Entry & Expansion Strategy

By: Arun Kumar

MBA 4th Sem.

MONIRBA

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Global Business Strategies

A. Internationalization of Business

B. International Market Selection Process

C. Market Entry Strategies

D. Strategies for Competitive Advantages

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Operational Philosophy of Companies

Philosophy and style of operation of firms change over time with change in their goals and strategies along with environments.

Stage One – Domestic  

Majority of companies come into existence with operation in home country. Their focus, vision and operations are limited.

At this stage, companies focus upon domestic market, domestic suppliers and domestic competitors.

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In general, the mind-set of stage-one companies is “If it is not happening in home country, it’s not happening anywhere neither it is worth happening” – it is referred to as ‘Ethnocentric’ orientation. It is best signified by “ Sare Jahan Se Accha Hindustan Hamara”.

Stage Two – International

On being attracted by opportunities abroad or otherwise, companies extend one or more of their business functions like marketing, manufacturing etc, to foreign countries. Thus company’s operation become international.  

But the company follows same strategies, products, promotion and distribution policies in all countries. It practices only extension of same strategies.

i.e. its orientation continues to be Ethnocentric.

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Stage Three – Multinational

In operating at different country markets, firms realize difference in demand pattern in them and also learn that they need to change their approach, marketing mix etc. to succeed in markets.

That is when the company goes into different strategies in different markets, called multidomestic approach, i.e. the company formulates unique strategy for each country which is referred to as Multinational operation. 

This approach emanates out changed orientation from ethnocentric to Polycentric mindset of company. 

Thus Multinational companies respond to difference in environments of host countries and evolve different strategies to deliver satisfaction to customers in different nations.

For example, MacDonalds market Mac AluTikki in India in contrast to their burgers in US and European markets.

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Multinational companies (MNC) view the World as conglomeration of national markets that are distinctly different.

So, strategies of a MNC in different nations may simulate a bouquet of flowers (of different variety) in contrast to strategies of International companies that resemble a bunch of flowers (same variety). 

Thus, MNCs assort marketing mix elements like product, price, path and promotion in manner that suit to satisfy the country customers.  

MNCs generate competitive advantages over local and other players by focusing their business strategies upon

     Manufacturing at lowest cost

     Differentiation of products from competitors and

     Evolving and exploiting market protection.

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Stage Four – Global In next stage of operation company focuses either upon Global marketing strategy or Global sourcing strategy but not both.

That is, a Global company tries to satisfy customers located all over the globe by sourcing the product from home country. For example, Sony’s Walkman, Harley Davidson motorcycles etc.

Sony generates competitive advantage of ‘economy of scale’ by producing Walkman sets at one location in Japan unlike other players and market it all over the world. 

Similarly, Walmart in US, procure value-added products from all over world and provide those to costumers in their home country through their more than 13000 retail stores.

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In global operation, key activities are marketing and sourcing. The suppliers and customers bear a hub and periphery relationship.

Orientation of Global companies is mixed of ethnocentric and polycentric. 

Stage Five – Transnational 

Next type of operation integrates global resources with global markets at profit carried out by Transnational corporations (TNC). 

A TNC thinks globally but acts locally. It adopts strategy “to add best value to product or service by making use of resources from wherever those are best and economical globally to provide greater satisfaction to customers universally”.

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For example, News Corporation Ltd. ( Star TV of Rupert Murdoch), Caterpillar Ltd. etc. Most of automobile giants are going to become TNCs soon.

A TNC integrates key functions like finance, R&D, New product development, purchasing etc in global fashion to generate substantial competitive advantage. 

Orientation of TNCs is Geocentric i.e. ‘ vasudaivya kutumbakam’ meaning ‘whole world is my family’. 

Therefore, TNCs do not possess any national bias in selection of human and material resources. They pick the best for optimum value-addition to deliver customer satisfaction at profit. 

Key assets of TNC are dispersed, interdependent and specialized

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International Market Selection Process  There are 213 markets in World and resource of companies are limited, therefore companies require to exercise systematic approach in selection of market for operation abroad.  

The firms carry out Preliminary Screening of worthwhile markets based upon secondary data available from different sources like

       UNCTAD

       World Bank (IBRD)

       International Monetary Fund (IMF)

       World Trade Organization (WTO)

       International Trade center (ITC), Geneva

       Centre for Promotion of Imports from Developing Countries, Netherlands

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       Directorate General of Commercial Intelligence and Statistics, (DGCI&S)        Commercial banks       Foreign and Indian Missions        Indian and foreign Chambers of Commerce        Export Promotion Councils, Commodity Boards, FIEO etc.

Parameters of Market Selection

       Market Related Factors

       Firm Related Factors

Market Related Factors :

1. General Factors : related to market as whole like

       Economic Policies include Industrial policy, Foreign investment policy, Commercial policy, fiscal and other economic policies.

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       Economic Factors include GDP growth rates, income distribution, per capita income, sectoral distribution of GDP, nature of and trends in foreign trade, BOP, indebtedness etc.        Currency Stability : one of very important factors for market selection.

       Business Regulations include industrial licensing, restrictions, mergers, takeovers, foreign remittances, tax laws, import restrictions, export obligations etc.

       Bureaucracy and Procedures

       Infrastructure includes physical infrastructure like power supply, roads, transportation, ports, telecommunication and business infrastructure like banking system, stock exchanges, type of middlemen, marketing research, advertising agencies etc.

       Political Factors : Nature of political system, behavior of ruling and opposition parties, political stability, govt. system etc

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• Ethnic Factors difference in characteristics of people and its impact on business

     Market Hub: Ability of a market to act as base for operation in contagious markets.

2. Specific Factors – related to specific industry like

  Trend of domestic production and consumption

  Future estimates of demand and production

  Trends of imports and exports with estimate of future

  Nature of competition

  Supply scenario of inputs

  Nature and number of market segments with price expectation

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Firm Related Factors :

        International business objective of the firm

  Extent of resources (finance, HR etc.) that can be assigned

• Mindset or orientation towards foreign operation

The firms based on their experience ascribe weight to above factors towards their contribution in deciding attractiveness of host markets called Evaluation Matrix.  

Thus ‘Total weighted score’ of each market is arrived at by multiplying above weighted average with raw score of every factor, then comparing for all nations.

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Market Entry Strategies 

International operation of a firm may be as simple as to produce the items in home country and make available abroad;

Alternately, carry out all operations to produce before making those available in foreign countries. 

Most companies adopt an in-between mode of entry into foreign markets like

1. Indirect Exports

     Products of a company are sold in foreign markets but not by manufacturing firm.

     Merchant Traders buy title of stock from producer and export to different countries abroad, called Export Trading companies, e.g. sogoshoshas of Japan.

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     Through domestic export agents who do not take title of stocks, only renders requisite services against fees or commission.

     Sometimes one manufacturer exporter exports non-competing products of another producer also called Piggyback exports.

     Sometimes a number of producers of commodities form an association to export jointly called Export cooperatives.

For small and new entrants, indirect exports offer a number of advantages.

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2. Direct Export

       In this case market research, market contact, pricing, export documentation etc. are done by manufacture who actually exports.

      Manufacturer exporters may make use of export agents’ specific services.

       Mostly used by large and medium sized firms. Scope of profit substantially higher as is the risk.

 

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3. Contract Manufacturing

It is a process in which a firm’s products are manufactured in foreign nation by another manufacturer under contract. The firm only undertakes marketing.

It is advantageous in that the firm need not invest in labor and manufacturing of products abroad.

It is useful when competitive advantage of firm lies on marketing.

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4. Licensing and franchising

It is another method in which a firm’s product is produced in foreign county by another party under license.

A firm (called licensor) having technology, know-how or strong brand image may give license to one or more companies in foreign countries ( called licensee) to use

        Patent right

        Trade mark rights

        Copyrights or

        Know-how

to produce and market products covered by the right in a given territory in exchange of stipulated payments.

For example, Coca-cola, Pizza-Hut etc. have licensed Indian companies to use their know-how in producing and marketing their products.

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5. Management contract

Under this process, the firm provides ‘management know-how’ to a company in a country abroad the skill to manage an integrated service against a compensation.

For example, Holiday Inn Hotels Inc. managed hotel in Pune. Tata Tea manages tea-plantations in Sri Lanka etc. 

6. Turnkey Contract

In these contracts the firm (seller) agrees to supply the buyer with

facility fully equipped and ready to be operated by buyer’s personnel, who will be trained by seller.

Generally this type of contracts are made in oil-exploration and Drilling industries, fast-food franchising business etc.

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7. Joint Ventures

It is the most common foreign market entry strategy practiced.

In joint-ventures, the firm joins with a company in foreign nation with sufficient equity as to have a voice in management but not dominate totally. Extent of equity participation depends upon law of the land. MNCs prefer this mode of entry in India e.g. Hindustan Unilever Ltd., Pfizer Ltd. etc.

Joint ventures draw home benefits of cheaper resources on profit sharing basis. Choosing a suitable local partner is crux of JV’s success.

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8. Wholly Owned Manufacturing Facility  

Wholly owned facility means 100% equity in the production facility in foreign country. More than ownership it means total control on production and quality. It also signifies greatest commitment to foreign market.

Generally, 100% equity ventures are established abroad through

  Merger and acquisition of a going concern – it is a quicker method than setting up of new facility. Also called ‘Brown-field project’.

  Acquiring equity share of J V partner – in 80% of cases, one partner sells shares to other partner (statistically after 7 years).

 Foreign Direct Investment or Green Field Projects – the firm sets up manufacturing facilities abroad starting from scratch. It

becomes company’s subsidiary abroad.

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9. Strategic Alliance

A firm may form an alliance (not JV) with a company abroad (generally, a competitor) to share each others’ strength on reciprocal basis.

For example, P&G formed a strategic alliance in 1990s with Godrej Consumer Products Ltd. to share their distribution network in India in exchange of P&G’s successful consumer product marketing know-how.

Or, an Indian pharmaceutical company may form alliance with a German pharmaceutical company to distribute and promote each others’ products in their respective countries.

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10. Countertrade

These are export and import transactions that are settled between themselves instead of being squared up through payment in terms of soft or hard currency.These are unconventional modes of entry into foreign markets.

Common forms being :

        Barter – Direct exchange of goods of equal value between two parties internationally.

        Buy Back – Suppliers of plants, technology etc. may receive payment in form of goods produced.

        Compensation Deals – Seller receives part payment in cash and rest in products.

        Counterpurchase – Seller receives full payment in cash but agrees to spend the whole amount in importers’ country within stipulated time.

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 11.    Third Country Locations

Large MNCs in their bid to globalize are creating “Regional Manufacturing Hubs” from where they supply value-added products to adjoining countries. These allow benefits of economy of scale and convenient logistics.

For example, Diamler Benz, Ford and others are setting up manufacturing units in India not only for supplying to Indian market but also for other countries.

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Strategies for Competitive Advantages 

Competition :

As economy of nations liberalize, newer players find their way into markets i.e. more and more players emerge in industry with fresh capacities. These players exert interacting forces upon each other which is called Competition.

Common objective of players in national and international markets is to attract customers toward their product or service by providing greater values under these interacting forces of competition. 

Such of those firms who are able to develop competences to deliver factors critical for success (like needs, wants, value expectation of customers) outperform other competitors. It is called Competitive Advantages.

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Forces that influence Competition : 

Michael Porter indicated that following forces influence competition

in any industry :

1.     Threat of New Entrants

2.     Threat of Substitute Products

3.     Bargaining Power of Buyers

4.     Bargaining Power of Suppliers &

5.     Rivalry among Competitors.

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These forces of competition exert substantial pressure on profitability of companies.

1. Threat of New Entrants

New entrants into an industry in a nation bring

       Increase in manufacturing capacity

       Desire to snatch market share

       Suitable strategy to satisfy customer needs.

Generally entry of new players are outcome of following barriers

a) Economy of Scale:

Existing players’ enjoying economy of scale in marketing, manufacturing, R&D etc..

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 b)     Product Differentiation

High level of ‘Product differentiation’ by an existing brand acts as entry barrier for new players.

 c)     Overall Capital Requirement

Requirement of huge capital to initiate operation reduces future competition. 

d) Switching Cost

When customer perceives cost to change product or supplier in the form of retraining, ancillary equipment cost etc. is high – it acts as entry barrier for new players. 

e) Access to Distribution Channel

Establishing suitable marketing channel takes lot of investment, training and time. 

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f) Government Policy

Extent of ‘protection’ and treatment meted by host country government.

g)     Other Advantages

Favorable location, govt. subsidies, access to cheaper raw material etc.

h) Competitor Response

Expected vigorous and unpleasant response from existing Players discourage new entrants.

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2. Threat of Substitute Products

Availability of substitute products limits price that market leader can charge.

3. Bargaining Power of Buyers

Organized buyers like industrial customers gain leverage upon sellers because

        they buy in large quantities

        they bargain hard to lower price as there are many suppliers

        there is possibility of backward integration.

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4. Bargaining Power of Suppliers

Raw material and other suppliers enjoy bargaining power

   when demand exceeds supply

   when number of suppliers are limited

   when product supplied is specialized in nature.

5. Rivalry among Competitors

In order to improve their positions and gain advantages, firms

quite often resort to

   intense price competition

   advertising wars and increased margin to channel members

   competitive ‘product differentiation’ and ‘positioning’.

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Competition and Competitive Advantages

In today’s economic scenario competition is hoting up nationally and internationally, therefore for any firm to prosper or even to stay afloat

        it should be aware of competition and

        possess competence to deliver greater value to customers.

This competence is competitive advantage which varies from market to market, industry to industry even market segment to segment.

Firms achieve competitive advantages through

        Creating greater value as perceived by customers than the competitors – Generic Strategies.

        Creating newer advantages faster than competitors – Strategic Intent Concept.

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1. Generic Strategies for Creating Competitive Advantages

Michael Porter developed this model of creating competitive advantages to beat competitors adopting following approaches          Overall Cost Leadership -- Firm gears up marketing machinery to achieve larger volume of sale nationally and abroad, then go for economy of scale manufacture. This brings down unit cost of manufacture and sale compared to competitors, enabling selling at lower price providing greater value to customers.  

This cost leadership is further accentuated with Learning curve and Experience curve cost reductions.

       Product Differentiation – It is a very appreciable competitive advantage. The firm develops a unique product and by superior marketing efforts create a brand image through ‘Product Differentiation’.

It allows the firm to charge premium price.

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         Narrow Focus Advantages -- The firm studies need pattern of different segments of market and then try to satisfy a narrow segment through narrow differentiation.

For example, Willy’s jeeps, Fair & Lovely Cream etc. focuses on satisfying specific needs of customers.

         Cost Focus – The firm may exploit its lower cost of manufacture to offer cut-throat price competition to win over a narrow market segment. 

These generic strategies produce sustained result when are backed by trade barriers.

e.g. Hindustan Lever’s strategy and success till 1990s.

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2. Strategic Intent Concept

C.K. Prahalad and Gary Hamel established that most of the generic competitive advantages are not long-lasting. Because competitors imitate those in no time.

So Prahalad and Hamel insist that real competitive advantages come from creating advantages faster than competitors can copy. 

This strategic intent is based upon Deming’s Principle that says a company should commit itself to continuous improvement to win this battle of competition. 

Hamel and Prahalad established that firms gain competitive advantage by disadvantaging competitors through competitive innovation. They suggest following approaches :

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 A. Building Layers of Advantages

Wider is the portfolio of advantages of a firm, more shall be its chance to outwit rivals.

B. Look for Loose Bricks

Identify weak spot of competitors and then direct your efforts to penetrate into market through these vulnerable zones.

C. Change the Rules

Adopt strategies totally different to leader and other players in market. For example, Eureka Forbes. 

D. Collaborate

The competitor is formidable it may be worthwhile to join them. It involves in using their know-how, patents etc. through joint- venture, partnership agreements etc. For example, Sony’s taking license of transistor technology in 1950s from AT&T for US $25000, rest is history.

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Global Competition & National Competitive Advantages 

We are in realm of universal competition; human beings, companies even nations are in state of competition with other nations. It is referred to as Global Competition. Growth in global trade is giving rise to global competition.

Major benefit of Global Competition

It creates greater value for customers through reduced price and

improved quality products and services. 

A nation A cannot remain untouched for long when a company in

nation B offers a better product at lower price. The company in

nation B shall start supplying customers in nation A with the value-

added product soon thus affecting competition in both nations.

For example, India’s automobile industry.

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Some nations attract prominent players of certain industries like computers, automobiles, movies etc. to US; chemicals, luxury cars, heavy machineries etc. to Germany and so on.

The elements of vital concern in locating these industries are value-chain activities driven by National Attributes that provide competitive advantages to nations. 

These attribute of nations have been identified by Michael Porter as National Diamonds viz.

1.     Factor Conditions

2.     Demand Conditions

3.     Related and supporting Industries &

4.     Firm Strategy, Structure and Rivalry

5.     Influence of Government

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1. Factor Conditions

Michael Porter indicates that factors (of production) which are created within a country are of special importance as its attributes like

A. Human Resource Factors

Quantity of workers available, skills possessed, their wage levels and overall work ethic constitute the nations’ Human Resource factor.

B. Physical Resource Factors

Availability, quantity, quality and cost of -- land, water, minerals and other natural resources determine nations’ Physical Resources factor.

In addition proximity to markets, sources of supply; transportation costs add credence to this factor.

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C. Knowledge Resource Factors

Availability of significant population with scientific, technical

And market related knowledge constitute nations’ Knowledge Resources Factor.

D. Capital Resource Factors

Availability, amount, cost and type of capital in a is its Capital Resources Factor. It mainly depends upon its savings rate, interest rate, tax laws and government deficits.

E. Infrastructure Resources

Availability and cost of usage of infrastructure elements like banking, health care, transportation, communication system are important in generating competitive advantage for nation.

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2. Demand Conditions

The nature of home country demand for product or service lends an edge to nations’ competitive advantage. The determinant factors being :

        Composition of Home Demand

        Size and Trend of Home Demand

        Rate of Home Market Growth

3. Related and Supporting Industries

Related and supportive industries provide raw and other material at competitive rates and of superior quality. Thus may add competitive advantages.

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4. Firm strategy, Structure and Rivalry

Differences in management styles, organizational skills and

strategic perspective create advantages or disadvantages for

firms.

Domestic rivalry keep the firms to be dynamic and continually

under pressure to innovate and improve. It makes them develop

new products, technologies, improve existing ones, quality and

service, lower costs and prices.

Domestic rivalry is not restricted to market and profit only, it

extends to better employee talents, R&D break through and

prestige in home market.

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5. Influence of Government

Government influences demand conditions as largest buyer and indirectly by through monetary and fiscal policies; it influences resources through suitable policies and also develops infrastructure and controls competition.

THANK YOU

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