Table of Contents
Often when a company is looking to expand its operations to foreign markets they have an overall goal to create revenue and increase profit. Entering new markets can be an excellent opportunity for companies to utilize core competencies and increase value to the company. This paper will define global strategy and research the best strategies to use when expanding operations to international markets. Recommendations and conclusions will also be defined for when entering a foreign market, thus expanding operations. Because of the increased competition in international markets global strategies are more important then ever. When developing a strategy not only does a company deal with lower cost pressures, but also pressures for local responsiveness, and a need to adapt to differences in consumer preferences.
This also can change the way the business on a whole is carried out. A company must choose a strategy that will help it best adapt to those pressures, as well as one that stays aligned with its overall strategic goals. Entering into a new international market seems like a good idea for most businesses, but requires lots of research and planning to be successful. The first decision to be made is what market to enter. New emerging markets with large populations allow for continued economic growth and an opportunity to add value to a product. The timing and scale of entry into a market can be also very important, for many companies in a new market the first mover advantage is one that comes with lots of benefits, including capture of market share.
If the company penetrates the market with a significant presence they are likely to send a message to consumers that they are in the market for the long-term. Selecting a mode of entry into a new market heavily relies on the company’s core competencies, and how much control is desired. For some companies, creating a strategic alliance with a competitor is the best entry method into a new market. By creating an alliance with a competitor allows a company to enter a new market with less risk, and also gives the opportunity to learn about the new market from the alliance partner. Introduction
International markets have become increasingly competitive recently because of liberalization of trade and investment environments. Due to this, companies entering the global marketplace must be more strategic to make a profit. “A company must have a strategy to reduce costs and create value as well as to differentiate its products from others, in order to be profitable in today’s foreign markets.” It is highly important for a company to work to reduce costs while, at the same time increase the perceived value of its products and differentiate product offerings, in comparison to its competitors. By creating more value on a company’s products, the more its customers will be willing to spend. By creating a product that is more appealing to the consumer through design, functionality, and quality, as well as lowering costs to produce the product, a company can create value in the eyes of the consumer.
The primary activities involved in creating value for a product are research and development, production of products, marketing and sales, and the service and support being provided to the customers. Because of differences between the markets in various countries it is potentially beneficial “for each value creation activity to be based where factor conditions are most conclusive to the performance of that activity,” otherwise know as location economies. By doing this, the company is working towards a low cost strategy for value creation. When a firm is considering entering a market in a foreign country, it must carefully decide what market to enter, when to enter, and at what scale it should enter. These decisions should be heavily based on long-run growth and profit potential within the market. A firm will often expand into international markets in an attempt to earn greater return from their technological or manager know-how; also know as a firm’s core competency.
As well as being faced with many cost reduction pressures, a company expanding globally is also likely to be faced with pressures for local responsiveness. When doing business in another country there will likely be a difference in customer preferences that will need to be met, differences in infrastructure, and the way of doing business such as distribution channels. Lastly, any demands that may be made by the host government (regulations) must be taken into consideration as well. These are all factors that need to be considered when a company is contemplating expanding to foreign markets, and choosing a
proper global strategy.
Strategy is defined as any actions a manager takes to attain the company’s goals. The main goal for a company’s strategy is generally to maximize their profit. Due to increased competition in many foreign markets, companies are forced to look at all of these strategies and see which are best for them when moving forward in the global marketplace, to be most successful. Strategic Choices
A firm will generally use one of four basic strategies to enter and compete within the global marketplace. They are as follows: International Strategy, Multi-domestic Strategy, Global Strategy, or a Transnational Strategy. The strategy a company chooses can depend upon how much it needs to cut costs, and the differences it must adapt to within the new market. A company choosing an International Strategy works to create value by bringing valuable skills and products to global markets where competitors don’t employ the same skills. The company will transfer successful products to foreign markets, while also creating some local customization.
For a company following an international strategy, many decisions including manufacturing and marketing decisions, will be localized to the country that they are doing business in. An example of a company using an international strategy is McDonald’s. In Japan they offer old favorites as well as the Korean KBQ Burger. When a company chooses a Multi-domestic strategy many key responsibilities and decisions become localized. The product offerings, marketing strategy and business strategy are customized to be successful in each market. Along with this strategy comes a mentality where management sees all foreign operations as independent businesses within the firms’ portfolio. A drawback of this strategy is because new value creation activities are employed within each market. A company may not get advantage from the experience curve benefits, and end up with a high cost structure.
Companies pursuing a Global Strategy are generally also pursuing a low-cost strategy. Because of this, the company generally will not customize the product offerings between different foreign markets. A global firm will prefer a standard set of products offered through all of its markets where they can use the cost advantage to allow for aggressive pricing tactics in foreign marketplaces. Because of the competitive nature of many marketplaces around the world many companies have no choice but to employ a transnational strategy. For a company that employs this strategy, it involves focus on reducing costs, transferring skills and products to new markets, and increasing local responsiveness. Because of all of the pressures that are involved with a transnational strategy, they can be difficult and complex to implement. Strategic Alliances
“As opposed to a firm entering a foreign market on it’s own, they may form a strategic alliance with a potential or actual competitor.” A strategic alliance is defined as a cooperative agreement among competitors from different countries. By creating a strategic alliance with a competitor, a company can more easily enter a new foreign market. Within a strategic alliance a company will share many fixed costs with the alliance partner company, which can also potentially reduce operational costs such as training and purchasing costs. Because of these factors a strategic alliance can be beneficial for a company striving for an overall goal of lowering costs. “The alliance is cooperation or collaboration, which aims for a synergy where each partner hopes that the benefits from the alliance, will be greater than those from individual efforts.” Although a strategic alliance has many benefits for a firm that is entering a market they have never competed in before, there are also risks that should be considered. There’s the possibility of giving competitors low-cost access to new technology and markets, which they may not have had access to before.
It is also important for a company to choose the right partner to ensure they are benefiting equally from the alliance. The proper partner for a firm will help achieve its own strategic goals, but will also have a shared vision for the purpose of the alliance. Any company that is looking to enter a strategic alliance with a competing company should do a proper background checks with public sources, and anyone that has maybe worked with the other firm in the past. It is also important to get to know the potential partner before immediately creating an alliance to ensure the chemistry is right between the management teams. Once an alliance has been created it is important for it to be managed properly, in order to be successful in its overall strategic goals. It is vital for the once competing companies involved in the strategic alliance, to build trust with one another. If there isn’t mutual trust built within the relationship it “…can lead to competition rather than cooperation, to loss of competitive knowledge, to conflicts resulting from incompatible cultures and objectives, and to reduced management control.” Sometimes building personal friendships between members of each partner can help to create stronger trust within the business relationship as well. Entering a Foreign Market
Although there is no clear-cut choice on how a company should enter a new market there are guidelines of things that should be considered and done before entering into a new market. A firm must first decide which market they should enter, then how it will enter the market, and finally at what scale and time it should make its entry. Not only is it important to research whether or not a specific business has viability within the market, you also need to assess the value that will be added to the market you are looking into entering. “Greater value translates into an ability to charge higher prices and/or build sales volume more rapidly.” Choosing A Market
When a firm is researching different countries and their marketplaces to determine what market to enter, the appeal of a certain country will depend on balancing benefits, costs and risks that come with doing business in that particular country. “The largest compiler of data about foreign markets in the world is the U.S. Department of Commerce. Some of this information is available free and some involves paying a small fee. Other federal agencies also provide significant amounts of data that is available on their websites.” There are also many private agencies that can help a company find information regarding a new market. “Such groups as industry & trade organizations, local chambers of commerce and other business development groups provide a wealth of information about foreign markets.”
When searching for a new or emerging market to enter it is important for a company to look at nations which are politically stable, and that have free market systems. These qualities are more likely to provide long-term economic growth and a larger capacity for such growth. Many companies that have expanded operations globally have gone to China and India in order to lower costs, as well to take advantage of the availability of growth, due to the large populations. Entry Timing
Once a company has done its research and chosen a market to enter they must then decide an appropriate time to enter the said market. A major advantage for a firm is when they are the first foreign firm to enter an emerging market, also know as first mover advantage. When a company is the first to enter a market, it is given the opportunity to capture demand within the market, and establish a strong brand name and recognition, before any of its competitors move in. “The firm gains the opportunity to build up sales volume and ride down the experience curve before rivals have a chance, giving the firm a cost advantage that later entrants into the market wont have.” This will enable the firm to cut prices and increase profits. Emerging Markets
For a business looking to move into an international market, an emerging economy within a large market could be a favorable option as there is likely to be more growth potential for companies that are early movers. Emerging markets often provide benefits to the company such as lower costs, and the opportunity to become industry specialists. It can be a major advantage for companies to enter countries with large emerging markets, such as China and India in an effort to reduce costs and in turn generate more profit. Although being an early mover within an emerging market comes with these advantages; there can also be the disadvantage of pioneering costs.
If business in the foreign country is done differently then in the home country the firm will need to spend time, energy and money on learning the rules of doing business within the host country. A firm that enters later into a market can avoid some of these costs by learning from what other companies have done, implement stronger strategies. Scale of Entry
Once it has been determined which market to enter, and when is the best time to enter, a company must decide whether to enter the market and slowly expand its operations, or enter in a big way, at one time. To make this decision the firm must examine any strategic commitments that may be involved when entering the market, as it could have long-term impact that can’t be easily reversed. Entering a market in a big way can mean major strategic commitment and can be hard to reverse but could pay off. If a company is entering a market on a significant scale customers and distributors are more likely to believe the company will remain in the market long term and will in turn attract more customers.
However if a company invests too much to enter one market at a significant scale it could mean not being able to expand to other markets. By entering small-scale to a foreign market, the firm has more opportunity to learn more about the market before creating any major risks to it. This will limit potential losses but could cause the company to miss out on all of the advantages reaped by the first movers. Modes of Entry to Foreign Markets
“The mode of entry is a fundamental decision a firm makes when it enters a new market because the choice of entry automatically constrains the firm’s marketing and production strategy. The mode of entry also affects how a firm faces the challenges of entering a new country and deploying new skills to market its product successfully.” A company has many different modes of entry to choose from, all with their own advantages and disadvantages. Modes of Entry Alternatives
Exporting – A company choosing to export will produce a good or service within the home country and sell it in the new market. Exporting can be low cost for the company as well as can be beneficial for the company to get experience doing business within the new market. Although the company may save money on manufacturing, they are also likely to be paying higher transportation costs to export the product to the new market. Manufacturing firms often begin with exporting products to enter a foreign market, before switching to another mode. Turkey projects – A company that chooses to develop a turnkey project will hire a contractor, who will handle all of the details on setting up a firm within the new market. Once the contract is complete the firm is handed the key to the business, which will be ready and full operational for the company to take over and begin work in the new market.
When choosing a turnkey project the company should ensure that the new market is within a country with stable political and economic conditions, to make the investment less risky. Licensing – “A company which chooses a licensing agreement will enter into an arrangement where a licensor grants the rights to intangible property to the company for a certain period of time. During this period the licensor receives a royalty fee from the company for the use of the property.” Licensing can be a good option for a firm with manager know-how as there is little control over technology, and also comes with little risk. Franchising – Franchising is a specialized form of licensing where the firm paying the royalty fee to use the property, must also follow a set of rules on how to run the business.
This can be good for firms with management know-how. Joint venture – “A joint venture entails establishing a firm that is jointly owned by two or more otherwise independent firms.” Joint ventures can be beneficial as there is often the opportunity to learn from your partner as well, as any risks are shared between the partners. Wholly owned subsidiaries – “Wholly owned subsidiaries occur when a firm owns 100 percent of its stock.” When establishing a wholly owned subsidiary in a new foreign market the company has the choice of setting up an entirely new business in the new market (Greenfield Venture), or it can acquire and already running business within the knew market and use its resources to promote the companies product line. Choosing an Entry Mode
All modes of entry a company can chose from have both advantages and disadvantages. When attempting to choose the proper mode of entry a company will be forced to make a decision based on pressures of cost reductions, however the best entry mode for a company will depend mainly on that firms competitive advantage, whether it is technological know-how or management know-how. If a firm has a competitive advantage that is based on technological know-how, generally a wholly owned subsidiary is preferred, as control over technology is very necessary.
By owning the whole subsidiary the company is giving up no aspect of control over their core competency. “The main competitive advantage of many service firms is that of the managers know how to run the business.” When this is the case, foreign franchises tend to be the preferred method of entry. By franchising the company has control over how the quality of the product or service. When choosing a mode of entry it could often depend on the amount a company gives control over its resources. Exporting offers the least amount of control, and a wholly owned subsidiary offers the most control. Conclusion
Although entering a new market and expanding a company globally can provide numerous benefits, it is something that needs to be done with proper strategic planning. Trade liberalization has caused heavy competition in many foreign markets and if proper research and planning isn’t flowed through, a company could fail in an international market. When choosing a new market, the company should loo at locations that will provide some benefit such as lower costs for manufacturing a product. “Create value for customers by lowering production costs and making products more attractive through superior design, functionality and quality.” Value creation is measure by the difference between what values a customer puts on a specific product, and the actual cost to make the product. The higher the value creation the more profit the business will make on that product. By reducing costs to increase revenue, the company is also increasing the value of the product, known as low cost strategy. Another way to increase value of a product value is through a differentiation strategy.
By differentiating products from that of a company’s competitor, they are increasing the consumers perceived value of the product based, on its different features. When choosing an overall strategy it is important that it align with the company’s main goals and values, as well as with the host countries preferences. Generally a transnational global strategy provides companies with the most benefits, it is also the hardest and most complex strategy to implement. Once a strategy is chosen for the expansion across borders, the company then needs to research and choose which market to enter, when to enter the market, and at what scale to enter the market at. All three of these decisions are very important to the success of the business in the new market.
The company should choose a market that will provide some cost benefit to it, such as cost savings manufacturing. Once a market is chosen, a time and scale need to be established for entry. The company needs to decide if it will enter with a large presence or if it will enter with limited exposure to better adapt to the new market. The company will pick between six modes of entry, mainly based on their core competencies. If the company has a lot of technological know- how they will likely chose a mode that offers more control such as a wholly owned subsidiary. If t is a managerial know-how based competency, it will likely choose a mode with less control such as a franchise. It is important to consider every advantage weighed against the disadvantages when choosing a mode of entry. Works Cited
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