Week 8: Market selection, entry strategies, and developing new goods & services

Week 8:Market selection, entry strategies, and developing new goods & services Prepared by Alistair Hodgson & Robin Roberts

Learning objectives After attending today’s lecture and studying chapters 8 & 9 you should be able to: • Identify market selection strategies • Discuss the major decision criteria for choosing a mode of market entry • Discuss the key advantages and disadvantages of the major market entry strategies • List the factors that affect the timing of entry to new markets • Understand the reasons for and risks associated with exiting a business

Learning objectives • Discuss the forces that affect the appropriate level of customisation or standardisation for products marketed internationally • Identify international product strategies • Explain the nature and process of multinational diffusion • Describe the major stages of new product development (NPD) strategies for international marketing

Scene Setter: Pie Face Pie Face was well-established in the Australian market Rapid expansion in South-East Queensland Focus on opening franchises in CBD areas Based upon traditional, popular Australian products (the pie – meat pie in particular & coffee) How did this translate overseas? How did Pie Face select a country to open in?

Overview • The ‘right’ market entry decisions can have a heavy impact on the firm’s performance in global markets • Several key decisions need to be made: • target product and market • goals of the target markets • mode of entry • time of entry • marketing mix plan • control system to monitor performance

Deciding to go overseas • When selecting a country to enter, companies consider a range of factors including: • cultural differences • political risk • logistics • economic conditions of the host country

Deciding to go overseas • Selecting a target market • a crucial step in developing an international expansion strategy usually starts with a large pool of possibilities and then narrows down • do a preliminary screening • select indicators and collect data • determine the importance of country indicators • rate the countries on each indicator • compute the overall score for each country • Think back to the chart shown in Week 3

Deciding to go overseas Figure 8.1

Choosing the mode of entry • External criteria • market size and growth • Risk (political & economic) • government regulations • competitive environment • local infrastructure • Internal criteria • organisational objectives • need for control • internal resources, assets and capabilities • flexibility

Choosing the mode of entry • External decision criteria • is the market large enough to be interesting? • Starbucks in India (clearly sizable, but is it accessible?) • Issue of timing with market entry • how do government regulations affect the situation? • EU has strict regulations regarding genetically modified (GM) food

Choosing the mode of entry • Market attractiveness also plays a part • what type of country are you dealing with? • 5 Main Types: • Platform Countries (can be used as a base for operations; to gather information within a region, i.e. Singapore & Hong Kong) • Emerging Countries • Growth Countries (BRIC countries) • Maturing Countries • Established Countries

Choosing the mode of entry • Internal decision criteria • organisational objectives • need for control: can be used for IP reasons; the size of the company; brand identity • internal resources, assets and capabilities: limited assets > restricted operations (licensing or export) • flexibility • Entry mode – a transaction cost explanation • Trade-off between low-control (reduced resource commitment) vs. high-control (high-resource commitment)

What are the options? • Exporting • Licensing • Franchising • Contract manufacturing • Joint ventures • Wholly owned subsidiaries • Strategic alliances *We’ll focus on those in bold

Exporting • Indirect exporting • use of a home based intermediary (trading house; broker etc.) • Pros: minimal risk; instant foreign market exposure • Cons: Little control over product marketing strategy > poor pricing strategy or weak distribution could follow • Cooperative exporting • an agreement with another organisation to use its distribution network to sell exporter’s goods > more control (within limits) and also protects resources • Direct exporting • company sets up its own export organisation and relies on a foreign based intermediary > the most control but expensive

Licensing • A contractual transaction where the organisation and the licensor offers some proprietary assets (i.e. trademarks, patents, production techniques) to a foreign organisation, the licensee, in exchange for royalty fees • e.g. Tokyo Disneyland is operated by Oriental Land Organisation under license from Disney

Licensing Disadvantages Advantages • revenue may be dwarfed by potential income earned through outright ownership • Particularly if the venture is a success • lack of enthusiasm on the part of the licensee • Licensee can become potential new competitor • highly profitable penetration strategy • local governments may favour it • lower exposure to economic and political conditions

Franchising • Franchisor • an organisation that gives the franchisee the right to use its trade names, business models and know-how in a given territory for a specific time in return for payment • Arrangements specify a particular business model to follow – this is usually well-developed with franchises • Also enables the right to distribute goods/services using the franchisor’s brand • McDonald’s is possibly the most famous franchisor of all

Franchising Table 8.2

Franchising Advantages Disadvantages • organisationcapitalises on a winning formula with long history of development • capitalises on local knowledge of the franchisee • preserves the capital of the franchisor • revenue may be dwarfed by potential income earned through outright ownership • finding suitable and experienced franchisees in developing markets could be difficult > significant potential risks to the brand

Joint ventures • Cooperative joint venture • an agreement between the partners to collaborate, that does not involve any equity investment • i.e. one partner offers manufacturing technology; the second provides effective distribution channels • Common form of joint venture when major organisation partners with smaller local entity • Equity joint venture • an arrangement where the partners agree to raise capital in proportion to the equity stakes agreed upon

Joint ventures Advantages Disadvantages • has potential for higher returns than either licensing or franchising • reflecting the investment risk • higher degree of control • Greater emphasis on complementary skills • has potential for greater losses than either licensing or franchising • reflecting the investment risk • lack of trust (likely in a range of situations) • developing a future competitor (particularly in developing nations)

Drivers of successful joint ventures • Pick the right partner • Establish clear objectives from the beginning • Bridge cultural gaps • Gain the commitment and respect of top management • Use an incremental approach (overly ambitious ventures often fail > better to start small and develop)

Timing of entry • Timing of entry can be critical • too early means a lost investment • Hong Kong based restaurant chain Café de Coral’s early investment and subsequent withdrawal from strategic locations in China • too late means lost opportunity • Starbucks entered Australian market in 2000, then closed 61 stores in 2008 citing failure to attract customers from the European style coffee culture that Australians prefer • In contrast to the UK (Starbucks helped to define coffee culture) • Also in contrast to India, as was shown earlier

Exit strategies • What are some of the reasons for why a company might exit a market? • sustained losses • Volatility (see recent companies threatening to pull out of Scotland, or at least relocate) • premature entry • ethical reasons • intense competition • resource reallocation

Exit strategies • Risks of exit • fixed costs of exit • paying workers for severance • disposition of assets • fire sale of assets or lack of potential buyers due to specialised nature of the business • signal to other markets • may signal overall global weakness • long-term opportunities • can you get back in later? Boost Juice Bars initially failed in China and then attempted to re-enter the market

Standardisation versus customisation Basic Recap • Should the company aim for a standardised or country-tailored product strategy? • There are five common forces that favour a more standardised approach: • common customer needs • global customers • economies of scale • time to market • regional market agreements

Standardisation versus customisation • Modular approach • consists of developing a range of product parts that can be used worldwide in different product configurations • Enables extensive (and inexpensive) customisation • Core-product (platform approach) • Core product with attachments for customisation • Key Issues • overstandardisation: initiative and experimentation is stifled at the local subsidiary level • overcustomisation: product loses its differentiation from the local brands • foreignness: the characteristic that provides the cachet and differentiation from the local brands

International product strategies There are essentially three strategies: • Extension • using the same product or communication strategy that the home market uses • Adaptation • making changes to the product or communication strategy to suit the local marketplace • Invention • designing new products from scratch

International product strategies Figure 9.1

Strategic option 1 Product and communications extension – dual extension • Market a standardised product using a uniform communication strategy (this ad on multiple Shiseido Youtube channels) • Japanese cosmetic organisation, Shiseido • markets in Europe, North and South America, and across the Asia-Pacific region • Some new products introduced over time in N. America, but still falls within a dual extension strategy

Strategic option 2 Product extension – communications adaptation • The same product is chosen but a different communications strategy applies • Dove localised its ‘Campaign for Real Beauty’ • feminist and advertising groups praised the brand in Europe and the United States • in China, the notion of ‘real beauty’ flopped • Belief that typical advertising images are attainable.

Strategic option 3 Product adaptation –communications extension • Organisations may adapt their product but maintain the same communications globally • BP adapts the energy product in 100 countries to suit the local market due to regulations, however, it maintains a core global message in its communications • The brand remains consistent

Strategic option 4 Product and communications adaption – dual adaption • Differences in both the cultural and physical environments across countries call for a dual adaptation approach • Sony launched a version of its Walkman flash-memory portable digital music player developed in China for the Chinese market by Chinese engineers • it displays the lyrics of Chinese songs and is only sold in China • Marketing promotions are unique to the Chinese market

Strategic option 5 Product invention • Inventing a whole new product for a foreign market • Samsung runs six design centres • London, Rome, Los Angeles, San Francisco, Shanghai and Seoul • Obviously more expensive, but leads to rapid product development • These products can then be sold in other markets

Multinational diffusion • Not all markets are ready for new products at the same rate • speed and pattern of market penetration can vary • Asahi breaks into the market successfully in Thailand (despite initially being aimed just at Japanese nationals living in the country) • Leads to extensive operations within Thailand > export of Asahi products from Thailand (brewed under licence) to other regional countries • Fosters fails twice to break into the Chinese market How can we tell who will succeed and who will fail?

Multinational diffusion • Essentially driven by three factors: • Individual • Personal influences • Product characteristics

Multinational diffusion Individual differences • Individuals differ in willingness to try new products • early adopters: eager to experiment • late adopters: wait and see

Multinational diffusion Personal influences • Word-of-mouth of previous adopters • Good (but long – 10 minutes – video discussing the influence of word-of-mouth marketers) • Non-personal factors, such as media advertising have less of an impact

Multinational diffusion Product characteristics • Relating to the nature of the product itself • relative advantage (what is the perceived value that the product offers when compared with existing alternatives?) • Compatibility (are there switching costs involved in adopting the new product? Is the product compatible with pre-existing consumer values?) • Complexity (is the product user friendly?) • Trialability (can the product be used over a limited period?) • Observability (are the benefits of the product clear?)

Multinational diffusion – is it all the same? Figure 9.2

Developing new products forinternational markets New product development steps: • The idea • Screening (similar to country screening – unsuitable product ideas are abandoned) • Test marketing • Timing of entry

Developing new products forinternational markets Test marketing • Testing the product ‘live’ in the marketplace after internal prototyping • McDonald’s • Mars Corporation • Think back to the use of Columbus, Ohio from Week 6 lecture • Testing in similar markets • test Australia then release in UK • Not testing at all is also an option • IKEA is keen not to signal to competitors • IKEA perhaps more-dependent upon its brand identity

Developing new products forinternational markets Timing of entry • Waterfall strategy • a phased rollout • introducing the product into the home market • rolling the product into advanced markets • rolling the product into less advanced markets • Customisation of a product takes time > need to separate market entry • Phased rollout is less immediately demanding on an organisation’s resources • Risk of alienating consumers in later markets

Developing new products forinternational markets Timing of entry • Sprinkler strategy • simultaneous worldwide entry, with the global rollout taking place within one to two years • Global segments make this possible • Concern over competitive preemption in overseas markets also a factor • Games console manufacturers a perfect example here • Affordability issues in some markets • Production needs to keep up with demand

Summary You should now have an understanding of: • Market selection strategies • The major decision criteria for choosing a mode of market entry • The key advantages and disadvantages of the major market entry strategies • joint ventures • exporting • licensing • franchising

Summary • The factors that affect the timing of entry to new markets • The reasons for and risks associated with exiting a business • The forces that affect the appropriate level of customisation or standardisation for products marketed internationally • International product strategies • The nature and process of multinational diffusion • The major stages of new product development (NPD) strategies for international marketing

Questions Any Questions?

Week 8: Market selection, entry strategies, and developing new goods & services