Module 1a

International Business Economics,

Aalborg University

Tomas Sedivy, Martin Hansen, Melanie Ihlenfeld, Cristian Costea, Marina

Larsen, Carolin Staller, Dimitrios Zygolanis - 23 Sep 2015
 MSc in International Business Economics
1st semester
Aalborg University

Internalization of Jabwood
International

The report has been prepared by: Group 17

Tomas Sedivy _____________________

Martin Hansen _____________________

Melanie Ihlenfeld _____________________

Cristian Costea _____________________

Marina Larsen _____________________

Carolin Staller _____________________

Dimitrios Zygolanis _____________________

Delivery Date: 23-09-2015

Number of words: 8647

II
Executive summary

Jabwood International, a well-known wood trading company in the Middle East faces a serious
crisis. Due to the unstable political climate in the region, Jabwood's sales have decreased
dramatically, with an overall drop of 20%. To further complicate the situation its main supplier
informs Jabwood to share their exclusivity rights for one of their most important products,
TANITA, with other distributors.
It is not a fortunate situation for Jabwood, but what can they do? A decision has to be made, as
the family-owned company needs to act immediately for holding and broadening its market
position. Therefore they discuss entering new markets, in this case Saudi Arabian and Chinese
market. As both markets offer different opportunities, risks and the success in the new market is
essential for the company's surviving, the decision really matters.
In this project we are working as consultants to give Jabwood several recommendations, they
could follow for overcoming the crisis.
First the country's attractiveness is evaluated. This analysis has a great focus on all possible
factors, which act upon the firm in its business environment. Therefore the firm itself is evaluated
with regard to all internal and external factors, while there is a special focus on the two potential
markets itself. Employing the CSA/FSA matrix, we outline the international competitiveness of
Jabwood and the proprietary elements it can use to its advantage. Consequently, the competition
in each country is analyzed with a special focus on the competitive advantages Jabwood possesses
for succeeding in the potential environment.
For evaluating the country`s attractiveness the analysis continues with calculation and
assumptions in regards to the potential market share, Jabwood could reach when engaging in
Saudi Arabia or Chinese market. Considering the experiential knowledge that Jabwood has
gathered in all the years, they can successfully enter a market if they would be willing to make the
necessary adjustments.
As both markets differ in opportunities and risks, the analysis goes on with a discussion of the
possible entry modes Jabwood could choose. By applying theories and frameworks from
international business we find the most suitable modes of entry for Jabwood in both Saudi Arabia
and China. Considering our analysis, the most appropriate entry modes would be an acquisition,
greenfield investment or joint venture on the Saudi Arabian market, while Jabwood should
consider a joint venture in China on the long term.
The result of the project represents final recommendations for Jabwood. The firm should focus
their efforts and resources on the Saudi Arabian market on which they have previous knowledge
and where the firm could successfully re-enter through an acquisition that would not only offer
them an increased market share but also the possibility of having full control over its operations.
Additionally, our recommendations also anticipate the possibility of entering the Chinese market.
Given the larger psychic distance that separates them and the need for Jabwood to act in a fast
manner, we advise them to consider entering the Chinese market just on a long-term expansion
plan via joint venture.

III
Table of Contents

Introduction ........................................................................................................................................ 1
1. Country Attractiveness.................................................................................................................... 2
1.1 Internal and external factors..................................................................................................... 2
1.2 Relevant factors for the company ............................................................................................. 8
1.3 Competition .............................................................................................................................. 9
1.4 Market Share........................................................................................................................... 13
2. Entry modes .................................................................................................................................. 18
2.1 Identification of possible Entry Modes ................................................................................... 18
2.2. Identification of most suitable Entry Mode ........................................................................... 22
3. Discussion and Conclusion ............................................................................................................ 27

List of Tables

Table 1: External Factor Scoring for China and Saudi Arabia .............................................................. 6
Table 2: Identification of FSAs (Jabwood) and CSAs (Lebanon) ........................................................ 11
Table 3: Estimated Market Share in Saudi Arabia and China ............................................................ 14
Table 4: Iconic income after taxes .................................................................................................... 15
Table 5: Alternative Routes of Services Markets .............................................................................. 25

List of Figures

Figure 1: Project Design ...................................................................................................................... 1

Figure 2: Business Model Canvas Source ........................................................................................... 3
Figure 3: Internationalization of the firm – a step by step approach Source ................................... 23
Figure 4: The Uppsala model – Stages of international market expansion ...................................... 24

IV
Introduction
Jabwood, a family owned wood trading company, is contemplating expanding abroad and have
settled on two options: Saudi Arabia and China. This comes in a period of crisis, seeing as since 2009
sales growth dropped and the company is about to lose its exclusivity as supplier for a well-
recognized brand of softwood.
In this paper we will assume the position of consultants, with the purpose in finding an adequate
solution for the company’s crisis. This will enable us to provide a well thought through suggestion
to a proceeding plan for the company, based on relevant theories and methods, which will be
debated throughout the paper. Both pro’s and con’s of these theories will be looked at in order to
provide an optimal solution. Furthermore, the conclusion will be based on the opinion of the
researchers after debating the value of each country opted for.
The following report aims to explore Jabwood’s internal and external environment. The project
begins with this introductory chapter, which has the aim to introduce to the reader the company
and to present an overview of the entire paper, as illustrated in figure 1.

Figure 1: Project Design

1
1. Country Attractiveness

While facing the risk of losing a significant amount of sales volume, due to a potential loss of
exclusive selling rights for its most important product, TANITA, Jabwood is searching for new
markets to hold and broaden its current market position.

As the business environment contains both internal and external factors with an impact on the
investigated company, it is important to identify the state of the firm before starting to evaluate
the suitability of the markets.

1.1 Internal and external factors

Internal Factors

Business model of the company

First, the Business Model Canvas1 will be used to assess the important information about the
workings of Jabwood in one place, as well as in a transparent manner. The group has decided to
use this model, because it provides a more comprehensive overview of the ownership and
localization advantages of the company.

Internalization advantages will be discussed in the chapter “External factors”.

1
A. Osterwalder, Y. Pigneur, Business Model Generation: A Handbook for Visionaries, Game Changers, and
Challengers, 1st edition, John Wiley & Sons, New Jersey, 2010, p. 14

2
Figure 2: Business Model Canvas
Source: Examination Case text
Strategyzer | Resource Index (Canvas), https://strategyzer.com/canvas (access 12 September 2015)

By looking at the business model canvas, a strong connection between the important pillars of the
company’s business model and its operation localities, can be observed. As the table shows, the
storage facility, located in Lebanon, belongs among the key company assets and ownership
advantages. This object allows Jabwood to purchase goods in large quantities, gain the advantage
of economy of scale, which enables it to provide its customers with cheaper wood than its
competitors.

The ability to offer high quality products, which are also suitable for the local market, is ensured
by a long company history in the industry, and the knowledge of local (Middle Eastern)
preferences.

Organization and culture of the company

Jabwood is a family owned, and managed company, which is organized hierarchically from its
headquarters in Lebanon. The company’s vision is to: „supply virtually every country in the Middle
East with products and services that have earned recognition...”

From the information above information, it can be understood that Jabwood values hard work,
knowledge and family, and has an ambition to expand in the region.

3
The communication with customers is seen as a partnership, rather than the classical relationship
of a supplier and client. The company possesses a unique knowledge of the local tastes, which
enables it to act as a consultant for the Middle Eastern market, when combined with a high level
of professional skills in the industry.

Only the family members are considered as candidates for managerial positions, which provides
the company with a very limited source of human capital, with only two currently available.

All the managers are fluent in Arabic, English and French.

The company has a strong focus on healthy cash flow, which is ensured by making payments in
cash, immediately following the completion of a trade favorable.

The motives of the company

There are various motives for companies to go international. In general it can be distinguished
into market-seeking, efficiency-seeking, resource-seeking and strategic asset seeking motives. 2
The motives of Jabwood can be classified as market-seeking motives, since the companies strives
to find new customers with the main goal of keeping its sales volumes. This highlights the
importance of considering market related factors to evaluate the country's attractiveness.

International experiences
Over the years, Jabwood has expanded to a number of markets, in the Middle East. Originated,
and still based in Lebanon, it had exclusive distributors in Saudi Arabia, Syria and Iraq in 2009.
Before the company left the Saudi Arabian market in 2009, the sales in Saudi Arabia accounted for
approximately half of the company’s total annual revenue.

Conclusion of the internal factors

A distinct local embeddedness of the company in the Middle Eastern region can be identified. The
following factors limit the company, and cause a lower mobility of its value chain:

1. Need of a well-working logistics network

Among the key values that the company delivers to its customers, is a fast and reliable
delivery. These qualities are difficult to reach in places where the company does not have
a well-developed logistics network, and where its managers lack knowledge of the
environment.

2. Know-how tied to the market

The know-how of Jabwood is tied to the complex knowledge of the Middle Eastern
markets’ taste, networks and channels.

2
G. R. G. Benito, ‘Why and how motives (still) matter’, The Multinational Business Review, vol. 23, 2015, pp.
4-5

4
 It can be assumed that this know-how cannot be fully implemented in non-Middle Eastern
market.

3. Strong connection on one supplier

60-70 percent of the company’s revenue comes from selling the products of TANITA.
Jabwood has the exclusive rights to sell the products of this company in the Middle East.

When expanding outside the Middle East, the company could find itself in competition
with more companies, which also have the rights to sell products of TANITA in the market.

4. Limited human resources

The fact that only a family member can become a manager can limit the company, when
entering fields and markets that the family members are not familiar with.

5. Company’s vision to supply the Middle East

The company specifies in its vision that it aims to supply “every country in the Middle
East…” Therefore, the company faces the threat of missing a business opportunity in a
more attractive country, while focusing solely on the Middle Eastern market.

External factors

General characteristics of both countries are going to be benchmarked in a table inspired by the
Business Environment Risk Index (BERI)3. This approach has been chosen, because it enables us to
compare a number of factors that the company has to consider, when deciding whether to expand
in China or Saudi Arabia, and allows for a quantification of the varying importance of these
categories as well.

The process of evaluation of the external factors, will continue with assessing and commenting on
characteristics, which have a low degree of measurability (such as the culture or liability of
foreignness).

At the very end, the overall connection of internal and external factors will be discussed.

3
S. Hollensen, Global Marketing: A Decision-Oriented Approach, 5th edition, Prentice Hall, New Jersey,
2011, p. 268

5
General characteristics benchmarking

Table 1: External Factor Scoring for China and Saudi Arabia

6
First of all, it is important to remember that the method that has been used, has a limitation in
terms of not considering the actual difference in size of the compared categories – in other words,
it only reflects whether one country is better than the other, but not by how much.

Having this in mind, there are several categories that are interesting to notice, even despite the
fact that both countries scored the same result.

One number is the notable difference in the market size, as China imports 100x more CBM of
wood than Saudi Arabia, which will be further discussed in section 1d.

A considerable distinction can be observed in the category of infrastructure investments planned

for the upcoming 15 years. While the Chinese institutions plan to invest less than 500 billion USD,
Saudi Arabia will invest more than 1,000 billion USD in the infrastructure. Considering the better
rated conditions for doing business in Saudi Arabia, which indicates that the local institutions have
a more favorable attitude towards entrepreneurs, it can be assumed that the politics of
institutions is better disposed to wood trading companies in Saudi Arabia, than in China.

Specific characteristics description

Beside the general characteristics, which have a high degree of measurability, specific
characteristics also exist. These are harder to quantify, but can have a high impact on the success
in a chosen market4.

In the Jabwood case, these specific characteristics are especially represented as cultural
characteristics and attitudes. While in the Saudi Arabian market, wood is the favored material for
construction and furniture making, the Chinese are more hesitant to build with wood and
generally prefer metal or concrete. Therefore, it is harder to convince the Chinese people to use
wood as a construction material.

Furthermore, the Chinese administrative procedures are very bureaucratic and the business
environment differs significantly from the environment in the Middle East.

Evaluation of the external factors

As both markets get the same score in the attractiveness of their general characteristics, the
specific characteristics have an even higher and more important impact on evaluating the
country's attractiveness.

4
Hollensen, p. 264
7
The Chinese hesitant attitude to build with wood, diminishes the country's attractiveness, even at
a first glance. Implying other factors, like complicated administrative procedures and the
Communist system, the Chinese market seems less attractive than the Saudi Arabian market.

1.2 Relevant factors for the company

When entering a new market, the firm faces cultural, economic and political differences, which
lead to information disadvantages.5

To overcome this liability of foreignness, the firm has to search for specific competitive
advantages, in order to succeed in the foreign market.

Furthermore, the firm should be aware of the costs, which arise due to the inexperience of the
new market. Especially in the beginning, the firm faces added costs of network-building and
coordination over distances and across time zones.6

Depending on the country the firm chooses for its internationalization, the competitive
advantages and the costs vary.

Considering the business model of Jabwood, as well as the differences in language and culture,
the level of liability of foreignness, and following threats, seem to be substantially higher in China
than in Saudi Arabia.

The transaction costs7 of establishing a new subsidiary of the company in China would be
increased, particularly due to the higher uncertainty about the environment and the asset
specificity of the country. Keeping in mind, the limited human resources of the company, the
attempt to manage potential Chinese employees without knowing their language, might cause
substantial transaction costs. Other transaction costs could be brought by the institutions, which
seem to be less favorably disposed to the entrepreneurs in China, than in Saudi Arabia. They could
also be brought by the bounded rationality of the company’s management, which lacks
experiences with managing employees that are not Arabian. The managers of the company have
to pay strong attention to the specifics of the culture that they are going to work with.

At first glance, it can be assumed, that the costs for entering the Saudi Arabian Market, which is
psychically and physically closer, and has already been entered successfully once by Jabwood, are
lower than costs of establishing a business in China, which would probably require a considerable
level of coordination, and high establishing costs.

5
S. Zaheer, ‘Overcoming the Liability of Foreignness’, Academy of Management Journal, vol. 38, no. 02,
1995, p. 341
6
Zaheer, p. 343
7
Hollensen, p. 78
8
However, as the company prefers a high level of control over its foreign operations no matter
where they are located, it is plausible to expect that a re-entry into the Saudi Arabian market
would require major investments.

Jabwood also has to pay strong attention to whether its most important supplier, TANITA, already
has a distributor in the market they are entering. Thus, if the company is unable to trade with
them in the new market (e.g. due to an exclusive contract between TANITA and a local
distributor), the competitive strength of Jabwood, would substantially decrease.

The company has to be aware of a very strong bargaining power of this supplier, and be prepared
in case TANITA acts opportunistically.

At least it is important for Jabwood to uncover its own position as a late starter in the two
markets, which makes it even more important to figure out the firm-specific advantages, also with
regard to its competitors.

1.3 Competition

Competition in Saudi Arabia

The Saudi Arabian wood trading industry can be described as highly competitive and is
characterized by a high buyer bargaining power, which causes lower profit margins of the
companies operating in it.

The wholesalers face an intense pricing competition, while the market is still attractive for new
entrants, due to the exemption of wood products from import duties.

Jabwood’s competitors are mainly powerful and wealthy families, which are embedded in local
relationships. This implies, that there is a strong focus on relationship and trust, and that those
factors are crucial in order to succeed. These companies own warehouses and branches
throughout the country. Most of them are a part of larger corporate groups and are, therefore,
highly diversified. This diversification makes the companies more stable, as well as more resistant
to the market changes, and facilitates their internalization. It can be argued that the broad
network resulting from this diversification, is one of their main competitive advantages.
Furthermore, those companies gain advantage from not being dependent on selling only one
product.

Competition in China

The Chinese market is the second largest wood importer in the world, and the demand for wood is
still increasing. The main competitors in the Chinese market are major wood brands from
countries like New Zealand, Australia, the United States and Russia. This means, that the
competitors are mainly MNEs which are globally active. It can be assumed that those companies
possess significantly higher experiential knowledge than Jabwood.

9
Furthermore, it is noteworthy that those competitors have exclusive distributors in the country.
This implicates the significance of finding partners for distribution in China.

Jabwood’s position within the competitive environment

Jabwood faces the liability of foreignness in both countries. This means that Jabwood has some
disadvantages, when compared to the local competitors in terms of a lack of knowledge about
certain local customs, markets, the unfamiliar legal systems or missing networks.8

However, in China, the liability of foreignness for Jabwood, seems to be much higher than in Saudi
Arabia, since Jabwood does not have the necessary knowledge about the Chinese culture, the
Chinese customers, their wants and needs, or their way of communicating and doing business. In
Saudi Arabia, Jabwood can exhibit experiential knowledge, seeing as the company has already
been active in the country. For that reason, the liability of foreignness in Saudi Arabia, for
Jabwood, is significantly smaller in comparison to the competitors, especially the domestic ones.

In view of the fact that Jabwood faces liability of foreignness in China and Saudi Arabia, it is
necessary to find out, which firm-specific advantages (FSA), can help the company outweigh this
liability. Here, the Resource-based View of the firm can be applied, since it aims to explain the
competitive advantages of firms compared to its competitors through both tangible and intangible
assets.9 Advantageous resources and capabilities need to be unique and difficult to duplicate by
competition.10 However, it is necessary to take the context of the firm into account, and for that
reason, the country-specific determinants (CSA) of the firm's home country, need to be
contemplated.11 The CSA / FSA matrix, suggested by Rugman (1981), constitutes a suitable
framework to outline the international competitiveness of a firm.12

8
A. Rugman, A. Verbeke, Q. Nguyen, ‘Fifty years of international Business Theory and Beyond’,
Discussion Paper Series, John H. Dunning Centre for International Business, no. 01, 2011, p. 7
9
J. Barney, M. Wright, D. J. Ketchen, ‘The resource-based view of the firm: Ten years after 1991’, Journal of
Management, no. 27, 2001, p. 625
10
S. Marinova, et al. ‘Evolution of firm- and country-specific advantages and disadvantages in the process of
chinese firm internationalization’, Advances in International Management, vol. 24, p. 237
11
A. Rugman, C. H. Oh, D. S. K. Lim, ‘The Regional and Global Competitiveness of Multinational Firms’,
Discussion Paper Series, John H. Dunning Centre for International Business, no. 03, 2011, p. 6
12
ibid, p. 8
10
Table 2: Identification of FSAs (Jabwood) and CSAs (Lebanon)

Jabwood possesses a different FSA, which can help the company entering new markets. However,
Jabwood’s home country, Lebanon, cannot reveal strong CSA. The environment in Lebanon
supported the improvement of Jabwood, in terms of gaining knowledge over the years, but
nowadays, there are no CSAs, which could help Jabwood succeed in international markets. This
means that differentiation of the firm, is the key to success for entering new markets.

Furthermore, some of the firm-specific advantages only apply for some countries and not for
others, for example cultural similarities. Because of this, it is necessary to consider which firm-
specific advantages can be transferred to the investigated countries and which advantages can
help Jabwood get into a better position, compared to both the domestic competitors, as well as
the international competitors, and to outweigh the liability of foreignness.

Jabwood can transfer the previously mentioned FSAs to the Saudi Arabian market. However, there
are additional FSAs, which only apply to the Saudi Arabian market. Jabwood possesses
experiential knowledge in the market, which means that knowledge about the customers, their
needs and wants, the competitors, the business procedures, or rules and regulations, already
exists.

Since the psychic distance between Lebanon and Saudi Arabia is rather small, Jabwood possesses
further advantages compared to other international companies. Additionally Jabwood has a good
reputation in the Middle Eastern market, with recognition of its high quality products and

11
reliability, and is known as one of the biggest companies in the region. In Saudi Arabia, Jabwood
had close customer relationships and a well-established network. A possible reactivation of these
relationships could present a significant advantage for Jabwood. Furthermore, Jabwood owns a
fleet of transportation trucks to deliver to the Middle East, due to a re-entry to the market could
be conducted, without high additional costs for transportation. It should be noted that another
FSA of Jabwood could emerge, assuming that Jabwood manages to maintain the exclusive rights
to sell TANITA.

Jabwood can utilize most of its FSAs, such as the high product quality, the expertise, the wide
product portfolio, or the economies of scale, to the Chinese market. However, in comparison to
the Saudi-Arabian market, Jabwood has some disadvantages in China. The favorable reputation in
Saudi-Arabia, for example, cannot apply in China, since Jabwood is new to the market, and most
customers won’t know the company. Furthermore, Jabwood has no knowledge about the Chinese
market, and the psychic distance from Lebanon is considerably larger. It will be a significant
challenge to figure out the needs and wants of the customers and to adapt to the Chinese market.
Moreover, Jabwood will not be the only seller, of TANITA if they expand to China. As previously
mentioned, a crucial determinant for success in China, is to find a suitable partner. This, however,
would mean a loss of control for Jabwood.

Having a look at the prevalent competition in China and Saudi Arabia, it can be concluded, that the
attractiveness to enter the Saudi Arabian market is higher compared to the Chinese. Jabwood
faces liability of foreignness in both countries. However, Jabwood is able to overcome those
liabilities much better in the Saudi Arabian market, due to its firm-specific advantages, especially
the already existing market knowledge.

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1.4 Market Share

Generally defined as the percentage that a company has of the total sales for a particular product
(either in units or revenue), market share represents one of the main indicators of a firm’s
position, in regards to its competitors, or its own position in the market. As explained by Farris13,
although market share constitutes one of the most important metrics available, we have no one
method that is generally acknowledged as the best for calculating it. The many different methods
of calculation can yield different results, which sometimes make it difficult to assess the real
position of a firm in a certain market.
In calculating the maximum potential market share for Jabwood in China and Saudi
Arabia, we have used all the available information, along with the given assumptions. This
provides us with relevant information regarding the potential market share, as well as the
eventual direction in which Jabwood should go.

The estimated market share for new entrants in both countries is at 5% of the total markets,
equivalent of 5,000,000 CBM in China and 50,000 CBM in Saudi Arabia. Out of these Jabwood has
the potential of gaining 2% in a new market (China) or 10% in a familiar market (Saudi Arabia),
which can be seen calculated in the following table.

13
P. Farris et al., Marketing Metrics: The Definitive Guide to Measuring Marketing Performance, 2nd edition,
Prentice Hall, New Jersey, 2010, n/a
13
Table 3: Estimated Market Share in Saudi Arabia and China

14
According to Table 1 the market share potentially available to Jabwood in China reaches their
supply limit of 100,000cbm in the first year, compared to an available market share of merely
5,000cbm in Saudi Arabia. For the second year sales, the new market entry cannot assume to raise
sales and thus the Chinese market share will remain at 100,000cbm. However, in Saudi Arabia, the
familiar market, a doubling can be expected, thus reaching 10,000cbm.

In the third year, statistics show that Jabwood’s market share in China can potentially be doubled,
despite their inability to supply more than 100,000cbm. In Saudi Arabia, the third year sales
potentially increase to 15,000cbm, reaching 30% of new market entry share.

The maximum sales profit entering China's market cannot exceed $30.000.000 per year for the
estimated three years, due to the limited supply power of Jabwood. This suggests that there may
be a deficiency in the company development and potential growth in market share. On the other
side, the Saudi Arabian market share profits may not be as high as the Chinese, but has the
potential of growing together with the market share, generating $1.500.000 the first year,
$3.000.000 the second year and $4.500.000 the third year.

Tariffs on lumber and Taxes on foreign corporations vary in both countries. The lowest overall that
Jabwood can expect in Saudi Arabia is 12% tariff and 20% taxes, compared to China's 3% tariffs
and 30% taxes.

In contrast, the highest overall Jabwood can expect is 12% tariffs and 30% taxes in China, unlike
Saudi Arabia with 12% tariffs and 45% taxes. But without a specific knowledge of when and how
the tariffs and taxes are going to be paid, Jabwood cannot have a specific view of expenses of
exporting.

Table 4: Iconic income after taxes

If Jabwood had the knowledge of which circumstances would require a certain amount of tariffs
and taxes in both countries, it could calculate with, more accuracy, the profit of the potential
market share.

15
In order to provide an overview of the income Jabwood will have, Table 3 shows, that in both
countries, the maximum profit that can earned is coming out of the equalizations of the
“Corporate Tax foreign” line. However, without a detailed analysis of the expenses, the tax fees
and the tariffs, Jabwood cannot at the moment calculate with accuracy the net profit.

Furthermore, although we have calculated the potential market share that Jabwood can reach
both in Saudi Arabia and China, these results can easily be altered with influences from specific
advantages illustrated previously in this paper:

- At the moment they are still the sole supplier of TANITA products in the Middle East.
TANITA has highly sought-after products which distinguish themselves through their
quality.
- The technical knowledge of Jabwood’s human capital is superior to other firms, they
can easily benefit from this higher knowledge.
- Through their culture they have high skills in creating and maintaining working
relationships.
- They have a good reputation on the market in regards to the way they conduct
business. A high quality of their products and a good management of customer
relationships have created this image and there is a high degree of probability they
could replicate this model in other countries, especially in the Saudi Arabian market
given the similarities in culture and the fact they have previously been active on the
market with significant results.
- Through a well maintained and organized fleet and well supplied warehouses they
have the ability to ship global orders immediately.
- Over time they have managed to build economy of scale, meaning they have lower
costs of wood, which gives them a cost advantage over the other companies in the
market.
- In the future, Jabwood also intends to reposition itself as a single product specialist,
focusing only on sawn timber, which could have a positive effect on the company as
they will develop into a product specialist company.

Most of these factors would influence the potential market share of Jabwood in both China and
Saudi Arabia, although there are a series of factors that could only be translated into an advantage
in the Saudi Arabian market, given the cultural similarities and geopolitical closeness.

There are also global factors that will influence the wood market as both the Chinese and the
Saudi Arabian markets are subject to influence from these global trends.

As presented, the market in Saudi Arabia encountered decline in 2010 but recovered. On the
other hand, the Chinese market has been rising since 2010. For both countries, the increasing
number of construction projects can translate into a higher sales volume for the timber industry.
However, businesses have to be aware that a new international crisis can lower sales.

16
In addition, other sets of variables will influence the development in both markets. In China there
is an increased usage of steel and cement, however if the Chinese get used to working more with
wood, then the volume of sales would increase, translating into a bigger market. The Saudi
Arabian constraint comes in terms of technical knowledge. At present there is an extensive usage
of wood, however, a gain of technical knowledge in working with steel and cement would signify a
decrease in the sales volume for the timber industry.

Analysing the situation from a global point of view, Kotler14 gives us nine megatrends for the 2013
– 2023 interval, which can influence the market, amongst which we find:

● global redistribution of wealth and economic power: Economic powers have shifted
towards Japan, Middle East, India and China;
● Continued urbanization and growing infrastructure needs: Major cities have reached 20
million in size, including Beijing and Shanghai. Furthermore, China is planning on creating
new cities in order to absorb urbanization growth. As these cities grow, they require
investments in roads and buildings.
● Growing cooperation between private and public sectors: Partnerships between local and
state governments and private enterprises can strengthen infrastructure and economic
development.
Furthermore, Jabwood can also use some of Kotler’s eight pathways to sustainable growth, to
further strengthen its position in the market and increase our market share. This increase has to
be achieved having in mind profitable and sustainable growth in the long run, not only in the short
run.

The potential market share that Jabwood can achieve in China and Saudi Arabia will also be
strongly influenced by the mode of entry into each market. Further explanations are available in
Chapter 2.

Conclusion: Country Attractiveness

In order to enter new markets, Jabwood has to follow the Business model Canvas exploiting the
facilities the company owns and the quality of products it can offer. Focusing in the market
seeking motives, Jabwoods goal is to evaluate the individual country’s attractiveness. By
eliminating the logistics network, market knowledge, supplier connection, human resources and
expand beyond the Middle East, Jabwood can achieve a successful entrance in new markets.

When rating the importance of the two target countries, Saudi Arabia and China, through specific
factors, the result comes out even. When entering new markets Jabwood is going to face
economic, cultural and political differences. Because of this the Saudi Arabian market is the

14
P. Kotler, M. Kotler, Market Your Way to Growth: 8 Ways to Win, 1st edition, John Wiley & Sons, New
Jersey, 2013, n/a
17
easiest to enter. Compared to China’s markets required specialized staff and knowledge of the
market.

Local competition is also a problem for Jabwood, because of the advantages local companies have
based on trust and relationship in both Saudi Arabia and in China. Of course Jabwood can take
advantage of the knowledge it has earned in Saudi Arabia from previous years. Although Jabwood
has the right FSA to help the entrance to new markets, Lebanon's CSA can't help the company.
However, the FSA’s to enter the Saudi Arabian market and the Chinese market are different. On
one hand Jabwood has knowledge of the needs for the Saudi Arabian market, but on the other
hand Jabwood can offer the quality, the expertise and the variety of products the Chinese market
demands.

The volume of the Chinese market share will potentially be larger, but comes with greater risk,
whereas the Saudi Arabian market is easier to enter, but will yield a lower sales volume compared
to the Chinese market.

2. Entry modes
The aim of this chapter, is to identify the most suitable entry modes for Jabwood by utilizing two
internationalization theories, namely the Eclectic Paradigm by Dunning and the Uppsala
Internationalization Model. Descriptions and explanations of different possible entry modes will
build a foundation for discussion and will therefore be the first step to answer this question.
Moreover, we will discuss the suitability of those entry modes for Jabwood. The reasons for
choosing the mentioned theories will be provided as well.

2.1 Identification of possible Entry Modes

Licensing/franchising
Licensing/franchising are two methods of international expansion that require only a low amount
of investment from the expanding company. In both cases the owner of the business concept gives
permission to another subject to use the know-how and brand for establishing a new local
subsidiary.15
The intermediate mode of franchising has vast similarities with licensing. The difference, however,
is in the marketing activities, which are a part of the licensee’s responsibilities in case of licensing,
but in case of franchising, the franchisor organizes them on an international basis.16
Seeing as Jabwood defines one of their main advantages as their tacit knowledge it will be hard to
do licensing/franchising since tacit knowledge is difficult to transfer to the future
franchisee/licensee.

15
Hollensen, p. 358
16
ibid, p. 357
18
Joint ventures
This mode of entering market is based on creating strategic alliances with one or more partner
companies. Afterwards, these partners share the costs of the market entry as well as their specific
resources such as production facilities, knowledge or distribution channels.
According to Porter and Fuller, there are two basic types of firms’ coalitions17:
1. Y-coalitions – where „the partners share the actual performance of one or more value chain
activities“18 and which comprise upstream (R&D and/or production) and downstream
(marketing, distribution, sales and/or service) based collaborations.
2. X-coalitions – where „the partners divide the value chain between themselves“19. This type
of collaboration is beneficial especially when the partners are experts only in some activities
but lack knowledge in the other parts of the value chain (e.g. expert in R&D with limited
sales skills).
While entering the Chinese market, creating an X-coalition with a Chinese partner could allow
Jabwood to lower the liability of foreignness as well as eliminate the disadvantage of not
knowing the Chinese culture and the local managerial practices. When entering the Saudi
Arabian market, Jabwood could potentially profit from a membership in a coalition of type Y, as
contacts are important in the Saudi Arabian culture, a local based company could extend its
network, help with the distribution of goods and, therefore, enhance the sales of Jabwood.
The con of this mode of entry is the limited level of control over the business activities, which
could most probably be a problem for the current management of the company.
Exporting
Export is a possibility when internationalizing, we will first go through the basic pros and cons of
exporting and afterwards we will relate it to how it might work with the Chinese and Saudi
Arabian markets, after that we will compare these individual advantages to the company’s goals
themselves.20
Exporting, rather than FDI, is low in costs and will not require much investment from Jabwood,
which directly means a lower risk and a lower impact on Jabwood’s capital.
On the other hand, export will often be slower than e.g. opening a subsidiary in the new country
and thus the growth in the country will take longer time.
China is a huge, but also a rather complicated market to join. Most of the world is trying to sell in
China, but because of the communist system and a very strict administrative procedure, many of
the suppliers have chosen to open offices in China instead of just exporting. This means that if
Jabwood wants to enter the Chinese market, we can assume they will have to open an office as
well, in order to compete.

17
M. Porter, M. Fuller, Competition in Global Industries, Harvard Business School Press, Boston, 1986, p. 336–
337
18
Hollensen, p. 367
19
ibid, p. 367
20
P. Kotler et al., Marketing Management, 2nd edition, Financial Times Prentice Hall, Harlow, 2012, p.70
19
Saudi Arabia is much smaller than the Chinese market, but still the biggest market in the Middle
East, where it is important to have good relations in order to do business. When Jabwood left the
market in 2007 and only used indirect exporting they lost their market share in Saudi Arabia, thus
leading to the conclusion that pure export is not the best idea for Jabwood.
Foreign direct investment (FDI)
As part of the hierarchical modes of market entry21, where the firm owns and controls the foreign
entry mode, we find the foreign direct investment (FDI). Historically, the two main categories of
FDIs are greenfield investments and mergers and acquisitions (M&A), which will, therefore, be the
main focus of the following discussion, although the suitability of other forms of FDIs will also be
investigated.
As researched by Lee and Lieberman22, when faced with the decision of entering a new market, a
firm must take into account several factors, amongst the most important ones being cost, risk and
speed of entry. A short analysis will be provided in regards to advantages and disadvantages of the
two entry modes in correlation with the above factors.
Cost of entry
An acquisition will most likely incur higher costs than a greenfield investment, given that they
involve acquisition costs, transaction costs and integration costs, which can represent a
considerable fraction of business value. In the case of a greenfield investment, building everything
from the ground up would also incur costs that can achieve a significant value.
Risk of entry
Although both modes of entry present risks, it is generally believed that the higher risk is presented
by acquisitions. Greenfield investments are done using incremental investments that are spread
across multiple transactions in a project, whilst acquisitions typically involve a large one time sum.
Risks for greenfield investments, are in the form of not achieving significant market share in terms
of revenue, so that the investment is profitable and sustainable. In a market that is highly
competitive, with many different competitors, Chatterjee and Singh23 found a tendency for firms to
enter concentrated markets by acquisition.
Speed of entry
When speed is important, there is no doubt that acquisition represents the fastest entry mode
available. Most acquisitions can be fulfilled in a short timeframe, whilst greenfield investments
might take several months or years to be profitable. Acquisitions also allow the firm to realize
revenue earlier, achieve scope economies faster and capture a larger market share.

21
Hollensen, p. 386
22
G. Lee, M. Lieberman, ‘Acquisition vs. internal development as modes of market entry’, Strategic
Management Journal, vol. 31, issue 02, 2009, pp. 143-144
23
S. Chatterjee, J. Singh, ‘Are tradeoffs inherent in diversification moves? A simultaneous model for type of
diversification and mode of expansion decisions’, Management Science, vol. 45, no. 01, 1999, pp. 25
20
Greenfield investments
Greenfield investments represent the expansion of a firm’s activity on a foreign market from the
ground up. A greenfield investment could infer high costs, as the infrastructure needs to be built
from scratch.
Shimizu K. et al.24 found that firms that engage in FDIs, such as greenfield and mergers and
acquisitions (M&As) are commonly faced with either “liability of foreignness” or “double-layered
acculturation”, which could jeopardize the success of a FDI. But taking into consideration the
somewhat familiarity that Jabwood already has with the Saudi Arabian market, since they were
previously active in it, and the cultural similarities between Lebanon and Saudi Arabia, the liability
of foreignness and the double-layered acculturation lose their strength as arguments against
penetrating the market through an acquisition. Greenfield investment or acquisition in China, are
going to be difficult given the cultural and geopolitical differences between China and Lebanon.
The motives for which Jabwood might consider a greenfield investment lie in the high degree of
control that such an investment has. Nevertheless, entering the market through a greenfield
investment also requires that Jabwood has the time and means needed for the success of this
investment.
Acquisitions
Another mode of entry that Jabwood could employ is through an acquisition. This particular mode
of entry, at the current moment, would be suitable only for the Saudi Arabian market. As shown
above, the knowledge Jabwood possess in this market would eliminate to some extent the liability
of foreignness and the double-layered acculturation. Entering the Chinese market through an
acquisition would not be viable at this point given the high cultural and geopolitical differences
between Lebanon and China and also the non-existent knowledge base that Jabwood has on the
Chinese market.

M&As have been a popular mode of strategic expansion for a long time. They can be used in
accessing new and lucrative markets, as well as in expanding the market for a firm’s current goods.
Qiu and Zhou25 argue that one of the incentives for an M&A a firm might have, is closely related to
the familiarity that the acquired firm has on the foreign market. Compared to a foreign firm, a local
firm has better information about local consumer tastes, rules and regulations, effective advertising
and network liaisons. In other words, although Jabwood possesses knowledge about the Saudi
Arabian market, its knowledge base is undoubtedly lower than that of a local firm.
Touching on benefits, the acquisition of a company that meets specific criteria relevant to Jabwood
might be a long process, but a rewarding one, seeing as Jabwood will then have access to an
extended knowledge base and gain further access to the market. The company should be situated

24
K. Shimizu, M. Hitt, D. Vaidyanath, V. Pisano, ‘Theoretical foundations of cross-border mergers and
acquisitions: A review of current research and recommendations for the future’, Journal of International
Management, vol. 10, no. 03, 2004, pp. 307-353
25
L. Qiu, W. Zhou, 'International Mergers: Incentives and Welfare', Journal of International Economics, vol.
68, no. 1, 2006, pp. 38-58
21
in the same branch of the industry so that it becomes a market extension for Jabwood. The size of
the company and the assets it possesses are relevant, but also have to fit Jabwood’s current
capabilities. Through warehouses and processing equipment Jabwood can have products shipped
straight to their new Saudi Arabian warehouses to be processed and stored, thus further reducing
costs. In respect to control, which is of extreme relevance to Jabwood’s management, it provides a
high degree of control. Following the thinking of Haynes and Thompson26, the most desired
outcome will be an obvious growth in terms of sales, and significant increases in terms of net market
share.
Foreign sales branch/foreign sales subsidiary
These represent other forms of FDIs, although the value of the investment is much lower compared
to greenfields or acquisitions. According to Hollensen27, a firm might find it relevant to establish
foreign branches that are an extension and a legal part of the firm. Or foreign subsidiaries that are
companies located in the host country, but are owned and operated by a foreign company, under
the laws of the host country, to which resident salespersons can be assigned. If the sales are going
in the right direction, then a subsidiary will be formed. Since these two types of small scale FDIs are
not adding a significant value to the host country, there will promptly be local demands for a
manufacturing or production base. If the firm’s products have a long-term market potential in a
country that is relatively stable politically, and there are signs for a market share increase, then the
firm will seek full ownership of sales and production in order to meet the firm’s strategic objectives
fully.

2.2. Identification of most suitable entry mode

The Uppsala internationalization model

For identifying the most suitable entry mode for Jabwood, we decided to apply the Uppsala model
and the eclectic paradigm. While the Uppsala model provides a general idea on a company's
internationalization process, the eclectic paradigm is more specific in identifying the suitable
mode of entry according to the firm-specific and localization advantages, the internationalization
offers. Both theories are essential for understanding and identifying the suitable mode of entry for
Jabwood.

26
M. Haynes, S. Thompson, ‘Mergers and Market Share: Evidence from the UK Financial Mutual Sector’,
Empirica, vol. 26, Issue 1, 1999, pp. 39-54
27
Hollensen, p. 387
22
The Uppsala model addresses the internationalization process of MNCs and SMEs as a time
dependent process, developed through an incremental and gradual approach, firms starting their
operations abroad in fairly nearby markets with similar cultures and institutional conditions and
only gradually penetrating more distant markets.28

Figure 3: Internationalization of the firm – a step by step approach

Source: S. Hollensen, Global marketing, 2011, p. 75

Johanson and Vahlne29 explain that this gradual process is intended to allow firms to learn from the
experience they acquire in their initial operations, and further use this experiential knowledge to
reduce the uncertainty they would face in subsequent internationalization efforts, through which
they gradually increase their market commitments abroad. Market-specific knowledge is assumed
to be gained through market experience. Meanwhile, knowledge of the operations can be
transferred from one country to another.

28
M. A. De Villa, T. Rajwani, T: Lawton, ‘Market Entry Modes in a Multipolar World: Untangling the
Moderating Effect of the Political Environment’, International Business Review, vol. 24, no. 03, 2015, pp. 419-
429.
29
J. Johanson J., J. E. Vahlne, ‘The Uppsala Internationalization Process Model Revisited: From Liability of
Foreignness to Liability of Outsidership’, Journal of International Business Studies, vol. 40, no. 09, 2009, p.
1411
23
According to the Uppsala framework after engaging in export, the firm will try to increase its market
reach by investing in FDI. These four stages of entering an international market, where the
successive stages represent higher degrees of international involvement or market commitment
were identified by Johanson and Wiedersheim-Paul30.

Stage 1: no Stage 2: export Stage 3: Stage 4: foreign

regular export via establishment production/ma
activities independent of a foreign nufacturing
(sporadic representatives sales subsidiary units
export) (export modes)

Figure 4: The Uppsala model – Stages of international market expansion

Source: J. Johanson, F. Wiedersheim-Paul, ‘The internationalization of the firm: Four Swedish cases’, Journal
of Management, vol. 12, no. 03, 1975, pp. 305-322

In 2009, Johanson and Vahlne31 revised the original Uppsala model by also accounting for the
importance of trust-building and knowledge creation in local networks. In the revised model, it is
not the liability of foreignness that matters, but it is now the liability of outsidership, which can be
broadly defined as being an outsider to the relevant business networks. Given the easy transfer of
knowledge from one country to another, smaller perceived psychic distances, a more homogenous
world, quicker and easier access to knowledge about doing business abroad and the increasing
number of experienced personnel, it is not the liability of foreignness that affects a firm’s
internationalization, it is the difficulty of becoming an insider in local networks.
Trying to transpose the Uppsala model to the Saudi Arabian market would be inefficient for
Jabwood, as it was already proved that exporting and indirect dealing with the Saudi Arabian market
is not a viable way of conducting business. The relatively small psychic distance and their previous
knowledge of the market, as well as remembering that firms that internationalize through the
Uppsala framework do that over a long period of time, are further indicators that the framework
would not be suitable for an expansion on the Saudi Arabian market.
On the other hand, the higher psychic distance and the lack of knowledge of the Chinese market
would favor Jabwood in employing the Uppsala framework for the start of internationalization in
China.

30
J. Johanson, F. Wiedersheim-Paul, ‘The internationalization of the firm: Four Swedish cases’, Journal of
Management, vol. 12, no. 03, 1975, pp. 305-322
31
Johanson J., Vahlne J. E., 2009, pp. 1411
24
While the general internationalization patterns have been pointed out via the Uppsala model, the
eclectic paradigm defines appropriate entry modes by regarding ownership, localization and
internalization advantages altogether32.

Table 5: Alternative Routes of Services Markets

Source: J.H. Dunning, ‘Explaining the International Direct Investment Position of Countries: Towards a
Dynamic or Developmental Approach’, Review of the World Economics, Weltwirtschaftliches Archiv, vol.
117, issue 01, 1981, Dunning, p. 32

A firm has ownership advantages when its firm-specific advantages outweigh the disadvantages, it
experiences when entering a new market, facing liability of foreignness. As it has unique capital, for
example knowledge, this immaterial capital can be transferred across borders by keeping its value
without causing high transaction costs.33 In Jabwood’s case this unique capital can be identified as
the high and unique expertise, good reputation, and their using of economies of scale for achieving
high quality products at affordable prices. As they are already one of the leading companies in
Lebanon and the Middle East, it can be assumed that they could overcome the liability of
foreignness in the new markets due to their existing experience and knowledge.
According to Dunning, ownership advantages are the foundation for engaging in contractual
resource transfers, for example licensing.34 If the firm possesses internalization advantages beyond
their ownership advantages, it would probably engage in exporting. Internalization advantages are
achieved, when it is more profitable for the firm to use their firm specific advantages themselves,
than externalizing them via licensing, etc. In Jabwoods case they would rather use their valuable
expertise and knowledge themselves, than risk losing control via sharing their key success factors
with another firm. As a result licensing/franchising is not a possible entry mode for them. Due to

32
J. H. Dunning, ‘Explaining the International Direct Investment Position of Countries: Towards a Dynamic or
Developmental Approach’, Review of the World Economics, Weltwirtschaftliches Archiv, vol. 117, issue 01,
1981, pp. 30-31
33
ibid, pp. 30-31
34
Dunning, p. 32
25
the physical presence which is needed in both markets for succeeding, exporting is not a suitable
entry mode for Jabwood either.
If additional localization advantages exist, the firm will engage in FDI.35 Localization advantages can
be identified as market size and growth, economic advantages and other specific business
environment indicators. Via FDI the firm tries to maximize its advantages, by combining ownership,
internalization and localization advantages. As the ownership and internalization advantages are
more firm-specific, the localization advantages are determined by the location the firm chooses. As
the localization advantages of Saudi Arabia and China have been discussed before, it can be
summarized that Saudi Arabia, at the moment, offers more localization advantages than China.
According to the eclectic paradigm, Jabwood should focus on FDI in Saudi Market.

Conclusion: Entry modes

Incorporating the previous discussed entry modes, the most suitable entry mode for Saudi Arabia
can be identified as acquisition. Although it implies risks and high costs, it offers a fast market entry,
which is needed at the moment. As Jabwood has proved its success on the Saudi Arabian Market
before, this decreases the risks, because they are not entering a total unknown market. A greenfield
investment would also be a reasonable possibility, but given the current circumstances it would be
a time consuming entry mode.
For entering the Chinese market, Jabwood could engage in a Joint-Venture on the long-term, for
decreasing its liability of foreignness, while also profiting of this fast-growing, profitable market.
Due to several reasons pointed out before, exporting and licensing are not suitable entry modes for
Jabwood International.

35
Dunning, p. 32
26
3. Discussion and Conclusion

“The years ahead will be best for those who learn to balance dreams and discipline.
The future will belong to those who embrace the potential of wider opportunities…”
Rosabeth Moss Kanter

Jabwood is in need of a fast growth in their sales in order to keep their exclusivity with TANITA.
Jabwood themselves are considering either expanding to China or to Saudi Arabia. In order to
determine the future course of action for Jabwood we have to consider which possibilities they
have and what incremental repercussions those options cause. The answers we provide came
from analyzing Jabwood International with a special focus on the firm’s specific advantages
followed by an analysis of the individual market of China and Saudi Arabia.

On one hand we have China, a thriving and massive market with 100 million m³ wood imported
each year and a prospect of very high sales. Taking into account only the numbers, any wood
wholesaler should consider expanding to China. However, expanding to China can be costly,
specific factors such as high selling requirements and fierce competition, decisively influencing
their decision to enter the market, on account of potential local investments. The psychic
distance between Lebanon and China is also high and with Jabwood´s inclination to be in control
and having key managerial positions held by family members, does not provide a safe
environment for entering a foreign market with special characteristics such as China.

On the other hand, Saudi Arabia presents a smaller market in terms of unit consumption, whilst
having a lower psychic distance and higher previous knowledge of the market. This should
unquestionably provide them with an advantage if they should choose to enter the Saudi Arabian
market. Both markets require close connections between Jabwood and the customer, thus
exporting does not seem advisable. This leaves several other possible entry modes for both
markets.

Through careful consideration of our in-depth analysis, our position is that the best possible
outcome for Jabwood would come if the expansion of their operations will start in Saudi Arabia,
under the form of an acquisition, greenfield investment or a joint venture with a local partner.
These three options are best suited since they will all give them a local presence with focus on the
specific market, high degree of control over investments and a favorable pathway to growth.
However acquisition and greenfield are both quite capital intensive, whilst joint venture will offer
them a lesser degree of control.

The main drawback of the explored options would be represented by the unfamiliarity that
Jabwood has in using forms of market control, other than exporting, thus initial failures might
have to be expected.

27
As initial steps, the company should scan the Saudi Arabian market and seek for a suitable
company it can acquire for a reasonable price. The advantage of this approach is the speed of
gaining market share, knowledge and network of contacts. The downside is the demanding
character of acquiring an already established company, which, depending on their current
financial health, could theoretically force Jabwood International to look for alternative financing
options, such as banks willing to finance its expansion. If the company cannot find a suitable firm
to acquire, it should look for a partner willing to form a Joint Venture with it. Jabwood
International can offer knowledge as well as exclusive right to sell TANITA products and the
partner will contribute with a local market knowledge and an already existing market share. Even
though this solution goes against Jabwood’s idea of having complete control, it is an efficient way
to solve potential problems such as liability of foreignness or lack of financial capacity.

Additionally, the company should keep monitoring the Chinese market. Despite the fact that it is
not ready for an expansion to China at this specific moment, Jabwood International should
consider entering this market in future. The Chinese market presents itself as very attractive
primarily due to its size and potential for a very fast growth; therefore, there is a big opportunity
for the company as long as they increase their knowledge of aforementioned market and its
specific ways of transacting.

However, another significant aspect that the company should re-evaluate, is represented by their
work with human resources. Because of the fact that only a family member has a chance to
become a manager, the company has a very limited source of human resources and might be
missing some interesting opportunities for internalization because of this aspect. If it continues in
the same direction and does not allow inside access to well-prepared and capable people outside
the firm, the current company’s management has a difficult mission in achieving success in its
future endeavors.

With its current strengths Jabwood has the potential of transforming itself into a major
competitor in the wood trading market. Improving the current way of conducting business and a
constant openness to innovation should be paths to be followed. Potential does not always
translate into success so Jabwood has to overcome current inside weaknesses and transform
them into factors that would ultimately contribute to their overall development and prosperity.

28
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