Transcript 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 King's University College 2
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 King's University College 3
Internationalization
• Deciding where to go: – – What is a comparative advantage to one firm may not be so for another – 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) Requires a lot of analysis – this is the focus of this course King's University College 4
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: 1.
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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) King's University College 5
Internationalization
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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
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Bringing in raw materials from their home country to another country to manufacture old products to sell in that country 10. Bringing in raw materials from their home country to another country to manufacture old products to sell in other countries 11. Bringing in raw materials from other countries to another country to manufacture old products to sell in that country 12. Bringing in raw materials from other countries to another country to manufacture old products to sell in many different countries 13. Bringing in raw materials from other countries to many different countries to manufacture old products to sell at home 14. 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 King's University College 8
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 King's University College 9
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 King's University College 10
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 King's University College 11
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 King's University College 12
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 King's University College 13
Dimensions of Internalization
• Outward Perspective often follows what is called “ The Sequential Process ” modes of activities. Each step has less risk than the next: - Includes the following High Risk Level King's University College Low Exporting Licensing IJV WOS Entry Mode Type 14
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 Partially Owned Existing Business New Business (1) Capital Participation (2) Joint Venture Wholly Owned (3) Acquisition (4) Greenfield King's University College 15
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 King's University College 16
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 King's University College 17
Dimensions of Internalization
• • • • • • • Internationalizing is Complex Difficult Risky Uncertain Time consuming But . . . it can be done and have huge rewards!
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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 King's University College 19
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 King's University College 20
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 King's University College 21
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 King's University College 22
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 King's University College 23
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 King's University College 24
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 King's University College 25
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 King's University College 26
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 King's University College 27
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 King's University College 28
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 King's University College 29
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 King's University College 30
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Entering New Markets Trevor Hunter King’s University College
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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) King's University College MOS 2285 32
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: 1. Global product Cost reduction 2. Local product Local responsiveness King's University College 33
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 King's University College 34
Strategy and Internationalization
• Examples of industries that face cost reduction pressure: – Nickel – Computer hardware – Pulp and paper – Auto parts – Clothing and shoes – Food King's University College 35
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 King's University College 36
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 King's University College 37
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 King's University College 38
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 King's University College 39
Strategy and Internationalization
• Examples of differences in host government demands: – Taxation – Regulation – Enforcement – Bribes – Degree of bureaucracy King's University College 40
Strategy and Internationalization
• Firms use four basic strategies to compete in the international environment: – International strategy – Multi-domestic strategy – Global strategy – Transnational strategy King's University College 41
Strategy and Internationalization
Four Basic Strategies for International Businesses High Global Trans national Cost Pressures Low Low Inter national Multi domestic Pressure for Local Responsiveness High King's University College 42
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.
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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 King's University College 44
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 King's University College 45
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?
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Strategy and Internationalization
Knowledge Flows in Transnationals Sub Sub Sub Parent Firm Sub Sub Sub King's University College 47
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 King's University College 48
Entering New Markets Trevor Hunter King’s University College
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 King's University College 50
Entry Modes - Exporting
• 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 King's University College 51
Entry Modes - Exporting
• 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 King's University College 52
Entry Modes - Exporting
• 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 King's University College 53
Entry Modes - Exporting
• • • 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 King's University College 54
Entry Modes - Exporting
• Advantages: – Avoids costs of establishing host-country operations – May help firms achieve experience curve scale and location economies King's University College 55
Entry Modes - Exporting
• 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 King's University College 56
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 King's University College 57
Entry Modes – Turnkey Projects
• 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) King's University College 58
Entry Modes – Turnkey Projects
• 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 King's University College 59
Entry Modes – Turnkey Projects
• 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 King's University College 60
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 King's University College 61
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 King's University College 62
Entry Modes - Licensing
• 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 King's University College 63
Entry Modes - Licensing
• 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 King's University College 64
Entry Modes - Licensing
• 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 King's University College 65
Entry Modes - Licensing
• 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 King's University College 66
Entry Modes - Licensing
• Unattractive markets for Licensing – Governmental regulatory schemes – Restrictions imposed on duration and exclusive rights to territories – Foreign exchange controls and tax on royalty fees King's University College 67
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 King's University College 68
Entry Modes – Joint Ventures
• • • 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 King's University College 69
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 King's University College 70
Entry Modes – Joint Ventures
• 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 King's University College 71
Entry Modes – Joint Ventures
• 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 King's University College 72
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) King's University College 73
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 King's University College 74
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 King's University College 75
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 King's University College 76
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” King's University College 77
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 King's University College 78
Internationalization Drivers and Entry Mode Choice
• 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 King's University College 79
Internationalization Drivers and Entry Mode Choice
• 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 King's University College 80
Internationalization Drivers and Entry Mode Choice
• 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 King's University College 81