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Sunday, February 15, 2009

Entry Modes into Foreign Markets

I am currently taking a class title "Transnational Marketing", this weeks topic was entry modes into foreign markets. I would like to share the case report from this weeks work on - Disney Hong Kong. Enjoy


Case Analysis – Hong Kong Disneyland
JONES INTERNATIONAL UNIVERSITY
Transnational Marketing
MBA521
Prof. Sabine Amend
February 13, 2009

Abstract
This paper analyzes marketing entry modes into foreign countries. The case that was used to compare marketing entry modes was the Hong Kong Disneyland case. This case reveals evidence of Global strategies implemented by Walt Disney and their entry to other areas such as Paris and Tokyo; include in the case is detailed information about past entrant experiences. The case also reviews market entry modes and learned mistakes (losing large sums of revenue) by not seeking alternate routes. The purpose of the case report is to research marketing entry modes especially those in a global environment. Global marketing strategist considers the geographical scale, cultural differences, language, and overall perspective needs; more particular decision criterion should focus specifically on the country, type of industry, the company and the product or services. The country specific criterion analyzes country specific exchange rates, regulations, policies, culture, customs and curtsies. The other criteria (industry, the company and the product or services) will be considered and compared to the specifics of the country entering. The Mode of entry is a specific strategy that is related to major decision or an approach that a company will take to enter into a market. These choices are critical, because it effects future decision that the company will make; the financial performance relies on this decision. Resource commitment is the main distinction of the different types of entry modes: Licensing, Partnership or Joint Venture, Exporting; and Direct Investment. In today’s growing diverse society it only makes since to take the global approach to marketing when determining strategies to gain market entrance.

Introduction
The case study of Hong Kong Disneyland introduces a company (Walt Disney) who has a very different approach in its global strategy as it takes lead in their global entertainment market share to a whole new level of strategy. Walt Disney has a phenomenal amount of support through its wide spread investments and operations (marketing platforms): amusement parks/resorts, real-estate, TV and radio stations just to name a few. Walt Disney used these different marketing platforms to establish contact with different market segments capturing all ages both children and adult. This is just one of the many reasons why they are so successful today. This case introduces strategies that Walt Disney took to gain entry into different markets specifically entrant to: Tokyo, Hong Kong and Paris. This case also describes the many challenges that were faced by the company and the uniqueness’s of each towards each entry area. Aside from the entry barriers or the differences between the markets “culture, economic situations” Walt Disney brought new opportunities (employment, market opportunities for local economy, new tourists) to the countries that they conducted business with. Walt Disney has a very strong product offering (branding), quality culture climate, and provided part-time and full time jobs to the local economy. The return on investment (ROI) was one of the main factors that differentiate between the presented strategies in the case. When reviewing the information included in this report will provide evidence of the different strategies used to present a case illustrating the preferred methods of entry. Other key ingredients (those that may not have been captured) will be presented to determine if alternative entry modes were feasible or in existent, exhibited under recommendations.

Situational Analysis
Previous Approaches – Analyzing previous entry attempts
Walt Disney presented evidence that they would have gained more revenue if they chose different entry modes to each of the markets they entered. Once they entered into the country, the agreements were already drafted and the wheels were already spinning, backing out or re-strategizing wasn’t a cost effective option. The markets that they entered were Tokyo, Hong Kong and Paris. Each location presents a new scenario of barriers to entry, highlighted under tariffs, economy situations, and other additional costs measured against fore casted outcomes. The modes of entry that were identified in the case were: licensing agreement “Tokyo”, partnership agreement “Paris” and proposed Joint Venture “Hong Kong”. The purposes of theses entry modes is to share costs and to gain by both parties the benefits of the existence of a world class entertainment. Worse case scenario would be for Walt Disney to put up all cost up front, and obtain 100% of the royalties/revenue afterwards. The risk of doing this option is 100% loss, compared to the other methods where a shared loss is incurred. Tokyo and Paris will be used as a comparison baseline in determining if Hong Kong’s predicaments are an affordable entry mode.

(1980) Tokyo – Licensing agreement
In this situation Walt Disney didn’t realize their full potential of their earnings, did so only to reduce the potential risks associated to the costs of the project. The route by Licensing agreement which left Disney with no ownership in the deal equaling to minimal returns in profit, only royalties and other returns. Disney acted as a franchiser of the company that was built in Tokyo, and only received a small fraction of the returns. Resources were invested, by way of time spent on developing the park itself. As stated in the case the total construction cost estimated around 250 Million USD, the royalties that Disney gained was 40 Million USD accumulated from categories: Food/Merchandise, Admission and Corporate Sponsorship.

Chart 1 - Removed

The Initial investments for the licensing agreement was 2.5 Million USD, within the first years Disney received royalties in the amount of 40 Million USD accounting for a ROI of 1600%. If Disney went without the agreement, potentially 560 Million USD would have been projected as the revenues and the initial cost for the construction were 250 Million USD; the ROI in this case would have been 224%, compared to 1600% with agreement. But over the course of time, each investment would present consistent increases in the revenues received; the case presents $125million USD for the gross revenues in 1999, which would have been $1,750 billion USD potentially using the data above in chart 1. Wither view as potential ROI or Dollars received in revenue, the risk of investment was minimal, without the agreement. Barriers to entry described in the case were the cost of construction cost of 250 million USD, limited data compared to what is offered for Paris and Hong Kong.

(1992) Paris – Partnership Agreement
This method increased revenue for Walt Disney, but they still weren’t receiving their full earning potential. What were the differences between this method and the agreement? The agreement method led Walt Disney, to have smallest risk possible, potentially none. The partnership agreement presents some risks, but allows the area to join resources that are more valuable in a joint effort than when kept separate. With out the partnership, during the time that Disney ventured Paris, the project would be feasible or possible. In this case, the project was initially evaluated to be worth a total of $1 billion USD, grew to 5 billion or more USD. The timing of the entry was the key, and during this time this country was going through a recession. As much shared cost as possible seemed to be the strategy that Disney was approaching with the partnership, a long term investment approach; the risk of the investment grew since projected cash inflows were based off of potential customer spending money at the theme parks (spending was lowered during the recession). The partnership afforded the Walt Disney the opportunity the reduce the potential losses that may have incurred if the company solely entered into the country; the case explains the many risks that the project posed: Multiple Design changes (construction), Tourist traveling reduced; banking interest rates increasing, and increased debt in US. If the economic condition was restored, Walt Disney in Paris would have been more successful. The JV allowed Walt Disney the opportunity to free up some resources, otherwise the operations during that time period would have sunk.

(1998) Hong Kong – Joint Venture (JV) or which is more strategic?
Hong Kong Govt. and Walt Disney move was a political and cultural adventure. Like the previous entry to Paris, economic times where in the US feared Y2K and in china unemployment rates were increasing. Hong Kong was in a position that they needed an attraction to increase visitors “tourists”. Walt Disney wanted to manage the venture instead have just providing the resources, but they also wanted to minimize their risks. The original suggested strategy (JV) was for Walt Disney to enter the Hong Kong market via Joint Venture, assessing specific requirements from a long laundry list (royalties, Management fee’s). Uncertainty of the investment brought attention to the returns that Walt Disney would expect if the country would respond to the economic enhancement (adding new technology or Businesses) to increase their production possibilities. The length of time that it will take the country to respond will directly result in the ability for Walt Disney to redistribute the resources across reoccurring debts and maintenance. Tourists were also a consideration for this area, since there travels to this are have reduced more resulting from the removal of the British colonial. What are the options invest or chose a different country to invest within Asia! What were the lessons learned from previous entry opportunities:
1. Timing is everything – balance entrance with economic offsets
2. No risk equals low revenue returns
3. Be careful what you agree to
4. Minimized the design changes to reduce construction costs

Identification and Evaluation
Initial analysis of Hong Kong Entry
Country Specific:

Local Economy
-Loss of Jobs 6% Unemployment
-Removal of British Colonial – decrease in tourist activity
-Foreign exchanges – reduction of revenue going into the country - Hong Kong Government

Agreed to conditions of JV:
-Royalties 5%
-Base (2% Gross revenues) and Variable (2-8% EBITDA) Management fees
---Refused free land to US
---Expressed demand for paying taxes on profits
---Intense negotiations

Competition
-Ocean Park.
---Attracts 35,000 people a day

Culture - Not reviewed in case

Politics
-Govt. needs away for bringing back the visitor to the country, but yet are no working with Walt Disney, to make the venture profitable.

Barriers to Entry:
-Construction - Project split into two phases – two theme parks and sets of hotel resorts
---Phase I
Infrastructure Costs
-HK$13.6 billion
-Land Premium’s - HK$4 billion
---Phase II
Expansion - project 2014

Company – Walt Disney
-Limitation on demands for agreement
-Free land
-Tax immunity

Product or services
-Fraud duplications of merchandise – negative impact on sales
-Distribution methods for services
-Disney films – Beijing Govt. involvement “quite censorship”.

Cost analysis
-Debs of the projected were dependant upon multiple levels of fall out monies:
-Tourists – increased visitation – estimated projections suggest requirements for high tourists activity
-Locals – their spending habits
-Would the agreement pay the dividends

Pros and Cons
This venture presents main barriers, not seen in other entry modes of licensing agreement nor the partnership. One of the main ideas was for Walt Disney to manage the investment, as opposed to the other adventures where they were just resources invested. The Hong Kong venture presents similar evidence of a partnership agreement with the exception of the management fees obtained. Hong Kong was set up for tourist attraction from the past, reasoning behind settling Disney to the deserted area in hopes of spiking traffic once again. Specific Pros and cons can be listed for this entry:

Pros:
--Ability for Walt Disney to turn a profit
--Close management will translate into Quality Production and services $$$$$
-- Resources from other parks will support initial phases of the entry and sustain for 2yrs when area can support its self.
--Economic conditions locally will increase – more money will meet projections set by Walt Disney
--Tourist traffic familiarity of the area and the production of Walt Disney – create a new reasoning for visiting the area once again.
--Capture market “35,000 visitors daily” of competitors customers – Revenue

Cons:
--Initial costs for construction and land premiums (reoccurring) are high.
--Cost figures are high – resulting in a potential non profitable situations
--Other theme parks may lose money, and would not support park development
--Govt. may not support venture when unprofitable situations arise
--Govt. already doesn’t see potential real-estate value – will not grant free land or make agreement with Walt Disney make investment more attractable
--reduction of revenue going into the country due to loss of foreign travelers
--locals have to apply for visa for entry into park – limitation in revenue

(2009) Hong Kong Disneyland Project
Hong Kong Disney is still in the first phase of development, with no future plans for expanding to the second phase until late 2014. The park has been successful with the joint ventures, opening September 2005, nearly meeting anticipated attendances of 5.6 million visitors short .6 million visitors; follow on years 2 and 3 resulted in: Year 2( 2006-2007 4 million visitors) and Year 3 (2007- 2008 4.5 million visitors) (Hong Kong, 2009). “The venture showed promising increases relevant towards an expansion into phase II, which is already mapped out according a web site previously visited “Disneyandmore”. Rumors say the Disney will invest HK$4 billion in the expansion investment, which is expected to be released sometime next year to the Hong Kong Govt. (Disneyandmore, 2009).” More add-ons continue with the projections of increased visitor in year 4, despite world economic down turn. Disney will continue to see success and 2014 will be here before they know it.

Recommendation
Disney was on target, with their financial projects for the first year of the joint venture with Hong Kong Govt. Currently Disney has to have approval, before phase II expansion can begin, another 5yrs. Limitations exist in Disney’s ability to make financial moves, such as starting new constructions or expanding. I don’t think that Disney could afford to start the adventure as soon as they did, and to be ready in 2005, without the agreement with Hong Kong Govt. Having the JV was a good judgment call by Disney. I wish that they built in a little more flexibility into their plans so that they could achieve higher growths obtained from market influxes.
Recommend as follows:

Reduce Political Barrier
- Draft an agreement the will bring revenues to Govt. Hong Kong – exchange for increase equity shares from current (43%) to 49% or 50%.
Estimate number of jobs bringing to local economy
Estimate number of HK$ that the investment will attribute Notes: This will be a plan that will be presented for economy enrichment
Since Disney is basically putting Hong Kong back on the map, a lot of leniency should be given to Disney despite political differences.

Suggest the Disney Lease the Land for X number of years for a set price, example:
-HK$24 billion for 10 Yrs. – at this point the land will be up for renegotiation.
Notes: one of the barriers was the ROI, for the phase I, which would be reduced if Disney were given the land.

Settle for Increased royalties, as opposed to capturing management fees.
-Raise from 5% to 20% - after all it is Disney’s product, all Hong Kong is used for is the scenery and the location.
Notes: This will increase the earning projections per share by 4 times the amount projected, capturing the largest revenue groups: Merchandise, admission, invested monies for new creations etc.

Alternative Entry Mode
This will be a plan that will be presented for economy enrichment. The JV was an attractive method to achieve the challenges set forth by economic restraints, which wouldn’t be possible at a high growth rate which developed a new market opportunity for the entertainment industry.
Choosing a different location would have been my strategy. One of the limitations that Hong Kong presented was visa’s that were required to gain entrances even from those who were locals. This problem didn’t exist in the three other researched possibility location of: Shanghai, Zhuhai, and Singapore. I would have chosen Singapore, who really wanted to gain entry into the Chinese market. Even though this option was frowned upon in the case, I would have research the possibilities of leveraging Singapore’s interests in the china market to meet Disney’s objectives.

Summary
Walt Disney expanded operations overseas with strategies of modes of entry into the country of entry. Various outcomes were viewed as a result of the entry modes of: licensing, partnership and Joint venture. The situations increased for Disney during each situation of entry due to the changes that Disney made in the selection of entry mode. Benefits were viewed and local country conditions were explained so that insights could be determined of best or better alternatives. The case report illustrated evaluations and recommendations of Disney’s current theme park expansions in Hong Kong. A lot can be learned from the various choices that Disney made, which were made during economic conditions weren’t favorable in most situations presents. Today the company, as illustrated in the case report is looking to expand, this wouldn’t be possible if it weren’t for the strategic analysis that Disney conducted prior to entry. From the presented data in this case report, on entry modes strategies can be developed to help future companies looking to expand in an international venture; recalling information on decision criterion that focuses on the country, type of industry, the company and the product or services to develop detailed outline analysis of the situation.




References:

Disneyandmore (2009, January 26). Disney and more. Retrieved February 14, 2009, from Hong Kong Disneyland : Coaster to the Rescue ! Web site: http://disneyandmore.blogspot.com/2009/01/hong-kong-disneyland-coaster-to-rescue.html

Johansson, J.K. (2006). Global marketing. New York: McGraw-Hill/Irwin.

Ho, M., Chan, S. H., & Wang, K. (2000). Hong Kong Disneyland (A): The Walt Disney perspective. Harvard Business Review, 1-22.
Hong Kong Disneyland Resort. (2009, January 11). In Wikipedia, The Free Encyclopedia. Retrieved, February 13, 2009, from http://en.wikipedia.org/w/index.php?title=Hong_Kong_Disneyland_Resort&oldid=263455272

2 comments:

Anonymous said...

What mode of entry might have been, or could be a better choice for Disney other than the three they had already utilized?

Manzanos Business Blog said...

Good Question!

A company must not only consider a method to entry, but also the internal and external forces that drive or effect the business ability to perform. In this case, which illustrated that economic situations were unfavorable, company resources were tied or committed to other efforts etc.; this would be and example to include in the decision criteria. When the company decides that they want to enter into a market, they must develop a plan for the amount of resources that they support for the effort (of course taking into account of the current and future conditions). After that they should analyze the types of entry methods.

Each of the methods had variable risks levels, (lower to high: Licensing, Partnership, Joint Venture, Direct Investment) associated to resource commitment and other invested resources such as management involvement, expertise – Design – planning , time, etc.
So the best method is the method that is correctly chose to fit the current situation, which analyzed all the risks, to gain the most profit possible.
Hope this explanation has helped.

Best Regards,
Shaun

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