firms may take the opportunity to unfairly acquire the other firm. Therefore according to Chi and McGuire (1996), the joint venture is likely to survive when there exist transaction cost problems such that it will be economically inefficient for one firm to acquire the other. Moreover, there always arises a challenge where, despite both firms having intention to share resources, each of them tries to protect its proprietary skills.

All in all joint venture is more amicable than all the other modes of entry, especially where the product that is being introduced into the market is new and there is a lot of competition from the existing products. Goldendrops will benefit a lot from this arrangement considering that it will not have to commit a lot of resources to penetrate into the market.

Conclusion

Having established itself as a leading wine-producing company in Australia, international venture is important as a way of expanding its portfolio. The company’s unique mango wine products are in relatively low supply in the global market and therefore, the company must adopt strategies to venture into the German market. Due to the high competition in the German wine market, the company should enter into a joint venture with a locally based company, who will provide market goodwill to enable the mango wines to establish themselves in the German wine market. Despite the many challenges faced under the joint venture arrangement, other options remain to be less favorable in establishing Goldendrops mango wine in the German market. the advantages of having to commit fewer resources and sharing the expertise with the joint venture partner make it more attractive than the other options.

Reference

Agarwal, Sanjeev and Ramaswami, Sridhar N. Choice of Foreign Market Entry Mode: Impact of Ownership, Location and Internalization Factors. Journal of International Business Studies, Vol. 23, 1992. (Online). 2009. Web.

Chi, Tailan and McGuire, Donald J. collaborative Ventures and Value of Learning: Integrating the Transaction Cost and Strategy Option Perspectives of the Choice of Market Entry Modes. Journal of International Business Studies, Vol. 27, 1996. (Online). 2009. Web.

Fleuren, Hein et al (2005) Operations Research Proceedings 2004. NY, Springer.

Foley, J. F. (2007) The Global Entrepreneur: Taking Your Business International. (Online). 2009. Web.

Golden Drops (n.d) Golden Drops. (Online). 2009. Web.

Harpers Editorial Team (2008) German Wine Consumption Reaches New Record. Harpers Wines and Spirits. (Online). Web.

Hill, Charle W. et al An Eclectic Theory of the Choice of International Entry Mode. Strategic Management Journal, Vol. 11, No. 2 (1990), pp. 117-128.

Lane, Henry N. et al (2000) International Management Behavior: Texts, Readings and Cases. Fourth Edition. Wiley-Blackwell.

New Zealand Trade & Enterprise (2006) Sector Profile for Wine in the German Market. (Online). 2009. Web.

Tallman, S. B. (2007) A new generation in international strategic management. Cheltenham, Edward Elgar Publishing.

Wine market in Germany (2009) Wine Market in Germany. New Zealand Trade & Enterprise. (Online). Web.

Wine To Germany (2009) Wine to Germany. Australian Government Austrade. (Online). Web.

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