3.3 How Do Firms Deal With The Hurdle to Ongoing Expansion?
By examining the strategies of New Zealand firms attempting ongoing expansion we can get a sense of the issues they are facing. The striking theme coming out of surveys and case studies is how, for many firms, distribution economies are a key element to further expansion. For most firms it is a hurdle that is too high to hurdle with many firms seeking foreign owners or partners to leverage their brands and distribution networks. Some firms go it alone and pursue both organic expansion or expansion by acquisition. New Zealand has some famous examples of failure in this area, but there are also a handful of firms that have worked very hard at overcoming this hurdle and could in the future experience uninterrupted growth – perhaps even becoming New Zealand’s next generation of MNEs.
Regardless of the firm’s strategy, all New Zealand firms aiming to be MNEs grapple with the issues of distribution economies. There are five key strategies used by New Zealand firms to deal with this ongoing hurdle, including organic growth & acquisition of distribution businesses, international alliances with MNEs, local alliances, or “clustering”, licensing the production and distribution of new products to overseas firms and “merging” or more likely being bought out by a foreign MNE.
3.3.1 Organic Growth & Acquisition
The acquisition strategies of New Zealand firms hint at the central importance of distribution economies. The Infometrics study (1999) states “most common successful acquisitions appear to be the purchase of relatively small foreign distribution and retail companies.” This allows companies to expand their overseas sales. However the net impact of this on expansion of exports is small. SMEs do not have the financial clout to purchase significant distribution companies. No firms outside of the commodity producers have managed to achieve MNE status through organic growth and acquisition to date, and it is likely to take considerable time and effort to do. Foreign acquisitions may also be risky for New Zealand firms in some industries, as foreign operations may be large in comparison with their home base.
That said, there are some signs of high performing New Zealand firms emerging with effective distribution systems (sometimes world class - largely helped by sophisticated information technology). This “new generation” of firms (while still SMEs) have recognised the importance of distribution economies and made considerable investments in their brands and distribution systems. These firms now need to push more products through these systems to truly achieve world-class scale. If these firms are successful, they would show that this hurdle to ongoing expansion can be overcome. They may also provide vital skills and motivation for New Zealand firms wishing to emulate their success.
3.3.2 International Alliances
A few firms leverage international alliances to continue expansion. Again, the driving motivation for such alliances is product development, distribution, and marketing. The most difficult part of this strategy is building these alliances. Courting prospective allies can be expensive, risky and time consuming. The greatest risk of this approach is in the information exchange with prospective allies. It is not unusual for prospective allies to suddenly become prospective owners, with discussions of partnership turning into discussions of takeover bids. Once successfully established however, the alliance approach is a promising strategy. It allows the use of other firms’ distribution channels and brands without loss of control.
Example: Montana
Montana’s international strategy is a good example of leveraging international alliances. They have used overseas brands (Deutz and Cordier) to increase sales, and have entered joint alliances for research and development. Montana have even made use of European designers to make their labels appealing to the foreign eye - helping to overcome some of the informational difficulties of the distance from consumers.
Source; Campbell-Hunt and CANZ (2001)
3.3.3 Clustering
A third strategy for ongoing growth is the clustering approach. Clusters are (based on the Porter definition) geographically grouped firms in related industries. They are sometimes used as a way of pooling finance, networks and expertise to obtain distribution economies.
Example: Wellington Media Cluster
Creative Capital is a consortium of over 30 Wellington based companies specialising in various aspects of information presentation and entertainment. Creative Capital has secured $1million worth of museum exhibition work in Singapore. The group worked together to make a bid to re-develop the national museum in Singapore. When they failed to win this contract, they were offered a smaller project as a “consolation prize”.
''While we are happily accepting these ''smaller'' contracts, our eye continues to remain on the big prize - entire museum developments. We are currently pursuing seven of these projects in both Singapore and Hong Kong.'' say Emily Loughnan (co-chair and Click Suite director).
Source: http://www.smartwellington.co.nz/smart_news/pd_2_x.asp?ID=163 [Incorrect Link.]
Example: Jemco
The Jemco story is an example of many of the issues that pertain to distribution economies. It is also an interesting example of clustering to overcome those issues.
Four oyster companies had all tried to enter the Asian market and had failed. Despite the possibilities available in the Asian market, New Zealand business commonly struggle to establish footholds. This may be related to cultural difference, and often requires the ability (and finance) to learn from mistakes. These four oyster producing companies (representing 70% of New Zealand’s Pacific oyster production) and marketing company CSI Seafood formed a joint venture in 1999 called Jemco. The group invested in the name, logo and colours for its key product – a frozen half-shell oyster for raw consumption. This strategy has proven to be very successful. The group has had average annual sales growth of 175% for the past three years and is predicting similar growth for the future.
Source: NZ Business (Dec 2001)
There is very little evidence on the existence or effectiveness of clusters in the New Zealand context. One question that is often raised is whether increased clustering could benefit New Zealand SMEs, but that our individualistic culture hinders their formation.
3.3.4 Licensing the production and distribution of new products to overseas firms
Some firms have very recently started using licensing to allow overseas firms to produce and distribute their products. This means that ownership of the innovation is retained in New Zealand, while overcoming problems with production and distribution. Whether this allows for more of the economic rents of the innovation to be captured compared with selling the idea completely depends on details of the deal.
The approach is not completely flawless however. Licensing deals are complicated, and involve some fixed costs in their formation. They also rely on the firm having a patent-able form of competitive advantage. This is not possible for many subtler innovations, or for firms that compete on areas other than product innovation.
Example: Formway
Formway designs and manufactures office furniture. In 2000, Bretford Manufacturing began selling Formway furniture under license in the US market.
