Global Gate

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Global Gate

Author: Marieke Noorlag Student number: 1064207

1^st supervisor: Mr. Drs. H.A. Ritsema 2^nd supervisor: Drs. M.E. Boon

Rijksuniversiteit Groningen

Faculty of Management and Organisation February 2004

The author is responsible for the contents of this thesis; the copy-right of this thesis rests with the author.

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RijksUniversiteit Groningen 2

Preface

In front of you lay the result of a research done on behalf of CRH Fencing &

Security in order to investigate the opportunities of the Delta Gate over the border.

During my internship at this organisation I have researched seven countries in general and two countries in more detail. Objective was to research the opportunities of the Delta Gate in the seven countries and to find a fitting entry mode for one of these countries. This essay is the final assignment of my study, International Business at the Faculty of Management and Organisation, Rijksuniversiteit Groningen.

One of the selected countries is China. During my internship at CRH Fencing &

Security I have had the opportunity to experience China by myself, to eat the ‘real’

Chinese food. As most people travelling to China I was in first instance a bit afraid of the food I had to eat in China. You hear so many strange stories about it;

monkeys, brains, cats and dogs, you name it the Chinese eat it. At least that is our prejudice. But as usual you have to experience it before you can have your opinion;

the food was great. Okay, some dishes may be different, but this doesn’t mean they are less good.

In many areas we, as ‘Western’ people, have our prejudices about China. Maybe it is just scary to us, this large country with its own culture and habits. But whatever our prejudices are, this country is slowly catching up on the West. Many foreign investors have already put aside their prejudices and discovered the many opportunities this economy of the future has to offer.

My ten days in China were great; I found it a real privilege to be able to experience this great country. Although far away many new opportunities are developing for European companies. Whether the Chinese market is also offering great opportunities for CRH Fencing & Security, you will find out after reading this essay.

Before whishing you a pleasant reading I want to thank some people without whom this essay wouldn’t be what it is. First of all many thanks to my parents, my brother and of course my boyfriend for supporting me. Following many thanks to the employees of CRH Fencing & Security, Heras and Magnetic Autocontrol, I especially want to thank my supervisor Arno Hulshof and Managing Director of CRH Fencing &

Security Geert Jan van Schijndel. Last but certainly not least many thanks to both my supervisors of the Rijksuniversiteit Groningen, mr. drs. H.A. Ritsema and drs.

M.E. Boon. Their merciless feedback was sometimes painful, but most of the times helpful.

Finally I want to wish you a pleasant reading. I hope this essay will contribute the future adventures of CRH Fencing & Security in new countries.

Marieke Noorlag

´s Hertogenbosch, February 2004

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Executive summary

A product in the gamma of Heras is the Delta Gate, a featherweight aluminium gate with a unique patented construction. Unlike other sliding gates the Delta Gate has a modular design, which makes the gate easy to install, to maintain and to transport.

This modular design makes the gate perfect for export. Presently Heras is following a market penetration strategy concerning the Delta Gate. CRH Fencing & Security, as holding company, is supporting to turn over this strategy into a market development strategy; a less reserved and more pro-active strategy.

This research is conducted in order to investigate the possibilities of the Delta Gate across the border. To limit the scope of the research, just the countries where Magnetic Autocontrol is active are researched; China, South Africa, Australia, United States of America, India, Brazil and Malaysia. This company has recently been acquired by CRH Fencing & Security. Attendant advantage of this research for CRH Fencing & Security is the ability to gain more objective information about these countries.

Main question to be answered in this essay is:

What country offers the best opportunities for CRH Fencing & Security and what is the best fitting entry mode?

This question is divided into the following sub-questions:

1. What internal organisational aspects influence the present international strategy?

2. Which country or countries are presently considered as most attractive for CRH Fencing & Security based upon a general scan of the macro- environment?

3. What elements influence the operational environment of the selected country or countries?

a) How can the competitive rivalry of the market(s) be described?

b) Who are the main competitors of CRH Fencing & Security in the selected market(s)?

c) Who are the potential customers of CRH Fencing & Security in the selected market(s)?

d) How are/is the market(s) structured?

4. What variables determine the choice of entry mode?

These sub-questions define the structure of the essay. Based on analyses of the internal and external environment of CRH Fencing & Security a fitting entry mode will be chosen.

The organisation of CRH Fencing & Security is structured as a holding company structure in which CRH Fencing & Security functions as the parent, and Heras or Magnetic Autocontrol as semi-autonomous business units. As a parent CRH Fencing

& Security has strategic control over its business units, which implies setting out the general company strategy. The semi-autonomous business units fill in this strategy.

The analysis of the external environment is divided into two phases. First a general analysis of the macro-environment of the seven countries will be done. Based on this analysis two countries are selected to further investigate: Australia and China.

The second phase of the external analysis is an analysis of the operating environment of Australia and China. This operating environment is divided into a meso- and a micro-environment.

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RijksUniversiteit Groningen 4 The Australian gate market distinguishes three segments, the Delta Gate fits in the middle security segment. Application of gates in this segment could for example be found in the security of a production facility. The gate industry of Australia is young and still growing. The competition in the market is relatively small, many of the present Australian gate manufacturers are not specialised in sliding or cantilever gates. The position of Magnetic Autocontrol in this market is strong and the organisation contains a high market share. When CRH Fencing & Security decides to enter the Australian market the organisation is able to provide from this presence. The costs involved when entering Australia will be considerably lower because Magnetic Autocontrol is present. During this research first initiatives were taken to enter the Australian market.

In the Chinese gate market the Delta Gate also fits in the middle security segment, but this is where the similarities between the Australian gate market and the Chinese gate market ends. Gates used in China today are characterised by a design different from ‘Western’ sliding gates. The main difference can be found in the design of the gate. However other differences are found in quality, security and price. The Delta Gate beats the Chinese collapsible gate in quality and security, but not in price. Because of these large differences the power of the customer is considerable. Therefore it is of great importance to understand the decision-making process of the customer.

Overall the competition in the Chinese gate market is fierce, but very locally orientated. China is an enormous country, enormous in home market but also in surface. Sales figures of potential competitors and the amount of foreign investors implicate a growing and large gate market. Considering the choice of a distribution structure two options are possible: direct selling or indirect selling. Taking the surface of China in account, direct selling is almost impossible. When entering China the choice how to distribute the Delta Gate needs to be made.

Due to a time-binding factor and the present developments in the Australian market, it is decided to further diminish the scope of the research to China. For this country a fitting entry mode will be chosen in the third phase of the research.

Two aspects proved to be important when choosing a fitting entry mode to enter the Chinese gate market; control and flexibility. Control because of the need to market the product intensively to create a demand, but also to prevent potential competitors from copying the gate. Flexibility is important because of the felt uncertainty; China is physically and culturally far from the home market of the Delta Gate.

The best fitting entry mode for CRH Fencing & Security to enter China has been found in a combination of distributorship and the establishment of a representation office. This combination gives CRH Fencing & Security both control and flexibility.

The establishment of a representation office gives CRH Fencing & Security the ability to control and direct the marketing activities related to the Delta Gate from up-close, but because of the minimum fixed costs the organisation stays flexible.

The use of distributors makes it possible for CRH Fencing & Security to reach more potential customers, and to create awareness of the product in multiple areas of China.

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Table of contents

Preface 2

Summary 3

Chapter 1: Introduction 7

Chapter 2: Problem definition and methodology 10

2.1 Introduction to the problem 10

2.2 Objective and problem definition 10

2.2.1 Objective 10

2.2.2 Problem definition 10

2.2.3 Limitation 12

2.3 Theoretical concepts 12

2.4 Data collection 17

2.5 Definitions 18

Internal Environment

Chapter 3: The Internal Organisation 20

3.1 Innovation 20

3.2 Manufacturing 20

3.3 Finance-access to capital 21

3.4 Management 21

3.4.1 Structure 21

3.4.2 Management 22

3.4.3 International strategy 22

3.5 Marketing 23

3.6 Customer base 24

3.7 Concluding remarks 24

External Environment

Chapter 4: The Macro-Environment 27

4.1 China 28

4.2 South Africa 29

4.3 India 30

4.4 Brazil 32

4.5 Malaysia 33

4.6 Australia 34

4.7 U.S.A 35

4.8 Conclusion 36

Chapter 5: Australia 39

5.1 The Australian gate industry 39

5.1.1 Threat of entry 39

5.1.2 Power of buyers 40

5.1.3 Power of suppliers 40

5.1.4 Threat of substitutes 40

5.1.5 Competitive Rivalry 41

5.2 The Australian gate market 41

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5.2.1 The competitors 41

5.2.2 The customers 44

5.2.3 The market structure 44

Chapter 6: China 48

6.1 The Chinese gate industry 48

6.1.1 Threat of entry 48

6.1.2 Power of buyers 50

6.1.3 Power of suppliers 50

6.1.4 Threat of substitutes 51

6.1.5 Competitive rivalry 52

6.2 The Chinese gate market 52

6.2.1 The competitors 52

6.2.2 The customers 54

6.2.3 The market structure 56

Entry Strategy

Chapter 7: Modes of Entry 61

7.1 Types of entry modes 61

7.2 Desired mode characteristics 62

7.3 Moderators 64

7.4 Preferred entry mode 65

7.5 Role of Magnetic Autocontrol China 69

7.6 Conclusive remarks 69

Conclusions and recommendations

Chapter 8: Conclusions and recommendations 72

8.1 Conclusions 72

8.2 Recommendations for future research 76

Bibliography 78

Appendixes 80

Appendix I : Organisation Chart CRH plc.

Appendix II : Organisation Chart CRH Fencing & Security Appendix II : The Delta Gate

Appendix IV : Swing & Sliding Gate manufacturers Australia Appendix V : China Trip 15-23 October 2003

Appendix VI : Chinese Harmonica-Collapsible Gate

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Chapter 1: Introduction

In this chapter a brief description of the investigated organisation will be given.

Three layers of CRH are described; CRH plc., CRH Fencing and Security, Heras and Magnetic Autocontrol. All are affected by this research.

CRH plc.

CRH Public Limited Co. is headquartered in Dublin, Ireland. The organisation was formed in 1970 through a merger of two leading Irish public companies, Cement Limited (established in 1936) and Roadstone Limited (1949). Since the merger, CRH’s strategic vision has been to become an international leader in building materials, delivering superior and sustained shareholder returns, while reducing its dependence on individuals markets and achieving a balance in its geographic presence and portfolio products.¹

Today CRH plc. is employing circa 50,000 people at over 1,600 locations in 23 countries world-wide. The company has a presence across the construction industry supply chain. The activities of CRH plc. can be divided into three closely related core businesses: primary materials, value-added building products and specialist distribution. The organisation is organised on a geographic basis with four divisions in Europe and the Americas, see Appendix I.

The continuous growth of the group comes from improving existing operations, investing in capacity enhancements in new products and markets, and making small to medium-sized add-on acquisitions augmented as appropriate by larger deals, which expand geographic reach and open new market opportunities.²

CRH is listed on the Irish and London Stock Exchanges and through its ADRs on NASDAQ. In 2002, CRH generated sales of 10,794 million Euro, roughly 60% of which arose in the Americas, and a profit before tax of 856 million Euro.³

CRH Fencing & Security

CRH Fencing & Security is a leading European supplier of fences and outdoor security systems. CRH Fencing and Security is a manufacturer, distributor and installer of security systems and solutions, with well-known trademarks such as Heras, Adronit, SKS, Geoquip and Darfen, see appendix II. The organisation is a market leader in the Netherlands and UK, enjoys a top-three position in Germany and has annual sales of circa 200 million Euro.

CRH Fencing & Security’s objective is to be the leading company in Europe in all professional segments of outdoor security solutions, with an emphasis on the added value sector. The objective is translated into a organisation strategy; improvement of its leadership position in the European fence and gate market, and extension of its presence in the industry of electronic security systems, for example intrusion detection, access control and camera surveillance systems. This organisation strategy is derived from the development strategy CRH plc. has formed for CRH Fencing & Security; ‘Grow security fencing from current strong bases in Germany, the Netherlands and the UK into neighbouring regions; develop full range of perimeter protection systems.’ ⁴ As part of this strategy CRH F&S is acquiring businesses to strengthen and to extend its position, as a result the organisational structure of CRH Fencing & Security continues to develop.

1 www.crh.com

2 idem

3 www.datamonitor.com

4 www.crh.com

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RijksUniversiteit Groningen 8 The role of the holding CRH F&S towards its daughters is one of supporting, the main roles of the holing are:

1. Giving a strategic framework,

2. Financial management and monitoring,

3. Business development and management development 4. Support and sparring partner

The organisation likes to express this role by leaving the local management with a high degree of individual responsibility and operational autonomy. “Central to CRH success is combining strong local operations with an effective sharing of resources and expertise.”⁵

Heras

Heras is a familiar name in the fencing industry in Europe. The organisation was founded by F. Ruigrok in 1952 and was acquired by CRH Fencing & Security in 1987.

The fencing market is a relatively new market. F. Ruigrok was literally a pioneer when he started his business in standardised fences in 1952.

Heras is divided into several autonomous parts, see appendix II. In four countries, the Netherlands, Germany, Poland and the UK, Heras has its own offices. These local offices serve the domestic markets and are able to co-ordinate all activities including, sales, assembly, after-sales and customer service.

Heras Products is a separate autonomous business unit of CRH Fencing & Security, see appendix II. Heras Products sells its products to the other business units of CRH Fencing & Security through an inter-company pricing system. This structure is used to keep prices competitive and to prevent the organisation from falling asleep.

In countries where Heras has no official representation the central export department, stationed under Heras Products, serves the customers. Projects from Qatar to Nigeria and from Moscow to Mecca bear witness to this claim. Despite of the world-wide projects, the focus of the export department is aimed upon Europe, with emphasis on Belgium, France, Austria and the Czech Republic. This emphasis is supported by the strategic vision CRH plc. has for CRH Fencing & Security.

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PRICE

Magnetic Autocontrol

From July 25, 2003 forward, CRH Fencing & Security has acquired 100% of the shares of the Magnetic Autocontrol Group. The company is headquartered in Germany, and has offices in the United States of America, China, India, Malaysia, Australia and Brazil. Today Magnetic Autocontrol has 200 employees and has increased its sales to approximately 35 million Euro in 2002.⁶ Magnetic Autocontrol

5 Liam O’Mahony, CEO CRH plc., report 2002, p.7

6 www.crh-fsg.com

Heras is operating in the high/middle quality segment with a relatively high price. These two aspects are interconnected with each other. To guarantee the high quality of its products Heras often utilises turnkey projects, projects from design stage to execution and installation. To keep the prices competitive the turnkey process is not used in export.

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RijksUniversiteit Groningen 9 is considered one of the leading suppliers in the world of pedestrian barriers for automatic fare collection and automatic immigration systems.

Whereas their position in pedestrian barriers is strong world-wide, in Australia the main market focus is aimed upon gates, sliding as well as swing gates, which are closely related to the Delta Gate, see appendix III.

The markets where Magnetic Autocontrol is active are relatively new markets for CRH Fencing & Security. The acquisition is seen as an opportunity for CRH Fencing

& Security to enter new markets with their present products.

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Chapter 2: Problem definition and methodology

This chapter consists out of three subsequent parts. First a short description of the research problem is given. This is followed by the objective and problem definition, which include the conceptual model and the limitations of the research. The last part of this chapter discusses the used theoretical concepts and the function of them in the research.

2.1 Introduction to the problem

A product in the gamma of Heras is the Delta Gate, see appendix III, a featherweight aluminium gate with a unique patented construction. Unlike other sliding gates the Delta Gate has a modular design, which has a positive influence on the difficulty to install, maintain and transport the gate. These factors make the Delta Gate an excellent product for export. Today, Heras is already active in several parts of Europe, like England, France, Germany and the Benelux, and a co- operation with a Canadian partner is currently installed.

As from 25 July 2003 CRH Fencing & Security has acquired Magnetic Autocontrol, a German company active in pedestrian access control and boom gates. As a result of this acquisition new markets have opened up, for CRH Fencing & Security and its business units.

Because of its proven quality as export product, CRH Fencing & Security wants to investigate the opportunities for the Delta Gate in the seven new markets of Magnetic Autocontrol; China, South Africa, Australia, United States of America, India, Brazil, Malaysia and China.

2.2 Objective and problem definition

A problem definition consists out of an objective, a main question and limitation of the research.⁷ The main question can once again be divided into a main research question, a conceptual model and the derived sub-questions.

2.2.1 Objective

Give a recommendation concerning the best fitting entry strategy to enter the most attractive country for CRH Fencing & Security.

2.2.2 Problem definition

What country offers the best opportunities for CRH Fencing & Security and what is the best fitting entry mode for this country?

Conceptual model

Several aspects become of relevance when answering the above problem definition.

The conceptual model, see figure 1, shows the relations between the separate relevant aspects.

7 De Leeuw, A.C.J. (1996); Bedrijfskundige Methodologie, Van Gorcum, Assen; p. 85

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Figure 1: Conceptual model

The objective of this research is to give a recommendation concerning a possible entry strategy. The conceptual model above is derived from the model for strategic analysis of Aaker⁸. Similar to this model the conceptual model consist out of three main elements; the internal environment, the external environment and the recommended entry strategy. As the model shows the entry-strategy is dependent of three factors; first the internal environment of the company, secondly the external environment and at last the potential entry modes. These three factors determine the final recommendations.

Muhlbacher ea. have distinguished three environments an organisation interacts in⁹: 1) The macro environment

2) The operating environment 3) The internal environment

These three environments cannot be seen as separate elements, but always interact with each other.

The separation of the external environment into a macro and an operational environment is of importance in this research. Based upon the elements where the macro-environment is build of a first selection of two countries will be made. The elements of the operational environment of the two selected countries are more closely looked at in the following stage of the research. The operational environment is once more divided into a meso- and a micro-environment.

8 Aaker, D.A., (1995), Developing Business Strategies, John Wiley & Sons, p. 22

9 Muhlbacher, H., ea., (1999), International Marketing, A global perspective, International Thompson Business Press, London, p. 50

Recommended Entry Strategy

Internal environment

Modes of entry Macro

environment

Operational environment

External environment

Government

Economy

Culture

Technology

Customer Base Marketing

Management

Finance

Manufacturing Innovation

Entrants

Buyers Competitors Substitutes Meso

Micro

Suppliers Customers

Market Structure

Competitors

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RijksUniversiteit Groningen 12 The relevant elements of these environments combined with the relevant elements of the internal environment and the modes of entry lead to the recommended entry strategy.

Sub-questions

In the conceptual model above the needed information in order to give an answer to the main research question is laid out. The sub-questions are formulated based on the model. The four main elements; the internal environment, the macro- environment, the operational environment and the entry modes can be found in the following sub-questions. These questions contribute to the answering of the main question.

1. What internal organisational aspects influence the present international strategy of the organisation?

2. Which country or countries are presently considered as most attractive for CRH Fencing & Security based upon a general scan of the macro- environment?

3. What elements influence the operational environment of the selected country or countries?

a) How can the competitive rivalry of the market(s) be described?

b) Who are the main competitors of CRH Fencing & Security in the selected market(s)?

c) Who are the potential customers of CRH Fencing & Security in the selected market(s)?

d) How are/is the market(s) structured?

4. What variables determine the choice of entry mode?

2.2.3 Limitation

• The scope of the research is limited to the countries Magnetic Autocontrol is active in outside Europe: the United States of America, South Africa, Australia, Malaysia, Brazil, India and China. Although Magnetic Autocontrol is also active in Canada, this country will be excluded from this research because of the present activities of Heras in Canada, see paragraph 2.1.

• The research is limited to the Delta Gate, other products of Heras or CRH Fencing & Security are not involved.

• Assumed is that CRH Fencing & Security is financially healthy and is able to generate or acquire funds in both short and long run.

• The duration of the research is limited to the period of 1 may 2003-1 November 2003.

2.3 Theoretical concepts

Together with the problem definition the choice of theoretical concepts form the heart of the research.¹⁰ This paragraph discusses the used theoretical concepts.

As showed in the conceptual model this research consists out of three phases; an internal analysis, an external analysis and the choice of the entry mode. These three phases will finally lead to the answering of the main question; What entry mode is best applicable for CRH Fencing & Security? Because the research is a market research, more attention will be paid to the external environment of CRH Fencing & Security. The results of the internal and external analysis will be combined and will lead to the selection of the best fitting entry mode.

10 De Leeuw, A.C.J., (1996), Bedrijfskundige Methodologie, Van Gorcum, Assen, p. 91

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RijksUniversiteit Groningen 13 The internal analysis

The outcomes of the internal analysis is a part of the input in the final stage of the research; the strategic choice. As said above the internal analysis is not the stressed part in this research but must not be overlooked. Objective of the internal analysis is to identify the important aspects for and in the organisation which are of influence when entering a new market.

The internal analysis will be accomplished according to the checklist developed by Aaker¹¹. This checklist gives an impression of the influential aspects in an organisation:

1) Innovation 2) Manufacturing

3) Finance – Access to capital 4) Management

5) Marketing 6) Customer base

The external analysis

The external analysis is the central item in this research. ‘One Output of external analysis is an identification and understanding of opportunities and threats facing the organisation, both present and potential.’ ¹² The theoretical concepts discussed below help to identify the opportunities and threats the organisation faces in the new environments. This will finally help to answer the main question stated in par.

2.2.1.

The scope of the research is the seven markets where Magnetic Autocontrol is active. Considering the time limit of the research, it was decided to narrow down the scope to two attractive countries after a first general scan of the seven countries.

Czinkota ea.¹³ have presented a framework in structuring a market analysis where multiple countries are involved. This model, see figure 2, discerns three phases after which the most attractive market, the target market, can be selected. In this research the model is limited to two phases; phase two and phase three are combined. The model is used as a method of working in this research. The two phases of selection will be filled in with other complementary theories.

The results of the internal analysis and of the second phase of the external analysis will finally form the input of the last stage in the research, the strategy identification and selection.

11 Aaker, D.A., (1995), Developing Business Strategies, John Wiley & Sons, New York, p. 80

12 idem, p. 21

13 Czinkota, M.R., ea., (1996), International Business, The Dryden Press, 4th edition, p. 505-508

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Figure 2: Screening process in target market choice

Phase 1

The environment of an organisation can be divided into three levels; macro-, meso- and a micro-environment¹⁴.

The first phase of the external analysis is a general scan of the seven countries.

This scan is made on a macro-environmental level. To structure the investigation of the macro-environment of the organisation the PEST-analysis is used. The analysis indicates the importance of Political, Economical, Social and Technological influences on organisations.¹⁵

Phase 2

Phase two is a more detailed analysis of the operating environment of the two markets selected in phase one. The operating environment can once again be divided into a meso- and a micro-environment.

The meso-environment of an organisation can also be described as the industry where the organisation is active in. This industry will be analysed with the help of the Five Forces Model developed by Porter¹⁶, see figure 3.

14 Rustenberg e.a. (1999), Marketing: NIMA-B Kernstof, Wolters-Noordhoff, Groningen, p. 42

15 Johnson, G., Scholes, K., (1997), Exploring Corporate Strategy, Prentice Hall, Hertfordshire, p.93

16 Porter, M.E., (1979), How competitive forces shape strategy, Harvard Business Review, March-April 1979, p. 137-145

All Countries

Prospective Target Countries

High Market Potential Countries

Highest Sales Potential Country (Target Market) Preliminary screening 1. General Country Factors

2. General Product specific factors

Estimating Market potential by Product type 1. Size of national market 2. Potential of national market

Estimating sale potential for companies product 1. Product Comparison

2. Competition 3. Market Structure 4. Channel Structure 5. Final Consumers

Rejected Countries

Other Target Markets

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Figure 3: The Five Forces of Porter

Competitive rivalry

Industry profitability will be low if there is intense competition between the competitors in the industry¹⁷.

The intensity of rivalry is influenced by the amount of competitors in the market, the size of the market and the competitors, the differentiation between competitors and their products and the existing exit barriers.

Threat of entry

Profits will be depressed, because of a higher competition, if it is easy for new competitors to enter the industry¹⁷.

The threat of entry is depend on the barriers of entry, like access to distribution channels, the growth potential of a market, the capital requirement of entry and the product differentiation.

Power of buyers

If buyers are strong they will have the bargaining power to squeeze the profits of producers¹⁷.

Power of suppliers

If raw material suppliers, utilities or trade unions are strong they can depress the profits to be earned in the industry¹⁷.

The power of suppliers is influenced by the concentration of suppliers and the height of the ‘switching’ costs. In the case of this research suppliers are only of relevance when CRH Fencing & Security should decide to produce locally.

The threat of substitutes

An industry’s attractiveness is less if the product is easily substituted by alternative technology or the products of other industries¹⁷.

A threat of substitutes exists when a product’s demand is affected by the price change of a substitute product.

The analysis of the meso-environment is followed by a more detailed analysis of the micro-environment. This environment is characterised by elements directly related to the organisation, like competitors and customers. The results of the industry

17 Doyle, P., (1994), Marketing Management and Strategy, Prentice Hall Europe, 2^nd edition, p. 120 Competitive

rivalry

Substitutes Potential entrants

Buyers Suppliers

Bargaining power of suppliers

Threat of new entrants

Threat of substitute products Bargaining

power of buyers

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RijksUniversiteit Groningen 16 analysis will give a first impression of the operational environment of the countries and perhaps reveal some of the bottlenecks that CRH Fencing & Security will encounter when entering the countries.

The analysis of the micro-environment adds a more detailed competitor-analysis, a customer-analysis and an analysis of the market structure¹⁸ to the analysis of the meso-environment of the two markets.

The results of the analyses of the meso- and micro-environment will give a more detailed impression of the operational environment of CRH Fencing & Security and will be of help answering the main question in the last stage of the research.

Strategy identification and selection

The objective of the third phase of the research is to choose a fitting entry mode for one of the countries based on the results of the internal and external analysis done in the previous phases.

Figure 4 gives an overview of the possible entry modes¹⁹.

Figure 4: Market-Entry Modes

Quadrant 1: Indirect export-Marketing only. This market entry mode offers the lowest level of risk and the least market control to an expanding firm.

Quadrant 2: Direct entry-Marketing only. The firm becomes directly involved in the marketing of its products in the host market. This entry mode contains a greater risk than quadrant 1.

Quadrant 3: Indirect entry-Marketing & Production. Rapid market entry with limited capital risk.

Quadrant 4: Direct entry-Marketing & Production. Capital intensive entry mode, but direct involvement in the foreign market.

18 Aaker, D.A., (1995), Developing Business Strategies, John Wiley & Sons, New York

19 Muhlbacher, H., ea., (1999), International Marketing, A Global Perspective, International Thomson Business Press, London, p. 457

• Casual exporting

• Catalogue and telephone sales

• Export management companies

• Export trading companies 1

• Licensing 3

• Franchising

• Production/management contract

4

• Joint ventures

• Direct Foreign Investment Marketing & Production

Marketing Only

Limited Capital

Extensive Capital

Indirect Entry Direct Entry

• Export department

• Import houses

• Wholesaler

• Agent (sales representative)

• Representative office

• Branch office 2

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RijksUniversiteit Groningen 17 The process of choosing a fitting entry mode will be structured by the mode choice framework developed by Driscoll²⁰, see figure 5. The results of the preliminary phases, the internal and external analysis, function as input in this framework.

Although two countries are selected in phase one, phase three will proceed with just one of these two countries to decrease the scope of the research.

The framework makes a distinction between the desired entry mode by an organisation and the actual entry mode. Certain factors, moderators, can create a gap between the desired entry mode and the actual entry mode and are of influence on the final decision circumvent the mode choice.

2.4 Data collection

During the research several sources of information are used, this paragraph gives a general overview of the used resources. In the particular chapters the used resources will be described more specific.

Documentation

• Study-literature

• The Internet

• The archives of the organisation

• Earlier market-researches done by the organisation.

• Business related magazines Databanks

Databanks, like the Economische VoorlichtingsDienst (EVD)²¹ and the export- organisation FENEDEX²², have provided much of the needed general country- information.

20 Driscoll, A., Foreign Market entry methods: A mode choice framework, in: Paliwoda, S.J., Ryans Jr., J.K., (1995), International Marketing Reader, Routledge London, p. 15-34

21 www.evd.nl

Environmental factors

Moderators Desired mode

characteristics

• Control

• Dissemination risk

• Resources

• Flexibility

• Ownership

Mode chosen Firm factors

Figure 5: Mode Choice Framework

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RijksUniversiteit Groningen 18 Reality

• Observation. Because the researcher is part of the organisation a lot of information can be gathered by observation.

• Interviews. Interviews held with people inside and outside the organisation will provide information.

• A trip to China. By observing, talking and experiencing the ‘real’ China a lot of information contributing to this research is gathered.

2.5 Definitions

Product: The Delta Gate, product of Heras Products.

Attractive country: An attractive country must offer CRH Fencing & Security the possibility to increase the market share and profit circumvent the Delta Gate.

Entry Strategy: The way the organisation can enter a new market. The strategy can be seen as the sum of the possible entry modes with the external and internal environmental elements of the organisation.

Macro environment: The political, economical, cultural and technological elements of the environment; the ‘indirect’ influences on the organisational behaviour.

Operational environment: ‘direct’ influences on the organisational behaviour, for example competitors, customers etc.

Internal environment: internal elements of the organisation which have influence on its international strategy, for example management, innovation etc.

Customers: Potential customers of the Delta Gate

Market potential: The potential of the Delta Gate in a market, based on present figures and future trends.

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Internal Environment

The internal environment of CRH Fencing & Security will be investigated according to the checklist provided by Aaker (1995). The checklist stresses the areas where an organisation can have strengths or weaknesses:

1. Innovation 2. Manufacturing

3. Finance – Access to capital 4. Management

5. Marketing 6. Customer base

The results of the internal analysis will become of importance when the entry mode needs to be chosen.

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Chapter 3: The Internal Organisation

A short description of the structure and the business of CRH plc., CRH Fencing &

Security, Heras and Magnetic Autocontrol already have been given in chapter 1.

This chapter takes a closer look at the organisation of CRH Fencing & Security.

Specifically the present international strategy of the organisation and the management of this are discussed. Secondly organisational and product aspects relevant to the internationalisation process of the Delta Gate will be discussed.

These aspects will become of relevance when choosing a fitting entry mode later in this research.

The internal analysis is structured by the checklist of Aaker²³. This checklist contains relevant organisational aspects, but also to the product relevant aspects.

The relevant information to interpret and analyse the organisation is gained by interviews and by observation during the internship at CRH Fencing & Security.

3.1 Innovation

3.2 Manufacturing

23 Aaker, D.A., (1995), Developing Business Strategies, John Wiley & Sons, New York, p. 76

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RijksUniversiteit Groningen 21 3.3 Finance-access to capital

3.4 Management

3.4.1 Structure

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RijksUniversiteit Groningen 22 3.4.2 Management

3.4.3 International strategy

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RijksUniversiteit Groningen 23 3.5 Marketing

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RijksUniversiteit Groningen 24 3.6 Customer Base

3.7 Concluding remarks

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External Environment

Macro-environment

Seven target countries are subject of analysis in this first phase. To filter the most attractive countries as a new potential market out of the seven countries a PEST analysis will be done. Political, Economical, Social and Technological (PEST) aspects of each country are discussed.

Finally the pros and cons of each country are weighed up against each other to filter out the countries with the most opportunities for CRH Fencing & Security.

The objective of this macro-environmental analysis is to make a selection of the most attractive countries for further investigation.

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Chapter 4: The Macro-Environment

The objective of the research is to extract the most attractive country or countries for CRH Fencing & Security to invest in and to develop a suitable entry strategy.

The objective of this chapter is to make a first selection out of the following seven countries: China, South Africa, Brazil, India, Malaysia, Australia and the United States of America. This first selection is done by analysing macro-environmental aspect as economics, culture, politics etc. of a country. A good tool to analyse the macro-environment of a country is the PEST-analysis. This analysis makes a distinction between the political, economical, social and technological aspects of a country.

In the recent past market research has been conducted in the United States of America and Canada. Because of the co-operation and the already installed export of the Delta Gate to Canada this country functions in this chapter as a comparison to the other countries.

The main part of the information used in this chapter is gained by research on the internet. Other important sources are interviews and the U.S. market research.

To be able to make a better comparison of some economical facts, like GDP, inflation and the import duties, table 1 shows economical data relevant in making a selection.

Table 1

China South

Africa Brazil India Malaysia Australia Canada USA Real

growth GDP 2002

7,5% 3,0% 1,5% 4,4% 4,2% 3,8% 3.4% 2.4%

GDP per head

Є 796.6 Є 2032.1 Є 2249.8 Є 420.2 Є 3212.7 Є 16159.9 Є 20280.4 Є 31869.8

Av.

Inflation 1998-2002

-0,4% 6,4% 6,1% 5,9% 2,6% 2,9% 2% 2.3%

Av.

Inflation 2002

-0,8% 9,9% 8,5% 4,1% 1,8% 3% 2.2% 1.6%

FDI*

(2003)

Є 49.6 billion

Є 1.4 billion

Є 10.3 billion

Є 6.0 billion

Є 1.3 billion

Є 5.5 billion

Є23.1 billion (2001)

Є108.8 billion (2001) Dutch FDI Є 516

million

Є 330 million

Є 38 million

Є13.2 billion (2001) Dutch

export Є 1.497

million Є 749.9

million Є 735.5

million Є 543.6

million Є 471 million Є 671.9

million Є 933

million Є 10.5 billion

Costs 40ft sea freight $750

(Shanghai) $2750

(Durban) $675

(all) $975

(Mumbai) $750

(Port Kelang) $1900

(Sydney) $2050

(Toronto) $1000 (New York) Import

duties Delta gate

27,8% 24% 22,5% 38,7% 30% 15% 6.5% 5.7%

* FDI: Foreign Direct Investment. Sources: Growth and inflation figures: The Economist,

www.economist.com, FDI figures: Economist Intelligence Unit, Export figures: Economische Voorlichting Dienst, Quotation Sea freight: Cleve & Zn. (Rotterdam), Import duties: Market Access DataBase, mkaccdb.eu.int

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RijksUniversiteit Groningen 28 4.1 China

Official name: People’s Republic of China (PRC) Capital: Beijing

Surface: 9.561.000 km (230 x the Netherlands Population: 1.284,3 million (2002)

Language: mainly Putonghua (standard Chinese) or Mandarin²⁴ Political

China is, although it is opening up, still a country with a communistic regime. The lack of transparency in the bureaucratic system and regulation of China makes it more difficult to do business. For example, getting a license to import manufactured goods can be a time-consuming and expensive process.²⁵

The Chinese government is increasingly implementing state policies and regulations that facilitate foreign investment to be attractive and stay attractive for foreign investors. The admission of the country to the WTO in December 2001 has increased the accessibility of Chinese markets for foreign companies.

Economical

Today, China is the sixth largest economy of the world with a GDP of $1,202 Billion²⁶ and almost 20% of the world population residing within its borders. The country’s projected growth for the coming 5 years amounts up to 7%.²⁷ Even the further future is promising. The report of Goldman and Sachs²⁸ states that the economy of China could be larger than that of the United States in 2041, and larger than that of everyone else in 2016.

It hasn’t been long since the Chinese government started its policy of opening up the economy, but many foreign investors already have discovered China and its potentials. As table 1 shows, many new foreign investments have been made in the past years. In the 1990’s China’s annual increase of FDI has averaged over 40%. It has been attracting half of the FDI going to developing countries.²⁹ Not only the booming economy and its huge home-market are due to these rising foreign investments. The conditions to set up a production facility are also favourable³⁰:

1. Low labour costs, a Chinese worker costs provides labour at about 10% of the costs of a Western worker.

2. Cheap factory costs, around 25% of the costs when starting up a factory in Europe.

3. Innovative production technologies 4. Presence of building material 5. Relatively low investment costs

To create confidence at the investors side the Chinese government has linked the Chinese Yuan to the dollar. This reflects on the price of the goods imported from Europe, but it also gives some security.

24 www.evd.nl

25 mkaccdb.eu.int

26 www.fenedex.nl

27 idem

28 Wilson, D., Prushothaman, R., Global Economics Paper no:99, Dreaming with BRICs:The Path to 2050, GoldmanSachs, 1 October 2003, p.3

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30 Kuipers, W., Interview 07-04-2003

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RijksUniversiteit Groningen 29 Social

The large surface of the country means that China cannot be approached as if it were one country. Several small markets with their own preferences and culture can be discovered around the country.

The large surface isn’t the hardest part of doing business in China; the cultural differences between Europe and China are enormous. These differences will be encountered when starting to do business in China. An example is the attached value to having a good and long relationship, guanxi. “Doing business in China is a case of patience and persistence.” ³¹ When setting up business the importance of having a good relationship can cause trouble, the process of getting orders takes longer.

To deal with the cultural and language differences properly a Chinese contact person or partner is inevitable, it will prevent many unnecessary obstacles.

Technological

As said in the economic part China offers the possibility to set up a production facility for only a percentage it costs in Europe.

The product quality could be a drawback to start local production. When producing in China one must always monitor to protect the quality of its products.³²

A second drawback of local production and even entering the country is the risk of copy-paste. ‘The international trade and industry misses each year about 25 million dollar because theft of China of the intellectual property right.”³³ Problem is that the Chinese national government recognises the problem and tries to counteract the copying, but local governments don’t.³⁴ Because of this, the risk of copying is still considered to be the biggest threat to Foreign Investors in China.

The patent on the Delta Gate is almost expired. The expiration date is 4 December 2003, from this day on the gates are due to the risk of being copied.³⁵

4.2 South Africa

Official name: Republic of South Africa

Capital: Pretoria (Administrative capital) and Cape Town (Legislative capital) Surface: 1.221037 km (32 x the Netherlands)

Population: 45,7 million (estimation 2003)

Language: 11 languages, including English (business language), Zulu, Xhosa and African³⁶

Political

South Africa is a constitutional democracy with a bicameral parliament and an indirectly elected executive president.

Economical

Similar to China, although to a minor extent, the economy of South Africa is growing. Because of the longer history in international business South Africa is more developed than China. This implies less risk in many areas in the business territory. The economical centre of South Africa is Gauteng, with 37,7% of the BNP, followed by Western Cape with 14,2% of the BNP.³⁷

31 www.evd.nl

32 Corona, H., MD Magnetic Australia, interview 07-07-2003

33 NRC Handelsblad, ‘Hello watch, hello bag. Hello cheap’, namaak is in China een miljardenindustrie, en overal te koop, 11-29-2003

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35 register.bie.nl

36 www.evd.nl

37 idem