International Business Management Midterm Report

Your task: The American company Monstra Health and Fitness (MHF)1 has hired you
as a consultant. Use Porter’s Five Forces (Click here to read a short introduction
about the five forces model) to analyze the business environment of South Korea
and to recommend whether or not MHF should enter South Korea.

About MHF: MHF is the number one health and fitness equipment brand in the US.
It plans to enter South Korea in 2020 and target people who want to exercise at
home. In the initial phase, MHF will produce and sell two main items: exercise bikes
and treadmills. Its products will cost at least 20% more than existing products in
the Korean market. MHF is hoping that its reputation and the high quality of its
products in addition to aggressive marketing will help it to attract customers.

Conduct the five forces analysis: write short paragraphs on each of the five
forces.
● If information is not available, make assumptions. For example, you can assume
what materials are needed to produce exercise bikes and treadmills.

● As far as possible, write about information relevant for MHF.

● When answering the questions, use as much data, graphs, tables, and charts as
possible (not included in your word count) from reliable websites. Whenever
possible, list a source for each answer.

Part 1 (10 points)

1. Is the supplier power low, medium, or high? ___Low_______ (just one word)

Hint: Do not write about MHF as a supplier. Write about the individuals/ companies
that will supply to MHF.

Why (Maximum 300 words)?

The bargaining power of suppliers in the industry of metal and alumni is
considered low in South Korea. In Korea, there are many suppliers of raw metal as
well as plastic because of wide spread of recycling companies that gain metals from
vehicle scraping, washing machine and so on. Due to this, MDF will have many
substitutes that allow avoid switching cost. In Korean market, steel supplier power
is low and the only way that they will have power is their distribution channel,
financial status, and customer loyalty to the company. Financial developed supplier
guarantee long term partnership because novice supplier companies may not resist
in economic crisis. Interesting fact is that in 2019 among “top 10 export products of
South Korea is iron and steel 23.1 billion dollar” as reported in the website World's
Top Exports (2019). This fact once again proves that in Korea finding steel supplier

1 Not a real company

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would not be a problem. For MDF, looking for electronic parts supplier in Korea is
much easier than finding metal supplier, as South Korea has great electronic
companies such as Samsung and LG. There are also less-known companies that
also provide electronic systems that need MDF. In this case, giant companies may
have power due to their status and customer loyalty.

2. Is the buyer power low, medium, or high? ___High________ (just one word)

Hint: Do not write about MHF as a buyer. Write about the individuals/companies
that will buy MHF’s products. You can also assume that apartment complexes or
retail stores such as Emart might be interested in buying MHF’s products.

Why (Maximum 300 words)?

In Korea, online shopping is a convenient way to purchase a product.
Consumers easily find all necessary information about product there. Also, there is
a help from several shopping websites such as Coupang, Gmarket and himart and
so on. Costumer can compare prices easily and choose the best price. Moreover,
home delivery price also plays a big role for Korean’s purchasing behavior. As MHF
is planning to sell their products to home use buyers, they should create timely
delivery system with affordable or no price. Due to these factors, bargaining power
of individual’s buyer is high in Korean Market. However, there is a demand from
Korean customers because they are attracted to successful brand’s visible luxury
and quality details.

There are several trade malls in South Korea such as Emart, Homeplus, and
Costco. These retail stores can take measures to increase the buyer power because
of large amount purchase. Retail companies have high buyer power, as they can
trade with MHF and decrease its price. Moreover, retailers provide to home in case
of heavy products and this can also be a factor during trade agreement.

Another potential buyers are fitness clubs, as they have high demand for good
quality sport equipment. Due to this, their bargaining power is relatively low
compared to retail stores. However, fitness clubs may become loyal customer and
constantly buy MHF’s products. Fitness club companies have a medium buyer
power.

3. Is competitive rivalry low, medium, or high? __high_______ (just one word)

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Why (Maximum 300 words)?

Competitive rivalry is quite high in South Korean market because of several
national and international sport equipment companies such as Egojin, Bando,
Excider, and Xiaomi that offer same category products. Although, sport equipment
industry has been constantly growing over the past few years, competitive rivalry is
unavoidable. Due to low exit barriers and high fixed cost, many companies cannot
fight in price wars. Therefore, as new entrant, MHF has less experience in price
wars and this may become a competitive disadvantage. MHF needs sometimes to
decrease profit margin for advertisement, which increases production cost. Also,
price wars can decrease price as MHF plans to sell for a higher price than
competitors, which leads to decline in profit margin. In the long term, MHF needs a
differentiation strategy to compete with rivals. In other words, MHF should sell
several products by illustrating innovativeness and quality of their products.

4. Is threat of substitution low, medium, or high? _____low______ (just one word)

Why (Maximum 300 words)?

If we look from the perspective of home buyers, there is low substitution threat
because purpose of treadmills and exercise bike are to exercise at home. This is
probably done to do exercises within house, which burns calories and improves
cardiovascular process. There is only one valuable substitute and it can be the
same type of product from other companies with low price, as MHF plans to sell
product 20 percent above existing price. However, other companies will not provide
high quality that MHF guarantees to provide. Just the same, if we look from a
different angle, there are substitutes like running and cycling, but these can only be
done out. In this case, the substitution rate is high because customer finds out the
different affordable ways to the same exercise without treadmills and exercise bike.

5. Is threat of new entry low, medium, or high? ____meduim___ (just one

word)

Why (Maximum 300 words)?

New entry threats for international companies in South Korea is medium. Let’s
first look at country’s barrier. There are four types of business companies in Korea:
Private limited, public limited, limited partnership, and general partnership. These

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all do not require minimum level of capital to start up business. Tax differs for
resident and non-resident in Korea.” For non-resident companies, Korean-source
capital gains are taxed at either 11% of sales or 22% of gains (whichever is less).
In general, no special taxes are levied on gains from mergers” (2020, CAG). For
international companies, taxes may create medium threat, but the investment is
dependent on new entry company’s economies of scale. Second possible barrier can
be brand loyalty to competitor’s product. Because of Korean culture, there is a
chance that customer prefer local product rather foreign ones. If we look at a
classic example “Nokia failed in its Korean market entry due to competition from
large Chaebols like Samsung and LG”. This is because of the fact that Korean
culture respects more of their own manufactured product. However, nowadays
customer behavior of Korean culture is slightly changing because of young
generation. Also, MHF sector of production is different from Chaebols and they are
not direct competitors for MHF, therefore threat for new entry is medium.
Distribution channel is not to create any obstacle for the new entrant because of a
variety form of distribution in market like online shopping, department stores, and
hypermarkets. Labor cost in South Korea is quite cheap compared to US, which also
makes low threats in entry of MHF in Korean Market.

Part 2 (10 points)

6. Conclusion of Porter’s Five Forces Analysis: Would you recommend MHF to enter
South Korea? Why or why not? (4 points)

(Maximum 400 words)

After analyzing South Korean market with Porter’s Five Forces, I would to
MHF to enter to Korean Market due to several reasons. First reason is availability
of several suppliers that allow MHF to choose most valuable partners and create
good supply chain that helps to avoid switching cost. Second, partnership
opportunity with Chaebols like LG and Samsung can work as they might be
electronic appliances supplier to MHF. This type of partnership gains customer
loyalty in a new market. Third reason is variety of distribution channels that help
boost sales and gain market share. Online market in Korea is one of the
convenient ways to sell and of products due to convenient home delivery
system. Moreover, there are three bid retail stores like Emart, Homeplus, And
Costco that might be potential distributor of MHF products, but these
agreements need some concession from MHF due to large scale buy power.

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Fourth reason is medium entry barrier in Korean market. International

companies can establish their business in democratic way with minimum tax
rate of 11 percent from sales or 22 percent from gains. This is despite the
presence of competitors that provide identical products in the market. However,
they are not well known giants that could offer high quality product. This allows
MHF to enter to the market with higher price as luxury and elite sport equipment
provider with high quality known as number one in the US. Fifth reason might
be costumer behavior of Koreans in recent years. Young generation starts to
look more for brand and visually seen quality products that goes with latest
fashion trend. This tendency is also seen in sport clothing like Nike and Adidas.
The last reason is that MHF can implement a new type of product in near future
that helps establish high barriers in the smarket. In other words, a competitive
rivalry in the market rises for competitors that currently dominate MHF in
market share due to their brand loyalty and quality.

7. What impact does globalization have on the success or failure of a company

such as MHF? (6 points)

(Maximum 500 words)

Globalization modifies the world of business and leads it to the upper level.
Trades and international companies make all good and services available in any
corner of the world. What are effect of globalization and how it bring companies
success such MHF, which is planning to enhance business by entering foreign
market and establish international business. First major impact of globalization is
developing trade policy between countries through World Trade organization that
made exchange of products between countries more smooth. Moreover, it creates
foreign trade zones with lower taxes and decrease tariffs and quotas. These policies
open whole world market where every company can enter and create competition in
an international level. Advantage of international market is that in case local market
faces economic decline in sales, the foreign market’s profit might minimize
company’s threats and keep it stable. These factors help them avoid risks and
achieve success as international companies. However, these policies can be a
barrier for companies with less investment. Second effect of globalization is the
development of technology that leads to better living standards and improves
productivity in companies through Internet, transportation, e-commerce and
company intranet and extranet. These tools help companies to operate effectively
with their business, even in distance through video conference. For example,
multinational companies such as Coca-Cola have HQ in US, which controls
production process in Peru. Another great benefits from technology is
transportation that creates great comfort for distribution channel as well as in
delivery system of the company. Not only international companies, but also locals
are getting benefit from cutting edge technologies and achieve success. Thirdly,
globalization gives opportunity to produce product in countries with low labor cost.

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Not only low cost labor, but also reach highly educated employees which bring
diversity in company’s workplace. Perfect usage example would be US companies
such as Nike and Apple, which bring their production place in China to decrease
production cost. Diversification helps companies to make use of brain drain and
identify aesthetics of every culture. Fourth, impact of globalization can be in foreign
direct investments and building partnership. Foreign Direct Investment (FDI) allows
company to purchase physical asset or stock of foreign and gain control and
become the sole owner of a business. Portfolio investment not only allows control of
the company, but also gain profit as a stockholder. These investments improve host
country’ economy by decreasing unemployment and increasing competition in
market place. This in turn lead host countries making promotion like low taxes and
low interest loans. Benefit for investors is to get partnership opportunities that
creates joint ventures and acquires exiting companies. For example, Coca-Cola
made FDI to bottle supply companies in order to buy stock and have some control
power. While entering new market, companies need reliable partnership with FDI
suppliers companies to ensure not to lose partners and have control to avoid
switching cost. To sum up, globalization creates a lot of opportunities to establish
successful international business. Company MHF also has a big chance to achieve
success thanks to it.

References:

Internationalsupport.
(2020).Retrievedfromhttps://international.groupecreditagricole.com/en/international-support/south-
korea/business-environment

The impact of globalisation on international business. (n.d.). Retrieved from

https://www.iqualifyuk.com/library/business-management-section/the-impact-of-globalisation-on-
international-business/

Samurai. (2019, September 11). How to Win the Hearts and Trust of Korean Consumers. Retrieved from
https://www.infocubic.co.jp/en/blog/south-korea/how-to-win-the-hearts-and-trust-of-korean-
consumers/

Stenius, P. (2020, May 17). Discovering business opportunities in South Korea. Retrieved from
http://www.reddal.com/insights/discovering-business-opportunities-in-south-korea/

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Workman, D. (2020, March 13). South Korea's Top 10 Exports. Retrieved from
http://www.worldstopexports.com/south-koreas-top-10-exports/