Developing an International Entry Strategy

Learning Topic

International Expansion and Global Market Opportunity Assessment

Companies may decide to expand internationally for a variety of reasons. Before deciding on an international strategy, however, it is important to clearly understand the rationale and motivations for international expansion. These motivations typically include one or more of the following:

· seeking new markets—Company growth objectives that cannot be met with domestic demand drive the search for new revenue sources. The company may also want to establish a strong foreign presence to gain a first-mover advantage.

· geographic advantage—Some countries provide resources and strengths that are not available in the company’s home country. Access to skills and knowledge is a common motive for international expansion. The establishment of effective global hubs can also increase distribution efficiency.

· risk diversification—Economic downturns in one location can be mitigated by a company’s presence in another location.

· keeping up with the competition—If the company has a competitive rivalry in its home country, it may follow its competitor into a new territory.

Namely, international expansion allows companies to take advantage of global business opportunities including the following:

· marketing and distribution of products and services

· establishing production facilities to produce more competently or cost effectively

· procuring raw materials or components, or services of lower cost or superior quality

· entering into collaborative arrangements with foreign partners

Global market opportunities manifest as a combination of circumstances, locations, or timing that offer prospects for exporting, investing, sourcing, or partnering in foreign markets.

Before the company decides to expand internationally, it should carry out international due diligence and analyze the impact of regional differences, consumer preferences, and industry dynamics on its markets. A presence in a new market will have to follow the company’s specific strategies, which can be influenced by the local culture, regulatory mechanisms, and the structure of the industry.

International expansion may be attractive, but competition in these markets can be intense. Risks and costs can be underestimated in markets that are new to managers, and systematic global marketing opportunity assessment is therefore essential. Some of the well-known failures in global markets include the following:

· Best Buy failed to notice that Europeans prefer smaller shops to big-box stores. The company also closed its branches in China and Turkey.

· eBay initially failed to expand into China, where customers prefer to develop trust through their own interactions with sellers rather than act on other users’ ratings, and into Japan, where buyers had to input their credit card information in order to make a purchase, a practice that was not popular there at the time.

· Starbucks closed its six stores in Israel, failing to appreciate the nation’s coffee culture and misinterpreting the local consumer base’s tastes.

· Wendy’s closed its 71 locations in Japan. Japan already had McDonald’s and Burger King, but the company did not place appropriate focus on the Japanese palate.

The main steps of the global marketing opportunity assessment are shown in the figure below.

Global Marketing Opportunity Assessment

As we saw in the above examples, a weak opportunity assessment of global markets can expose companies to failure. Analyzing and evaluating markets for international expansion is critical for companies planning to access global markets.

Resources

· Case Study: The Invisible Global Retailer and Its Re-Entry into US Markets

· Global Strategic Choices

· Entry Modes for International Expansion

· Scenario Planning and Analysis

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Learning Resource

Case Study: The Invisible Global Retailer and Its Re-Entry into US Markets

Which corporation owns 123 companies, operates in twenty-seven countries, and has been in the mobile-phone business for over a decade? If you don't know, you're not alone. Many people haven't heard of the Otto Group, the German retailing giant that's second only to Amazon in e-commerce and first in the global mail-order business. The reason you've likely never heard of the Otto Group is because the firm stays in the background while giving its brands the spotlight. This strategy has worked over the company's almost eighty-year history, and Otto continues to apply it to new moves, such as its social media site, Two for Fashion. "They are talking about fashion, not about Otto, unless it suits," Andreas Frenkler, the company's division manager of new media and e-commerce, explained about the site's launch in 2008 (Dishman, 2010). The site is now one of the top fashion blogs in Germany and is an integral part of the retailer's marketing strategy.

Leading through Passion, Vision, and Strategy

Today, the Otto Group consists of a large number of companies that operate in the major economic zones of the world. The Otto Group's lines of business include financial services, multichannel retail, and other services. The financial services segment covers an international portfolio of commercial services along the value chain of retail companies, such as information-, collection-, and receivable-management services. The multichannel retail segment covers the Otto Group's worldwide range of retail offerings. Goods are marketed across three distribution channels—catalogs, e-commerce, and over-the-counter (OTC) retail. The third segment combines the Otto Group's logistics, travel, and other service providers as well as sourcing companies. Logistics service providers and sourcing companies support both the Otto Group's multichannel retail activities and nongroup clients. Travel service providers offer customers travel offerings across all sales channels. Unique to the Otto Group is the combination of travel agencies, direct marketing, and Internet sites. The combined revenue of these three ventures is growing rapidly, even during the global economic downturn. The travel service revenues for 2010 were 10 billion euros, or about $12 billion.

Future growth is guided by the Otto Group's Vision 2020 strategy, which is based on achieving a strong presence in all key markets of the three largest regions—Europe, North America, and Asia. In doing so, the Otto Group relies on innovative concepts in the multichannel business, current trends in e-commerce, OTC retail, and developments in mobile commerce. In keeping with that vision, its focus for near-term expansion is on expanding the group's strong position in Russia and increasing market share in other economic areas, such as the Chinese and Brazilian markets. Investment options in core European markets are continually being reviewed to strengthen the multichannel strategy. As a global operating group, Otto aims to have a presence in all major markets and will continue to expand OTC retailing.

In 2010, for instance, the Otto Group continued to develop its activities in the growth markets of Central and Eastern Europe. Through takeovers and the acquisition of further shares in various distance-selling concepts, including Quelle Russia, the Otto Group has continued to build on its market leadership in Russian mail order. A further major goal for the future is to expand OTC retail within the multichannel retail segment, making it one of the pillars of Otto alongside its e-commerce and catalog businesses. The foundations of value-oriented corporate management are reflected in the uncompromising customer orientation evident in business activities with both end consumers and corporate clients.

The strategy envisages targeted investments that provide the Otto Group with best-in-class business models. Otto not only draws on an excellent range of customer services as the basis for its success in its core business of multichannel retailing but also offers an array of retail-related services for its corporate clients. In the future, the company is looking to expand these services, moving beyond its core business. The buying organization of the Otto Group has been repositioned under the name Otto International and is now a firm fixture in the world's key sourcing markets. Otto International's corporate clients stand to benefit directly from the market power of the Otto Group while providing the volumes to make their own contribution to its growth.

The US Market Re-entry Initiative

Germany remains the Otto Group's most-important regional sales market, followed by France, the rest of Europe, North America, and Asia. In the United States, Otto set up a greenfield division called Otto International and quietly launched Field & Stream 1871, a brand of outdoor clothing, outerwear, footwear, and accessories, in 2010. The products are available only on the Field & Stream e-commerce site. As always, the Otto name is almost nowhere on the site, being visible only on the site's privacy policy page.

Industry experts thought it surprising that Otto launched the clothing line because it had previously left the US market after its acquisition of Eddie Bauer's parent company, Spiegel, failed in 2009.

Still, the Otto Group has received much acclaim for its innovations in the retail arena. For example, according to a Microsoft case study, Otto was the first company (1) to use telephone ordering, (2) to produce a CD-ROM version of its catalog in the 1990s (to deal with slow dial-up connections), and (3) to build one of the largest collections of online merchandise. The Otto Group may have other innovations planned for Field & Stream, but the US fashion market is saturated with competitors. As WWD reported, Otto may do better to focus on growing its own retail brands and utilizing its impressive in-house manufacturing and logistics divisions, which are now Otto's fastest-growing segment (Brenner, 2010). Otto could use these divisions to build other retail operations—while keeping a low profile, of course.

References 

Brenner, T. (2010). Otto Group: A German giant tiptoes back to the US. WWD. Retrieved from http://www.wwd.com/wwd-publications/wwd/2010-04-14?id=3036440&date=today&module=tn/today#/article/retail-news/otto-group-a-german-giant-tiptoes-back-to-the-u-s--3036500?navSection=issues &navId=3036440

Dishman, L. (2010). How the biggest online retailer you've never heard of will take the US market. Retrieved from http://www.bnet.com/blog/publishing-style/how-the-biggest-online-retailer-you-8217ve-never-heard-of-will-take-the-us-market/248

Licenses and Attributions

Chapter 8: International Expansion and Global Market Opportunity Assessmentfrom International Business v. 1.0 was adapted by Saylor Academy and is available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the work's original creator or licensor. UMUC has modified this work and it is available under the original license.

© 2019 University of Maryland University College

Global Strategic Choices

The Why, Where, and How of International Expansion

The allure of global markets can be mesmerizing. Companies that operate in highly competitive or nearly saturated markets at home, for instance, are drawn to look overseas for expansion. But overseas expansion is not a decision to be made lightly, and managers must ask themselves whether the expansion will create real value for shareholders. Companies can easily underestimate the costs of entering new markets if they are not familiar with the new regions and the business practices common within the new regions. For some companies, a misstep in a foreign market can put their entire operations in jeopardy, as happened to the French retailer Carrefour after their failed entry into Chile. In this section, as summarized in the following figure, you will learn about the rationale for international expansion and then how to analyze and evaluate markets for international expansion.

Analyzing Markets for International Expansion
Why?	Where?	Hard criteria	Soft criteria	Fit	How?
· Positive economic logic? · Supported by our differentiators? · Strengthen/add to our differentiators? If No, then Stop! If yes, see "Where" and "How" columns.	· What new countries fit our differentiators? · Which ones can strengthen/add to our differentiators? · What hard and soft criteria did we use to evaluate them? · Where is business fit the best? The worst? · If there are multiple opportunities, which ones should be first, second, etc.?	· Market size · Size of target growth · Future growth · Parking levels · Regulatory or statutory hurdles/incentives for target products or market segments · Competitive environment · Customer needs · Ability to earn reasonable returns	· Economic and political stability · Restriction on foreign ownership · Freedom of capital flows · Intellectual property issues · Human resource availability · Government transparency · Legal environment · Infrastructure	· Human resources · Geographic proximity · Culture differences · Risk adversity · Internal company resources	· Do it on our own? · Do we need a local partner? · How big and how fast?

Rationale for International Expansion

Companies embark on an expansion strategy for one or more of the following reasons:

· to improve the cost-effectiveness of their operations

· to expand into new markets for new customers

· to follow global customers

For example, the US chemical firm DuPont, Brazilian aerospace conglomerate Embraer, and Finnish mobile-phone maker Nokia are all investing in China to gain new customers. Schneider Logistics, in contrast, initially entered a new market, Germany, not to get new customers but to retain existing customers who needed a third-party logistics firm in Germany. Thus, Schneider followed its customers to Germany. Other companies, like microprocessor maker Intel, are building manufacturing facilities in China to take advantage of the less costly and increasingly sophisticated production capabilities. For example, Intel built a semiconductor manufacturing plant in Dalian, China, for $2.5 billion, whereas a similar state-of-the-art microprocessor plant in the United States can cost $5 billion ("2011 Global R&D," 2010). Intel has also built plants in Chengdu and Shanghai, China, and in other Asian countries (including Vietnam and Malaysia) to take advantage of lower costs.

Planning for International Expansion

As companies look for growth in new areas of the world, they typically prioritize which countries to enter. Because many markets look appealing due to their market size or low-cost production, it is important for firms to prioritize which countries to enter first and to evaluate each country's relative merits. For example, some markets may be smaller in size, but their strategic complexity is lower, which may make them easier to enter and to conduct operations. Sometimes there are even substantial regional differences within a given country, so careful investigation, research, and planning are important to do before entry.

International Market Due Diligence

International market due diligence involves analyzing foreign markets for their potential size, accessibility, cost of operations, and buyer needs and practices to aid the company in deciding whether to invest in entering that market. Market due diligence relies on using not just published research on the markets but also interviews with potential customers and industry experts. A systematic analysis needs to be done, using tools like PESTEL and CAGE, which will be described in "PESTEL, Globalization, and Importing" and "CAGE Analysis", respectively. In this section, we begin with an overview.

Evaluating whether to enter a new market is like peeling an onion—there are many layers. For example, when evaluating whether to enter China, the advantage most people see immediately is its large market size. Further analysis shows that the majority of people in that market can't afford US products, however. But even deeper analysis shows that while many Chinese are poor, the number of people who can afford consumer products is increasing (Kleiner, 2010).

The next part of due diligence is to understand the regional differences within the country and to not view the country as a monolith. For example, although companies are dazzled by China's large market size, deeper analysis shows that 70 percent of the population lives in rural areas. This presents distribution challenges given China's vast distances. In addition, consumers in different regions speak different dialects and have different tastes in food. Finally, the purchasing power of consumers varies in the different cities. City dwellers in Shanghai and Tianjin can afford higher prices than villagers in a western province.

Let's look at a specific example. To achieve the dual goals of reducing operations costs and being closer to a new market of customers, for instance, numerous high-tech companies identify Malaysia as an attractive country to enter. Malaysia is a relatively inexpensive country and the population's English skills are good, which makes it attractive both for finding local labor and for selling products. But even in a small country like Malaysia, there are regional differences. Companies may be tempted to set up operations in the capital city, Kuala Lumpur, but doing a thorough due diligence reveals that the costs in Kuala Lumpur are rising rapidly. If current trends continue, Kuala Lumpur will be as expensive as London in five years. Therefore, firms seeking primarily a lower-cost advantage would do better to locate to another city in Malaysia, such as Penang, which has many of the same advantages as Kuala Lumpur but does not have its rising costs (Chamania, Mehta, & Sehgal, 2010).

Understanding Local Consumers

Entering a market means understanding the local consumers and what they look for when making a purchase decision. In some markets, price is an important issue. In other markets, such as Japan, consumers pay more attention to details—such as the quality of products and the design and presentation of the product or retail surroundings—than they do to price. The Japanese demand for perfect products means that firms entering Japan might have to spend a lot on quality management. Moreover, real-estate costs are high in Japan, as are freight costs such as fuel and highway charges. In addition, space is limited at retail stores and stockyards, which means that stores can't hold much inventory, making replenishment of products a challenge. Therefore, when entering a new market, it's vital for firms to perform full, detailed market research in order to understand the market conditions and take measures to account for them.

How to Learn the Needs of a New Foreign Market

The best way for a company to learn the needs of a new foreign market is to deploy people to immerse themselves in that market. Larger companies, like Intel, employ ethnographers and sociologists to spend months in emerging markets, living in local communities and seeking to understand the latent, unarticulated needs of local consumers. For example, Dr. Genevieve Bell, one of Intel's anthropologists, traveled extensively across China, observing people in their homes to find out how they use technology and what they want from it. Intel then used her insights to shape its pricing strategies and its partnership plans for the Chinese consumer market (Radjou, 2009).

Differentiation and Capability

When entering a new market, companies also need to think critically about how their products and services will be different from what competitors are already offering in the market so that the new offering provides customers value. Companies trying to penetrate a new market must be sure to have some proof that they can deliver to the new market. This proof could be evidence that they have spoken with potential customers and are connected to the market ("How We Do It," 2011). Related to firm capability, another factor for firms to consider when evaluating which country to enter is that of corporate fit. Corporate fit is the degree to which the company's existing practices, resources and capabilities fit the new market. For example, a company accustomed to operating within a detailed, unbiased legal environment would not find a good corporate fit in China because of the current vagaries of Chinese contract law (Wingard, n.d.). Whereas a low corporate fit doesn't preclude expanding into that country, it does signal that additional resources or caution may be necessary. Two typical dimensions of corporate fit are human resources practices and the firm's risk tolerance.

Take Note

From 2005 to 2009, the number of Global 500 companies headquartered in BRIC countries (Brazil, Russia, India, and China) increased significantly. China grew from eight headquarters to 43, India doubled from five to 10, Brazil rose from five to nine, and Russia went from four to six. At the end of this period, the United States led with 181 company headquarters, which is down from 219 in 2005 (Meister & Willyerd, 2010).

Industry Dynamics 

In some cases, the decision to enter a new market will depend on the specific circumstances of the industry in which the company operates. For example, companies that help build infrastructure need to enter countries where the government or large companies have a lot of capital, because infrastructure projects are so expensive. The president of Spanish infrastructure company Fomento de Construcciones y Contratas said, "We focus on those countries where there is more money and there is a gap in the infrastructure," such as China, Singapore, the United States, and Algeria ("Practical Advice for Companies," 2011).

Political stability, legal security, and the rule of law—the presence of and adherence to laws related to business contracts, for example—are important considerations prior to market entry regardless of which industry a company is in. Fomento de Construcciones y Contratas learned this the hard way and ended up leaving some countries it had entered. The company's president, Baldomero Falcones, explained, "When you decide whether or not to invest, one factor to take into account is the rule of law. Our ethical code was considered hard to understand in some countries, so we decided to leave during the early stages of the investment" ("Practical Advice for Companies," 2011).

Ethics in Action

Companies based in China are entering Australia and Africa, primarily to gain access to raw materials. Trade between China and Africa grew an average of 30 percent in the decade up to 2010, reaching $115 billion that year (Redfern, 2011). Chinese companies operate in Zambia (mining coal), the Democratic Republic of the Congo (mining cobalt), and Angola (drilling for oil). To get countries to agree to the deals, China had to agree to build new infrastructure, such as roads, railways, hospitals, and schools. Some economists, such as Dambisa Moyo, who wrote Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa, believe that the way to help developing countries like those in Africa is not through aid but through trade. Moyo argues that long-term charity is degrading. She advocates business investments and setting up enterprises that employ local workers. Ecobank CEO Arnold Ekpe (whose bank employs 11,000 people in twenty-six African states) says the Chinese look at Africa differently than the West does: "[The Chinese] are not setting out to do good," he says. "They are setting out to do business. It's actually much less demeaning" (Perry, 2009). Deborah Brautigam, associate professor at the American University's International Development Program, agrees. "The Chinese understand something very fundamental about state building: new states need to build buildings and dignity, not simply strive to end poverty," she says (Bloomfield, 2010).

Steps and Missteps in International Expansion 

Let's look at an example of the steps—as well as the missteps—in international expansion. American retailers entered the Chilean market in the mid- to late 1990s. They chose Chile as the market to enter because of the country's strong economy, the advanced level of the Chilean retail sector, and the free trade agreements signed by Chile. From that standpoint, their due diligence was accurate, but it didn't go far enough, as we'll see.

The retailer JCPenney entered Chile in 1995, opening two stores. The French retailer Carrefour also entered Chile, in 1998. Neither company entered through an alliance with a local retailer. Both companies were forced to close their Chilean operations due to the losses they were incurring. Analysis by the Aldolfo Ibáñez University in Chile explained the reasons behind the failures: the managers of these companies were not able to connect with the local market, nor did they understand the variables that affected their businesses in Chile ("The Globalization of Chilean Retailing," 2007). Specifically, the Chilean retailing market was advanced, but it was also very competitive. The new entrants (JCPenney and Carrefour) didn't realize that the existing major local retailers had their own banks and offered banking services at their retail stores, which was a major reason for their profitability. The outsiders assumed that profitability in this sector was based solely on retail sales. They missed the importance of the bank ties. Another typical mistake that companies make is to assume that a new market has no competition just because the company's traditional competitors aren't in that market.

Now let's consider the example of native Chilean retailers entering a market new to them, in Peru. The Chilean retailers were successful in their own markets but wanted to expand beyond their borders in order to get new customers in new markets. The Chilean retailers chose to enter Peru, where people also speak Spanish.

The Peruvian retailing market was not advanced, and it did not offer credit to customers. The Chileans entered the market through partnership with local Peruvian firms, and they introduced the concept of credit cards, which was an innovation in the poorly developed Peruvian market. Entering through a domestic partner helped the Chileans because it eliminated hostility and made the investment process easier. Offering the innovation of credit cards made the Chilean retailers distinctive and offered an advantage over the local offerings ("The Globalization of Chilean Retailing," 2007).

Key Points

· Companies embark on an expansion strategy for one or more of the following reasons: (1) to improve the cost-effectiveness of their operations, (2) to expand into new markets for new customers, and (3) to follow global customers.

· Planning for international expansion involves doing a thorough due diligence on the potential markets into which the country is considering expanding. This includes understanding the regional differences within markets, the needs of local customers, and the firm's own capabilities in relation to the dynamics of the industry.

· Common mistakes that firms make when entering a new market include not doing thorough research prior to entry, not understanding the competition, and not offering a truly targeted value proposition for buyers in the new market.

Glossary

corporate fit

the degree to which the company's existing practices, resources, and capabilities fit the new market

international market due diligence

analyzing foreign markets for their potential size, accessibility, cost of operations, and buyer needs and practices to aid the company in deciding whether to invest in entering that market

References

Bloomfield, S. (2010, May 27). China in Africa: Give and take. Emerging Markets. Retrieved from http://www.emergingmarkets.org/Article/2580082/CHINA-IN-AFRICA-Give-and-take.html

Chamania, A., Mehta, H., & Sehgal, V. (2010). Five factors for finding the right site. Strategy and Business. Retrieved from http://www.strategy-business.com/article/10403?gko=e029a

The Globalization of Chilean Retailing. (2007, December 12). Knowledge@Wharton. Retrieved from http://www.wharton.universia.net/index.cfm?fa=viewfeature&id=1450&language=english

How We Do It: Strategic Tests from Four Senior Executives. (2011, January). McKinsey Quarterly. Retrieved from http://www.mckinseyquarterly.com/PDFDownload.aspx?ar=2712&srid=27.

Kleiner, A. (2010). Getting China right. Strategy and Business. Retrieved from http://www.strategy-business.com/article/00026?pg=al

Meister, J., & Willyerd, K. (2010). The 2020 workplace. New York, NY: HarperBusiness.

Practical Advice for Companies Betting on a Strategy of Globalization. (2011). Knowledge@Wharton. Retrieved from http://knowledge.wharton.upenn.edu/article.cfm?articleid=2541

Radjou, N. (2009). R&D 2.0: Fewer engineers, more anthropologists. Harvard Business Review (web log). Retrived from http://blogs.hbr.org/radjou/2009/06/rd-20-fewer-engineers-more-ant.html.

Redfern, P. (2011, February 11). Africa: Trade between China and continent at US$115 billion a year. Daily Nation. Retrieved from http://allafrica.com/stories/201102140779.html

Perry, A. (2009, March 12). Africa, business destination. Time. Retrieved from http://www.time.com/time/specials/packages/article/0,28804,1884779_1884782_1884769,00.html#ixzz1DwbdOXvs

2011 Global R&D Funding Forecast. (2010, December). R&D Magazine. Retrieved from http://www.rdmag.com/tags/publications/global-r-and-d-funding-forecast

Wingard, C. (n.d.) Ensuring value creation through international expansion. L.E.K. Consulting Executive Insights, 5(3).

Entry Modes for International Expansion

The Five Common International-Expansion Entry Modes

In this section, we will explore the traditional international-expansion entry modes. Beyond importing, international expansion is achieved through exporting, licensing arrangements, partnering and strategic alliances, acquisitions, and establishing new, wholly owned subsidiaries, also known as greenfield ventures(Zahra, Ireland, & Hitt, 2000). Each mode of market entry has advantages and disadvantages. Firms need to evaluate their options to choose the entry mode that best suits their strategy and goals.

Exporting

Exporting is typically the easiest way to enter an international market, and therefore most firms begin their international expansion using this model of entry. Exporting is the sale of products and services in foreign countries that are sourced from the home country. The advantage of this mode of entry is that firms avoid the expense of establishing operations in the new country. Firms must, however, have a way to distribute and market their products in the new country, which they typically do through contractual agreements with a local company or distributor. When exporting, the firm must give thought to labeling, packaging, and pricing the offering appropriately for the market. In terms of marketing and promotion, the firm will need to let potential buyers know of its offerings, be it through advertising, trade shows, or a local sales force.

Lost in Translation

One common factor in exporting is the need to translate something about a product or service into the language of the target country. This requirement may be driven by local regulations or by the company's wish to market the product or service in a locally friendly fashion. While this may seem to be a simple task, it's often a source of embarrassment for the company and humor for competitors. David Ricks's book on international business blunders relates the following anecdote for US companies doing business in the neighboring French-speaking Canadian province of Quebec. A company boasted of lait frais usage, which translates to "used fresh milk," when it meant to brag of lait frais employé, or "fresh milk used." The "terrific" pens sold by another company were instead promoted as terrifiantes, or terrifying. In another example, a company intending to say that its appliance could use "any kind of electrical current," actually stated that the appliance "wore out any kind of liquid." And imagine how one company felt when its product to "reduce heartburn" was advertised as one that reduced "the warmth of heart" (Ricks, 1999).

Among the disadvantages of exporting are the costs of transporting goods to the country, which can be high and can have a negative impact on the environment. In addition, some countries impose tariffs on incoming goods, which will impact the firm's profits. In addition, firms that market and distribute products through a contractual agreement have less control over those operations and, naturally, must pay their distribution partner a fee for those services.

Ethics in Action

Companies are starting to consider the environmental impact of where they locate their manufacturing facilities. For example, Olam International, a cashew producer, originally shipped nuts grown in Africa to Asia for processing. Now, however, Olam has opened processing plants in Tanzania, Mozambique, and Nigeria. These locations are close to where the nuts are grown. The result? Olam has lowered its processing and shipping costs by 25 percent while greatly reducing carbon emissions (Porter & Kramer, 2011).

Likewise, when Walmart enters a new market, it seeks to source produce for its food sections from local farms that are near its warehouses. Walmart has learned that the savings it gets from lower transportation costs and the benefit of being able to restock in smaller quantities more than offset the lower prices it was getting from industrial farms located farther away. This practice is also a win-win for locals, who have the opportunity to sell to Walmart, which can increase their profits and let them grow and hire more people and pay better wages. This, in turn, helps all the businesses in the local community (Porter & Kramer, 2011).

Firms export mostly to countries that are close to their facilities because of the lower transportation costs and the often greater similarity between geographic neighbors. For example, Mexico accounts for 40 percent of the goods exported from Texas (Cassey, 2010). The Internet has also made exporting easier. Even small firms can access critical information about foreign markets, examine a target market, research the competition, and create lists of potential customers. Even applying for export and import licenses is becoming easier as more governments use the Internet to facilitate these processes.

Because the cost of exporting is lower than that of the other entry modes, entrepreneurs and small businesses are most likely to use exporting as a way to get their products into markets around the globe. Even with exporting, firms still face the challenges of currency exchange rates. While larger firms have specialists that manage the exchange rates, small businesses rarely have this expertise. One factor that has helped reduce the number of currencies that firms must deal with was the formation of the European Union (EU) and the move to a single currency, the euro, for the first time. As of 2011, seventeen of the twenty-seven EU members use the euro, giving businesses access to 331 million people with that single currency.

Licensing and Franchising

Licensing and franchising are two specialized modes of entry.

Partnerships and Strategie Alliances

Another way to enter a new market is through a strategic alliance with a local partner. A strategic alliance involves a contractual agreement between two or more enterprises stipulating that the involved parties will cooperate in a certain way for a certain time to achieve a common purpose. To determine if the alliance approach is suitable for the firm, the firm must decide what value the partner could bring to the venture in terms of both tangible and intangible aspects. The advantages of partnering with a local firm are that the local firm likely understands the local culture, market, and ways of doing business better than an outside firm. Partners are especially valuable if they have a recognized, reputable brand name in the country or have existing relationships with customers that the firm might want to access. For example, Cisco formed a strategic alliance with Fujitsu to develop routers for Japan. In the alliance, Cisco decided to co-brand with the Fujitsu name so that it could leverage Fujitsu's reputation in Japan for IT equipment and solutions while still retaining the Cisco name to benefit from Cisco's global reputation for switches and routers (Steinhilber, 2008). Similarly, Xerox launched signed strategic alliances to grow sales in emerging markets such as Central and Eastern Europe, India, and Brazil.

Strategic alliances are also advantageous for small entrepreneurial firms that may be too small to make the needed investments to enter the new market themselves. In addition, some countries require foreign-owned companies to partner with a local firm if they want to enter the market. For example, in Saudi Arabia, non-Saudi companies looking to do business in the country are required by law to have a Saudi partner. This requirement is common in many Middle Eastern countries. Even without this type of regulation, a local partner often helps foreign firms bridge the differences that otherwise make doing business locally impossible. Walmart, for example, failed several times over nearly a decade to effectively grow its business in Mexico, until it found a strong domestic partner with similar business values.

The disadvantages of partnering, on the other hand, are lack of direct control and the possibility that the partner's goals differ from the firm's goals. David Ricks, who has written a book on blunders in international business, describes the case of a US company eager to enter the Indian market: "It quickly negotiated terms and completed arrangements with its local partners. Certain required documents, however, such as the industrial license, foreign collaboration agreements, capital issues permit, import licenses for machinery and equipment, etc., were slow in being issued. Trying to expedite governmental approval of these items, the US firm agreed to accept a lower royalty fee than originally stipulated. Despite all of this extra effort, the project was not greatly expedited, and the lower royalty fee reduced the firm's profit by approximately half a million dollars over the life of the agreement" (Ricks, 1999). Failing to consider the values or reliability of a potential partner can be costly, if not disastrous.

To avoid these missteps, Cisco created one globally integrated team to oversee its alliances in emerging markets. Having a dedicated team allows Cisco to invest in training the managers how to manage the complex relationships involved in alliances. The team follows a consistent model, using and sharing best practices for the benefit of all its alliances (Steinhilber, 2008).

Take Note

Partnerships in emerging markets can be used for social good as well. For example, pharmaceutical company Novartis crafted multiple partnerships with suppliers and manufacturers to develop, test, and produce antimalaria medicine on a nonprofit basis. The partners included several Chinese suppliers and manufacturing partners as well as a farm in Kenya that grows the medication's key raw ingredient. To date, the partnership, called the Novartis Malaria Initiative, has saved an estimated 750,000 lives through the delivery of 300 million doses of the medication.

Acquisitions 

An acquisition is a transaction in which a firm gains control of another firm by purchasing its stock, exchanging the stock for its own, or, in the case of a private firm, paying the owners a purchase price. In our increasingly flat world, cross-border acquisitions have risen dramatically. In recent years, cross-border acquisitions have made up over 60 percent of all acquisitions completed worldwide. Acquisitions are appealing because they give the company quick, established access to a new market. However, they are expensive, which in the past had put them out of reach as a strategy for companies in the undeveloped world to pursue. What has changed over the years is the strength of different currencies. The higher interest rates in developing nations has strengthened their currencies relative to the dollar or euro. If the acquiring firm is in a country with a strong currency, the acquisition is comparatively cheaper to make. As Wharton professor Lawrence G. Hrebiniak explains, "Mergers fail because people pay too much of a premium. If your currency is strong, you can get a bargain (“Playing on a Global Stage," 2010).

When deciding whether to pursue an acquisition strategy, firms examine the laws in the target country. China has many restrictions on foreign ownership, for example, but even a developed country like the United States has laws addressing acquisitions. For example, you must be an American citizen to own a TV station in the United States. Likewise, a foreign firm is not allowed to own more than 25 percent of a US airline (“Playing on a Global Stage," 2010).

Acquisition is a good entry strategy to choose when scale is needed, which is particularly the case in certain industries (e.g., wireless telecommunications). Acquisition is also a good strategy when an industry is consolidating. Nonetheless, acquisitions are risky. Many studies have shown that between 40 percent and 60 percent of all acquisitions fail to increase the market value of the acquired company by more than the amount invested (“Playing on a Global Stage," 2010).  

New, Wholly Owned Subsidiary

The process of establishing of a new, wholly owned subsidiary (also called a greenfield venture) is often complex and potentially costly, but it affords the firm maximum control and has the most potential to provide above-average returns. The costs and risks are high given the costs of establishing a new business operation in a new country. The firm may have to acquire the knowledge and expertise of the existing market by hiring either host-country nationals—possibly from competitive firms—or costly consultants. An advantage is that the firm retains control of all its operations.

Entrepreneurship and Strategy

The Chinese have a "Why not me?" attitude. As Edward Tse, author of The China Strategy: Harnessing the Power of the World's Fastest-Growing Economy, explains, this means that "in all corners of China, there will be people asking, 'If Li Ka-shing [the chairman of Cheung Kong Holdings] can be so wealthy, if Bill Gates or Warren Buffett can be so successful, why not me?' This cuts across China's demographic profiles: from people in big cities to people in smaller cities or rural areas, from older to younger people. There is a huge dynamism among them" (Kleiner, 2010). Tse sees entrepreneurial China as "entrepreneurial people at the grassroots level who are very independent-minded. They're very quick on their feet. They're prone to fearless experimentation: imitating other companies here and there, trying new ideas, and then, if they fail, rapidly adapting and moving on." As a result, he sees China becoming not only a very large consumer market but also a strong innovator. Therefore, he advises US firms to enter China sooner rather than later so that they can take advantage of the opportunities there. Tse says, "Companies are coming to realize that they need to integrate more and more of their value chains into China and India. They need to be close to these markets, because of their size. They need the ability to understand the needs of their customers in emerging markets, and turn them into product and service offerings quickly" (Kleiner, 2010).

Key Points

· The five most common modes of international-market entry are exporting, licensing, partnering, acquisition, and greenfield venturing.

· Each of these entry vehicles has its own particular set of advantages and disadvantages. By choosing to export, a company can avoid the substantial costs of establishing its own operations in the new country, but it must find a way to market and distribute its goods in that country. By choosing to license or franchise its offerings, a firm lowers its financial risks but also gives up control over the manufacturing and marketing of its products in the new country. Partnerships and strategic alliances reduce the amount of investment that a company needs to make because the costs are shared with the partner. Partnerships are also helpful to make the new entrant appear to be more local because it enters the market with a local partner. But the overall costs of partnerships and alliances are higher than exporting, licensing, or franchising, and there is a potential for integration problems between the corporate cultures of the partners. Acquisitions enable fast entry and less risk from the standpoint that the operations are established and known, but they can be expensive and may result in integration issues of the acquired firm to the home office. Greenfield ventures give the firm the best opportunity to retain full control of operations, gain local market knowledge, and be seen as an insider that employs locals. The disadvantages of greenfield ventures are the slow time to enter the market because the firm must set up operations and the high costs of establishing operations from scratch.

· Which entry mode a firm chooses also depends on the firm's size, financial strength, and the economic and regulatory conditions of the target country. A small firm will likely begin with an export strategy. Large firms or firms with deep pockets might begin with an acquisition to gain quick access or to achieve economies of scale. If the target country has sound rule of law and strong adherence to business contracts, licensing, franchising, or partnerships may be middle-of-the-road approaches that are neither riskier nor more expensive than the other options.

Glossary

Acquisition an international entry mode in which a firm gains control of another firm by purchasing its stock, exchanging stock, or, in the case of a private firm, paying the owners a purchase price

greenfield ventures an international entry mode involving the establishment of a new, wholly owned subsidiary

licensing an international entry mode involving the granting of permission by the licenser to the licensee to use intellectual property rights, such as trademarks, patents, or technology, under defined conditions

strategic alliances an international entry mode involving a contractual agreement between two or more enterprises stipulating that the involved parties will cooperate in a certain way for a certain time to achieve a common purpose

References

Cassey, A. J. (2010, October). Analyzing the export flow from Texas to Mexico. StaffPAPERS: Federal Reserve Bank of Dallas, 11. Retrieved from http://www.dallasfed.org/research/staff/2010/staff1003.pdf

Kleiner, A. (2010). Getting China right. Strategy and Business. Retrieved from http://www.strategy-business.com/article/00026?pg=al

Playing on a Global Stage: Asian Firms See a New Strategy in Acquisitions Abroad and at Home. (2010, April 28). Knowledge@Wharton. Retrieved from http://knowledge.wharton.upenn.edu/article.cfm?articleid=2473

Porter, M. E., & Kramer, M. R. (2011, January–February). The big idea: Creating shared value. Harvard Business Review. Retrieved from http://hbr.org/2011/01/the-big-idea-creating-shared-value/ar/pr

Ricks, D. A. (1999). Blunders in international business. Hoboken, NJ: Wiley-Blackwell.

Steinhilber, S. (2008). Strategic alliances. Cambridge, MA: Harvard Business School Press.

Zahra, S. A., Ireland, R. D., & Hitt, M. A. (2000). International expansion by new venture firms: International diversity, mode of market entry, technological learning, and performance. Academy of Management Journal, 43(5), 925–50.

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Scenario Planning and Analysis

The History and Role of Scenario Planning and Analysis

Strategic leaders use the information revealed by the application of PESTEL analysis, global dimensions, and CAGE analysis to uncover what the traditional SWOT framework calls opportunities and threats. A SWOT (strengths, weaknesses, opportunities, and threats) assessment is a strategic-management tool that helps you take stock of an organization's internal characteristics, or its strengths and weaknesses, such that any action plan builds on what it does well while overcoming or working around weaknessess The SWOT assessment also helps a company assess external environmental conditions, or opportunities and threats, that favor or threaten an organization's strategy. In particular, you can use it to evaluate the implications of your industry analysis, both for your focal firm specifically and for the industry in general. However, a SWOT assessment works best with one situation or scenario and provides little direction when you're uncertain about potential changes to critical features of the scenario. Scenario planning can help in these cases.

Scenario Planning

Scenario planning helps leaders develop a detailed, internally consistent picture of a range of plausible outcomes as an industry evolves over time. You can also incorporate the results of scenario planning into your strategy formulation and implementation. Understanding the PESTEL conditions—as well as the level, pace, and drivers of industry globalization and the CAGE framework—will probably equip you with some insight into the outcomes of certain scenarios. The purpose of scenario planning, however, is to provide a bigger picture—one in which you can see specific trends and uncertainties. Developed in the 1950s at the global petroleum giant Shell, the technique is now regarded as a valuable tool for integrating changes and uncertainties in the external context into overall strategy (Schoemaker, 1991; Schoemaker, 1993; Schoemaker & van der Heijden, 1992). Since September 11, 2001, the use of scenario planning has increased in businesses. Analysis of Bain & Company's Management Tools and Trends Surveyshows that in the post-9/11 period, approximately 70 percent of 8,500 global executives reported that their firms used scenarios, in contrast to a usage rate of less than 50 percent in most of the 1990s (Rigby & Bilodeau, 2007). In addition, scenarios ranked fifteenth in satisfaction levels among the twenty-five management tools that Bain examined in 1993, while it ranked eighth in 2006.

Unlike forecasts, scenarios are not straight-line, one-factor projections from present to future. Rather, they are complex, dynamic, interactive stories told from a future perspective. To develop useful scenarios, executives need a rich understanding of their industry along with broad knowledge of the diverse PESTEL and global conditions that are most likely to affect them. The six basic steps in scenario planning are detailed below.

Six Basic Steps of Scenario Planning

1. Choose the target issue, scope, and time frame that the scenario will explore. The scope will depend on your level of analysis (i.e., industry, subindustry, or strategic group), the stage of planning, and the nature and degree of uncertainty and the rate of change. Generally, four scenarios are developed and summarized in a grid. The four scenarios reflect the extremes of possible worlds. To fully capture critical possibilities and contingencies, it may be desirable to develop a series of scenario sets.

2. Brainstorm a set of key drivers and decision factors that influence the scenario. This set could include social unrest, shifts in power, regulatory change, market or competitive change, and technology or infrastructure change. Other significant changes in external contexts, like natural disasters, might also be considered.

3. Define the two dimensions of greatest uncertainty. These two dimensions form the axes of the scenario framework. These axes should represent two dimensions that provide the greatest uncertainty for the industry. For instance, the example of the global credit-union industry identifies changes in the playing field and technology as the two greatest areas of uncertainty up through the year 2005.

4. Detail the four quadrants of the scenarios with stories. Describe how the four worlds would look in each scenario. It's often useful to develop a catchy name for each world as a way to further develop its distinctive character. One of the worlds will likely represent a slightly future version of the status quo, while the others will be significant departures from it.

5. Identify indicators that could signal which scenario is unfolding. These can either be trigger points that signal the change is taking place or milestones that mean the change is more likely. An indicator may be a large industry supplier like Microsoft picking up a particular but little-known technological standard.

6. Assess the strategic implications of each scenario. Microscenarios may be developed to highlight and address business-unit-specific or industry-segment-specific issues. Consider needed variations in strategies, key success factors, and the development of a flexible, robust strategy that might work across several scenarios.

The process of developing scenarios and then conducting business according to the information that the scenarios reveal makes it easier to identify and challenge questionable assumptions. It also exposes areas of vulnerability (e.g., in a country, an industry, or a company), underscores the interplay of environmental factors and the impact of change, allows for robust planning and contingency preparation, and makes it possible to test and compare strategic options. Scenarios also help firms focus their attention on the trends and uncertainties that are likely to have the greatest potential impact on their future.

Once you've determined your target issue, scope, and time frame, you can draw up a list of driving forces that is as complete as possible and is organized into relevant categories (e.g., science-technology, political-economic, regulatory, consumer-social, or industry-market). As you proceed, be sure to identify key driving forces—the ones with the greatest potential to affect the industry, subindustry, or strategic group in which you're interested.

Trends and Uncertainties

Among the driving forces for change, be sure to distinguish between trends and uncertainties. Trends are forces for change whose direction—and sometimes timing—can be predicted. For example, experts can be reasonably confident in projecting the number of consumers in North America, Europe, and Japan who will be over sixty-five years old in the year 2020 because those people are alive now. If your firm targets these consumers, then the impact of this population growth will be significant—you may view it as a key trend. For other trends, you may know the direction but not the pace. China and India, for example, are experiencing a trend of economic growth, and many foreign investments depend on the course of infrastructure development and consumer-spending power in this enormous market. Unfortunately, the future pace of these changes is uncertain.

Take Note

In his book Africa Rising, Vijay Mahajan documents how trends surrounding the 900 million African consumers may offer businesses more opportunities than they're currently taking advantage of.

Many tourists come to Africa every year to see the big game there—the elephants, lions, and rhinos. But I came for a different type of big game. I was seeking out the successful enterprises that are identifying and capitalizing on the market opportunities, and seeking lessons from those that are not so successful, too. In Nairobi, Maserame Mouyeme of The Coca-Cola Company told me how important it is "to walk the market." Then, in Harare, I first heard the term "consumer safari" in a meeting with Unilever executives. This is what they call their initiatives to spend a day with consumers in their homes to understand how they use products. Years after I started on this journey, I now had a term to describe the quest I was on. I was on a consumer safari. The market landscape that is Africa is every bit as marvelous and surprising as its geographic landscape. It presents as big an opportunity as China and India. (Mahajan, 2008, p. xii)

In contrast, uncertainties—forces for change whose direction and pace are largely unknown—are more important for your scenario. European consumers, for example, tend to distrust the biotechnology industry, and given the number of competing forces at work—industries, academia, consumer groups, regulators, and so on—it is difficult to predict whether the consumers will be more or less receptive to biotechnology products in the future. Labeling regulations, for instance, may be either strengthened or relaxed in response to changing consumer opinion.

You might also want to consider the possibility of significant disruptions—that is, steep changes that have an important and unalterable impact on the business environment. A major disaster—such as the September 11 terrorist attacks—can spur regulatory and other legal reforms with major and lasting impact on certain technologies and competitive practices.

Key Points

· Scenario planning was developed in the 1950s by Shell as a tool for integrating changes and uncertainties in the external context into overall strategy. Today it ranks among the top ten management tools in the world in terms of usage. Scenarios are complex, dynamic, interactive stories told from a future perspective. To develop useful scenarios, you need a rich understanding of your industry along with broad knowledge of the diverse PESTEL and global conditions that are most likely to affect them.

· The six steps in formulating a scenario plan are the following: (1) choose the target issue, scope, and time frame that the scenario will explore; (2) brainstorm a set of key drivers and decision factors that influence the scenario; (3) define the two dimensions of greatest uncertainty; (4) detail the four quadrants of the scenarios with stories about that future; (5) identify indicators that could signal which scenario is unfolding; and (6) assess the strategic implications of each scenario.

· Considering the distillation of issues and drivers, select two dimensions of change that will serve as the two dimensions of your scenario-planning matrix. You must be able to describe the dimensions as high and low at each extreme.

Glossary

PESTEL analysis

an important and widely used tool that helps present the big picture of a firm's external environment in political, economic, sociocultural, technological, environmental, and legal contexts, particularly as related to foreign markets; analyzes for market growth or decline and, therefore, the position, potential, and direction for a business

scenario planning

a process of analyzing possible future events by considering alternative possible outcomes (scenarios)

SWOT (strengths, weaknesses, opportunities, and threats)

a strategic management tool that helps an organization take stock of its internal characteristics (strengths and weaknesses) to formulate an action plan that builds on what it does well while overcoming or working around weaknesses and also assess external environmental conditions (opportunities and threats) that favor or threaten the organization's strategy

trends

In the context of scenario planning, forces for change whose direction—and sometimes timing—can be predicted

uncertainties

In the context of scenario planning, forces for change whose direction and pace are largely unknown

References

Mahajan, V. (2008). Africa Rising: How 900 Million African consumers offer more than you think. Upper Saddle River, NJ: Pearson Prentice Hall.

Rigby, D., & Bilodeau, B. (2007, July–August). A growing focus on preparedness. Harvard Business Review, 85.

Schoemaker, P. J. H.. (1991, November). When and how to use scenario planning: A heuristic approach with illustration. Journal of Forecasting, 10(6), 549–64.

Schoemaker, P. J. H. (1993, March). Multiple scenario development: Its conceptual and behavioral foundation. Strategic Management Journal, 14(3), 193–213.

Schoemaker, P. J. H., & van der Heijden, C. A. J. M. (1992). Integrating scenarios into strategic planning at Royal Dutch/Shell. Planning Review, 20(3), 41–46.