Michel’S Patisserie

Global Marketing

325-309

Assignment 2: Michel’s Patisserie

Word Count: 1979

(excluding title page, executive summary, tables, and bibliography)

I Executive Summary

This report analyses the expansion of Michel’s Patisserie into the Chinese market through the creation of joint venture franchise agreements. Michel’s will be evaluated based on the motivations for expanding to China, process of internationalisation, choice of entry mode, and standardisation versus adaptation decisions. This analysis will be undertaken so that recommendations can be made to determine the most effective means of securing the future success of Michel’s in Shanghai. It will be demonstrated that while the motivations for expansion were fundamentally sound (being largely proactive rather than reactive), Michel’s Australian managers should have invested more time and money into research before the commitment was made. The process of internationalisation was perhaps too informal and while the entry mode was sound, there should have been more support for the franchisees from Australian management. Moreover, the initial standardisation versus adaptation decisions did not recognise the significant differences in culture and tastes in Shanghai. Accordingly, we have recommended that Michel’s Patisserie develop a long-term strategic commitment sympathetic to cultural, social and legal differences, and invest more heavily in advertising to establish the brand and avoid confusion regarding its French-Australian origins. Further, Michel’s may continue to test the market and engage in further research to determine the most viable product offerings for the Shanghai market.

II Introduction

Michel’s Patisserie was established in 1988 and has grown to become one of Australia’s most successful patisserie and franchise groups. It now has over 300 outlets throughout Australia (http://www.michels.com.au) and has expanded internationally into New Zealand and Shanghai, China. This report will evaluate Michel’s expansion to China in 2003, scrutinizing motivations, the process of internationalisation, choice of entry mode, and standardisation versus adaptation decisions. The substantive analysis will contrast what they have done with what they should have done, and following this evaluation, recommendations will be made for future strategic decisions.

III Evaluation of Expansion into Chinese Market by Michel’s Patisserie

A Motivations for Expansion

Firms expand overseas due to either proactive or reactive motivations (Czinkota and Ronkainen 2004, p. 226). Proactive firms are most typically driven by increasing profit opportunities, but other motivations include: unique products, technological advantages, exclusive information, managerial urge, tax benefits, and economies of scale. Conversely, reactive firms may internationalise due to competitive pressures, overproduction, declining domestic sales, excess capacity, saturated domestic markets, or proximity to customers and ports. In fundamental terms, proactive firms go international because they want to, whereas reactive firms go international because they have to (Czinkota and Ronkainen 2004, p. 228). Michel’s decision to internationalise was driven partially by reactive factors but predominantly by proactive factors.

Michel’s International/National Operations Manager, Chris Fitzmaurice, made the following observations regarding Michel’s Patisserie’s status in Australia prior to their decision to internationalise:

• They had developed a strong position in the market.

• They were nearing critical mass with probably only 3 to 4 years of strong growth in Australia before they would achieve market saturation.

• They wanted to continue to grow and therefore had to look overseas for growth opportunities to avoid stagnating.

These observations formed the primary motivations for Michel’s to explore internationalisation opportunities.

INTERNAL MOTIVATIONS

Internal Expertise

Richard Fang, an existing franchisee, expressed interest in expanding to China. His father-in-law was an established Shanghainese businessman who knew the market, and had good contacts in government and in the retail industry.

Negligible Risks

Through a joint venture franchising structure with fairly rigorous contractual stipulations Michel’s central administration were able to expand the business to China “on a shoestring” while still maintaining “arms length control” of how the Chinese business was run. The licensee and joint venture partner bore the financial risks, while risks of damage to the brand that a failed venture would cause were deemed negligible due to China being so far away from the Australian market.

EXTERNAL MOTIVATIONS

Globalisation

China is becoming more westernised, particularly the �cosmopolitan’ city of Shanghai, where demand for Western products is increasing rapidly as disposable income rises in line with China’s strong economic growth. Michel’s wanted to establish a foothold in the market at an early stage to demonstrate a long-term commitment, which has been identified as essential to compete successfully in the Shanghai market (per Tim Harcourt, Austrade Chief Economist).

China’s accession to the World Trade Organisation (�WTO’)

China’s accession to the WTO in 2001 has helped shape its economy to becoming a more predictable environment for trade and foreign investment. Corporate governance and frameworks for business operations and interactions have improved, providing a much more transparent environment. (Deckers, 2004)

The Chinese