Analysis Of Entry Strategy Of A Multinational Firm In A Foreign Market (Essay Sample)

Critical evaluation of FDI by China Media Capital and Citic Capital in Manchester City
Introduction
Football, non-arguably the most popular sport in the world, is gaining footholds in the eastern hemisphere, driven by the increasing participation from China, Japan and South Korea (Manzenreiter & Horne, 2004). The participation is not confined to the presence on pitch, but also at the broader level at administration, manufacturing and sponsorship. As one such participation, China Media Capital, backed by the Chinese government and Citic Capital, a state-owned investment company, jointly acquired 13 % stake in City Football Group (CFG) by investing $400m. CFG is the parent company of the Manchester City Football Club (MCFC), New York and Melbourne football teams, in addition, it also owns a minority stake in Yokohama F. Marinos (Duerden, 2015). The CFG is an umbrella company by Abu Dhabi United Group, to manage its footballing interests globally (MCFC Annual report, 2015). The strategic intent behind entering the foreign market is to realise President Xi Jinping’s vision of developing China into a “World Football Superpower” by 2050 (Liu, 2016). The strategy chosen, FDI will be discussed in this essay.
Entry mode strategy
The strategy for any firm is determined by various influences as demonstrated below:
Table 1: Factors influencing firm’s strategy (Driscoll, 1995)
As mentioned earlier, the Chinese consortium is supported by the government with Citic Capital owned by the government. The internationalization strategy is influenced by the ownership of the firm (Agarwal & Ramaswami, 1992). Since the government plans to promote football in China, for which a state-owned company is executing the plan. There are two possible options for development of football- International football footprints in China or Chinese footprints in international football. The first one is already in place with many international players playing in the Chinese Super League. The latter requires entering a foreign market.
The choice of mode for foreign market entry for a firm can be explained based on a framework as demonstrated below:
Figure 1: Framework for choosing foreign market entry mode (Driscoll, 1995).
The application of the above framework in the current context suggests that a firm which has limited experience in international sports management like the Chinese consortium will opt for a strategic alliance by FDI. MCFC is an English club with loyal fans. The infrastructure, resources and risks are already been managed by the current management. This strategic alliance enables the Chinese consortium to tap the huge potential offered by the football enthusiasts. This is similar to the notion that firms with less international experience should complement their resources to serve the potential foreign market (Agarwal & Ramaswami, 1992).
Rationale behind FDI
Over last two decades, FDI has emerged as a leading driver behind globalisation (Tahir & Weijing, 2011). The UK has emerged has the prime destination for FDI in Europe over the years, with receiving over a £1 trillion FDI in 2014 (Gov.UK, 2015). This is due to the fact that the countries which are open to international investments and have low barriers to entry, will witness more equity based investments (Calegario et al, 2015). FDI is a long term investment which is irreversible thus implying high risks (Stiegert et al, 2006). It is expected that prior to the investment of this complexity and magnitude, the consortium would have done a detailed due diligence of the target. The access to that diligence report is not available, so a simple yet effective tool- SWOT analysis is used in this essay. The SWOT analysis developed in the 1960s, also known as the Internal-External matrix enables us to understand the strengths and weakness (internal) and identify the opportunities and threats (external) for a company (MindTools, 2016). It is presented below:
Strengths
The main strengths of MCFC are its strong playing squad and a large stadium. The team has won the Premier League twice in last four seasons in 2012 and 2014. The club's stadium, Etihad Stadium, is the third largest Premier League club stadium in the country, with a seating capacity of almost 55,000, which allows the club to generate significant match day revenues from ticket sales and refreshments (MCFC Annual report, 2015).
MCFC is the fifth most valuable football team in the world with a valuation of $ 1375m and a brand valuation of $ 203m (Forbes, 2015).This implies that MCFC can generate massive revenues from broadcasting rights, commercial sponsorship deals and merchandise sale. This brand strength is associated with massive increase in the fan base which was an estimated 523% in recent years (Jefferson, 2015).
Overall, the company has done good business in recent time. During the year ending on 31st March, 2015, MCFC achieved a revenue of £351.8.7m while delivering a profit of £10.7m after several years of losses (MCFC Annual report, 2015).
Weaknesses
Lack of star players, with likes of Messi, Ronaldo, Rooney playing for European rivals. This decreases the potential brand value despite good performance in recent time.
The commercial revenue is lower when compared to the leading clubs in the world. Etihad stadium although a large stadium has seating capacity which is 20,000 lesser than Manchester United’s stadium Old Trafford.
The current sponsors for the team are Etihad airways, Aabar, Hays, Jaguar, Nissan Motors and Viagogo. They lack big and globally known sponsors like Aon, DHL, Chevrolet and Nike. These brands have a global presence and are easily recognisable.
Opportunity
The on-pitch performance of the club is on a rise, they have reached the semi-finals of UEFA Champions league as on 15th April, 2016. This with a drastically increasing fanbase, will ensure the revenue will follow through. Of the newly acquired fans, 72.5m were based out of China (Jefferson, 2015). With the investment by the Chinese consortium, this number is expected to increase further.
There is no financial debt on the club, thus making it attractive for the equity holder. The investment by the Chinese consortium is evidence of that.
The club has owners based out of Central and Eastern Asia, which is an unexploited fan base for the club. This will facilitate the commercial revenue which the club can generate.
Threats
Exit of Manuel Pellegrini, as the manager of MCFC, can potentially impact the performance of the club.
The other Manchester club, Manchester United is more popular than MCFC, which is the third most valuable football team, having three times the valuation of MCFC (Forbes, 2015). They have a stronger fan base not only in Manchester but around the world as well.
The club was primarily owned by a group based out of Central Asia, now an Eastern Asia company has also acquired ownership. This might make the club less English-rooted, despite playing in the Premier League thus reducing the local support.
Significance of this partnership
The blueprint for China becoming a “World Football Superpower” by 2050, involves various action items. China has announced an ambition of creating an $850 billion worth domestic sport economy by 2025 (Yuanyuan et al, 2016). These plans also involve setting up 20,000 football centres and 70,000 pitches in the country by 2020. An interim target is to become one of the Asia’s top team by 2030 (Duerden, 2016). However, the aim is not confined to become a strong team, but building a sports industry, which will include business parks, manufacture sports apparel and gym equipment, sponsorship and event management consulting and sports colleges (Liu, 2016). An integral part of the blueprint is to bid, host and win a World cup (Yuanyuan et al, 2016).
This FDI in CFG, represents a strategic alliance between the Abu Dhabi United Group and China Media Capital and Citic Capital to increase the footholds in the English as well as Chinese markets. It will enable the club to acquire the Chinese fans and will present opportunity for many Chinese players to become a member of the squad. This new funding will enable the company to improve its operations or possibly acquire players from other clubs. The association with a renowned club, will open a chance for the investor’s (Chinese Government), other interests to succeed. China can set up an industry for sports equipment, merchandise and apparels and possibly create an own brand to replace Nike as the official kit manufacturer
The benefit is not solely for the Chinese economy, but for MCFC as well. Despite MCFC winning the Premier League twice in last four years, still it is not as globally popular as other Premier League teams. As per a report by Yutang sports, Manchester United is the most popular Premier League team in China, with 31.98% of the votes, MCFC only got 5.47% of the votes (Duerden, 2015). The Freestyle Football Beijing World Tour event was witnessed by 154m people in China in 2014, so these potential fans need to be brought to mainstream football as well (Duerden, 2015). The importance of this partnership can be understood from the fact that during Chinese president Xi Jinping visit to UK, Sun Jihai a former China International and MCFC footballer was inducted into the National Football Museum's Hall of Fame (Duerden, 2015).
This partnership has received mixed response. Professor of sports enterprise, Simon Chadwick, at England's Salford University, recommends this partnership approach over the aggressive marketing implemented by the Premier League teams for promotion in China (Duerden, 2015). However, Ma Dexing, one of leading soccer writers in China, does not argue with the success of the blueprint for becoming a strong football team as unlike Japan and South ...