Objectives and Criteria
This report seeks to explore options for the expansion of SME’s wishing to become international. It considers the Stage Model (including exportation, manufacturing and direct investment) and the Network model (considering strategic alliances and distribution channels) as among the most significant amongst the strategic literature. This is followed by recommendations for Acomb Tyres to expand to France and justifications for this choice. Finally this brief offers strategic advice as to how Acomb Tyres should enter France, resources needed and any problems they may face. Ultimately this report suggests that exportation through a distributor, leading to establishing a second manufacturing plant is the best option for Acomb Tyres.
Expansion Strategies for SME’s
A variety of options are available to SME’s wishing to expand into an international environment. The appropriate strategy is related to the size and structure of the firm, the leadership which is in place and the risk which the organization is willing to take (Hegge 2002). A wide variety of entry strategies are available such as “manufacturing, licensing, franchising, contract manufacture, direct investment, strategic alliances, competitive alliances, joint ventures, exporting and knowledge agreements” (Coade 1997). For the sake of applying appropriate detail, this report considers only the most significant options. The strategies which this brief will address were outlined above.
To some extent, most international expansions could be classified as the Stage Model (Bell et al 2004). This model suggests that SME’s should stagger their entry into new national markets at a pace which reflects their stability and confidence. The Stage Model suggests that firms gradually become more integrated within their new market and this begins by exporting directly to customers from their domestic country. For manufacturing companies, this is an ideal form of expansion as it represents limited risk, by maintaining their base in their domestic market, whilst building a customer base and testing sales in a new market. If this is deemed to be successful, the firm could move on to implementing more risky, but potentially fruitful strategies. However, firms outside of the manufacturing market such as service companies may find this more difficult to complete (Bell et al 2004). As this builds in popularity, the organization could choose a number of routes to enter their target market such as the acquisition of an already established company, building a second base within the target country or expanding their role by networking such as joint ventures.
The acquisition of an already established company within their target market is a very risky strategy for an SME. The requirements for it to be feasible are also strict as it would be very costly, potentially problematic and would commit them heavily to the new market. Although this is a feasible strategy, it is unlikely that many SME’s would be willing to choose this option over the less risky and costly options available. However, the promise of an already strong domestic brand, potentially with an established product base makes it an important option to be noted.
Building a base within the new country is also a high commitment, high cost option which is more suitable for organizations considering a long term expansion strategy. Having a production and office base within the new country would cut the export and transport costs, particularly if the expansion is intercontinental. It also offers direct links to customers in countries which neighbour the target market. However, this is heavily dependant on the organizations management, long term goals and commitment to the expansion.
Another potential expansion strategy is well described by the Network Model, which suggests expansion strategies should be adopted through a series of contacts within the country which they are targeting (Bell et al 2004). This provides much needed insight and local knowledge which can prove crucial to an organization in a new market. For example, an organization could build networks through joint ventures with businesses well established in the target country, potentially native to their target market. This offers significant advantages of massive market knowledge and already having an established presence within the country. This would be a close working relationship which would mean that considerable time and effort would need to be invested by the SME in finding the right partner. A poor choice could be catastrophic to the move into a foreign market. Hoffmann and Schlosser (2001) suggest that “soft” factors such as trust are key to relationships being successful; however, “compatibility and appropriate governance mechanisms” are equally important to the success of working relationships.
The use of agencies and distributors is another option, which doesn’t offer the closeness and insight of a joint venture, but it does offer a commercially driven relationship, with both parties wishing the product to succeed, and the agency or distributor possessing significant amounts of market knowledge. Using a distributor does lower the risks to the organization; however, they also reduce the international experience which may be necessary for the organization in the long run. If further expansions are expected then more direct methods of dealing with consumers or setting up outlets within the new market could improve their own brand image and experience which may be necessary if they later choose to expand into more new markets. These two alternatives of the Network Model also show different advancing positions within the Stage Model, showing that a combination of strategies can be created to suit the individual organization and that there is no set procedure for SME’s expanding outside of their domestic market.
The table below offers some insight into what factors make expansion strategies successful. As the data shows, “top management support, agreement on clear and realistic objectives and emphasising the potential for joint value creation” all scored highly on what were considered important factors to organizations considering expansion strategies.
Industry and Environment Analysis: France
This report recommends expansion into France for the following reasons. France is a country with a close proximity to the UK, which offers excellent transport links, minimising costs and problems should they choose to export directly from their UK base. France is also the second largest agricultural producer in the world (after the USA) and is the largest European producer, which offers a large and reliable market base to target (Business in Europe 2007). Although Acomb tyres already have free trade within the EU, a potential base on the continent would offer easier access to new markets through differing transportation routes. This is particularly important with countries such as Turkey joining in the next few years as this is the country which has a massive agricultural market and with them included in free trade they will be more open to innovative technology offered by Acomb Tyres. Ellis and Williams (1995) suggest that the desire for movement is caused by the push pull factors of each country. Although France is lacking in the “pull” factors of a new market and lower production costs, it offers an answer to the push factors of the UK market. These factors will now be considered in more detail.
Although agriculture only accounts for 6% of the French workforce, it produces 22% of the EU’s agricultural products (French Embassy to Australia, 2007). In response to this the market has undertaken significant modernization in the past 30 years, with traditional farming methods being abandoned in favour of more efficient and effective farming techniques. The farms which do exist are also significantly larger than they were three decades ago, with smaller farms merging to produce greater land averages per farm. This concentration coincides with a growth in the amount of technology used on farms. 1,310,000 tractors are now owned by farmers with many owning several to serve their larger land bases (French Embassy to Australia 2007).
As customers are encouraging of new technology in order to improve their efficiency further, competitors must be innovative and invest heavily in research and development in order to continue producing cutting edge tyres. This is particularly important for organizations who strive to have the newest technology. With new technology constantly being produced, those who serve the French market must maintain the tyres to keep up with this. As this is something which Acomb Tyres already strives to do, this should be an ideal situation for Acomb to thrive in.
The leading agricultural tyre competitors are Bridgestone, Trellebourg and Michelin, all global, multi brand companies. Firstly, this means that their competitors will have significantly more time and money to invest in developing cutting edge tyre technology; they also have a massive brand image and established links within France making them strong competitors However, this does not exclude Acomb Tyres from the market, as many countries tyre industry’s are dominated by global organizations. There is also scope for the admission of specialist agricultural tyres manufacturers such as Acomb Tyres, as long as they are aware that heavy investment in new technology is integral to success in this sophisticated market. There are also several distribution companies operating in the country such as Centre du pneu d’occasion, Euromaster and Nordic Pneu, which could either serve as competitors or network agents, depending on the strategy which Acomb Tyres eventually chooses (DMOZ Open Directory Project 2007). These findings are summarised in a STEP analysis below.
Porters Five Forces Analysis
Michael Porter produced an excellent strategic tool called the Five Forces Model, which will now be used to analyse the French industry further (Mellahi et al (2005).
In terms of new market entrants, France offers no barriers to entry due to its EU membership. It geographical location and routes to entry are also attractive to Acomb Tyres. The competitive rivalry is an issue in France, with the aforementioned multi national companies providing some resistance to Acomb Tyres. However, this is the situation in most countries that Acomb Tyres could wish to target. By focusing on their innovative strategies at a local level, they could differentiate themselves to gain a loyal customer base. Product and technology development in France is similar to the environment which Acomb Tyres are accustomed too. Their customers will expect continual innovations and developments in line with technology, but this is a situation that they are used to dealing with in the UK. Initially, Acomb tyres will have lower supplier power than other competitors in the environment. However, this will develop over time as their customer base and brand image improve and they become increasingly integrated in the French industry. Finally, buyer power is high in France. Consumers have high levels of choice and competition for their trade is strong. However, again, this is the situation in most countries and represents the necessity to continue pushing innovation and development in order to differentiate themselves from competitors (from Chapman 2007, see also Mellahi et al 2005 for further analysis of Porters model). This competition is due to what Sadtler (1995) suggests is the recognition of other companies that France is a prime market to work within.
Conclusions and Recommendations
Having recommended that Acomb Tyres target France’s agricultural tyre market, this brief will now deal with strategies and consequences in more detail. The first recommendation is that Acomb Tyres try to enter France according to the Stage Models suggestions, gradually becoming more integrated. It is suggested that Acomb Tyres export through a distributor and according to the Network model; this would be an ideal way to introduce Acomb Tyres to the country. The evidence suggests that Acomb Tyres management, although specialists in their area, do not have sufficient contacts and insight into the French market to make the most of this opportunity by selling directly to customers. Therefore it may be less problematic and costly to establish links with one or more distributors outlined earlier. By developing a network of contacts within France, through the use of distributors such as Centre du pneu d’occasion, Euromaster and Nordic Pneu, Acomb Tyres would be able to develop a loyal customer base which would make later plans more successful. Faulkner (1995) points out those strategic alliances such as this can also be less costly than investing in the training to develop these competencies within the company. They could also increase sales by utilising the expertise of the distributors and learning from their networks valuable insights into the French industry. This could prove invaluable in the competition between Michelin and other established brands for sales. There is also the potential that one of their English distributors could also act on their behalf in France, extending their exportation policy without having to forge new links. For instance, Euromaster has a heavy presence in both England (540 branches) and France (383 branches) (Euromaster 2007). However, if they do not have any French links, then the management must be willing to obtain these networks.
On the basis that exportations through a distributor are successful and that a steady customer base has been established, this report suggests that Acomb Tyres begin a second expansion plan. This is supported by the work of Humes (1997) who suggested that a gradual evolution in response to the European environment would be far more successful than a revolution. Acomb Tyres rely on transport links from the English manufacturing plant, which increases the overall cost of producing their tyres. With a turnover of £22,000,000, before their expansion plans began, there is scope to build a second manufacturing plant to serve France and its neighbouring countries; however this does rely on several factors. Firstly, the management attitude to the expansion is crucial to whether this is undertaken and a responsive attitude to the environment is imperative. If a more ambitious long term strategy is desired then the management must be willing to take the risks to achieve this. This will mean committing the time and resources to establishing a second manufacturing facility in France. This report recommends the region of Bourgogne as a suitable option because of its central and eastern position offering proximity and direct road links to countries such as Italy, Switzerland, Germany and Belgium. The export opportunities from this region are excellent for serving more continental countries.
The initial resources necessary for this would be managers to oversee the development and to lead it upon its completion. Capital would be needed to fund the development, which could place a strain on financial resources in the UK. High level management would also be required in France to oversee the operations. This potential loss of power may be something which challenges the current mentality of the long time owners of this organization. Top levels of management may also have to commit to regular travel to France to deal with problems which may arise, which places a strain on managerial resources at home (Sadtler 1995).
However, if management are committed to a long term strategy, they must be willing to except some loss of power as the business grows further from its base. Alternatively, one of the partners could manage the development themselves. Manolova et al (2002) suggests that human factors are massively important to the success of expansion strategies. Stating that all SME’s will face financial hardship during expansion, management skills could have the potential to override these issues. For example, “business skills, international orientation, perceptions of the environment and demographic characteristics” all impact upon the success of a company’s expansion strategy (Manolova et al 2001). The most significant advantage of the move to France is not only the new market that it represents but also the opportunities to expand further into EU countries. This area of free trade which is continuously expanding is an ideal opportunity for Acomb Tyres, particularly with the agriculture based countries such as Turkey developing their technology and close to joining the EU.
Ultimately, France is an excellent expansion option for Acomb Tyres, particularly if they begin by exporting through established distributors before building their own manufacturing plant. This is the strategy which is strongly recommended as it is takes into account Acombs lack of experience in France and offers a slow programme in which issues can be dealt with promptly.