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Article: IS IT TOO LATE TO ENTER TO CHINA?

1. Why do most of the companies try to have a foothold in the market of


China in spite of PRC (People's Republic of China) being a command
economy?

The PRC(Peoples Republic of China) has a strong hand over business in


china and it still prevents foreign companies to enter into the core
sectors. But still most of the companies try to have a foothold in the
market of china because of following reason. The fact that China is
large market and will soon be the worlds growth engine in terms of
output and consumption, motivates companies to have a foothold
there. Like in Automotive sector, carmakers are restricted to joint
ventures in which their maximum stake is 50%, but the possibility of
selling products in the worlds largest automobile market and gaining
unmatchable economies of scale motivates them to enter this market.

2. As you understand from the article, what were the positive features of the
China markets in 2010(when the article was written) and the key risk then
for the MNEs planning to enter the China market. Explain the rationale.

Some Positive features of chinas market in 2010 were:

Net Profit for top 500 companies was higher for China as compared to
U.S. which shows as a positive sign for Chinas market. According to
September 2009 review from the China Enterprise Confederation and
the China Enterprise Directors Association, the top 500 Chinese
companies net profits were $170.6 billion in the first half of 2009,
exceeding for the first time the net profits reported by the top 500
American companies, which were $98.9 billion for that period.
From data given in the article we can analyse that China Recovered
from Recession of 2008 is very fast and the pace of growth showed up
11.3% in the end of 2010.
Chinas Cheap labor and availability of raw material have also been a
positive aspect for economic growth of market.
The large supply of engineers and scientists in the country helped in
research and innovation which further lead to company and economies
growth in the bigger picture.
3. Explain the terms:
China context It is really difficult to enter a complex country like
China without any hurdles. Although the Chinese government began
freeing the economy from controls in 1978, it has always wielded a
strong hand over business, balancing the need for economic growth
and the entrepreneurship that demandswith its overriding
desire to maintain political and social stability. The government is
still preventing certain companies to enter particular sectors like
telecommunication and media. Although many companies thought
that they have understood the strategies how to do business in
China, the scale and intensity of change in the Chinese economy is
rendering even successful strategies inadequate. It is very difficult
to develop a freestanding business business in the country. The 3
factors which have been changing the context in China are:
Official China - The Communist Party of China had an isolate
attitude towards the foreign companies. Although growth
generates legitimacy for Chinas government and guarantees
social stability, the party will continue to determine the pace
at which it frees the economy from controls. Companies
wishing to setup their business in China had to cater to their
needs and modify their strategies but the ownership of certain
sectors like communications, energy, finance, resources, and
media sectors was retained by China itself.
Competitive China - China has been highly successful in
capturing world export markets. China opened its markets to
foreign companies when its economic reforms began and has
opened them wider ever since. It is growing global like many
of the big companies and attracts the most foreign companies
too which results in intense competition and creates a host of
business opportunities in China.
Consumer China A substantial middle class has been
generated by Chinas growth. So, it has a lot of brands and
products due to which there has been a lack of loyalty and a
large shift in market share. A large rural population has been
shifting to cities. By 2020 city dwellers will account for 60% of
Chinas population, compared with 40% in 2009. The
migration of 200 million people will transform markets afresh.
Competitive China - China has been highly successful in capturing
world export markets. China opened its markets to foreign
companies when its economic reforms began and has opened them
wider ever since. It is growing global like many of the big companies
and attracts the most foreign companies too which results in
intense competition and creates a host of business opportunities in
China. There has been a lot of waste and environmental damage
because of cheap labor and large investments. Companies in China
will have to reduce their consumption of raw materials, mitigate the
environmental impact of their operations, radically improve quality,
and hone their management skills which will make them even more
competitive than they are today.
Official China - The Communist Party of China had an isolate
attitude towards the foreign companies. Although growth generates
legitimacy for Chinas government and guarantees social stability,
the party will continue to determine the pace at which it frees the
economy from controls. Companies wishing to setup their business
in China had to cater to their needs and modify their strategies but
the ownership of certain sectors like communications, energy,
finance, resources, and media sectors was retained by China itself.
The foreign companies have more than doubled their investment in
China. But some companies like Google decided that China is not
the place for them to invest as they realized later that rivals like
Yahoo and Microsoft were getting ahead because they had
established a presence in China. The government did not lift
censorship on Google. The company is still trying to establish a
position in the Chinese context, knowing that if it can find a way to
manage the reputational risks, maintaining its China operation will
not be a bad thing.
Consumer China - A substantial middle class has been generated
by Chinas growth. So, it has a lot of brands and products due to
which there has been a lack of loyalty and a large shift in market
share. A large rural population has been shifting to cities. By 2020
city dwellers will account for 60% of Chinas population, compared
with 40% in 2009. The migration of 200 million people will transform
markets afresh. Over the next 10 years Chinas mass market will
morph into differentiated and multitiered segments.
4. Outline briefly the key questions which a company planning to enter
China in 2015 needs to address and deal with. Why?

The key questions which a company planning to enter China in 2015


needs to address and deal with are:
One way to evaluate potential demand for the company is to
determine if it fits with Chinas current development plans. The timing
and relevancy of the company is important. Entering the market when
there is government supported demand for your product will increase
the likelihood of your success.
Having the right attitude and understanding that business might be
done in different ways internationally is important to keep in mind.
When doing business in China, the company should expect to
encounter differences in human resources, government policies, and
the legal system as well as the language. Being open to learning local
values, customs and maybe even a few Chinese phrases will make the
companys transition to the Chinese market far smoother.
Understanding the competitors abroad can provide insights into how
and whether to expand. But many companies don't take time to figure
out whether similar products and services are already available in a
new market and what they would need to offer to compete
successfully. Spending time in China and speaking with potential
customers can help to avoid costly mistakes.
Having the right people working in China can set up for success. This
team can be formed in any number of arrangements, whether it be a
joint venture with a Chinese firm, an office with qualified staff, or a
consultant hired to assist you. Having support from those experienced
in the market will be a huge advantage to the company. As is any new
market, China possesses unique challenges which can be abated by
enlisting the assistance of specialists.
Article 2: COMPETETIVE ADVANTAGE OF
NATIONS
1. What is the main theme in this landmark article by Michael Porter?

This article gives insights into why and how industries, regions, nations
or some social groups thrive or fall short. The book explains and
presents the theory on the sources of sustained prosperity in the
contemporary worldwide economy. This seminal work has assisted
countries to develop national policy based on their international
competitiveness. Porter methodically and systematically discusses why
some nations achieve continual economic prosperity. He explains the
roles of governments and companies in economic development. The
author shows the distinction between competitive advantage as a
source of wealth and the concept of comparative advantage which had
been until recent years the paradigm on thinking about international
competition. Most discussions of the competitive success of nations
look at aggregate, economy-wide measures like the balance of trade.
Porter chose a different starting point, beginning with individual
industries and competitors and building up to the economy as a whole.
Nations do not compete in the marketplacebusiness firms do, and
the performance of individual companies in particular industries in
where competitive advantage is either won or lost. The home nation
influences the ability of its firms to succeed in particular industries,
with the success or failure of thousands of struggles in many industries
determining the state of a nations economy and its ability to progress.
Porter and his research team studied ten important trading nations,
including the three leading industrial powers (the United States, Japan,
and Germany), plus other European and Asian countries chosen to vary
widely in size, government policy toward industry, social philosophy,
geography, and region. In every case, firms were found to be
internationally competitive because of a set of conditions in the home
country favorable to the development of their industry. Four
determinants interact to form a diamond": firm strategy, structure,
and rivalry; factor conditions (e.g., natural resources); demand
conditions; and related and supporting industries. The diamond is
further influenced by chance events and government action. There is
no single set of national conditions favorable to all industries, a fact
borne out by the detailed industry and country studies which constitute
the bulk of the book. A final section presents the implications for
company strategy, government policy, and the national agendas of the
ten countries. The argument is incisive and original, the evidence
compellingcertainly any future work on national competitiveness will
have to take this thought-provoking book into account. Porters
approach did result in a very long volume, with considerable repetition
as the theory was applied to each new situation.

2. Could you relate to it as a PGDM-IB student? If so, how do you think


this article will be useful to you in your long term career as an
International Business professional?

Firms create competitive advantage by perceiving or discovering new and


better ways to compete in an industry and bringing them to market, which
is ultimately an act of innovation. Sources of innovation are :

New technologies e.g. Japanese firms & medical imaging


New or shifting buyer needs e.g. American fast food & consumer
demands for convenience & consistency
Emergence of new industry segment e.g. small Japanese lift trucks for
general purposes
Shifting input costs or availability e.g. transport costs and global
production
Changes in government regulation e.g. early U.S. financial
deregulation & American firms experience

3. Do you think the main themes of this article are valid today after 25
years as they were when the article was written in 1990. Explain the
rationale for your answer.
Michael Porter's research identified the fundamental determinants of
national competitive advantage in an industry and how they work
together to give international advantage. The findings are rich in
implications for firms and governments and set the agenda for discussions
of global competition. The core ideas of the book remain very relevant
today. In the past 20 years tools like analysis of patents, R&D
expenditures, the numbers of scientifically educated people, have
provided more quantitative insight. To these tools Porter adds realistic
analyses of top industries in various countries - from shoes and couture in
Italy, to Silicon Valley in the U.S. He points out that the fastest growth
comes when favorable factors are concentrated in centers where diverse
groups - industrial, academic, sometimes government or traditional
industries come together and have intense interactions.

4. What is your understanding of Porter's diamond? How it can be used by


companies and governments of countries? Explain the rationale for
your answer.

Porters diamond model provides us with the reason why particular


industries become competitive in certain locations. The approach looks at
clusters, a number of small industries, where the competitiveness of one
company is related to the performance of other companies and other
factors tied together in the value-added chain, in customer-client relation,
or in a local or regional contexts. Below is a figure of the Diamond model.
The Porter analysis was made in two steps. First, clusters of successful
industries have been mapped in 10 important trading nations. In the
second, the history of competition in particular industries is examined to
clarify the dynamic process by which competitive advantage was created.
The second step in Porter's analysis deals with the dynamic process by
which competitive advantage is created. The basic method in these
studies is historical analysis. The phenomena that are analysed are
classified into four broad factors incorporated into the Porter diamond,
which has become a key tool for the analysis of competitiveness:

Factor conditions are human resources, physical resources,


knowledge resources, capital resources and infrastructure. Specialized
resources are often specific for an industry and important for its
competitiveness. Specific resources can be created to compensate for
factor disadvantages.
Demand conditions in the home market can help companies create a
competitive advantage, when sophisticated home market buyers
pressure firms to innovate faster and to create more advanced products
than those of competitors.
Related and supporting industries can produce inputs that are
important for innovation and internationalization. These industries
provide cost-effective inputs, but they also participate in the upgrading
process, thus stimulating other companies in the chain to innovate.
Firm strategy, structure and rivalry constitute the fourth
determinant of competitiveness. The way in which companies are
created, set goals and are managed is important for success. But the
presence of intense rivalry in the home base is also important; it
creates pressure to innovate in order to upgrade competitiveness.
Porter argues that firms gain competitive advantage when:

their home base allows and supports the most rapid accumulation of
specialised assets and skills;
their home base affords better ongoing information and insight into
product and process needs;
the goals of owners, managers, and employees support intense
commitment and sustained investment;
their home environment is the most dynamic and challenging,
stimulating firms to upgrade & widen their advantages overtime.

5. Outline separately the prescriptions the author makes to government


of countries and to CEOs of MNEs for building and sustaining global
competitiveness of the countries and the MNEs in the rapidly changing
International business environment.

A nation's competitiveness depends on the capacity of its industry to


innovate and upgrade. Companies gain advantage against the world's
best competitors because of pressure and challenge. They benefit from
having strong domestic rivals, aggressive home-base suppliers, and
demanding local customers. In a world of increasingly global competition,
nations have become more, not less, important. As the basis of
competition has shifted more and more to the creation and assimilation of
knowledge, the role of the nation has grown. Competitive advantage is
created and sustained through a highly localized process. Government's
proper role is as a catalyst and challenger; it is to encourage or even push
companies to raise their aspirations and move to higher levels of competitive
performance, even though this process may be inherently unpleasant and
difficult. Government cannot create competitive industries; only companies
can do that. Government plays a role that is inherently partial, that succeeds
only when working in tandem with favorable underlying conditions in the
diamond. Government policies that succeed are those that create an
environment in which companies can gain competitive advantage rather than
those that involve government directly in the process, except in nations early in
the development process. It is an indirect, rather than a direct, role.