Entering New Markets

Entering New Markets

Trevor HunterKing’s University College

King's University College 2

Internationalization

• Internationalization is the process of operating in markets other than their domestic one

• There are four parts to the internationalization process– Deciding whether to go– Deciding where to go– Deciding what to do there– Deciding how to go



• Deciding whether to go:– A strategic decision based upon the firms needs,

resources and capabilities, environmental conditions and goals

– Firms must both have a good reason to and the ability to internationalize (in other words it must be strategic) or the process will fail

– Not really the focus of this course



• Deciding where to go:– Not all countries are right for all firms – there needs

to be a match between why the firm is internationalizing (i.e. what it needs from a country and what it can do) and what the country can offer the firm (i.e. the country’s comparative advantage)

– What is a comparative advantage to one firm may not be so for another

– Requires a lot of analysis – this is the focus of this course



• Deciding what to do there:– Internationalization is not just selling things in a

different country– There are many types of internationalized operations

MNCs follow:1. Selling old products made in their home country for

consumption a new country (global product)2. Selling old products made in a different country for

consumption in that country (local tastes)3. Selling old products made in many different countries for

consumption in one specific country (portfolio, local taste)

Internationalization4. Selling old products made in many different countries for consumption in

many countries (portfolio, global product)5. Selling old products from their home country, for consumption in their

home country but made entirely in one or more countries other than their home country (efficiency seeking)

6. Bringing in raw materials from one country to manufacture old products in their home country for domestic consumption.

7. Bringing in raw materials from several countries to manufacture old products in their home country for domestic consumption

8. Bringing in raw materials from their home country to anther country to manufacture old products to sell in their home country


Internationalization9. Bringing in raw materials from their home country to another country to

manufacture old products to sell in that country10. Bringing in raw materials from their home country to another country to

manufacture old products to sell in other countries11. Bringing in raw materials from other countries to another country to

manufacture old products to sell in that country12. Bringing in raw materials from other countries to another country to

manufacture old products to sell in many different countries13. Bringing in raw materials from other countries to many different

countries to manufacture old products to sell at home14. Bringing in raw materials from other countries to many different

countries to manufacture old products to sell in one or more different countries




• Deciding how to go:– Not all entry modes will work for all MNCs– Firms need to understand what they need out of their

internationalization, what they will do in the country and what each mode will give them depending upon the environment of the country or countries into which they will enter

– Requires an understanding of the firm, the mechanics of each mode and the fit with the firm’s strategy, structure and goals – covered in MOS 4404


Rationale

• Firms become international in scope for a variety of reasons: – Desire for continued growth– Unsolicited foreign orders– Domestic market saturation, – Potential to exploit a new technological advantage

• The dominant reason relates to performance


Rationale

• Internationalization is driven by needs for efficiency and market share increases

• However, internationalization is more than “simply” doing business outside the home country – it is an organizational mindset


Process

• Internationalization is the process by which – Firms increase their awareness of the

influence of international activities on their future

– Establish and conduct transactions with firms from other countries


Process

• International transactions can influence a firm’s future in both direct and indirect ways. Business decisions made in one country, regarding such things as foreign investments and partnership arrangements, can have significant impact on a firm in a different country—and vice versa. The impact of such decisions may not be immediately and directly evident


Dimensions of Internalization

• Internationalization has both inward-looking and outward-looking dimensions

• The outward-looking perspective incorporates an awareness of the nature of competition in foreign markets when you enter them

• The inward-looking perspective incorporates an awareness of the nature of competition in the market from foreign firms coming to your market


Dimensions of Internalization• Outward Perspective often follows what is called

“The Sequential Process” - Includes the following modes of activities. Each step has less risk than the next:

RiskLevel

High

Low

Entry Mode Type

Exporting Licensing IJV WOS



• The theory suggests that as firms build confidence, experience and success they move from one level of complexity to the next (14)

Existing Business

New Business

Partially Owned Wholly Owned

(1) Capital Participation

(2) Joint Venture

(3) Acquisition

(4) Greenfield

The Sequential Process of Internationalization



• The inward perspective has an opposite mindset wherein you operate at home as you facilitate an MNC coming to your market.

• The related modes of activity have an inverse risk level:

RiskLevel

High

Low

Entry Mode Type

Exporting Licensing IJV WOS



• Many firms have an appreciation of the global environment but do not seek out international opportunities in countries that differ greatly

• Questions to explore:– What products/services can be “global”?– How can a firm know if it has a globally

competitive product?– How can the firm successfully take a product

global?– Questions we explored earlier



• Internationalizing is• Complex• Difficult• Risky• Uncertain• Time consuming• But . . . it can be done and have huge rewards!


Timing of Entry

• When an MNC enters a market, it is by definition either the first one there or a follower

• First-mover: First firm in the market, either foreign or domestic

• Late-mover: Not the first (or last) to market, but entering when other firms (domestic or foreign) have established themselves


Timing of Entry

• First-mover Advantages: – Preempt rivals and capture demand by

establishing a strong brand name– Build sales volume and ride experience

curve ahead of rivals – cost advantage over late-comers

– Create switching costs that tie in customers


Timing of Entry

• First-mover Disadvantages:– Pioneering Costs: costs an early entrant must bare

that a late-entrant avoids– Costs arising from the difficulty of entering a

market that has no prior experience with what is brought

– Costs of promoting and establishing new products or services


Timing of Entry

• Late-mover Advantages:– Learning from first-movers and following good

examples and avoiding problems– Exploiting opportunities made by others at their

cost– Changes in regulations that are more

advantageous

• Late-mover Disadvantages: – Opposite of first mover advantages


Scale of Entry

• How much money do you want or have to spend to establish a new business?

• Speed of entry – all at once or over time – will affect the scale required

• Strategic Commitment – long-term impacts on the firm as well as the market and may be difficult to reverse


Scale of Entry

• Strategic Commitment: – Actions may alter the firm by committing

huge resources thereby locating a majority of the company internationally (taxes, PPE etc.)

– Actions may alter the PEST environment of the new market potentially opening it up or closing it off to competitors – need to be prepared for consequences


Scale of Entry

• The type of entry has the power to signal the “seriousness” of the market to:– Domestic competitors – could weaken or strengthen – Local governments – could lead to subsidies or

barriers– Global competitors – could seek to enter your new

market or domestic market where there is less focus or other new markets because your attention is elsewhere


Scale of Entry

• Scale needs to be balanced against:– Risks of too little and inflexibility of too much– Potential return on investment– PEST conditions and risks

• Smaller scale makes it difficult to earn critical mass in market share and efficiencies to gain competitive and first-mover advantages


Scale of Entry

• Sometimes big is not always better• Smaller scale allows:

– Flexibility to pull out with little investment if things don’t go well

– Relatively easy and inexpensive learning to set up next step in Sequential Entry


The PEST System

• Each country has political, economic, social, technological (PEST) forces within which firms must operate

• The PEST environment has a strong influence on firms’ activities and behaviours, both domestic and foreign

• Helps determine a country’s comparative advantage


The PEST System

• PEST environment influences the comparative advantage of the products a firm produces relative to products produced by other firms abroad

• The PEST environment may also influence the firm’s competitive advantage in the national market and abroad


The PEST System

• Conditions in one PEST environment relative to the those of other countries have a strong influence on the attractiveness of a given market and will influence the firm's ability to enter that market or to continue international operations




Strategy and Internationalization

• In order to try to capture both location and scale economies firms tend to internationalize one of two ways:1. Introduce global products that sell to everyone

everywhere and produce them in the lowest cost place (global)

2. Introduce products that are specialized for different countries to meet the local preferences (local)



• Firms have to develop the right internationalization strategy for their industry, company and the competitive context in which they operate.

• Generally there are two pressures that determine the type of strategy international businesses will follow:1. Global product Cost reduction2. Local product Local responsiveness



• If there are pressures for cost reductions:– Firms will likely respond by mass-producing a

standard product in the optimal locations worldwide – seeking economies of scale

– Greatest in industries producing commodity type products where price is the main competitive weapon, when there are many strong competitors, excess capacity, powerful consumers and low switching costs



• Examples of industries that face cost reduction pressure:– Nickel– Computer hardware– Pulp and paper– Auto parts– Clothing and shoes– Food



• If there are pressures for local responsiveness:– Firms will locate operations within the country to

which they want to sell to make sure they:– Capture differences in consumer tastes and

preferences– Conform to infrastructure and traditional

practices– Utilize special distribution channels– Meet host government demands



• Examples of differences in taste and preference:– Salt and vinegar potato chips– Automobile sizes– Packaging colouration– Store layout and décor– Distribution methods



• Examples of infrastructure and traditional practice differences:– Telephony quality– Road, rail and boat transportation systems– Supermarket vs. local market shopping habits– Cultural expectations of service and products



• Examples of differences in distribution channels:– Supermarkets vs. country markets– Stores vs. corner vendors– Wal-mart vs. independently owned stores– Large vs. minimal inventory storage



• Examples of differences in host government demands:– Taxation– Regulation– Enforcement– Bribes– Degree of bureaucracy



• Firms use four basic strategies to compete in the international environment:– International strategy– Multi-domestic strategy– Global strategy– Transnational strategy



Four Basic Strategies for International Businesses

Low High

High

Low

CostPressures

Pressure for Local Responsiveness

Global

Multi-domestic

Inter-national

Trans-national



• International Strategy:– Firms transfer resources and capabilities

developed in the home market to foreign markets while undertaking some limited local customization

– They may suffer from a lack of extensive local responsiveness and an inability to exploit location and scale economies.



• Multidomestic Strategy:– Firms customize their products, marketing and

business strategy to national conditions.– They may suffer from an inability to transfer

resources, capabilities and products between countries and therefore may not be able to exploit scale and location economies



• Global Strategy:– Firms focus on reaping cost reductions from scale

and location economies, producing large numbers of the same product. So-called “world products”.

– May suffer from a lack of local responsiveness



• Transnational Strategy:– Firms exploit scale and location economies,

transfer resources and capabilities throughout the firm and pay attention to local preferences. There needs to be an effective flow of knowledge within the transnational firm

– Sounds simple right?



Sub Sub

SubSub

SubSub

ParentFirm

Knowledge Flows in Transnationals



• International business strategy is complex and affected by numerous factors that are difficult to judge and analyze.

• That is why although many firms go global, few do so successfully, and they tend to be very big and tend to invest a great deal into the countries they enter through FDI.

• That is why they have such a large impact on the societies in which they operate




Entry Modes - Exporting

• Exporters tend to do so following Four distinct strategies

• Strategy 1 - Requiring prices in export markets that yield higher returns than are available in domestic markets– Based on the belief that export operations are

more risky relative to domestic sales - can result in uncompetitive prices



• Strategy 2- Pricing to yield similar returns in domestic and export markets– Based on the viewpoint that export markets do

not necessarily differ from domestic markets



• Strategy 3 - Pricing to yield lower returns, or even losses, in export markets - at least in the short run– Reflects an approach that views export

markets as the potential growth markets of the future - firm vulnerable to antidumping action



• Strategy 4 - Pricing to sell production in excess of the needs of the domestic market so long as these sales make a contribution to fixed overhead and profit– View of export markets as a dumping ground for

production in times of excess capacity - firms very vulnerable to anti-dumping actions



• Stage 1 – Unplanned entry– Unsolicited order from abroad, overproduction,

declining domestic sales, pressures, “follow the leader” behavior, government-sponsored trade fairs, and funded export missions

• Stage 2 – Systematic evaluation of the impact of exports

• Stage 3 - Exports become a major factor in the firm’s strategy and operations



• Advantages:– Avoids costs of establishing host-country

operations– May help firms achieve experience curve scale

and location economies



• Disadvantages:– May create a disadvantage if there are lower cost

areas where production could be less expensive– High transport costs may make exporting

uneconomical– Tariffs may artificially raise costs– Using local agents (common) is risky due to

agency risk


Entry Modes – Turnkey Projects

• A foreign contractor handles all aspects of a project (building, staff training, distribution network set-up, etc.) and when the project is completed, it is handed over to the domestic firm



• Common in countries that want to restrict FDI or in industries that are very capital intense or highly technical where expertise is limited (i.e. no domestic comparative advantage) but the need exists (i.e. oil refining)



• Advantages:– A great way to earn a return on technical know-

how, proprietary knowledge, comparative advantages and resources/competencies that are not easily transferred to other countries or companies

– Less risky than FDI because no ownership



• Disadvantages:– Only a short-term perspective and little chance of

subsequent entry – requires constant selling– Possibility of creating a competitor– May be selling access to proprietary technology

that is source of competitive advantage


Entry Modes - Licensing

• Licensing is a contractual arrangement whereby the licensor (selling firm) allows its technology, patents, trademarks, designs, processes, know-how, intellectual property, or other proprietary advantages to be used for a fee by the licensee (buying firm)

• It is a strategy for technology transfer


Entry Modes - Licensing• Used both in technology intensive and non

technology-intensive industries (eg. Computer software, food, sport teams, publishing)

• A licensor lacks the capital knowledge of foreign markets required for exporting or FDI, but wants to earn additional profits with minimal commitment.

• Host-country governments restrict imports or FDI, or both; or the risk of nationalization or foreign control is too great



• A firm wishes to test the potential for future direct investment

• The technology involved is not central to the licensor’s core business. Generally only peripheral technologies are licensed



• The licensee is unlikely to become a future competitor

• Rapid pace of technological change such that the licensor can remain technologically superior to the licensee. If the technology may become obsolete quickly, there is pressure to exploit it fully while the opportunity exists



• High prospects of technology “feedback” or “flowback” (access to future technology developments or advances)

• The licensor wishes to exploit its technology in secondary markets that may be too small to justify larger investments; the required economies of scale may not be attainable



• Risks– Dissipation of proprietary advantage– Tarnishing of reputation due to lack of quality– Profits may not be maximized

• Indirect market involvement• Exchange rate risks• Limits to foreign license payments

– Difficulty in enforcement of license terms



• Unattractive markets for Licensing– Governmental regulatory schemes– Restrictions imposed on duration and exclusive

rights to territories– Foreign exchange controls and tax on royalty

fees


Entry Modes – Joint Ventures

• An international joint venture is a company that is owned by two or more firms of different nationality

• Strategic alliances vary widely in terms of the

level of interaction and type, and equity joint ventures usually require the greatest level of interaction, cooperation, and investment



• Joint ventures have moved from being a way to enter foreign markets of peripheral interest to become a part of the mainstream of corporate activity

• The popularity and use of international joint ventures and cooperative alliances has remained strong

• However, failures do exist and are usually widely publicized


Entry Modes – Joint Ventures• International JVs are used by firms wishing to strengthen or

protect existing businesses through: – Achieving economies of scale– Raw material and component supply – Research and development– Marketing and distribution – Divisional mergers

• Joint Ventures are also used for:– Acquiring technology in the core business– Reducing financial risk



• Advantages:– Benefits of local partner’s market knowledge– Costs of market entry shared with local partner– Political conditions may make JVs the only entry

mode possible (China)– Lower risk of nationalization of assets



• Disadvantages:– Risk of giving up control to a partner who may be a

competitor– Limited control to realize experience curve scale

or location economies– Shared ownership may lead to battles over

management, strategy, profit sharing etc. As JV and market change, past arrangements my not be appropriate yet you are locked in


Entry Modes – Wholly Owned Subsidiaries

• The foreign firm owns 100% of the shares• Can be done through either a greenfield or

brownfield:– Greenfield: the establishment of completely new

assets such as production facilities or distribution network

– Brownfield: purchasing already existing assets (aquisition)


Entry Modes – Greenfield

• Advantages:– Much greater flexibility in design, strategy,

marketing, operations etc.– Absolute control over all aspects of the business– Clean slate in a new country– Can leverage resources/capabilities built at home


Entry Modes – Greenfield

• Disadvantages:– Starting from scratch with no track record or

customers or awareness or anything– Your resources and capabilities may not be

transferable to new market– 100% of the risk– Liability of foreignness – lacking legitimacy means

additional work to gain acceptance


Entry Modes – Acquisition

• Advantages:– Offer quick access to market and completion of

the transaction– Allows for a fast preemption of competitors– May have less risk because the purchase is of an

existing and established business that has recognition, customers, distribution and supplier networks and legitimacy


Entry Modes – Acquisition

• Disadvantages:– Often payment is too high and value is not

forthcoming– Cultural differences between foreign

management and local workforce/ management

– Predicted synergies are either less or non-existent

– Inadequate pre-purchase due diligence resulting in the purchase of a “lemon”


Internationalization Drivers and Entry Mode Choice

• The driving force behind why a firm internationalizes has a strong effect as to which entry mode they follow

• Other related factors include:– Industry structure/characteristics– Competitive forces– Nature of the product/service– Purpose of internationalizing



• Efficiency Drivers:– Combination of exporting and WOS allows better

achievement of location and experience scale economies

– Tighter control for operations that are purely for export to developed countries using low factor costs



• Market Share Drivers:– Licensing, JV, Franchise due to need to

“customize” to local preferences while at the same time bringing certain “non-manufacturing” competencies to new markets where local knowledge is needed

– More common where production for local consumption is goal



• Note that WOS and exporting are forms of globalization that are most often related to the perception that MNCs are exploiters since their purpose seems to lower costs

• JVs and licensees are less likely to exploit because of the involvement in management of domestic partners with a vested interest in the host-country and legitimacy within the local market is needed for success

Documents

Entering New Markets