Entering New Markets

Entering New Markets Trevor Hunter King’s University College

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

Internationalization • 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

Internationalization • 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

Internationalization • Deciding what to do there: • Internationalization is not just selling things in a different country • There are many types of internationalized operations MNCs follow: • Selling old products made in their home country for consumption a new country (global product) • Selling old products made in a different country for consumption in that country (local tastes) • Selling old products made in many different countries for consumption in one specific country (portfolio, local taste)

Internationalization • Selling old products made in many different countries for consumption in many countries (portfolio, global product) • 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) • Bringing in raw materials from one country to manufacture old products in their home country for domestic consumption. • Bringing in raw materials from several countries to manufacture old products in their home country for domestic consumption • Bringing in raw materials from their home country to anther country to manufacture old products to sell in their home country

Internationalization • Bringing in raw materials from their home country to another country to manufacture old products to sell in that country • Bringing in raw materials from their home country to another country to manufacture old products to sell in other countries • Bringing in raw materials from other countries to another country to manufacture old products to sell in that country • Bringing in raw materials from other countries to another country to manufacture old products to sell in many different countries • Bringing in raw materials from other countries to many different countries to manufacture old products to sell at home • Bringing in raw materials from other countries to many different countries to manufacture old products to sell in one or more different countries

Internationalization • 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: High Risk Level Low Exporting Licensing IJV WOS Entry Mode Type

Partially Owned Wholly Owned (3) Acquisition Existing Business (1) Capital Participation New Business (2) Joint Venture (4) Greenfield Dimensions of Internalization • The theory suggests that as firms build confidence, experience and success they move from one level of complexity to the next (14) The Sequential Process of Internationalization

Dimensions of Internalization • 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: High Risk Level Low Exporting Licensing IJV WOS Entry Mode Type

Dimensions of Internalization • 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

Dimensions of Internalization • 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: • Introduce global products that sell to everyone everywhere and produce them in the lowest cost place (global) • Introduce products that are specialized for different countries to meet the local preferences (local) MOS 2285

Strategy and Internationalization • 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: • Global product Cost reduction • Local product Local responsiveness

Strategy and Internationalization • 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

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

Strategy and Internationalization • 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

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

Strategy and Internationalization • 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

Strategy and Internationalization • 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

Strategy and Internationalization • Examples of differences in host government demands: • Taxation • Regulation • Enforcement • Bribes • Degree of bureaucracy

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

Strategy and Internationalization Four Basic Strategies for International Businesses High Global Trans- national Cost Pressures Inter- national Multi- domestic Low Low High Pressure for Local Responsiveness

Strategy and Internationalization • 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.

Strategy and Internationalization • 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

Strategy and Internationalization • 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

Strategy and Internationalization • 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?

Strategy and Internationalization Knowledge Flows in Transnationals Sub Sub Parent Firm Sub Sub Sub Sub

Strategy and Internationalization • 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

Entering New Markets