Mabe Case Essay
MABE has a good internationalization strategy with widely spread manufacturing plants in Mexico and Latin America, such as Venezuela, Colombia, Peru and Ecuador. It relies highly on acquisitions and JVs with local brands to lower manufacturing cost and increase its market share by entering different markets. This strategy is valuable as it decreases net costs and increases net revenues. It is rare because one third of all gas, electric ranges and refrigerators sold in the U.S. are manufactured by MABE. It is also hard to imitate as MABE spent many years to develop its plants in Mexico and Latin America, thus, competitors would face a cost disadvantage in developing similar strategy. Its products can be easily substituted as GE is still one of the largest competitors. However, MABE has exploited the full potential of this strategy in the international market.
Research & Development
In the early stage of development, MABE formed alliance with GE and took advantage of the foreign technology and penetrated new market. Later on, it developed higher and more sophisticated technical skills and decreased reliance on GE and developed its proprietary technology. It has used its R&D capability to exploit opportunities in the electric stoves, refrigerators, dish washing machines and clothing dryers markets. Thus, its R&D skill is valuable. Also, it is rare and non-substitute because very few competitors possess these skills and it will be costly for competitors to duplicate. MABE exploits its R&D by constant adaptation and innovation to ensure success in the growing appliance market.
MABE has a well-established multinational organizational culture. It hired engineering graduates and assigned them with seasoned MABE and GE executives. It used GE’s methodology of “action learning” so that multidisciplinary teams of executives can work together to recommend ways to enter into new markets. This organizational culture is valuable as it plays an important role in shaping management and employees’ values, expectations, behaviors, and experiences. It is not rare as many multinational firms have good organizational culture. Notwithstanding, it is non-substitutable because organizational structure is set up by many years of business experience and every organization has its own typical organizational culture, so it is hard to imitate from one to another. MABE is organized to fully exploit its resources and capabilities. Summary: MABE has a sustainable competitive advantage in the international market because it takes advantage of all of its unique resources and capabilities and continue to expand its market and remain competitive.
Porter’s five forces
Degree of Rivalry — Moderate to High
In the Russian appliance industry, majority of the market share is shared among Indesit, Bosch-Siemens and LG. MABE occupies less than 1 percent of market share and falls far behind 9 other major competitors. Due to the market size (i.e. $3 billion) and profitability (i.e. two times the average operating margin), the appliance market is attractive to foreign investors. Thus, the degree of rivalry is moderate to high.
Threat of Substitute — Low to Moderate
Before entering the appliance industry, initial capital and technologies are required. MABE has existed for a while now and has continuously produced good quality appliances, therefore, no better substitute for stove, freezer and washing machine are available. However, due to weather conditions, living habits and customs, the consumption of canned food may substitute the freezer sales as it is convenient and easy to store. Hence, the threat of substitute is low to moderate.
Threat of New Entrants — Moderate to high
The threat of new entrants in Russia is moderate to high. On one hand, new entrants need to consider Russia’s culture, low foreign acceptance, trust issues, economic environment and unstable political position before entering Russian market. All these factors may result in potential risks in business. Conversely, the profitability of the appliance market in Russia attracts new entrants to the industry.
Bargaining power of Buyers — Moderate to high
Customers have many options in the Russia appliance industry. They can select products based on their preferences as there are nearly 9 strong brands to satisfy buyers various needs. Thus, the bargaining power of buyers is moderate to high.
Bargaining power of Supplier — Low to Moderate
Suppliers have low to moderate bargaining power. When production is done by the JV, the supplier will have low bargaining power but when production is outsourced, supplier tend to have moderate bargaining power. Conclusion: Based on the analysis, the Russian economy is favorable with growing potential for the JV to exploit. Nevertheless, they have to pay more attention to the intensified rivalry and political and economic status and learn about customers’ needs as well as strive to increase economy of scale in order to achieve competitive advantage and increase profit and market share.
Russian State has high involvement and enormous influence over business activities and decision making. Moreover, there is political instability, weak legislative and enforcement regimes as well as immense corruption and bribery at all level. Therefore, it is vital that MABE understand the political risk when entering the market as it could have negative impact on their business as well as their reputation.
In 2008, the Russian economy was devastated by the recession which affected its monetary system. Among the BRIC countries, Russia has the highest FDI, per capita and discretionary incomes. It is also the world’s largest gas reserve and the second largest oil reserve. However, Russia economy offers low entry to small and medium size companies and its financial system is monopolized by one big bank resulting in a rather small domestic investment by locals and loan difficulty. Notwithstanding, there are still numerous opportunities for development that MABE can take advantage of if they can implement a method to handle these issues.
Russia has a collective culture with informal social orientation and considers trust as a prominent factor in doing business especially with foreigners and it takes a considerable amount of time for foreign firms to earn the trust of locals. Therefore, the adaptation of MABE to the Russian cultural cues is essential. Furthermore, Russia is facing comparative problems of population abatement, human capital deterioration, high mortality, low level of life expectancy, health and knowledge. In spite of the Russia’s vast natural resources, their declining human capital, low level of knowledge and other related issues have limited its social and economic development which will pose a problem for MABE to extract high skilled and competent workers.
Technological innovation and improvement is one of the main success factor to achieve competitive advantage in the appliance sector. In a merging market like Russia, with increasing competition, it is imperative that MABE invest more in technology improvement, innovation and development so as to stay abreast with the rapidly changing technological environment and improve their business efficiency, performance and competitiveness.
Russia environment can be quiet hostile for foreign investment with several laws and regulations pertaining to environmental protection. For instance, doing AIDS test to obtain work permit and also, the hiring of several local work force in order for business to successfully operate in Russia. Additionally, there have been energy consumption regulations imposed by most government including Russia. Thus, MABE has to take into consideration these requirements and conditions.
Russia has had weak legislative and enforcement regimes with increasing corruption and bribery. Its biased legal and judicial systems, corrupt law enforcement, weak capital market institutions and poor private property right protection has relatively formed and increased the volatility and instability of its economy. This will lead to the loss of interest of existing and potential foreign firms to do business there. C
Russia has an attractive and profitable appliance market with high technical innovation capabilities. However, the poor legislative and judicial system with a corrupt government that highly influences business practices makes it quite challenging and risky for entry into the country. Despite its social impediment and structure, there is still opportunities for successful entry in the market and for the joint venture to achieve its goal, it must adjust itself to the Russian environment.
Administration and Political Distance
Attributes creating distance
-Different languages, -Different religions, -Different ethnicity, Different social norms
-Absence of colonial ties,
-Different monetary system & currencies
-Different country size
-Limited sea access
-Difference in customer income
Cultural distance: Russia and Mexico have very distinct cultures. They have different languages, ethnicity, social norms and religions, hence, there is a huge cultural difference between them.
Administration and Political Distance: Both country’s government have high influence on all aspect of business and other operations in the country. Although they suffer from the same poor political and legislative system as well as corruption and bribery, some administration and political differences still exist.
Geographical Distance: Due to the large geographic distance between Russia and Mexico, goods can be exchange via transportation and most communication through information system.
Economical Distance: Russia and Mexico are developing countries with similar economic situations such as average salary, GDP and population size. In this regards, the economic distance is little.
Russia and Mexico are somewhat similar in term of their political, economic and administrative situations while very different in term of culture and geography. However, as many factors need to be considered to adjust to the changes, the JV must adapt to the Russia environment. Alternative and Recommendation
Mabe has to make a decision based on its business objectives and these will be discussed below:
Whether or not MABE decides to stop or continue with the JV, it will most likely still seek to go to other markets in the world since the JV was a result of its aim of wanting to explore new regions of the world and expand to other markets. If it decides to stay, it may partner with a local manufacturer in Russia as discussed in our third alternative or if Mabe decides to leave Russia, it may seek to enter into other markets in other regions of the world but these markets will also have their potential threats in addition to their opportunities and benefits.
The major aim of Mabe wanting to expand operations to other regions of the world is to grow its business. In order to ensure that this happens, Mabe will have to tailor its next step on what to do about its JV in Russia to something that not only helps it expand to other countries, but one that also increases the growth of the business.
Whether or not Mabe decides to continue with its present JV, go into another JV in Russia or go to another region of the world, it has to consider the current market situation there and the major market players to see if it can gain adequate market share that will sustain its business there. In addition to this, it also has to consider the business culture in the region and see if its business can fit into their ways of doing things there. The available opportunities in those regions also matter but this may not be a huge problem in emerging markets unlike under developed regions.
Even in the midst of these available opportunities, Mabe has to see if it has the resources that will enable it benefit from these opportunities. Another important factor is the threats in the region since they can serve as a major hindrance to not only taking advantage of opportunities, but also the growth of the business as a whole. The environment in which a business operates in goes a long way in determining how well it will perform. More on the external environment has been discussed in our external business analysis section.
-Strong customer purchasing power
-Low economic and financial risk
-Relatively lower cost of manufacturing
-Transportation system is well established
-Large number of potential business partners and investors
-The level of price sensitivity is high. Thus, how to set up proper price becomes critical
-Faces intense competition, i.e. Haier, Midea, Mitsubishi
-A high level of government regulation and business requirements
-Relative a high level of local bribery
According to the internal and external analysis, MABE should form a new joint venture with a Russian company for growth. Russia have one of the largest appliance market in the world with an impressive profit margin. However, it is relatively difficult and challenging to do business in Russia due to its political structure, sociocultural and economic environment. It’s best for MABE to work with a local Russian partner who knows the system and has extensive line of network in order to reduce the various connected risks. Furthermore, by entering the Russian market, Mabe will fully exploit its resources and capabilities and will achieve its objectives of international expansion, business growth and increase in market share. Therefore, Alternative 3 is recommended.
In order to resolve the above issue, it is important for MABE’s executives to comprehend and gain extensive knowledge of Russia’s business system and environment in order to be competitive. To implement the recommended alternative, a short and long term plan is discussed below.
Short-run implementation Plan (See Exhibit 1)
Phase 1 (day 1-7): A board meeting need be held to discuss and form a research team. A professional market analysts and few expatriates of MABE should travel to Russia on an exploratory visit to understand Russia market and find a reliable Russian manufacturer. At the same time, the research team should also hire local employees who are acquainted with the appliances market in Russia. In addition, the expatriates and executives should begin to learn the language and gain more knowledge about Russian culture because it helps to communicate with local manufacturers and employees in order to effectively operate the JV. Phase 2 (day 8-12): The research team should be divided into several groups to collect more information and make sure every aspect is considered. The groups should regularly meet to exchange information and insights to ensure that the current situation in Russia is updated.
In this case, the advantage and disadvantage of each potential Russian company could be listed orderly by professional market analysts. Meanwhile, expatriates should keep learning. Phase 3 (day 13-19): Presentation should be well prepared for board members to show the knowledge and analysis about potential Russian partner. Board members will analyze and negotiate with these manufactures based on what is on the list. Phase 4 (day 20-31): With the help of lawyers, a contract will be drafted and negotiated with local partner about the business model, routine, strategy and management structure. Negotiation should not be stopped until the two companies are satisfied with the details. Phase 5 (day 29-38): The final contract should be prepared and signed by MABE and local partner. Then, the new Joint Venture would be set up and operation would begin.
Long-run Implementation Plan
MABE should focus on the fastest growing segment, that is, the small and middle end products to increase profit and should show concern for the local employees and society by increasing salary, offering employee benefit and donating to the society. With extensive knowledge of Russia economy, MABE could forecast on the future trend of the Russian market and develop new strategies to compete in future situations There should be vast and continuous investment in R&D, technical innovations and process improvement in order to increase efficiency and competitiveness After fully develop in Russia, MABE could expand their reach in larger international markets like China to take advantage of the numerous growth opportunities.
If the recommended alternative does not work out, we would recommend that JV be dissolved and Mabe should exit the Russian market to another emerging market like South Africa. This is because it is relatively easy to do business there; it will help Mabe gain more presence in Africa as a whole which is politically and macro-economically stable with competitive labor costs. In addition, the country has better patent and copyright laws that will protect its innovations and designs from knockoffs as opposed to some other emerging markets like China.
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 26 September 2016
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