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Dec 24, 2012 | #1
Market Entry Strategies in a Global Business
Abstract
This document analyzes the positive and negative aspects of five market entry strategies that could be utilized by an international business during the implementation of a global strategy.
Keywords: International business, global strategy, market entry strategy
1 Background
Making the right decisions when entering a foreign or international market can make a tremendous difference in a company`s bottom line (Kotabe & Helsen, 2009, 291). However, the opposite is also true: making the wrong decisions can also make a tremendous difference in the company`s bottom line. The right decision, of course, brings in money and helps the company prosper. It can result in eventual profitable world-wide expansion. The wrong decision, however, can result in decisions that literally kill the company. The importance of making the right decisions cannot be underestimated. This paper uses a theoretical expansion into India as a starting point, and considers how to expand with a DVD or DVR system (utilized for example only).Market entry strategies are not created in a vacuum. They are closely related to other decisions that involve the entry of new products into any market. According to Kotable and Helsen (2009, 291) the company has to decide on the product, the target market, the objectives for the markets, the mode of entry, time of entry, marketing mix, and a way to monitor marketing performance. Taken together these criteria form the market entry strategy.
Cunningham, on the other hand, suggests that strategies used for entry into new foreign markets can be defined into five strategies:
- Technical innovation, where the company either has truly superior products or can convince the customer they do. This can also include a high level of technical service.
- Product adaptation, where the company makes modifications to products that already exist. This can include on time delivery, service adapted for the customer market, and so on.
- Availability and security, where the company is able to help overcome transportation risks by either convincing the customer they are not important, or by offering delivery, installation, service, and security.
- Low price strategy by developing a low price specifically to penetrate the market.
- A total adaptation and conformity strategy, where the foreign producer takes a holistic approach to doing everything the customer might need in terms of product, handling, development, and delivery (Cunningham 1986, 9).
The first four strategies are very similar to Porter`s generic marketing strategies. Porter suggested that there were four basic strategies: cost leadership, differentiation, cost focus, and differentiation focus. Cost leadership essentially means that the product would be the lowest cost items in field (Cunningham`s low price strategy), while differentiation refers to creating products that are unique and thus desirable (product adaptation). In Porter`s works, focus suggests the concept of adding a specialized service, with a focus on either cost or differentiation. Cunningham would suggest that this focus is more on availability and security (transportation) with an overall emphasis on either total adaptation and conformity or on technical innovation. The entire goal of both Cunningham`s works and Porter`s works is to gain market share. The analysis of potential strategies will suggest the best approach to take in the market that the company will enter.
Once the decision to go overseas or into the international market has been made, the strategies have to be considered, but none of the strategies standalone. Other inputs are involved in being competitive.
2 Seeking Competitive Advantage
Competitive advantage can arise from efficiency, from strategic decisions and advantage, from taking risks, from learning, and from developing the brand and reputation. Efficiency comes from economy of scale, but it can also come from operational flexibility. The ability to shift production to adjust cost and expense, the ability to exploit exchange rates, and the ability to take advantage of other situations that may come up locally. It is also possible to take advantages of the resources offered in other nations. There are few people who are not aware at this point that labor is significantly cheaper in other parts of the world.
2.1 Efficiency
To put the economic advantages of opening a business in India in perspective, Price Waterhouse reported in 2005 that roughly 2.5 million people per year in India graduate with a university degree (Price Waterhouse, 2005). These individuals are billed as being highly qualified. Of the 2.5 million people who graduate with a university degree, approximately 200,000 graduate with an engineering degree of one type or another (WENR, 2007). In 2008, Reuters suggested that the figure might be higher, perhaps as high as 250,000 (Reuters, 2008). There is, clearly, a large population of highly educated workers to draw from. Making the situation even more attractive, the average graduate from an Indian university makes only $2,400 per year USD. Incomes are currently raising approximately 10 to 15 percent per year. Contrast this to the average young engineering graduate in the US, who starts at roughly $40,000 in the communications engineering friend and ranges to $64,000 in the aerospace field (Knovel Solutions, 2012)
With a difference of $38,000 to $62,000 per single employee, it is very easy to see how a company wishing to open up a branch in India might decide to export items back to the United States, at a cost savings. The competitive advantage would be immense. The cost of employees is so low relative to cost in the UK and United States that companies who open branches in India could also pay employees a premium to get the very best employees, and still be receiving an advantage. In the case of an American company who pays their Indian employees $3,500 a year rather than $2,400, the company would still be getting a value-added proposition of as much as $61,000 per year.
Another form of efficiency develops from economy of scale. If the company is producing widgets that everyone wants (or needs), then Indian and Pakistan are good places to be, as would be Hong Kong. Areas that have a high concentration of population, a needed product, and a developed market can provide economy of scale. If the widget is also needed or popular throughout the Middle East, Asia, or United States, it becomes a value added proposition.
In lesser-developed nations, it may be possible to extend product lifecycle. Somewhere, the DVD player may be a hot commodity! Companies can capitalize on extended life cycles and utilize highly educated employees to develop new products at a lower cost. The last facet of efficiency is the flexibility that occurs when shift workers are paid less. It can cost far less in lesser-developed nations to run a production line than it does in UK and US.
2.2 Strategic
If the product is going to be the first mover (and only provider, initially) of a product to market, there can be a strategic advantage. Using the example of the DVD, above, we can postulate that the first company to bring the hypothetical nation from DVD to DVR would have a real advantage. If something can be worked out to subsidize production or distribution over several nations, that would give an advantage also. Finally, the transfer pricing may offer strategic advantage. Kalyanarm and Gurumurthy (1998) suggests that companies which cannot be first in, or a "pioneer", may be able to gain advantage by attacking the first mover directly and aggressively. As they point out, aggressive competitiors can knock down the leader if they plan the market attack correctly. Conversely, companies that are are pioneers must take steps to ensure that their market share does not erode when a new company enters the market (Kalyanarm & Gurumurthy, 1998, 1).
2.3 Risk
Risk can be a huge factor in the corporate strategy. The SWOT analysis and the PEST analysis address risk when they look at the political situation (Pest) and threats (swoT). Risk can also arise from inside the company (sWot) when someone has miscalculated the probability of failure versus the possible payoff. The external risks relate to the possibility of war, terrorism, or infrastructure failure. Threats can be the threat of attack or threat of change of national leadership and thus a change in how the country perceives foreigners. There is a risk that no one will buy the product. Perhaps no one in the nation can envision the need for a product like a DVR. If this is the case then the first mover would have a terrible problem creating a market. Other risks, internal risks, include the possibility that the market analysis was inaccurate and thus the estimations are incorrect. The company may exceed the planned budget significantly. In more rural nations, infrastructure can become an issue. To understand this, realize that if the company planned to distribute the DVRs through a mountainous highway (because there was no other way to get them to the town on the other end) and the highways were bombed by terrorists, the distribution plan would fall apart. The next question would be: do we send them in by burro? Do we drop them from a plane? Do we wait until the road is rebuilt? Any alternative would be very costly. What happens if a tsunami takes out the coastal distribution areas, or an earthquake damages the factory? All of these risks must be considered.
2.4 Learning/Knowledge Management
Establishing a center of knowledge in the company may not seem important, but it empowers employees both from a technical standpoint and from the standpoint of flexibility and longevity. If the nation is particularly oriented towards education (as is India, for example) then helping employees develop their knowledge (and in turn give it back to the company) would be a welcome benefit to employees.
2.5 Brand and Reputation
Companies live and die on their brand. Can a known brand be utilized, or must a new one be developed? What is the company`s reputation in the area that the company has planned for a factory? One tragic example is the Union Carbide brand. Willey and Berger (2006) pointed out that the explosion in Union Carbide`s plant in Bhopal caused 3,787 people to die on the spot; eventually over 10,000 had died and somewhere between 200,000 and 578,000 were injured. The chairman of Union Carbide was charged and arrested. He jumped bail and India was not successful extradicting him from the US (Polgreen & Kumar, 2010). Surely no one in India, or much of the eastern world, will ever trust Union Carbide again.
3 Forms of Strategy and Modes of Entry
The strategic considerations of entry strategies have been considered, but there are so many more things to think about. Will the company use a multi-domestic strategy, customize the product for each market, and use local decision making? Or will they use a global strategy, with the product the same everywhere? Even McDonald`s, the king of sameness, was forced to concede that to survive in a competitive market, they would have to allow local stores to make marketing decisions and personalize food. Thus, McDonald`s in Islamic nations does not serve the McRib; in Albuquerque, NM they serve the chile sauce that all of the customers demand. The multi-domestic strategy works for them.
Finally, the mode of entry must be considered. Will the company export directly? Will it license or franchise its name? Will it form a joint venture with a company in the host nation? Some nations require this type of partnership in foreign investment, but other times the company itself prefers it. Will the company enter the nation through foreign direct investment (i.e., invest in local companies)?
4 Conclusion
No matter what the perceived goal of the company is, the actions the company takes must be personalized to that goal. Union Carbide chose to enter a joint venture with a company in Bhopal. In retrospect, the decision would be different - or perhaps the joint venture partner would be different. Every company has decisions it would undoubtedly change; sometimes the decisions have a huge impact on the company`s eventual survival. This paper has endeavored to explain the decisions and choices involved in the analysis of five potential market entry strategies in implementation of a global strategy for an international business.
References
Cunningham, M., 1986. Strategies for Internatonal Industrial Marketing. In: P. Turnbull & J. Valla, eds. Strategies for Internatonal Industrial Marketing. London: Croom Helm, p. 9.
Kalyanarm, G. & Gurumurthy, R., 1998. Markey entry strategies: Pioneers versus late arrivals. Best Practice, pp. 1-10.
Knovel Solutions, 2012. Engineering salaries in 2012.
[Online]Kotabe, M. & Helsen, K. Global Marketing Management. 5th ed. Hoboken, NM: John Wiley.
Polgreen, L. & Kumar, H., 2010. 8 former executives guilty in '84 Bhopal chemical leak.
[Online]Porter, M. Competitive Strategy: Techniques for analyzing industries and competitors. New York: Free Press.
Price Waterhouse. The evolution of BPO in India.
[Online]Reuters, 2008. India's outsourcing revenue to hit $50 bn.
[Online]WENR, 2007. Engineering education in India: A study in contrasts.
[Online]Willey, R. H. D. & Berger, S., 2006. The accident in Bhopal: Observations 20 years later. Orlando(FL): American Institute of Chemical Engineers.