Pearl River Piano
Introduction PRPG was a state-owned enterprise and was developed form an old piano factory in Guangzhou of China. The piano factory is located Pearl River, so that the brand of piano is called Pearl River. Since the adoption of an open-door policy, Chinaexploited a range of new opportunities provided by a market-oriented economy for expanding production, employments, and profits through free trade markets. As a result, PRPG face a chance due to import technology and export products, and then they were expended to become Pearl River piano Industrial Corporation.
Their business become more successful , fter they merger with several small company. In2000, PRPG had more than 130 strategic alliance through-outs the country, in addition to 208 sales units. Question1 Drawing on industry- resource- and institution-based views, explain how PRPG,from its humble roots, managed to become China’s largest and the world’s second largest piano producer. 1. 1 Industry-based view Rivalry among established firms may prompt certain moves. PRPG face somechallenges, since piano is traditional European musical instrument, European pianoshas a long history, and they always target upper market, such as Steinway.
PRPG will face a strong challenge when they target upper market. For example, althoughYAMAHA is the largest piano producers, they focus on medium and low-end market;however, Tong would like their PRPG become best brand, next only to Steinway. Inaddition, PRPG not only import technology of piano making, but also learn andintroduce western culture to them. Higher the entry barriers, PRPG face the difficult entre in US market; the US peopledo not believe PRPG can make low price high quality products. PRPG cannot easily target foreign people.
US people stay loyal to their local product. The bargaining power of buyers may lead to certain foreign market entries. In USmarket, there are many competitors, such as Steinway. Steinway product always target upper market. Buyers may buy Steinway product, rather than PRPG. 1. 2 Resource-based view in 1960-1980, the factory had very low productivities, lowcompetitive ability, even less than 100 labors and produce only 13 pianos per year. The industry introduced total quality of management in 1988, and they also promoteISO 9000 in 1998.
Moreover, they built business partnership with YAMAHA via joint venture. As a result, PRPG learned higher technology skill via business activities. PRPG not only import technology of piano making, but also learn and introducewestern culture to them. Tong pay attention to communicate with their employees in order to build good“GUANXI”. Tong also established close relationship with some famous world well-know piano players, and recommended they play their Pearl River piano in their concerts. This is ‘celebrity’s appeal’ strategy in order to target people.
Innovation included the importation of new technology in production and quality measurement and production innovation. Production innovation can be concluded developing a wide range of pianos to meet the upper-, medium- and low-end marketin order to target different consumers’ group. 1. 3 Institution-based view Regulatory risksThese risks are associated with unfavorable government policies. Since the adoptionof an open-door policy, PRPG is allowed import high technology and export their products. As a WTO member, the government’s has been encouraging local industries to learn from their foreign partners.
Currency risk China is becoming an export powerhouse, which caused the friction with other countries, United States in particular. The U. S. senators urging the Whitehouse toexert pressure to China for RMB revaluation most recently and President Obama gavean official statement to point out RMB should be appreciated. China’s direct responseto RMB rate issue can be found in Premier Wen JiaBao’s answer in the pressconference just after the NPC;amp;CPCC* this month in Beijing. Premier Wen claimedRMB is not raise in value by presenting China’s increased figure of imp/expo absolutevalue in 2009.
Question 2Why did Tong believe that PRPG must engage in significant internationalization(instead of the current direct export strategy) at this point? China is a country with a huge exporting activities, recently it is changing itsexporting mode which from low-wage and low-labor-cost advantage towards high-tech, high-value-added exports. Pearl River Piano Group, a state-owned company inChina, had been stimulated from a slow-moving Chinese firm founded in the 1956 toa booming global company with growing sales in domestic market and internationalmarket.
While it has a good performance in the low-end product segment in the international market, there was an issue about whether Pearl River Piano could be awell-known global brand by ascending to the mid-high product segment, and whether it could achieve sustained growth by building a reputable and high-quality brandname in the world. 2. 1 Direct exports Direct exports represent the most basic mode of entry, which capitalizes oneconomized of scale in production concentrated in the home country and affords better control over distribution.
However, if the products involved are bulky. This strategy essentially treats foreign demand as an extension of domestic demand,and the firm is geared toward designing and producing for the domestic market firstand foremost. While direct exports may work if the export volume is small, it is notoptimal when the firm has a large number of foreign buyers. 2. 2 Dissatisfied of the Pearl River piano progress The company established a joint venture with Yamaha in 1995. Through this partnership, PRPG learned how to make a world-class and high quality product.
Bythe end of 2000, PRPG was the largest piano builder in china, the second largest in theworld, with an annual production capacity of over 100,000 pianos. The company hadmore than 4,000 employees with a total asset value of approximately $130 million. Also it diversified into other musical instrument, and contains more than 50% of piano market in China. However, Tong did not satisfy this progress; he thought thePearl River piano could be a world class brand. 2. 3 Competition in domestic market
Hundreds of private companies began entering the market and competing with their low quality and low price products. Such as the old well-known brand Star Sea and NiEr, and numbers of emerging piano builder company with a low price products. 2. 4 Future prospects of PRPG According to the case, Tong believed that the company could survive by themselvesin domestic market; however it is impossible for an entrepreneur to stay in the same position permanently. And he thought that the company had made some successes, butit is not enough for a company to stay in the good position.
The company is stilldeveloping and it needs to extend business in the global market in order to satisfycompany’s strategy. 2. 5 Challenges in international market When compared with other Chinese piano builders, PRPG had gained someexperience in exporting. Tong believed that although the piano market in the US was mature, PRPG could still take advantage in the market. Because US have a high levelof labor cost, PRPG could take advantage of cheap labor cost in China with high levelof product quality to gain market position in US market. On the other hand, it isdifficult to enter into the US market.
If company want to extend business in USmarket, firstly PRPG need to introduce the US partner to the Chinese market, as anexchange for its entry to the US market. Finally, PRPG established a sales subsidiaryin the US market for further expands. 2. 6 Building world class brand Direct exporting could be an efficient way for company to make sales, but it onlysuitable for a short term development. For long term, PRPG must build its world class brand and provide high quality product to target upper level markets in order tomaximize profit for sustainable development.
Question 3If you were one of the professors who visited Tong in March of 2000, how wouldyou have briefed him about the pros and cons of various foreign market entryoptions? 3. 1 Non-equity modes (exports and contractual agreements) Tends to reflect relatively smaller commitments to overseas markets, which do notcall require independent organizations. 3. 11 Exports 1) Direct exports: treats foreign demand as an extension of domestic demand, and thefirm is geared toward designing and producing for the domestic market first andforemost. ) Indirect exports: exporting through domestically based export intermediaries. 1 Non–equitymodes: 1 Non-equity modes : Exports| Pros| Cons| | Economics of scale in production concentrated in home country. | High transportation costs for bulky products. | Direct Exports| Better control over distribution (relative to indirect export)| Marketing distance from customers. | | | Trade barriers. | Indirect exports| Concentration of resources on production. | Less control over distribution (relative to direct exports)| | No need to directly handle export processes. Inability to learn how to operate overseas. | 3. 12 Contractual agreements 1) Licensing/franchising: the licensor/franchiser sells the rights to intellectual property such as patents and know-how to the licensee/franchisee for a royalty fee. 2) Turnkey projects: projects in which clients pay contractors to design and constructnew facilities and train personnel. 3) R;amp;D contracts: outsourcing agreements in R;amp;D between firms (that is, firm Aagrees to perform certain R;amp;D work for firm B). 4) Comarketing: agreements among a number of firms to jointly market their products and services. Non-equity modes : Contractual agreements| Pros| Cons| | Low development costs. | Little control over technology and marketing| Licensing/Franchising| Low risk in overseas expansion. | May create competitors| | | Inability to engage in global coordination. | Turnkey projects| Ability to earn returns from process technology in countries where FDI is restricted| May create efficient competitors. | | | Lack of long-term presence. | | Ability to tap into the best locations for certain innovations at low costs. | Diffecult to negotiate and enforce contracts. R;amp;D contracts| | May nurture innovative competitors. | | | May lose core innovation capabilities. | Co-marketing| Ability to reach more customers. | Limited coordination. | 3. 2 Equity modes (joint ventures and wholly owned subsidiaries) Indicate relatively larger, harder to reverse commitments, and equity modes call for establishing independent organizations overseas. 3. 21 Joint ventures : a new entity given birth and jointly owned by two or more parent companies. 3 Equity modes : Joint venture| Pros| Cons| | Sharing costs and risks. | Divergent goals and interests of partners. | Access to partners’ knowledge and assets. | Limited equity and operational control. | | Politically acceptable. | Difficult to coordinate globally. | 3. 22 Wholly owned subsidiaries 1) Green-field operations: building factories and offices from scratch. 2) Acquisition: A corporate action in which a company buys most, if not all, of thetarget company’s ownership stakes in order to assume control of the target firm. 4 Equity modes: Wholly owned subsidiaries| Pros| Cons| | Complete equity and operational control. | Potential political problems and risks. Green-field projects| Protection of technology and know-how. | High development costs. | | | Slow entry speed (relative to acquisitions)| Acquisitions| Same as green-field (above)| Same as green-field (above), except slow speed. | | Fast entry speed| Post-acquisition integration problems. | Question 4 Again, if you were one of those professors, what method would you have tosuggest as a way to tackle the US market? Method has been talked before: Joint ventures Nowadays, joint ventures have been the main form of foreign direct investment (FDI). 4. 1 Problems to tackle the US market: 4. 1 How to get a partnership with local company? US don’t believe Chinese company can make good quality and cheap price products. They don’t trust overseas company. They consider Chinese company as a competitor more than a partner. 4. 12 Administrative requirements: US government wants their own people to benefit from industrialization. So they pushforeign investors to ally with local firms before graniting access to market. 4. 2 Suggestions: 4. 21Share ownership with US companies: Increase the trust each other Goal: encourage some ethnic citizens to participate in industrial development. To
