Ch 12 lecture notes

Chapter Overview

Title: Entering Developed and Emerging Markets

Authors: Frank Cotae & Jacqueline Musabende, Mount Royal University

Focus:

Understanding firms' foreign market expansion decisions and the dynamics of entering new geographical markets, both developed and emerging, with a detailed quantitative and qualitative analysis of market opportunities and risks.

Learning Objectives

• Describe the basic decisions for firms considering foreign expansion:

  • Which foreign markets to enter?

  • When to enter these markets?

  • On what scale to enter these markets?

• Compare entry modes for foreign markets, highlighting their effectiveness and strategic fit.

• Identify factors influencing the choice of entry mode, including economic conditions, market characteristics, and firm capabilities.

• Discuss the advantages and disadvantages of acquisitions vs. greenfield ventures, providing real-world examples of firms' experiences.

Market Entry Decisions

Basic Entry Decisions

1. Which Foreign Markets?

   • Involves a systematic assessment of 195 countries to identify viable opportunities and profit potential based on market size, growth rate, competitive landscape, and regulatory environment.

   • Companies must intricately balance benefits, costs, and risks associated with market entry, employing rigorous market research and analysis to guide their decisions.

2. Timing of Entry

   • First Mover Advantages:

     • Gaining competitive advantages through establishing brand presence, achieving higher sales volume, and acquiring valuable market experience prior to competitors.

   • Late Mover Advantages:

     • Learning from existing competitors’ experiences, avoiding pioneering costs associated with market entry, but potentially facing higher switching costs and disadvantages due to late entry.

3. Scale of Entry

   • Large Scale:

     • Involves significant resource commitments that can yield high risk; however, it can maximize first mover advantages and establish a comprehensive market presence.

   • Small Scale:

     • Limits market exposure, reducing risk while providing opportunities for learning and diversification across other markets, allowing firms to iterate their approach based on initial outcomes.

Entry Modes

Main Modes of Market Entry:

1. Exporting:

   • A straightforward approach without heavy initial investment in foreign territory.

2. Turnkey Projects:

   • Complete installations provided to clients, requiring little follow-up from the providing firm post-completion.

3. Licensing:

   • Granting rights to local firms to produce and sell a company’s products, while receiving royalties.

4. Franchising:

   • Similar to licensing but often involves greater control over brand and operational practices.

5. Joint Ventures:

   • Collaborations with local firms to leverage their market knowledge and share the investment burden.

6. Wholly Owned Subsidiaries:

   • Full ownership and control of operations, which comes with higher risk but allows complete governance of business practices.

Mode of Entry Case Study: IKEA in India

• IKEA employed a customized approach that adapted to Indian customer preferences and cultural practices.

• Notable regulatory shifts in 2012 enabled 100% foreign ownership without necessitating local partnerships, fostering greater investment confidence.

• Comprehensive market research spanning five years informed IKEA’s strategies, adjusting its offerings to align with local expectations and purchasing behaviors.

Factors Affecting Market Entry

1. Economic and Demographic Factors

   • Substitution Behavior: Understanding that market demand can differ significantly between countries (e.g., diesel versus gasoline vehicles in India).

   • Cultural Considerations: Demand may shift dramatically due to cultural practices, such as dietary restrictions in certain regions, impacting product offerings.

   • Income Disparities: Uneven wealth distribution can distort GDP metrics, leading to miscalculations of consumer purchasing power across different socio-economic segments.

   • Obsolescence: A phenomenon where emerging consumers often leapfrog older technologies (e.g., favoring mobile phones directly over traditional landlines).

Strategies for International Expansion

1. Diversification Strategy: Rapidly entering multiple foreign markets to spread risk and capitalize on global opportunities.

2. Concentration Strategy: Focusing intensively on a few selected markets until a strong, sustainable presence is established, maximizing resource allocation.

3. Reinvesting and Harvesting: Strategic reinvestment of profits in promising markets while divesting from underperforming areas (e.g., Burger King’s adjustments in the Korean market).

Evaluation of Entry Modes

Pros and Cons of Entry Modes

1. Exporting:

   • Pros: Avoids extensive manufacturing costs and maximizes the experience curve benefits.

   • Cons: High transportation costs, potential tariff barriers, and risks of creating loyalty conflicts with agents due to intermediaries.

2. Licensing and Franchising:

   • Pros: Low-cost and risk for expansion; effective in penetrating markets with investment barriers (although some control is diluted).

   • Cons: Limited control over product quality and brand management; operational risks arise from varying local execution levels.

3. Turnkey Projects:

   • Pros: Provides price certainty, reducing unknown variables, and improving management control.

   • Cons: Cultural and expectation gaps can present significant risks.

4. Joint Ventures:

   • Advantages: Share resources and risks, benefiting from local market knowledge.

   • Disadvantages: Potential for control dilution and conflicts in management vision.

5. Wholly Owned Subsidiaries:

   • Pros: Ensures full control over operations, product quality, and technology transfer.

   • Cons: Highest cost of entry, with substantial risks in navigating complex cultural landscapes.

Challenges in Acquisition Strategies

• Acquisitions may face substantial pitfalls, including:

  • Overpayment for acquired assets due to inflated market valuations.

  • Cultural mismatches leading to operational inefficiencies post-acquisition.

  • Inexperienced management failing to implement effective integration strategies.

Conclusion

Overall, there is no universally optimal entry strategy; firms must critically assess market conditions, weigh potential risks, and match their capabilities to potential market challenges. Learning from past failures in market entry is essential for refining future strategic initiatives and enhancing global operational effectiveness.