Muji’s

Alternative

Entry Modes

Amine Berrada April 2, 2014

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Entry mode strategies

Alternative 1: Greenfield.

Chile is considered one of the most attractive countries in retailing especially because of the economic

condition that is growing continuously due to the political stability (Euromonitor, 2014) . The

consumption habits of the population is the main cause that enhance the desire to enter the country,

especially that the middle class that represents 60% of the population, are changing their consumers

habits from products providing convenience, to others that are turned to fashion and design

(euromonitor, 2014).Also, the high price sensitiveness of the consumers leaves the market in a high

competitiveness, especially that all companies are trying to develop their own premium private label

(most of the time proposing a reasonable quality/Price report) (Revised) (Euromonitor, 2014).

Moreover, Chilean consumers are characterized by having high levels of debts from the retail industry,

which means that they preserve a certain loyalty toward the store that they are purchasing from

(Euromonitor,2014).

The first alternative identifies the possibility for Muji to enter the market place by adopting the

Greenfield mode of entry. Greenfield is adopted by implementing direct managed stores in Chile.

Those stores are directly related to the headquarters, and the decisions are subject to centralization

(all taken by the headquarters in Japan). However, only daily and operational decisions are

decentralized and taken by the employees working in stores.

Because the firm has an international experience, it has developed a specific strategy that is

concentrated around sourcing the products from manufacturing to the host countries. The graph

below shows the sequence of providing the stores by Muji’s products.

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Figure: Development of global sourcing and logistics systems by Muji.

All supplies are going from the manufacturing centers that are located in China and Singapore to Chile.

The strategic economic partnership agreement signed between both countries allows the free

circulation of goods which is not impacting the logistics strategy of the company ( revised) (Ministry of

foreign affairs of Japan, 2014). Muji’s target is the middle and high social class that represents the

majority of the population (Revised -Bargaining power of Buyers).

The international strategy that Muji is adopting is global. Since it started its internationalization, the

global strategy was a key to target multiple markets (Asian and European) (Dawson & Mukoyama,

2013). By standardizing its products, the company starts registering greater economies of scales, a

facilitation of international exchange of goods and services and availability of products in stock

(Dawson & Mukoyama, 2013).

Muji’s corporate strategic direction is represented by an organizational growth. The organizational

growth is formulated by a diversification strategy focused on the option of developing its market

through an expansion. The markets explorations allow the company to serve additional geographic

areas that were not served by the firm (Dawson & Mukoyama, 2013). Consequently, it is a way to

increase sales revenues and profits, fully utilize the existing resources and capabilities and make a

good use of the surplus cash flows

Muji’s business level is focusing on an integrated low-cost/ differentiation strategy. The combination

of these two strategies is becoming more popular for global companies as long as they provide

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products that are differentiated from company’s host market, but also try to continuously lower costs.

The integrated low-cost strategy is formulated via the three following points:

Muji uses industrial materials that are not commonly used by other companies. These

materials are available at low cost and in bulk. Their advantage is to keep the prices low and

also enables the creation of distinctive and simple products (Dawson & Mukoyama, 2013).

Utilization of efficient production processes by paying close attention to the manufacturing

processes (Dawson & Mukoyama, 2013).

Keeping packaging to a bare minimum to minimize cost and waste (Dawson & Mukoyama,

2013).

Issues Greenfield :

Degree of rivalry: In industries with intense competition, new entrants would find it difficult to

enter and operate successfully (Elango et al, 2004). In the industry with high concentration

where numbers of competitors exists, the creation of new capacity could lead to a price war

between the incumbents and entrants. Also, the high concentration enhances the possibility of

retaliation by existing incumbents (Elango et al, 2004). Muji is trying to enter a market that is

dominated by national retailers that have good knowledge given by their longstanding

presence over 10 to 15 years average (Revised) (Euromonitor, 2014). Also, the Chilean market

is characterized by a continuous growth over the past 5 years, and a recent rate of 10% for

2013, whereas the rivals are highly committed to the business so they gain market shares

(Revised) (Euromonitor, 2014). By consideration the high degree of rivalry and the high growth

rate of the market, Muji is trying to enter a market where there is a moderate degree of

rivalry.

For the market characterized by intensed import activity, Greenfield alternative is suitable for

new entrants (Elango et al, 2004). Economic partnership agreements between both countries

(Japan and Chile) are incentives for entrants that are looking to import products to Chile

(Revised) (Euromonitor, 2014). However, the Greenfield alternative for Muji is focusing on

importing products from the manufacturing areas which represents an advantage (As

described earlier).

Entry Barriers: The economies of scale are a result of an expansion to a larger market where

the products can be sold. The benefits come from the fact that the company produces more

products with a lower cost. According to Elango et al (2004), industries characterized by plant

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scale economies have significant barriers of entry, as long as they have significant investments

and strong competitive reaction from incumbents. Also, the companies while entering the

market by using Greenfield as an entry mode, they have financial responsibilities that are

considered as sunk costs (Elango et al, 2004). The Muji’s alternative strategy is to implement

stores and not factories to produce its products. Plant economies of scale are not related to

Muji because it produces in its main factories, but it is impacting it positively because it will

make economies of scale by producing more products to market in Chile.

Demand conditions: According to Elango et al (2004), incumbents are less likely to engage a

price war or react against new entrants in a growing market, due to the fact that all firms have

the opportunity to grow without fighting to gain market share. The cause is that the industry

with a growing demand is able to absorb additional capacity. The opposite happens when the

growth rate is low, the rivalry between competitors is intense going to the point to create a

price battle. Beside the growth rate described before, the impact of internet retailing helped

companies increase their sales as long as the Chileans become more connected and companies

offer expanded product information, beside the deals for shopping online (Revised)

(euromonitor, 2014). The demand variability is impacting the year to year shipment of product

that are imported from the sources, and the frequent changes in demand enhance level of

operational risks related to inventories, the principal rigidity of Muji.

Brouthers and Brouthers (2001) in their journal article “Acquisition and Greenfield start up?

Institutional, Cultural and Transactional Cost Influences” develop and test which of the model of

diversification is the more convenient, taking into consideration institutional (includes tangible and

intangible assets), cultural and transaction cost variables.

From the Institutional side, the hypothesis developed by Brouthers & Brouthers (2001) discuss about

the size of the investment that a company is projecting. Talking about intangible assets, the authors

advance that multinational experience and technology intensity are the main points that influence the

choice for opting for the Greenfield option. They said that firms with a higher multinational experience

prefer Greenfield because it gives some advantages like the opportunity to gain greater returns for

propriety knowledge and ability to guard against dissemination risks. The technological intensity

focuses around the research and development activity. Muji started its international activities 2 years

after its creation, and developed its business for a period of 30 years (Euromonitor, 2014). The

international experience plays an essential role because the company knows how to deal with new

markets. The research and development is an activity that Muji is engaged to maintain, since the

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marketed products are related to fashion and new trends (Dawson & Mukoyama, 2013). The R&D is

not related to the strategy since only Greenfield is only focusing on the implementation of stores.

Brouthers and Brouthers (2001) consider cultural context as a key factor that helps defining potential

profits and risks associated with market entry. Hypothesis developed are related principally to

investments risk (economic, legal, political, institutional and cultural ) and market growth. The growth

rate is seen as element that companies have to look for before entering any market, and also the

cultural distance that there is between both countries. The cultural differences act to increase and

decrease managerial effectiveness in using firm-specific advantages in a specific location (Brouthers &

Brouthers, 2000). Small cultural differences perceive low levels of country risk, while a large cultural

difference enhances the level of country risks. The cultural difference between Japan and Chile are not

too different taking into consideration the uncertainty avoidance and the power distance are almost

similar (Hofstede, 2014).Since Muji has an international experience and produces products that suits

international consumers (not only Japanese), the cultural impact is very low.

From the transaction costs side, Brouthers & Brouthers report that diversified firms dislike Greenfield

because they have sophisticated management control systems that can provide organizational

efficiency. Another point is that, in a culture that is characterized to have high uncertainty avoidance,

organization tends to adopt for Greenfield mode because, by acquiring a company, the managers are

not psychologically prepared to handle the differences in an effective and eff icient manner; and also

employees are less willing to accept change, which results in more costs in managing the change.

Greenfield is more appropriate in uncertainty avoidance country like the chilean market that score 86

in UAI of Hofstede index (Hofstede, 2014). Moreover, Greenfield mode is preferred because of the

synergy achievement that represents a real obstacle for multinational companies. The transfer of

firm’s specific knowledge and technology is better with Greenfield because of the increased ability of

control (Brouthers & Brouthers, 2000).

Joint Venture with Chilemat:

Arrangements

The second alternative identifies the possibility for Muji to enter the market place by adopting the

Equity Joint venture mode of entry. The company selected for the operation is Chilemat which is

operating in different activities such as bath & kitchen, Home furniture and decor (Chilemat.cl, 2014).

The company’s core function is to act as an intermediary with intentions to satisfy the purchase needs

of its member (Chilemat.cl, 2014). The chain has a wide and solid network of suppliers, mainly focusing

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on the local supply (Chilemat.cl, 2014). Furthermore, the company offers more than 300.000 products

through its providers (Chilemat.cl, 2014). The company relies on resources such as the local and

worldwide suppliers’ relationship, information transparence, technological applications, distribution

Centre, human resources and restoration of facilities to conducts its operations (Chilemat.cl, 2014).

Through the resources provided, the capabilities are resumed in effective supply chain coordination,

number of products offered, number points of sale (via a merger with an important group of

companies from the retail area to ultimately have better commercial conditions) , cash flow

management and marketing strategy developed via a network of more than 124 businesses

(Chilemat.cl, 2014). The core competencies of the company are focused on a strong sales volume and a

good financial performance, logistics and distribution systems and IT systems (Chilemat.cl, 2014). the

market competencies are resumed in a better customer service through the numbers points of sales

and the national presence, a brand recognition because it serves more than 300.000 products, product

availability through the performant logistic and distribution system and IT system. The choice of the

Chilemat was obvious because it is covering the rigidities of Muji that are the IT systems, logistics and

distribution and unavailable stock items. Moreover, the home furniture and décor sales of Chilemat is

the lowest of its activity, and making a joint venture with Muji has a positive impact in boosting the

activity.

Strategies :

The International (global strategy), corporate (organizational growth) and business level (low-cost/

differentiation) strategies remains the same as the one of Greenfield entry mode.

Joint venture Issues :

Beamish (2011) has listed in his chapter “The Design and Management of International Joint Ventures”

a number of issues related to the decision of choosing joint venture as an entry mode. Those issues

present advantages and disadvantages, related principally to the nature of the company, and its

purpose of entering the host market.

Numbers of multinational companies are looking to strengthen the existing business by opting for a

joint venture. Achieving economies of scale via acquiring the needed technology and know-how, and

venture by reducing the major risks of projects. Economies of scale are given to the joint venture

parents via the raw materials, components supply, in research and development and marketing and

distribution. Forming this network gives an ease to enter and exit the market, but also required a

limited investment (In time and fees) (Beamish, 2011). The joint venture with Chilemat covers the

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rigidities that Muji in term of inventory management, distribution channels and IT systems. Fees

related to investment are divided with the partners, and also it is avoiding the issue of time

consumption.

The raw materials and component supply are another issue that Beamish (2000) took into account.

Manufacturers sometimes join their efforts to manufacture components. However, even if the results

are typically in cost savings and risk low, there are some other disadvantages that come out like the

slow process to take decisions because both companies have to agree or disagree about an issue

(Beamish, 2000).

Price transferring is another issue that arises in joint ventures (Beamish, 2000). A low transfer price on

products from venture to the parents means that whichever of them that buy the most get the most

benefits (Beamish, 2000). On the other side, some companies point out that the weight in shares hold

in the capital is the most appropriate way to share the economic benefits via the dividends distributed

the parents. As long as the shares obtained by a parent represent its contribution at the venture, it is

reasonable to follow the arrangement of the capital structure of the firms (Beamish, 2000). As long as

the joint venture between both companies (Muji & Chilemat) is an equity joint venture, the price

transferring is not a relevant issue because they share the profits made.

Marketing and Distribution is another issue that companies have to take into consideration when

forming a merger (Beamish, 2000). For the case of Muji, the merger is made principally to cover the

need in marketing and distribution. The experience of the local company has an impact in filling the

rigidities that Muji has. However, companies do not realize only economies in marketing and

distribution, but also cover the market wider with a lower cost without losing the direct control over

the sales force.

The financial risk is another issue that companies deal with while entering a foreign market. The

advantages and disadvantages depend on the nature of the activity and the importance of the project

taken. The case of Muji is to market its product in Chile, and earning experience and market shares by

limiting the financial risks and failures, are the aim to obtain from a joint venture. Another thing is that

the joint venture allows international company to keep close the competitor at least until having a

small pie from the market (Beamish, 2000).

Taking the products to a foreign market is the case of our particular company. The joint venture with

the local company seems to be the most attractive compromise (Beamish, 2000). The joint venture

starts as a sales and marketing operation, until the products starts to sell well and volumes rise. The

local partner also takes advantage of the joint venture to get a better utilization of existing plants and

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distribution channels, to protect itself against threatening new technologies, and to drive new growth.

Moreover, the foreign partner makes profits shipping finished products to joint venture because they

are considered as hard currency (Beamish, 2000). The foreign partner receives also a technology fee,

which is a fixed percentage from the sales volume of the joint venture, but also pays a withholding tax

from the dividends received (Beamish, 2000).

Beamish & Lupton(2009) In their article “Managing Joint ventures” indicates that joint ventures enable

firms to access each other’s complementary resources and capabilities in order to achieve economies

of scope and scale, to develop the products more reliably and more cheaply than could done by a firm

acting alone. Local partners are helped through their adventure to get use to foreign business

practices and policies, and develop their credibility in the eyes of the local customers.

The knowledge management (knowledge and capabilities) is considered by Beamish & Lupton (2009)

as an important issue that the joint venture parents have to take into consideration. The knowledge

refers to the intellectual capital or to the market knowledge, while capabilities refer to the research

and development (Beamish & Lupton, 2009). However, accessing the local knowledge improves the

Joint Venture performance, as long as in the long run, learning enhance s the competitive advantage.

Local firms open the market and allow to multinational firms to have access to the business practice

expertise and to develop local access talent (Beamish & Lupton, 2009). Also, It was found that it is

much more easier to transfer technological capabilities by joint venture because it uses the transfer of

personal directly the JV instead of transferring the employees tacit capabilities from an organization to

another (Beamish & Lupton, 2009). However, while knowledge is very important for a joint venture to

be successful, there are some firms that are concerned about protecting their intellectual property and

trade secrets. Firms, especially the ones operating in new or operating segments, are taking benefits of

the joint ventures just to limit the risks of a riskier research and development where the outcomes are

uncertain (Beamish & Lupton, 2009). Also, the companies take more time to build trust and to adapt to

each other, which takes longer to produce or share the knowledge. Moreover, Beamish & Lupton

(2009) argue that joint venture is advantageous when both companies’ capabilities and resources

complement each other, in order to have a good performance. Firms that replicate the Joint Venture

management process would be able to develop core competencies by collecting, codifying and

disseminating their best practices in Joint venture management throughout the organization (Beamish

& Lupton, 2009).

Cultural differences are issues that Beamish & Lupton (2009) are discussing in details in their article.

International companies forming the joint venture with a local firm are always facing a cultural shock

that comes from the market, or from the partner. Culture differences, as described by the authors, is

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primary related to the characteristics of the countries such as the individualism, power distance and

uncertainty avoidance (Beamish & Lupton, 2009).Companies may found differences in the

organizational culture (different management approaches) and differences in national culture, which

can affect the performance and the longitude of the partnership.

Franchising with Masisa :

Arrangements

The third alternative identifies the possibility for Muji to enter the market place by adopting the

franchising mode of entry. The company selected is Masisa S.A. which is producing and marketing

wood articles and fiber boards for furniture and interior architecture in Latin America (Masisa, 2014).

Masisa S.A is a subsidiary of Placacentro Group which has network business units that guarantees the

success of the core business (Masisa, 2014). The company focuses on satisfying the final customer by

providing sustainable and trustable articles through its fiber wood boards and industry (Masisa, 2014).

The company has a significant presence in South America, and its supply chain management and

distribution channels are the main factors that are leading its success (Masisa annual report, 2013).

The company is present in Brazil, Chile, Argentina, Colombia, Equator, Mexico, Peru, USA and

Venezuela. The firms have a large panel of suppliers that are providing it. The aim of choosing Masisa

as a franchisee is that the company wants to diversify its core business, as long as it is a

complementary segment. Moreover, the benefits of the Franchise contract are to take advantage of

the distribution channels of the company which is concentrated in Latin America, the international

experience and the supply chain management applied for its products.

Strategies

The International (global strategy), corporate (organizational growth) and business level (low-cost/

differentiation) strategies remains the same as the one of Greenfield and Joint Venture entry mode.

The reason why it remains the same over the entry modes is because Muji has an international

experience and has used the different entry mode for all its attempts. So the Strategies are formulated

to be adapted for all entry modes.

Franchising Issues According to Hoffman (2001), the diffusion of franchising as an entry mode in nations, is positively

related to monitoring nations. Large franchise systems can develop economies of scale by effectively

lowering the cost per unit of monitoring franchisee or by making promotions (Hoffman, 2001). The

experience of seeking other markets and expand acquire to the firms knowledge about foreign

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markets. It first reduces the degree of perceived risks of distant markets, but also gain experience in

making limited adaptation to the franchise concept for international firms by operating the system

efficiently and make easier the monitoring of dispersed units (Hoffman, 2001). The rivalry between the

local and foreign franchisors in a special market pushes the locals to make more effort to protect their

product, but also to duplicate the successful franchising methods.

The countries’ characteristics play an essential role in formulating the adequate mode of entry. The

economic condition of a country is one of the issues that Hoffman (2009) discussed about. A country

that is registering a higher per capita income boosts the franchise growth because can afford the

products and services without bothering themselves doing them (Hoffman, 2001). The Chilean GDP

per capita which is $15.410 and is increasing by 5.6% compared to 2013 (World Bank, 2013). The

Chilean peso and inflation rate have been stable for a long period of time, due principally to the

stability of the monetary institutions (Heritage, 2014). All these economic factors play a role to

enhance the plantation of franchises because the population starts consuming more when their

income grows.

Social trends are also factors influencing the lifestyle of consumers. Hoffman (2009) has found that

social changes impact positively the growth of a franchise. Urbanization, education, the increase of the

middle class population and women in labor force are special environmental characteristics that a f irm

must look for before implementing any strategy. Education is an important issue because it measures

the degree of awareness, and enhances the ability of the population for decoding a message (Hoffman,

2001). Urbanization is another factor that influences the franchise option because people in urban

areas use their wages to buy products, compared to rural areas where the population is self-sufficient

(Hoffman, 2001). About 85% of the people live in urban areas and nearly 40% live in the capital city

“Santiago” (CIA Factbook, 2014).

Cultural issues are factors that companies encounter when they go oversea, especially when the

values, customs and patterns of behavior and thoughts are different (Hoffman, 2001). Hofstede (2001)

research about cultural differences is taken into consideration because they align the perceived risks

of crossing border. Tolerance for ambiguity, uncertainty avoidance and individualism influence the

choice of the entry mode. More the country is low in uncertainty avoidance and individualistic, the

more people tend to adopt franchising as an entry mode (Hoffman, 2001).

Political sector that includes the government regulations and policies interferes in selecting franchise

as an entry mode (Hoffman, 2001). Taxes, Tariffs and currency are determinants that increase risk or

lower it, depending on the import and export tax border, the royalties repartition or profitability

(Hoffman, 2001). Chilean government made reforms to improve capital market liquidity and to

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enhance access to financial services for small companies (Heritage, 2014). However, Chile does not

provide any incentives for the tax reforms or tariifs (foreign investors are treated like the local ones),

but it allows the repatriate capital after one year of the entry and profits at any time (OCDE, 2002).

Doherty (2007) developed in the article “the internationalization of retailing: Factors influencing the

choice of franchising as a market entry mode” the key factors that lead the managers to select

franchising as an entry mode. The organizational factors such as the international experience influence

the choice of the company. Franchising has been profitable for firms as long as they move forward

internationally. Franchisees by recognizing the brand value, start approaching franchisor for settling

contracts (Doherty, 2007).

The availability of financial resources is a factor advanced by Doherty (2007). The companies start

expanding abroad with a limited financial commitment and exposure, and without having the

responsibility to manage a lot of assets (Doherty, 2007). The franchisees take the responsibility of

financing the settlement of the brand, but also pay royalty to the franchisor.

Furthermore, companies with a strong brand offers are much easier to replicate that firms with

weaker brands offerings (Doherty, 2007). International franchises become more attractive to

franchisees when it develops a brand image, and starts to be recognizable by the final consumers. The

international power of the brand is the key for success, and controlling it is very important (Doherty,

2007).

Recommendation: Based on the previous sections where we advanced a number of issues concerning each

alternative, time has come to choose the best alternative for Muji. However before starting analyses,

the table below summarizes the issues of each alternative.

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Mode of entry Authors Issues

Greenfield

Elango et al, 2004

Brouthers & Brouthers

(2001)

Degree of rivalry

Entry Barriers

Demand Conditions

Size of the investment

Investment risks

Multinational Experience

Technology Intensity

Cultural Context

Market Growth

Transaction costs

Transfer of knowledge

Joint Venture Beamish (2011)

Beamish & Lupton (2009)

Achieving Economies of scale

Strengthen existing Business

Raw Materials & components supply

Price transferring

Marketing & Distribution

Financial risk

Access to the resources & capabilities of the partner

Knowledge management

Cultural Differences

Franchising Hoffman (2001)

Doherty (2007)

Economies of scale

Country’s characteristics

Urbanization

Education

Cultural Issues

Political issues

International experience

Availability of financial resources

Based on the issues that the articles provided, the selection of the most adequate alternative results

for the number of advantages and disadvantages, the order of importance of each issue, and harmony

of the entry mode with the activity (Retail).

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Greenfield is considered as the riskiest alternative. First, even if Muji has an international experience

all over the continents, but it does not have any physical presence in all Latin American countries. The

population does not recognize the brand and the risk to have cultural differences is high. Also, there is

a risk in terms of interpreting the values and concepts of the firm by the local population, but also

needs extra investment for the knowledge transfer (training of the employees). The Chilean market

has a moderate degree of rivalry because of the presence of a high concentration and high growth rate

of the market (Revised) (Euromonitor, 2014). In terms of costs, it is the most expensive one because

the company relies on its own financial resources. The time to implement such a strategy takes

normally a long time due to the studies that the company does before entering the country. Moreover,

Muji still have to cover its rigidities that are related to logistics and IT systems.

Franchising comes in the second ranking of the best alternative to choose. The company by adopting

the franchising mode will realize economies of scale by producing more products for the new market.

Furthermore, the financial costs are low because the franchisee brings the financial resources and

invest in the project, while in the order side, Muji receives royalties. The time that implement the

project is very short because the franchisee is a local firm, and has the experience in the market

(Knows the cultural differences). However, the disadvantage is that the company does not represent a

strong brand for the Chilean consumers because it is new for them. Also, the risk of the company to be

misrepresented by the franchisee is high because they do not share the same cultural values.

Joint Venture is the alternative chosen for Muji as the best entry mode. First, the company’s rigidities

are covered by the Chilemat which has a strong supply chain management, plant and facilities, and an

effective IT system. Muji can learn from the knowledge of Chilemat, and develop its technology to be

better in terms of management and strengthen its existing business. Also, the financial costs are

divided between the partners which leads to conclude that there is less financial risks. The company is

achieving economies of scale because it has a new market where it can sell more products . Muji is

going to benefit from the network of the partner to expand its activities all over the area, but also it is

an occasion to learn from the partner and the market about the cultural differences and the different

needs of the customer. Muji, by being present in the market, implements correctly the values and

concept of the company which has a significant impact on the brand image of the firm. However, the

only disadvantage is the cultural differences between the partners that often lead to take a long time

making decision, but also to disagreements about the management.

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