Discuss about the Global Supply Network Embeddedness and Power.
When an entity wishes to expand their business, there are a number of crucial factors which have to be given due consideration, before opting for a medium of expansion (Chan, 2006). A company can choose to expand its business by hiring an agent of other nation, hiring a distributor to sell their products, or can opt for the formation of a joint venture with an entity of the nation in which the company wants to expand itself. Harry Incorporated (fictional company) is faced with this very dilemma of which method they need to opt for expanding their business in China.
Harry Incorporated is expanding its based in China, where the long term plan of the company is to form a branch in China, to tap its growing market. The reason for opting for China is that the nation has the largest population in the world, let alone the Eastern nations, and for a fast food company like ours, a higher population raises the prospects of profits (Hackett, 2014). However, instead of directly setting base in China, the company wants to evaluate the conditions present in the nation. And so, a dilemma has been raised on which method the company should opt for as its beginning in China. Thus, the report presents an evaluation of the three options available with it for expanding in China. Once this is done, the key requirements of establishing such option would be highlighted.
Harry Incorporated has three options for the legal relations which the company can form with an enterprise of China whereby it will be able to expand its operations in the nation. In the following parts, the key aspects of these options in context of their strengths and weaknesses have been analysed.
An agent is a person who acts for some other person, known as principal and the agents undertakes the act for the sale or purchase of products of the principal. The agent is given the authority by the principal to act on his behalf. When a contract is drawn, it is created between the consumer and the principal and not between the agent and the consumer. As a result of this, the principal is liable for the acts undertaken by the agent and this includes the acts which are carried out outside the scope of authority given to the agents, based on the concept of ostensible authority, as the agent portrays to have the authority, making the principal liable (Benett, 2014). A distributor on the other hand buys the product from the company and sells it to his own consumers. As the name suggests, the distributor is essentially, the distributor of the products. This is done in the name of the distributor itself. And as a result of this, for the acts of the distributor, the liability is not raised for the principal save for certain specified conditions (Mullet, 2017).
In the matter of goods’ ownership, the ownership of the product never lies truly in the hands of agent. The reason for this is that the agents only have the role of representing the principal’s supplier in a different nation, and the principal is the manufacturer of such product. In the case of distributors, the goods are purchased by the distributor from the manufacturer and then this product is sold in the international market, to the customers of the manufacturer. Owing to these reasons, the distributor obtains the product’s title. There is also a choice with the distributors on the target audience to which they want to sell their products. Hence, they can choose to make the sale to retailers, to wholesaler, and even through e-portals to other audience (Murphy Marketing, 2016).
When it comes to the agency, the exporting party, i.e., the supplier has the responsibility of making payment to the agent, and is usually in the form of commission based on the sale of product, achievement of targets or on the sale value of the product. The exporting party fixes the price of sale on the basis of inputs, which the agents provide to the seller, and this relates to the local or domestic market (Singh, 2015). When it comes to the distributors, the distributors earn their revenue by adding margins to the price of the product. This result in the prices of the product being raised and in order to bring this down, the principal has to absorb the margins of distributors in order to avoid the prices of the product from being raised. So, to avoid decline in the customers, the principal forgoes a part of their profits. Also, the fee given to the distributor is quite high in comparison to the compensation given to the agents (Alliance Expert, 2017).
The agents are responsible for getting the orders for the exports and in return for this service, the agents collects the payment from the consumers, and also delivers the invoices as a representative of the exporter. Hence, the marketing operations of agents relate to the sales activities and the network development. On the other hand, for the distributors, the duty of taking care with regards to the stock in terms of its presence, its restocking and the inventor, is that of the distributor and also for reducing the lead order time. The distributors also have in their hands, the power of granting credit and the limit of granting credit to certain set of consumers and they often provide after sale services to the consumers (Scotter, 2017). The responsibility of covering the marketing risks lies with the distributors in addition to offering the services to the consumers when compared with the agents. Due to these reasons, the distributors are able to charge a higher fee in comparison to the agents.
The agents usually have a carry the products of only one principal and also have smaller range of products, when compared to the distributors. The agents are not restricted by jurisdiction which is often the case with the distributors, particularly with regards to the restriction of selling the product in the nation from which the same is being exported. Owing to these reasons, the agent stays focused on the products of the principal. The principal does have a better control over the suppliers based on the training of the agents and the sale techniques where the principal has control. In case of distributors, they sell multiple products of different people at a single instance resulting in their focus being divided with different products. This also means that the focus of the distributor remains divided which makes it difficult for the suppliers to train them and also disallows the control over the sale staff of the distributor (Salzano, 2014).
A JV, or a joint venture, is another mode through which a business can enter in foreign lands. In a JV, usually two companies combine their resources for carrying on a business in unified manner for carrying on a business. A JV has features of sharing in terms of risks, return, ownership and even governance (Shishido, Fukuda and Umetani, 2015). Most of the time, a JV is opted for establishing temporary arrangements between two business entities, where they come to do a particular task, and when the venture is completed, the JV is ended in the manner provided under the JV agreement (Yeniyurt and Carnovale, 2017).
The reason for opting JV lies in the key features of it. A JV is chosen for taking advantage of economies of scale where by combing the assets and operations of the companies, the JV attains benefits. This is followed by the ability of sharing risks in terms of different investments and crucial projects. A JV also helps in the skills and capabilities being combined in addition to getting an access to the emerging markets, by forming association with an entity from such market (Morschett, Schramm-Klein and Zentes, 2011). The companies are also able to unite their skills, expertise and their competition, particularly when the companies are otherwise unrelated. The companies also get an opportunity of participating in such ventures, which would have not been possible for the lack of requisite resources, and working towards a common goal. Lastly, through a JV, the costs are reduced and the risks and liabilities associated with the venture, is spread amongst the JV participants (Campbell and Netzer, 2009).
JV has a number of disadvantages also and the biggest one lies in the limiting of opportunities as the participants are not allowed to work outside the JV. Apart from this, the exclusive agreements bind both the parties, which are often seen as the reason for avoiding JVs (Wolf, 2011). Often, there is a disparity in the division of responsibilities and resources, which often leads to a single party contributing most of the resources and lifting the weight of the JV on its shoulders (Gutterman, 2009).
For Harry Incorporated, the most suitable choice is to form a JV with an enterprise of China. This would allow the company to gain an understanding into the real time working environment and the possible problems which can be brought up in future. This would help the company in also understanding the taste and the food standards followed by the local people, which in the long run, would help the company in opening up its fast food joint, without any JVs. The agency would restrict the JV as the agents would not be able to work with as much commitment as a JV would have; and a distributor would discard the name of the company, as the same would not be used by the distributor. Thus, Harry Incorporated needs to form a legal relation of JV with an entity of China.
As it has been established in the previous segment that the best option of Harry Incorporated is to go for a JV, and the negotiations in this regard have already been undertaken by the MD of the company, with XYZ Incorporated, which is an entity of China, there is now a need to draw up the JV Agreement. However, care has to be taken when the same is chalked out, particularly with regards to the key terms to be included in the JV agreement. Some of the important terms which have to be carefully inserted in the JV Agreement have been summarized below.
Conclusion
The discussion carried on the previous parts highlighted that Harry Incorporated is looking to expand its fast food business in China, and for this purpose, the company had the option of choosing for an agent, a distributor or a joint venture. On the basis of the needs of the company aligning with the joint venture structure, the company decided to opt for joint venture with ABC Incorporated in China. In this regard, the company has to take care of certain key terms, which have to be included in a careful manner in the JV agreement and the details of some of such key terms have been detailed in the second segment of this discussion. By opting for a JV Agreement in the manner stated above, Harry Incorporated would be able to form a temporary business in China, and gain an understanding to the taste and other key factors of the Chinese market. Upon the conclusion of the JV Agreement, the company can form a permanent establishment in the nation, on the basis of the experience it attained from this JV and would also prove if establishing business in China would be successful or not.
References
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