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PRAGUE UNIVERSITY OF ECONOMICS AND BUSINESS

DIPLOMA THESIS

2021 Bc. Bruno Souza Alcantara

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Prague University of Economics and Business

International Business – Central European Business Realities

Market Entry Strategy of Porsche AG to China

Author: Bc. Bruno Souza Alcantara Thesis instructor: Ing. Marija Zlatić, Ph.D.

Scholar Year: 2020/2021

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Declaration:

I hereby declare that I am the sole author of the thesis entitled “Market Entry Strategy of Porsche AG to China“. I duly marked out all quotations. The used literature and sources are stated in the attached list of references.

In Prague on ... Signature

Bruno Souza Alcantara

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Acknowledgement

I hereby wish to thank my supervisor, Ing. Marija Zlatić, Ph.D. for her supervision and assistance during the process of writing my Diploma Thesis. I would also like to thank my family, beloved ones and friends who helped me and supported me during all this time.

Thank you.

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With differences in local business dynamics from one region to another, different entry strategies can produce different outcomes. Planning a strategy that can correspond with the target market conditions can be the key to success. Additionally, as a result of globalization and markets becoming more opened worldwide, large or even small-medium corporations can see that moment as an opportunity to expand their business internationally. But that also requires preparation and investment in areas such as marketing research, and the development of marketing strategies for the company. Enterprises considering entering new markets must also have directions of which marketing tools can contribute on their internationalization process, serving as guidelines and as a framework.

A special focus on this thesis research will be given to the case of Porsche AG and how the company expanded to mainland China in 2001, with the theoretical marketing background on the first chapter that will serve as a base for a market entry strategy discussion.

The motivation to choose this topic appeared while I was having the International Marketing course at Prague University of Economics and Business, and as we were going through some real cases of companies entering different markets, I felt really curious to understand that process, and saw myself working on developing similar projects in the future as one of my career goals. The interest for selecting the brand Porsche, comes also from my interest in focusing on premium / luxury brands. Lastly, the motivation for choosing China as the geographical scope for my research, came while I was investigating Porsche deliveries worldwide, as I discovered that China was ranking as the biggest individual market for Porsche worldwide as noticed on their reports (Porsche (China) Motors Ltd., 2021, January 12).

As known, some companies have failed, struggled or not implemented the right entry strategy when targeting a new market and maintaining themselves after entering.

Therefore, this thesis has in view to discover by a case study, how the car manufacturer Porsche AG entered the Chinese market. The main goal of this thesis will be to find the answers for the following questions:

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1) Which mode of entry was chosen by Porsche to expand to mainland China and how did it evolve?

2) What are the possible niche arguments and factors favoring the selected entry mode and continuation of strategies implemented in China?

This dissertation also intends to contribute with existing theoretical knowledge and case study evaluation, as the case of Porsche in China will be studied, but also, to provide the readers, either to entrepreneurs, decision makers, or other students doing a similar research, with some of the theoretical data transcribed and to illustrate the Porsche case in China. As different companies start to consider expanding to other locations, this research can also bring contribution to them by showcasing the selected example and how the international marketing literature can help them in this process.

This diploma thesis will bring theoretical discussions from authors specialized on the marketing field, therefore, the marketing instruments presented on the first chapter will try to serve as part of the steps to be explored on the marketing entry process.

As for the structure, it will be divided into three chapters. The first one will cover the International Marketing Framework. The theoretical contributions from the literature will be the base for the discussions later on the next chapters. Without this theoretical knowledge, the reader would not be familiar with some topics and the reasoning behind them. It will be discussed the international marketing and how it can contribute on the internationalization process, the marketing research, where the conditions from the selected market are identified, the marketing strategy such as segmentation, targeting and positioning, the micro and macro environment analysis and lastly, the planning steps together with the explanation on different entry modes from which a corporation can select. The literature review for the first chapter is based on Král, Lhotáková, Machková & Cook (2016), Kotler (2012), De Pelsmacker et al. (2018), Bogyor (2016), Daniels & Radebaugh (2001), Porter (1979), Pan & Tse (2000) etc.

The methodology used will be on qualitative data, through analysis and description of what the authors suggest for each specific topic.

On the second chapter, the focus will be on the Porsche case in mainland China.

Starting with the introduction about the company, the early days in mainland China, which were preceded by the presence in Hong Kong, covering some of the achievements by the company during its expansion process. The macro and micro analysis of the Chinese market will also be analyzed, using marketing tools e.g., PEST

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analysis and the customers, competitors and a brief analysis about employee’s conditions in China too. While on the first chapter there will be contributions from Porter (1979) with the Porter’s five forces, that analysis will introduce the concept, as on the second chapter the competitors and the customers discussion can be related to what Porter (1979) describes as the “bargaining power of customers” and the positioning with the competitors. It will also be made a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis, with some of the findings and the entry strategy selected by Porsche being divided on those four fields. The data sources and literature for this part will include different issues from the Christophorus Porsche Magazine, which was the available company’s data source for some of the interviews with executives and key players, it will also include reports from Deloitte (2020), PwC (n.d.), HSBC (2020), Cui et al (2018), the Euromonitor International (2021) and data from different Porsche Annual Reports and auto news bringing qualitative and quantitative figures. The reason why selecting the Christophorus Porsche Magazine comes as it is a source published by the Porsche company.

Lastly, the third chapter will focus on answering the goals and objectives of this thesis, after analyzing the Porsche case in mainland China and the theoretical contributions. It will be explained which methodology was used, followed by an analysis of the results from the research. The research limitations will also be clarified, as there might be constraints on the company data and information, as it is also important to state here that this thesis was conducted with no contribution or partnership from the Porsche AG group, nor from any individual related to the company, therefore, the possible limits will arise from the availability of information on the published materials. In the end, the author will also provide some recommendations for the entry strategy on the automotive industry, taking into consideration the current scenario on the Chinese market through an analytical and comparative methodology, comparing the conditions at the moment of entry in 2001, to the current conditions.

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1. International Marketing Framework

The first chapter of this thesis work will provide the reader with the related marketing discussions when one is discussing about market entry strategy. To decide which topics would be covered on this first chapter, the author tried to identify from the existent literature, which topics usually relates to the internationalization of a corporation and the steps that can be identified during this process. The methodology for this chapter covering the marketing theoretical contributions to a market entry strategy, focused on qualitative, secondary data from authors such as Král et al. (2016), Kotler (2012), De Pelsmacker et al. (2018), Bogyor (2016), Daniels & Radebaugh (2001), Porter (1979), Pan & Tse (2000) etc. The methodology was also based on descriptive data, as during the process of collecting theoretical contributions from the mentioned authors, there were no intervention on variables. The discussions were based on description and analyzing what the authors suggested for the topics covered.

The choice of materials to be analyzed was also to credible authors from the marketing field and from sources provided by the university library (physical books and e- sources). This methodological approach was selected as it was deemed by the author to be the most appropriate for introducing what aspects can be involved on a market entry strategy from the marketing perspective.

1.1 International Marketing

Over the last few decades, the way how business can be done globally has seen a shift towards liberalization, allowing the surging of a “global market place” (Král, et al, 2016). In this first chapter, the theoretical part of the International Marketing Framework will be discussed in order to provide a basis for discussing Market Entry Strategies and the Internationalization of business internationally. As Král, et al (p. 9, 2016) suggests, “a well-thought-out strategy of international marketing improves the business results of firms and makes their competitive positions much stronger”. With an increasingly interconnected global market, companies see that as an opportunity to expand its operations beyond its national borders and that is provided by internationalization itself. Some of the benefits firms obtain when having a successful internationalization are as defined by Král, et al, (p. 9, 2016):

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- Increasing sales revenues volume - Increasing profits

- Cost reduction

- Economies of scales (manufacturing, management and marketing cost reduction)

- Outsourcing leading to better prices

- “Pooling” global purchases and benefiting from volume discounts - Lower transactions costs (led by the “pooling” global purchase) - Optimization of resources

- Relocation of activities (e.g., to countries with lower production costs) (Král, et al, p. 9, 2016)

International marketing can provide many tools and strategies to companies, whether they are planning to expand domestically or internationally. A definition of international marketing by Král, et al (2016) are as follows:

International marketing is a business philosophy focused on satisfying the needs and wishes of customers in international markets. The main goal of an international marketing strategy is to create maximum value for stakeholders by optimizing a firm’s resources and searching for advantageous business opportunities in foreign markets. (Král, et al, 2016, p.10)

The framework provided by the international marketing is evidently relevant to this research. Companies seeking to strive in its international expansion and operations can take the benefit of the steps and strategies enabled by the international marketing discussions. As Král, et al., (2016) explains some of the steps involved in this process, this part of the research brings some of this author’s explanation. Relating to the role of a company and international marketing, the involved businesses will start by putting its focus on foreign customers. After focusing on them, the firm will attempt to have some leverage in comparison to the competitors and satisfy its potential customers needs and wishes. One of the aims of doing that explained by the author is to create a long-term relationship that will induce a higher “customer loyalty”. A following step would be to evaluate the market, which means to conduct a market research, followed

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by a “strategic marketing plan” according to the results obtained after the market research, and then selecting an international market entry form. After going through the mentioned steps, the businesses involved will be able to implement a market segmentation, then select the international target market in which it is of their interest, the company will also have to decide which positioning will be suitable and appropriate and consequently, be able to implement the international marketing mix (Král, et al, 2016).

1.2 Marketing Research

As each different location worldwide has different market specificities such as the environment, culture, consumer behavior, shopping frequency etc., the companies who are planning to go internationally will certainly have to take those differences into account. They will have to build their strategies based on those specificities, to a broader or lesser extent, depending on the location. Some adjustments can then be also necessary in order to enable a successful entry or not. However, decisions must be made. That is when marketing research comes in to assist in that process (Král, et al, 2016).

“Marketing research can be defined as the systematic and objective process of generating information to aid in making marketing decisions.”¹ (Zikmund, W. G., 1997, as cited in Král, et al., 2016, p. 47). By using the marketing research as an important tool, managers, entrepreneurs and decision-makers can assess the market under interest and extract information to assist and lead the way to their decisions. By going through this process, incorrect decisions can be avoided, thus, avoiding unnecessary costs or wrong actions that could damage the interested company financially, but also in time and effort (Král, et al, 2016).

Král, et al. (2016) suggests some decisions the companies have to make during the international marketing research process. Some of those decisions can be listed as follows:

• Which markets to enter?

1 Zikmund, W. G. Exploring Marketing Research, 6^th edition, Fort Worth: The Dryden Press, 1997, ISBN 0-03- 018763-X, p.4 as cited in Král et al, p. 47, 2016.

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As the author explains, “different markets offer different potential profits and future growth rates” (Král, et al., 2016, p. 47). This step involves the necessity to analyze the differences between the home market and the market in which it is intended to expand. It is suggested that in countries with a smaller difference if compared to the home market, the adjustments to be made can also be smaller, whereas in other markets, if the differences show to be larger if compared to the home country, the adjustments in order to the company still have a successful entry may also be larger.

• Which entry mode to choose?

Král, et al., (2016) reiterates the relevance of marketing research in this context, as this research can also be used to help the decision makers to decide on which mode will be the most suitable to enter the target market. The conditions and regulations in that market will be collected through this process. Further theoretical contribution on different types of entry strategies will be discussed on this chapter.

• Decisions on marketing strategy, communication tools, etc., where Král et al, (2016) explains that also these decisions can benefit from relevant information provided by marketing research.

It is also acknowledged that the international marketing research has some limitations and therefore, are also not exempt from inaccuracies. Král et al., (2016) explains that some of these limitations are due to some characteristics of the research.

For instance, he mentions that this research is based on sampling, and therefore, not everyone is part of the process, as it would not be feasible to do in that way. Instead, sampling considers only some of the people within the target market. He also addresses the limitations to other factors such as the limitation on people’s imagination etc., (Král, et al, 2016).

Another author also illustrates the process of conducting a marketing research, in which it is possible to compare with what has been discovered so far. In this context, Kotler, (p. 99, 2012) shows as follows:

Table 1: The Marketing Research Process

Source: Kotler, p. 99, 2012.

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In light of the illustration above, it can be identified what actions and steps are identified within the marketing research process. It is rather a visual representation of how to organize and plan this type of research, starting by defining what is the problem and what objectives are to be defined. Right next, it is suggested the development of a plan to research, which will lead to the gathering of information and data.

Consequently, the information will be analyzed, enabling a presentation of the findings and in the final part, a decision can be made based on this process. It is a logical understanding of the process illustrated by Kotler (2012) above.

To conclude on the marketing research process, Král, et al., (2016) describes that some managers or decision-makers can opt to decide directly or conduct a marketing research first so their decisions will be supported by the information to be obtained.

These authors mention three factors that can influence that decision, whether they will make their decision directly or to wait for the market research and then decide based on the results:

- Time constraint (it depends if the company can afford waiting the time it take for the research or if it is a decision to be made quickly)

- Availability of data (some companies might already have the information they need to decide, so in this case, it may not be necessary to conduct a market research)

- Value for the company (in this case, the authors also explains that the company must evaluate if the costs to conduct such research will be compensated by the additional benefits from the same process.) (Král, et al., p. 48, 2016)

1.3 Marketing Strategy

As the marketing strategy was shortly listed on th Ye previous discussion, it is considered an important and necessary step for companies looking for international expansion. As it has been discussed about internationalization of businesses, it is evident that a marketing strategy will involve multiple factors that vary from one environment to another.

Some of the elements that are present in the marketing strategy are: the marketing mix, usually divided into 4 categories such the 4 Ps or the 4 Cs as explained by De Pelsmacker (2018), but also, the other three elements that will be discussed in this

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subchapter, which are segmentation, targeting and positioning. Let’s take a look first at the instruments of the marketing mix, or in other words, the 4 Ps: Product, Price, Place and Promotion, provided by De Pelsmacker et al., (p. 2, 2018):

Table 2: Instruments of the marketing mix

Source : De Pelsmacker et al (p.2, 2018) illustration

The first category would then be the “product”, which reflects the “customer need”.

It relates to the benefits, features, the quality, design, packaging and other items. From this perspective, the company can work on these instruments within the product range, trying to translate its strategies through the product’s features. That is a field where the company can express its strategies by implementing them into the product.

The second category would be the price, which represents the cost to the customer, as it is listed on the table above. The instruments present in this category are the list price, discounts, the credit terms, incentives etc. According to De Pelsmacker et al., (p.3, 2018) “price is the only marketing instrument that does not cost anything but provides the resources to spend on production and marketing activities.” De Pelsmacker et al., (2018) also explains that the “list price” is the ‘official’ price, which the final customer can find it attractive or not. One of the strategies to making the product more attractive, is to work on the instruments available on this category. For instance, incentives and discounts can make the product more attractive, but managers and the company’s responsible for setting the price must also be careful with how this price discount would be interpreted. It depends on the strategy of the

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product. It can also be mentioned that such strategy of discount would have to be carefully adopted by luxury brands, as certain types of discount could harm the brand’s image and perception, as Bastien & Kapferer (2013) explains with the “anti-laws of marketing”.

The third category is the “place”. Looking at the table above, the place represents the convenience in which the product can be displayed and distributed. Its instruments are the channels, logistics, inventory, transport, assortments, locations etc. De Pelsmacker et al., (p.3, 2018) explains that “by means of place or distribution, the company manages the process of bringing the product from the production site to the customer.” It is one of the strategic steps a company must work on, which can also imply on creating a “co-operation between the company and the distribution channel, and finding new ways to distribute the products, such as infomercials … and e- commerce.” as De Pelsmacker et al., (p.3, 2018) also adds.

Lastly, the “promotion” is considered the 4^th “P”, which relates to the communication. It is said to be the “most visible instruments of the marketing mix.” (De Pelsmacker et al, p. 3, 2018). In this category, one can find many different instruments where a company can apply its communication strategies, and that will be directed to its target audience, but also to the stakeholders. There are multiple instruments available from which the firm can promote its products, or even the whole company.

Some of them are advertising, which usually used mass media, as it is a “non-personal”

communication; public relations, which has the press releases and conferences as one of the most appreciated tools in PR. Enterprises can also use other communication instruments such as personal selling, depending on the product that is being promoted, which happens by addressing individually a known potential client.

Therefore, the company can research and explore which communication strategy or mix of communication instruments will be the best depending on the objectives, goals, and which option can be the most profitable as well (De Pelsmacker et al, 2018).

It is also necessary to constantly observe the importance of marketing and the brand communication strategies as well. If the brand has a good communication with its target audience where the clients create an “idealized self-image” according to the experiences they had themselves, as Bogyor (2016, p. 3-4) clearly explained. It is the importance of “brand personality”. Keller and Richey (2016, as cited in Bogyor, 2016, p. 4) also bring contributions on this “brand personality”, as how it would be the

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incorporation of such traits of personality linked to that brand, in case if it would come out alive. It relates to associations of actions, behaviors, and other personality traits.

1.3.1 Segmentation, targeting and positioning

Segmentation and targeting are part of “the most important marketing tools” as suggested by Král, et al., (p. 87, 2016). According to the same authors, the objective of those two tools is to screen the different groups of the target audience, and from that, to understand what their needs are, which is characterized as segmentation. After doing that, the next step would be for the company to identify which group out of those been identified, are the most appropriate for what the company is offering, which can be their products or even services. That step is what authors define as targeting, which will be the company’s target, as they identified that group as the most suitable for what it will be offered (Král, et al., 2016).

Segmentation “is dividing up a market into distinct homogenous groups that have common needs and will respond similarly to a marketing action.” (Belch, G. E., Belch, M. A., 1995, as cited in Král et al., p. 88, 2016). By doing that, marketers can distinguish similarities within a homogenous group, as that will help the decision- makers and marketers to understand their target audience and address their products or services to them, accordingly. For example, if a group of people which is target by a given company, behaves in a certain way, or expects a certain feature on a product or service, the company promoting can focus on that, in order to attract and reach their target.

Král, et al., (p. 88, 2016) describes the segmentation process in the following way:

• “Decision on suitable criteria (ways) of segmentation and identification of existing segments;

• Selection of the suitable target group or groups – targeting;

• Decision regarding the targeting strategy” (Král, et al., p. 88, 2016)

When analyzing how the segmentation process works, the methods for this process are also supported by some authors. Král, et al., (2016) explains that the dynamism is always present in the markets and that there is a constant change within them.

However, there are five groups of variables that can always be used in those consumer

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markets, which is characterized by a market “where end-consumers buy products and services” (Král et al., p. 88, 2016). Those five methods or variables for the segmentation process can be divided in the following way as Král et al., (p.88, 2016) suggests:

1) Geographic segmentation: due to different local aspects, such as different buying habits from one geographic region to another, marketers and decision makers must be aware of this divergence. On this method of segmentation, “markets are divided into different geographic units.

These units may include cities, regions, countries, or continents.” (Král, et al., p. 88, 2016). This variable can be helpful for the managers to understand what the main differences are according to each location.

They will be able to understand if their product or service will be suitable for that market, and also, to elaborate adaptations that might be necessary in order to have a successful entry in the target market.

2) Demographic segmentation: this is another variable among the marketing tools which can be helpful in order to understand for instance what will be the most appropriate size of packaging of the products being offered. The criteria for this segmentation are age, sex, family size, ethnicity, and religion, as Král et al, (2016) explains. A concrete example of how this tool works is by comparing different sizes of packaging of the same product in different countries. The marketers will analyze what are the commonalities of the expectations and preferences of that demographic segment and will be able to suggest the best strategy, as the size of packaging, just mentioned before (Král et al, 2016).

3) Socioeconomic segmentation: this third variable is responsible for observing what are the level of education of the different target groups, as also observing the profession, income level and the expenditure structure. This help companies to understand how much their target group would be willing to expend with their product or service, and therefore, elaborate the price and type of product that can match the socioeconomic conditions of a given target audience (Král, et al., 2016).

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4) Psychographic segmentation: the fourth variable relates to characteristic that are common, including lifestyle, “values, attitudes and motivations driving one’s lifestyle.” (Král, et al., p. 89, 2016). This part of the process helps companies to understand which values their customers or potential ones share and personalize their products and services according to their target personality. Král et al, (p. 90, 2016) explains the methodology studied by “experts from SRI International Stanford University, and the University of California, Berkeley.” The three motivations explained by these authors that helps understanding how this variable can be explored is by analyzing the “three primary motivations: ideals, achievement and self-expression.” ² By self- expression, it is possible to compare with daily occasions where it is visible that many customers admire their products and love to use them as a self-expression, which can represent success and social status.

5) Behavioral segmentation: the fifth variable “focuses on whether people buy and use a concrete product, and how often and how much they use it.” (Král, et al., p. 91, 2016). Within this segmentation, authors describe some inner variables that will be briefly mentioned here such as:

“regularity of usage”, which analyzes if the product is heavily used, often used or not so much; “loyalty”, which relates to how loyal customers are to the brands they consume or might consume; “benefit segmentation”, described as the segmentation that analyzes the attributes of the product that satisfies specific consumer needs; and lastly, “purchase and usage occasion”, which is about the occasions when different groups will purchase and use a certain product. (Král, et al., p. 92, 2016).

Targeting, is usually the step that follows the segmentation process. From the previous discussions, it can be concluded that the segmentation analysis aids towards identifying many potential segments. In this context, specific brands such as Porsche as their specific case in China will be analyzed later on, can use this marketing strategies in order to identify which segments represent a potential for the brand and

2 http://www.sric-bi.com/VALS/types.shtml as cited in Král, et al., (p. 90, 2016)

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what it has to offer, and then they will be able to work on the targeting step. The targeting process will serve as a tool to determine, which of those segments will suit the target audience with the brand and products (Král, et al., 2016).

In the authors discussions, Král et al., (2016) identifies some of the criteria which must be taken into account when performing the targeting activities. Some of those criteria are concerns about the size of market segment, the competitors, if the level of costs for that segment is also acceptable and the homogeneity regarding the group being part of the same segment.

Overall, there are three targeting strategies in which companies can deploy.

Standardized strategy is one of them. This type of marketing does not take into account the differences that might be present in among the segments. It is a strategy similar to the “mass marketing” and as the name suggests, it is standardized, which means that it can be addressed to anybody. Secondly, there is the differentiated strategy. As the name also suggests, this strategy takes into account the differences among the segments and as some of the marketing authors define, “a differentiated strategy entails targeting two or more distinct market segments with different marketing mixes. A differentiated strategy allows a company to achieve wider market coverage.” (Král et al., p. 97, 2016). Lastly, there is the concentrated strategy. This last one aims at making the target group more homogenous as possible, in order to find benefits that can be unique for this group. In this case, it is the example of a niche market. However, in this strategy companies must also be aware that the size of the market available by following this approach will be more limited, as it is aiming at a more homogenous group, therefore, it would not have the potential to reach a higher target group as in a standard strategy (Král, et al., 2016).

Positioning is the part of the marketing strategy process which develops strategies to manipulate how the consumers and customers will perceive the brand. This is the step which is considered to be “how” the marketers wish the brands they are working for or developing, will be perceived when compared with other related brands by the consumers (Král, et al., 2016). It should be an evident position, which will enable the consumers to think about a given brand and compare with the others and identify how the consumer feels and thinks about that brand. For instance, what unique benefit does that brand will give to him that others might not, and what feeling do those consumers have while purchasing that given brand if compared with the others.

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Some marketing authors formulated a few questions that are useful when elaborating the targeting process. Král, et al., (p. 101, 2016) suggest the following ones:

• “Who are the consumers of the product and/or brand?

• How does the consumer perceive the brand?

• What does the brand deliver (should deliver) to the target consumer?...

• Who does the brand compete with and what is the positioning in the market among competing brands?...” (Král, et al, 2016, p. 101)

When analyzing what other authors explain about positioning, De Pelsmacker, et al., (2018) affirms that:

Positioning can be defined as the way a product is perceived by the target group on important attributes, ‘the place in the mind’ a product occupies relative to its competitor…. Unlike imitating successful competitors, positioning attempts to claim exclusive ‘ownership’ of a benefit in the mind of the customer which differentiates it from the competition.³(De Pelsmacker, et al., 2018, p.130).

It is possible to conclude that positioning of a brand reflects mostly its perception by the customer. And since companies expects to occupy a relevant and special place in the mind of their customers, the marketers and decision makers can adopt 3 strategies:

global positioning, international positioning and local positioning strategy. The global positioning strategy means a global approach, which will focus on offering the same advantages for the ‘global segment’ worldwide. But just to clarify, this does not limit some adjustments that might be done in different countries, as the way how the communicate in order to reach the target. It is instead, regarding only the positioning strategy. Moving to the next, the international positioning supports that in different markets, a given brand will also have a different perception as Král, et al., (2016) explains and complements with the example of Heineken, where in some European countries, the brand is perceived as a ‘premium brand’, whereas in the Dutch market,

3 McIntyre, R.P., Capen, M.M. and Minton, A.P. (1995) ‘Exploring the psychological foundations of ethical positions in marketing’, Psychology & Marketing, 12(6), 569-82 as cited in De Pelsmacker, et al., (p. 130, 2018)

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it is perceived as standard. Lastly, the local positioning strategy differs from the previous two, especially from the global strategy, as it aims at a specific target segment in a given market, and not aiming to be perceived similarly as the global positioning strategy intends to (Král, et al., 2016).

Therefore, companies whether small or large corporations can invest on the marketing strategy following the steps mentioned here and identify which of them can be the most successful depending on the objectives and interests, but also depending on the market in which it will be target. In the next chapter, as the Porsche case in China will be analyzed, the strategies adopted by the company will be the object of analyses in order to understand which strategies the company implemented and what were the characteristics of that market.

1.4 Environment analysis

The environment analysis is another relevant step in which enterprises who are seeking international expansion must attain to. When dealing with international employees, customers, behaviors and different legal systems, a company cannot just expect to extend its operations abroad and always have a successful outcome. An example of problems that might happen, as detailed by Daniels & Radebaugh (2001) is the PRI (Parris-Rogers International) case⁴, which is a British publishing house that set operations in Bahrain, in the Middle East, but did not recognize the possible differences, mainly in cultural aspects between its home nation, and Bahrain. The outcome was as one can imagine, the non-achievement of its own objectives. That can be a frustrating result, leading to expenses that will not be offset by profit returns.

Having that in mind, it is recommended that companies should analyze the environment in which the target market is about, both in the macro and micro level (Daniels & Radebaugh, 2001).

1.4.1 Macro environment

4 For more details about the case, see page 44, Daniels and Radebaugh (2001). International Business:

Environments and Operations.

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In the macro environment, one of the main and basic tools to evaluate the international environment is the PEST analysis, as many marketing authors suggest.

The PEST analysis consists of the following points, as explained by Král, et al., (2016):

• P – Political, legal and regulatory environments;

• E – Economic environment;

• S – Social and cultural environments;

• T – Technological environment. (Král et al, 2016, p. 27)

Starting with the political, legal and regulatory environment, Král, et al, (p. 27, 2016) explains that these “represent the general conditions for international business activities. They significantly influence the possibility of market entry as well as the level of risk connected with the market entry.” Taking now the point of view from Daniels and Radebaugh, (p. 87, 2001), “a country’s political system influences how business is conducted domestically and internationally.”

An example of the political environment playing a role on managers’ decisions can be the case of Hong Kong, a “Special Administrative Region in China” as indicated by Daniels and Radebaugh (p. 86, 2001). According to the authors, “the political change from China taking control in 1997 worried many managers that China would change the relationship between government and business with the government exerting more influence and control in the business environment.” (Daniels & Radebaugh, p. 87-88, 2001). That serves as an example of how political implications can also affect business decisions. Other variables that are also within the “P” group are the political risk, taxes, bureaucracy, corruption, lobby and control of ownership, as just a couple of the examples mentioned by Král, et al., (2016).

The economic environment, “E” from the PEST analysis, is the dimension where the general economic situation that might impact the business and its activities are described. Some of the factors can be “the overall macroeconomic situation and competitiveness of the country, exchange rate policies and governmental foreign- trade policy as well as approach to foreign investors.” (Král, et al., p. 32, 2016).

The social and cultural environments, therefore, the “S” from the PEST analysis is the third dimension that according to Král, et al. (2016) suffers a slower change towards unification, if compared with the other variables, such as the political,

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economic and technological environment. The cultural and social aspects are a part of all the societies, each one with its differences, where marketers should not try to change. There are emotional factors linked to this dimension. Therefore, marketers are suggested to understand the cultural differences before planning how they will approach a given society, and then, adapting their strategy in order to be successfully welcome in the target society.

Lastly, the technological environment (“T”), is the dimension where the technological conditions and development in a given market are analyzed. It supports decision makers, managers and marketers to understand if the technology they are considering taking into that market can be supported or not. For instance, in some countries the technological level is much inferior if compared with other countries who are more technologically developed. Therefore, there might not be support for that technology to operate in the country where there is no support for a more advanced one. Král, et al., (2016) suggests that this dimension influences in two ways: to estimate if the technology that can be more modern can be used in that country or not; and also, as an indication of the infrastructure available in the market and its quality.

1.4.2 Micro environment

Some of the contributions for discussing the micro environment, comes from the Harvard Business School professor, Michael Porter. He developed the tool named the

‘Porter’s Five Forces’. Together with the Macro environment analysis, the micro environment also plays an important role for companies expanding or planning to expand internationally. This time, the analysis is rather focused at the micro level. In the illustration below, the Five Forces by Porter (1979) can be observed:

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Table 3: Porter’s Five Forces

Source: Porter (1979). Harvard Business Review.

The first force it can be discussed is the threat of entry. Porter (1979) makes a parallel between the threat of entry and the barriers present on a market, which can decrease the chances of having a new entrant. According to him, “if barriers to entry are high and newcomers can expect sharp retaliation from the entrenched competitors, obviously the newcomers will not pose a serious threat of entering.” (Porter, 1979). He also mentions some of the major barriers to entry which are economies of scale, product differentiation, capital requirements, cost disadvantages, access to distribution channels and government policy. It can then be understood that when a company is with an exclusive position on the market, in which there are some difficult barriers to be overcome by entrants, it is highly likely that the current one will be able to benefit of its position. However, in a context where the barriers are being reduced and the entry process is not so difficult anymore, the current company must be aware that new entrants can pose a threat. (Porter, 1979).

The second force relates to the suppliers and their power. In a given market where the availability of suppliers is rather limited, they will be in a position where they will have more power to increase their prices and even reduce the quality of their products and services, they are supplying. However, on an opposite scenario, such as in a

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market with many suppliers available, they will be more constrained to increase their prices, since their customers could just look for another supplier offering lower prices.

Porter (1979) explains that a supplier group can be considered powerful when there is a domination by just a few of them, and when their products are rather “unique” or

“differentiated”. (Porter, 1979).

The next force is the bargaining power of customers. In other words, the buyer power. Porter (1979) suggests that a buyer group can be considered powerful if they are concentrated, or are buying in large volumes, if the type of product they are buying can be easily found somewhere else so they can also bargain and just negotiate with a competitor in case of price increase. On the other hand, less concentrated buyers can also struggle with bargaining power, since they can exert less influence then being on a concentrated position that can bring them leverage (Porter, 1979).

Another force is the threat of substitution. In this case, Porter (1979) relates to the threat that there might be other options that can substitute the current product or service. “By placing a ceiling on prices that can be charged, substitute products or services limit the potential of an industry.” Porter (1979) explains. This limitation is due since the price ceiling is also feasible for the competitors who can also provide their products or services within that price range.

The last force is the rivalry among current competitors, or as it can be seen on the illustration, “the jockeying for position among current competitors”. Porter (1979) describes this rivalry having the form of “price competition, product introduction, and advertising slugfests.” As one of the factors for having an intense rivalry, Porter (1979) suggests the case when competitors are numerous. In this case, there will be a fight to conquer the customers, using tactics already mentioned such as price competition, which can be good for the customers as they will have more options and they will also be able to shift to the competitor offering a better price. But the inverse can also occur, when there are not many competitors, therefore, it will be less like to have a price competition and customers will not be able to take advantage of price reductions due to rivalry among competitors.

1.5 Planning and market entry strategies

In this section, it will be discussed some of the entry modes from which companies can select and what these entry strategies are. To select an entry mode, those

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companies must create a planning based on some key factors in order to determine which mode or modes will be the most suitable. Some of these key factors are described by Král, et al., (2016) as the necessary capital investment; the resources quantity and type, the company has; the potential to have growth prospects in the market being targeted; the controllability of corporate activities being developed in the given market; the risks, including political and business related as well, etc.

The entry types will be analyzed and discussed based on the contributions from Pan

& Tse (2000) with the Hierarchical Model of Choice of Entry Modes representation and the arguments by Král et al, (2016) on International market entry strategy, which is divided in 3: exporting and importing; non-equity-based cooperation; and foreign capital investments.

First, right below the Hierarchical Model of Choice of Entry Modes illustrated by Pan

& Tse (2000) can be observed:

Table 4: Entry Modes Based on the Hierarchical Model

Source: Pan & Tse (p. 538, 2000)

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Following the illustration above, a correlation can also be made with the international market entry strategies defended by Král et al., (p. 74, 2016) which are divided into three groups:

1) Exporting and importing

2) Non-equity modes (licensing, franchising, etc.)

3) Foreign capital investments (equity modes) (Král et al, 2016, p. 74)

When it comes to exporting and importing, such strategy is recommended for companies which are just beginning their internationalization process. As Král et al., (2016) explains, this type of entry, is usually not considered to be an intensive investment form. In this group, the companies can choose different export modes such as by using intermediaries and their services, namely brokerage, retailing, distributorship, dealers, etc. They can also opt to have an exclusive distributorship, which grants exclusivity by the supplier and the distributor to be of exclusive use of each other. On one side, this mode can represent an easy, quick and lower cost way to enter a market with the products provided by the supplier, as the distributor can already have the distribution channel well settled in the target marker, but on the other hand, the supplier also has more limitations in control and contact with the final client, but the literature also indicates the disadvantage of potentially having lower loyalty from the partner (intermediary) company, but that depends from case to case. As Král et al., (2016) also defines, in this case, the intermediary does not make profit through commission, but by the difference between the price it was purchased from the seller / exporter and the price the intermediary sold in the market. There are also costs, that will have to be deducted and then the profit will be set. This method is important for this research and even though different authors focus on this method being for small and medium enterprises (SMEs), there are also cases where bigger companies opt for this method. Another option would be the piggybacking strategy, which basically relates to an already settled firm at a given market, having the possibility of a smaller firm (rider) operating on its premises by complementing the services and products provided by the larger company (carrier). It is good for the carrier as their visitors and customers can have more services and products available for them, but it can also damage the carrier’s image in case the smaller firm (rider) cannot fulfill the carrier’s expectations. Besides those modes, there is also the export alliance which usually

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relates to SMEs planning to benefit from an alliance and being able to have better export opportunities, and the direct export mode, meaning that the company will have a closer contact with their customers (Král, et al., 2016).

The second group is the non-equity-based cooperation, which also entails exporting, as it can be seen on the hierarchical model⁵. According to Král, et al., (p.

78, 2016) “market entry strategies of this type are used by companies that do not decide to invest abroad directly or to export their products and services directly.” Still according to the same authors, this mode of entry are rather contractual relationships, and in this case, there is no equity involved. Some of the examples can be licensing, where the right to use a brand or product name, or even the protection of a technology or process is assigned by a company. There can be also franchising, where one party (franchisor) gives the right to receivers (franchisees) to use the trade name or even trademark, process of operation, and standards of the franchise administration. There are also other modes within the non-equity strategy which will not be detailed here, but they are management contracting, outsourcing, contract manufacturing and industrial cooperation (Král, et al., 2016).

The third group is what the authors refer to as the foreign investment which can also be referred as the equity modes. As the literature describes, the mode of entry involving capital investment is usually for companies who have a strong financial status, and still, these companies are expecting to have the control over their activities abroad. Král et al, (p. 83, 2016) explains that “ownership requires the greatest commitment of capital, know-how and managerial effort, and offers the fullest means of presence in a foreign market.” Foreign Direct Investment (FDI) is the operation where the capital invest form is done through. The FDI represents a “lasting interest”

where there is also a “long-term relationship between the direct investor and the enterprise, and a significant degree of influence on the management of the enterprise”

as explained by Král et al., (p. 84, 2016). Through this information, it can be understood that this mode of entry is not aimed at companies looking for a short-term relationship or a small investment, but rather, it is aimed at financially strong companies who are interested in the long-term (Král, et al., 2016).

5 The literature used, however, differ on adding the direct export separately by Král et al (2016), whereas on the hierarchical model by Pan & Tse (p. 538, 2000), both direct and indirect export options appear on the non- equity modes.

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As part of the equity entry strategy, the main modes are: wholly-owned subsidiaries, cross-border mergers and acquisitions (M&As), green field investments, joint ventures and strategic alliances. Following from that, some of the modes out of the equity strategy can be explained. Starting with the wholly-owned subsidiary, Král, et al., (2016) describes as:

A wholly-owned subsidiary represents the most extensive form of a firm’s engagement abroad. They can have commercial objectives (export support), production objectives (when international marketing is done at the headquarters’

level) or they can be responsible for both activities. This form of entry assures complete control and decision-making power. In some developing countries (mainly), 100% or majority ownership is still forbidden. (Král, et al, 2016, p. 84).

Right next, there is also acquisitions, which entails taking control of a given corporation in a friendly or unfriendly way. This happens by acquiring stock from the company or even through exchange. There can be interests on strengthening the firm by acquisition, but as for the unfriendly way, the interests may be related to eliminating the competitors or to bring inflations to the stock price for that company. Mergers can also be part of the equity strategy. As the name suggests, a merger happens when two or more companies merge and creating a new corporation or merging into one that was already existing before. Green field investment as another type of strategy, is characterized when new facilities and buildings are creature from the ground. That is why the name is called green field, as suggesting a new field to have new constructions being built up over (Král et al., 2016).

Following to another mode, the joint venture can be the appropriate strategy for international companies, disposing the production and technologies expertise and means interested to enter a foreign market, and partnering up with a local entity in the target market who already has the knowledge about that market and the skills necessary to perform the business-related activities. It implies shareholding. Joint ventures can also be divided into equity or non-equity joint ventures. The difference is that on the other hand, in the non-equity joint venture, there is no capital investment, as Král, et al (2016) explains and gives the example of technical cooperation or research projects being developed under this agreement (Král, et al., 2016).

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Having the above entry strategies mentioned and explained, the strategies implemented by Porsche in the Chinese market will be analyzed later on the second chapter, where a special attention will be given to the one selected by Porsche for its operation in that market. It can also be concluded that there are different requirements, advantages and disadvantages for each of these strategies. To decide which one is the most appropriate, a company must define what are the objectives, for instance if there are interests on the long or short-term cooperation, the resources available for investment, as some of the modes require high financial means and the strategy that can also work on the target market, as the legal requirements can also represent a barrier, and different perception aspects such as the country where the product is made.

The aim of this first chapter was to provide a theoretical basis for the discussions that will arise as the Porsche case itself will be discussed.

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2. Porsche AG Introduction and History

In this chapter, part of the literature to be used for the discussion will be based on the Christophorus magazine, which is an official customer magazine owned by Porsche AG. The analysis will be made in the majority by qualitative analysis, where there will be also some quantitative data analysis, such as the market indicators and Porsche sales.

Dr. Ing. h.c. F. Porsche AG, but usually referred to as Porsche AG is a company manufacturing premium cars in Germany. It is also currently a subsidiary of Volkswagen AG. The company offers premium passenger cars, producing and selling them. Some of the car models offered by Porsche AG are the 718, Cayman, Panamera, 911, Macan, among others. Besides producing and selling passenger premium cars, the company also provides to its dealers and customers, some financial services.

Porsche AG has four subsidiaries from which its business operations are derived, which are Porsche Consulting, Porsche Engineering, Mieschke Hofmann und Partner (MHP) and Porsche CAx Supplier. Each of these four subsidiaries providing different services and products (MarketLine Company Profile: Dr. Ing. h.c. F. Porsche AG, 2021).

Regarding Porsche’s history, the Austrian-German Ferdinand Porsche, who was an automotive engineer, founded an engineering office, back in 1931. In 1948, together with his son Ferdinand, they “set up” a shop with 200 workers with the goal to build sports cars and racecars, making it one of the reasons why the Porsche name is nowadays a synonym of sports and luxury cars⁶, with the built of its “first 52 cars in a small garage in Gmund, Austria” (Porsche Historical Background:1948-2007, n.d., para. VII). With globalization, however, Porsche expanded to other countries around the world, and is currently found in many regions of the planet in countries throughout the Americas, the Middle East, Africa, Europe and in the Asia-Pacific region (MarketLine Company Profile: Dr. Ing. h.c. F. Porsche AG, 2021). As it will be the focus of this research, the Chinese market will be the scope of analysis of how Porsche entered in this individual market and the follow up of their activities and operations in

6 Still, some authors have a different argument on luxury car brands, as for Anurit et al (2008, as cited in Bogyor, 2016, p.16-17) by the fact that Porsche cars might not be intended for daily drives, but rather, for sports adventures. However, a discussion about whether Porsche is considered a luxury brand or not according to different authors will not be the focus of this research.

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China. What were the strategies they implemented and what some of the specific market approaches were.

Elaborating strategies that can be effective and that works properly in the place where it will be implemented, can make the whole difference, whether it will bring success or not. Managers need to have a various range of “business strategies”

according to Monrabal (2015, as cited in Bogyor, 2016, p. 3). They also complement that it is necessary to make the brand valuable and due to the trends in the market, it is necessary to use relevant strategies in order to adapt and reach the needs of that market (Monrabal, 2015, as cited in Bogyor, 2016, p.3).

As for the company nowadays, Porsche has remained in a strong position while being profitable at the same time, as an “independent maker of high-performance sportscar”

(Porsche historical background: 1948-2007, n.d., para. I).

2.1 Early days of Porsche in China

The early days of Porsche in mainland China, were preceded by its presence in Hong Kong, which dates back to 1955. A partnership between Porsche and the Jebsen group was responsible for the success in that region. The Jebsen Motors unit is said to be one of the largest dealers of

Porsche worldwide, according to a news article by PR Newswire Asia (Jebsen group celebrates 60th anniversary of partnership with porsche in hong kong 2015). The Jebsen Group has made success with Porsche in mainland China and Hong Kong.

They have a focus on marketing and distribution, but also with a deep understanding about mainland China, with a long presence in the region, also according to the PR Newswire Asia article (Jebsen group celebrates 60th anniversary of partnership with porsche in hong kong, 2015). From this information it can also be correlated with the discussion from the first chapter where the information on the selected market is a crucial step, such as the market research. Therefore, having a partner with a deep understanding about the local market in which is being targeted by a foreign company is crucial, and the case with Porsche and Jebsen proves to be a successful one.

One of the characters who had been deeply involved in Porsche’s initial presence in Hong Kong and later on, in mainland China, is Hans Michael Jebsen, as explained by Coughlan (2011) on the Christophorus magazine. Mr. Jebsen has been the Jebsen &

Co. Chairman since 2000 until nowadays - 2021. According to Coughlan (2011):

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Jebsen & Co. is also the largest Porsche Centre operator in the world, having first brought the brand to China with the license to sell Porsche cars in Hong Kong in 1955. A little over a decade ago, Hans Michael Jebsen was a driving force in bringing the world’s most illustrious sports car marque to Mainland China.

(Coughlan, 2011, para. 2).

It is also important to mention that, when multinational enterprises (MNEs) are considering entering in foreign markets, some of the incurred factors are “costs”, or putting it another way, some limitations and investment required that the MNEs might face. As Hymer (1976, as cited in Chen, H. et al, 2006, p. 637) explains, such costs can be related to the inexperience or unfamiliarity with that new foreign environment.

In this way, it can also be assumed that in the beginning of Porsche operations within mainland China, some market conditions were unfamiliar to Porsche, but Porsche entrance into this market benefited from the knowledge possessed by the Jebsen group, which was previously operating in Hong Kong, and also for being a company with a deep understanding about the local conditions and characteristics. Two other types of “costs” related to foreign market entrance, as explained by the same author are, first, how some customers, government bodies and agencies, suppliers, etc. can create some discrimination with the new enterprise coming into the market. Second, it is a type of cost that is linked to the geographical expansion of operations, so in this case, the extra costs related to its international operations (Hymer, 1976, as cited in Chen, H. et al, 2006, p. 637).

As an overview of the beginning of Porsche presence in the region, without entering the political discussion about mainland China, Hong Kong and Macau, the operations in Hong Kong therefore started in 1955, with the Porsche Centre Hong Kong. In mainland China, it started in 2001, and in Macau, it started in 2005, where the Porsche Centre Macau was opened, as indicated by PR Newswire Asia (Jebsen group celebrates 60th anniversary of partnership with porsche in hong kong, 2015).

Entering mainland China in 2001, certainly benefited from the “head start” in which Porsche had previously in Hong Kong, as Mr. Hans Michael Jebsen says on an interview. According to Mr. Jebsen’s own words, “Hong Kong has been a window to the world, for the Chinese mainland” (Porsche (China) Motors Ltd, 2021, March 25, 02:48–03:38). That was also the stage when the Jebsen group obtained the “first

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license to have a showroom in probably Beijing’s most prestigious building. Most prestigious club. The Chang An club, on Chang’an avenue” as Mr. Jebsen explained with his own words (Porsche (China) Motors Ltd, 2021, March 25, 02:48–03:18).

Therefore, with additional contributions and findings from Mosca & Re (2014), it can be concluded that the way how Porsche entered the territory of mainland China, was through the indirect export method, using an intermediary responsible for importing and distribution of Porsche cars in mainland China (Mosca & Re, 2014).

As it has been described, the partnership existent was with the Jebsen group, which was already established in the region. In this case, the Jebsen Motors division was the intermediary who brought Porsche to mainland China, when the first license was obtained, allowing to have the showroom in Beijing, as Mr. Jebsen mentioned on the interview.

The First Porsche Centre in mainland China was opened in Beijing, in 2001. In 2003 another Porsche office was opened in Shanghai. On an interview to the Christophorus magazine about Porsche’s “early days” in China, Mark Bishop and Lars Petersen – both senior executives, describes some details about that period. Mr. Petersen mentions that in the Shanghai office, the team started with 12 people, mixing newly employees with others who were working previously in Hong Kong. Petersen also explains that the training was difficult in that moment, as in the Chinese market, sports cars were not present, so the training of personnel was also one of the challenges at the initial operations. It was a period where the brand awareness was rather low, since most of the population would not show interest or the “need” of having a Porsche car.

One of the important steps taken by Mr. Petersen and his team was to create publicity about the brand, such as driving events around the country and other activities in order to show the Chinese population about the new brand in the market, as he had the idea of putting Porsche cars together in front of places like restaurants and getting some feedback (Holland, Bishop & Petersen, 2011).

Mark Bishop also attracted initial signs of success to Porsche expansion in China, as he already had previous experience in the Middle East where he developed Porsche operations (Holland, Bishop & Petersen, 2011). By leading successful strategies in the brand initial steps in China under the Bishop’s command, Porsche AG in Stuttgart saw that as an opportunity and enabled an increase in marketing investments, targeting at increasing the brand visibility (Holland, Bishop & Petersen, 2011).