M2 Assignment 2: Market Entry Strategies
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MarketExpansionStrategies.pdf
IGAL AYAL & JEHIEL ZIF
This paper presents a framework for planning and evaluation of multinational expansion strategies focusing on the rate of entry into new markets and the al location of efforts among markets. Two major and opposing strategies are presented and compared: market diver- sification and market concentration. The factors affecting the choice of strategies are analyzed and illustrated by examples.
MARKET EXPANSION STRATEGIES IN MULTINATIONAL MARKETING
ANY firm attempting to expand international opera-tions must decide on the number of countries and market segments it will attempt to penetrate at any given period. Given a fixed marketing budget the firm must also deeide how to allocate its efforts among different markets served. One can conceive of two major and opposing strategies for making these deci- sions: market diversification and market concentration. The first strategy implies a fast penetration into a large number of markets and diffusion of efforts among them. The second strategy is based on concentration of resources in a few markets and gradual expansion into new territories.
After a number of years, both strategies may lead
Igal Ayal is Senior Lecturer, Faculty of Management, the Leon Recanati Graduate School of Business Administration, Tel-Aviv University, Tel-Aviv, Israel. Jehiel Zif is Senior Lecturer, Fac- ulty of Management, Tel-Aviv University and Visiting Professor, College of Business Administration, Northeastern University, Boston, MA. Authors names are listed in alphabetical order. This study was supported by the Israel Institute of Business Research—the project on Export Marketing and International Business Activities. The authors are indebted to their col- leagues YairAharoni, Seev Hirsch, Dovlzraeli, YairOrgler, Dov Pekelman and Eli Segev for critical comments and suggestions on drafts of this paper.
the firm to export into the same number of markets. The alternative expansion routes may generate, however, totally different consequences in terms of sales, market shares, and profits over time. In this paper, these two strategies are compared and the factors impinging on the choice between them are analyzed. Within the framework of the two major strategies, a number of more detailed strategic choices are identified, and al- ternative measurements of market expansion are dis- cussed. Application of the framework for the choice of strategy is discussed and illustrated by a brief case study.
The Research Literature
Questions of market expansion in multinational market- ing have received limited attention in the literature. Most of the research has concentrated on questions of national rather than international marketing, and on the allocation of promotional budgets among sales ter- ritories. No published attempt for systematic identifica- tion and choice of market expansion strategies has been found.
Nordin (1943) applied a basic marginal approach for allocating sales effort between two geographic areas subject to a budget constraint. Zentler and Hyde ( 1956)
8 4 / Journal of Marketing, Spring 1979 Journal of Marketing Vol. 43 (Spring 1979). 84-94.
considered the allocation of advertising expenditures among a given number of countries. Their model takes into account an S-curve response function to promo- tion, and time-lag in the effect of promotion. A graphic solution is proposed to solve the complex mathematical problem. Härtung and Fisher (1965) used a model of brand switching and mathematical programming for market expansion in locating new gasoline stations.
Hirsch and Lev (1971; 1973) influenced our re- search by their empirical study of sales stability and profitability of two alternative penetration strategies into foreign markets. Their findings were supported by data from 200 exporting firms. Their identification of strategies was based on the direction of change in a market concentration index of sales between two periods.
Shakun (1965; 1966) attacked the related problem of promotional effort allocation between products through a game-theoretic approach. Luss and Gupta (1973) concentrated on the mathematical problem of designing an algorithm for solving the sales maximiza- tion problem, when marketing effort is allocated be- tween products and sales territories. More recently, Beswick (1977) studied the allocation of selling effort via dynamic programming.
The various research papers mentioned above con- tribute important points to the analysis of market ex- pansion and resource allocation. None of the papers however, presents a comprehensive framework for identification and analysis of alternative market expan- sion strategies over time. The purpose of this paper is to help fill this gap.
The Major Strategic Alternatives
The choice of a market expansion policy is a key strategic decision in multinational marketing. To develop such a policy, a firm has to make decisions in (he following three areas:
• Identification of potential markets and determi- nation of some order of priorities for entry into these markets.
• Decision on the overall level of marketing effort that the firm is able and willing to commit.
• Selection of the rate of market expansion over time, and determination of the allocation of ef- fort among different markets.
This paper concentrates on the third area, assuming ihat decisions in the first two areas have already been made. In practice, the process will frequently be itera- tive; analysis of the third area will be helpful in clarify- ing and reviewing the first two areas.' The major strategic alternatives of market expansion, within the
third area, are market concentration versus market di- versification.
A strategy of market concentration is characterized by a slow and gradual rate of growth in the number of markets served. On the other hand, a strategy of market diversification is characterized by a fast rate of growth in the number of markets served at the early stages of expansion. It is. therefore, expected that a strategy of concentration will result in a smaller number of markets served, at each point in time, relative to a strategy of diversification. Expected evolution of the number of markets served, for a strategy of concentration versus a strategy of diversification, is presented graphically in Figure I. The functional forms of the two strategies in Figure I represent a family of possible curves, show- ing the relative changes in the number of markets served over time.
In the long run, a strategy of diversification will frequently lead to a reduction in the number of markets, as a result of consolidation and abandonment of less profitable markets. A fast rate of market expansion is usually accomplished by devoting only limited re- sources and time to a careful study of each market prior to entry. The firm is, therefore, bound to make a few mistakes and is more likely to enter unprofitable mar- kets and drop them later."̂
The different patterns of market expansion are likely to cause development of different competitive conditions in different markets over time. The prof- itability of a late entry into new markets is affected by these competitive conditions and by the length of the product life cycle. As a result, the optimal number of markets served in the long run is not necessarily the same for both strategies.
The two strategies of concentration versus diver- sification lead to the selection of different levels of marketing effort and different marketing mixes in each market. Given fixed financial and managerial re- sources, the level of resources allocated to each market in a strategy of diversification will be lower than with concentration. The size of the budget gives an indica- tion about possible selection of means or marketing mix. Specifically, a lower level of marketing effort implies less promotional expenditures, more reliance on commission agents, and a stronger tendency for a
'Analysis of ihe third area requires identification of some markets with sufficient potential for entry and a preliminary idea about available budget. The results of the analysis may lead to a réévaluation of the order of entry priorities and provide more definite guidelines for the budget, Mn their empirical study, Hirsch and Lev (1973) have useJ the direction of
change in a market concentration index of sales between two pcH«xls in order to identify the two major strategies. Figure 1 demonstrates, however, that this measure is insufficient for strategy identificalion. The direction of change for the two strategies is different only during a limited range of time. A more positive idenitfication can rely on the rate or the shape of market expansion over an extended period of time.
Market Expansion Strategies / 8 5
skimming approach to pricing. A strategy of concentra- tion, on the other hand, involves investment in market share. This implies heavy promotional outlays, a stronger control of the distribution channel and, in some cases, penetration pricing.
Detailed Strategic Options
A strategy of market expansion is characterized not only by the rate of entry into new national markets. Two additional considerations are of particular importance for more detailed identification of optional strategies: (1) market segments within national markets and (2) allocation of effort to different markets (and market segments).
A number of strategic options can be derived based on the consideration of market segments and effort
TABLE 1 Market Expansion Strategies Based on Countries and Segments
Coun- Concentration tries Diversification
SEGMENTS
Concentration Diversification 1 2 3 4
allocation; these are introduced and briefiy discussed in this section. The full range of considerations affecting the choice of market concentration versus market diver- sification is treated in the following section.
Market segments within national markets. Four major market expansion alternatives can be identified when market segments are examined. These alterna- tives are presented in Table 1.
Strategy 1 concentrates on specific market seg- ments in a few countries and a gradual increase in the number of markets served. This dual concentration is particularly appropriate when the product (or service) appeals to a definite group of similar customers in different countries, and the costs of penetration into each national market are substantial in relation to avail- able resources. To be successful with this strategy, the segments served must be sufficiently large and stable.
Strategy 2—characterized by market concentration and segment diversification—requires a product line which can appeal to different segments. The strategy is particularly effective when there are significant economies of scale in promotion (e.g., umbrella adver- tising) and distribution, and when the sales potential of the home market and other national markets served is large. Under such conditions, a firm can achieve growth objectives by concentrating on many submar- kets within a limited number of national markets.
FIGURE 1 Alternative Market Expansion Strategies Over Time
Number of Markets Served
Market Diversification
Optimal number of markets served in the long-run
Market Concentration
Time
86 / Journal of Marketing, Spring 1979
FIGURE 2 Market Expansion of Volvo into Twenty National Markets
National Markets
25 -
2 0 -
15 -
10 -
Total number of markets served by independent agents or sales subsidiary
Number of markets served by sales subsidiary
1960
Number of markets served by manufacturing subsidiary
1930 1940 1950 1960 1970 Year
Source of data; Johanson and Wiedersheim (1975).
Strategy 3—characterized by market diversifica- tion and segment concentration—is suitable for firms with a specialized product line and potential customers in many countries. With this strategy, a firm frequently can use a similar product and promotion strategy in all markets. The strategy is particularly effective when the cost of entry into different markets is low relative to available resources. For strategy identification, it is important to note that two firms may follow different expansion strategies with respect to countries and seg- ments (strategy 2 versus strategy 3) yet serve the same total number of market segments at each point in time.
Strategy 4 is based on dual diversification in both segments and markets. This aggressive strategy can be employed by firms with a product line appealing to many segments, and sufficient resources to accomplish a fast entry into many markets. Large international firms with sales offices in many countries frequently use this strategy when they introduce a newly devel- oped or acquired product line. A poorman's version of strategy 4 can sometimes be employed by small firms with limited resources, based on superficial coverage.
The commitment of resources in market expansion is the subject of the following paragraphs.
Allocation of effort to different markets. Marketing expansion can be achieved by different means. Even a small firm with limited resources can achieve market diversification quickly by using independent commis- sion agents in each market, with little or no investment. In order to identify a specific strategy of market expan- sion it is., therefore, necessary to specify the overall marketing effort as well as the allocation of effort to different markets.
Some researchers have defined resource commit- ments to international markets on thebasisof astepwise expansion of operations (Johanson and Wiedersheim 1975). A sequence of three stages demonstrates succes- sively larger commitments of resources and marketing involvement:
• Export by independent agents • Sales subsidiary • Manufacturing subsidiary
The marketing expansion of Volvo into 20 coun-
Market Expansion Strategies / 87
FIGURE 3 Alternative Market Share Response Functions Sales
S-curve function
Concave function
Effective Marketing Effort' *Effective marketing effort takes into account current marketing effort as well as carry over effects of previous efforts.
tries between 1929 and 1973 is presented graphically in Figure 2. This figure separates expansion by the three stages above and shows the gradual increase in territo- rial coverage and resource commitments. Two periods of relatively fast diversification, prior to and after World War 11. are indicated.
The first two stages above specify an essential ele- ment of distribution strategy in market expansion. Ex- tensive use of independent agents is frequently as- sociated with market diversification; and a resource commitment to sales subsidiaries is a more likely strategic element of market concentration. Many firms like Volvo prefer to employ independent agents in some markets and sales subsidiaries in others. The relative share of each distribution method is an important strategic option of market expansion.
Distribution strategies do not always portray a cor- rect picture of effort allocation. A firm may invest the same resources in two markets using a different market- ing mix and distribution setup. In one market the firm may employ an independent agent backed by substan- tial promotional activity. In another market the firm may establish a sales subsidiary with a limited promo- tional budget. A quantitative measure of effort alloca- tion would be more precise for analytical purposes.
Managers inside the firm can determine the overall
marketing investment in each market, based on internal accounting. With this information, it is possible to calculate a diversification index that takes into account both the number of markets served and the uniformity of effort distribution.''
Considerations Affecting The Choice of Market Expansion Strategy The selection of market expansion strategy is influ- enced by characteristics ofthe product, characteristics ofthe market, and decision criteria of the firm. Table 2 summarizes 10 key product/market factors affecting the choice between market concentration and market diver- sification. The following discussion explains the effect of each factor on the adoption of market expansion strategy.
( 1 ) Sales response function. Two alternative classes of sales response functions—a concave function and an S-curve function—are common in the literature (Kotier 1971). Graphic examples of these functions are pre- sented in Figure 3.* If the firm believes that it faces a concave response function, there will be a strong moti- vation to follow a strategy of market diversification. On the other hand, when the response function is assumed to be an S-curve. a market concentration strategy usu- ally is preferred.
The concave response function implies that the best return on marketing effort (x) is at lower levels of effective effort (see Figure 3). This is based on the assumption that the markets under consideration in- clude a number of clients or submarkets which are particularly interested in the firm's products. Such in- terest is frequently generated by a unique product or marketing program, possibly the result of substantial investment in R&D. As additional effort is spent, mar- ket share increases, but the firm faces stiffer resistance, more skeptical buyers, and increased effort by com- petitors. Therefore, market response is characterized by diminishing marginal returns and diversification of
'An effort diversification index for period t, D,,,. is given by:
D,, = 1/ i ME^,,
where: MEi., = Marketing effort in market i and period I. expressed as a
fraction of the firm's total marketing effort for period t. n, = total number of markets served in period l.
Ttiis index is equal to the toial number of markets served D,., = n, when efforts are equally distributed: it approaches a lower bound D,., = I when the firm concentrates mosi of its effort in a single market.
*For a given initial market size, the sales response function can be separated inlo a market share response function and a rale of markel growth: the first is direcily influenced by Ihe finn's marketing efforts while the second is usually more dependent on product life cycles, environmenial conditions in the market, and the combined marketing efforts of all com- petitors .
88 / Journal of Marketing, Spring 1979
effort is more productive. It is interesting to note that most empirical studies of advertising effectiveness support the hypothesis of concave market response functions (Simon 1971; Lambin 1976).
The S-curve response function assumes that small- scale efforts of penetration to a new market are beset by various difficulties and buyers" resistance and will not count for much. Increases in market share and prof- itability will be achieved only after a substantial con- centration in marketing effort is made. This type of response function is likely for products that do not enjoy obvious advantages—which is. of course, the case for most products. There are a number of reported cases of geographical market expansion which support the premise of an S-curve response function (Cardwell 1968; Hofer 1975).
A quantitative example of the choice of market expansion under the two sales response assumptions is presented in a footnote below.'
(2) Growth rate of each market. When the rate of growth of the industry in each market is low, the firm can frequently achieve a faster growth rate by diversifi- cation into many markets. On the other hand, if the rate of market growth in present markets is high, growth objectives can usually be achieved by market concen- tration.
When the rate of growth of the industry in many markets is high, there arc occasional opportunities for diversification with limited resources. Penetration to many markets can be accomplished by relying on mar- keting efforts of independent sales agents and licensees who are interested in promoting the firm's products in (heir own growing markets. The case of Miromit. an Israeli producer of unique solar collectors, serves as an example. Following the energy crisis, the firm was flooded by requests for sales representation from inter- ested parties in many countries. In this case, the firm followed a mixed strategy by concentrating its re- sources in a few markets and diversifying to other markets with little or no investment. By this strategy the
••Let us assume ihat the functional form of Figure 5 is expressed quaniita- lively, in ihe following table.
Markt'tinji effort Concave function. Sales $ S curve. Sale.K S 100.000 1,000,000 600.000 200.000 1.800.000 1.200.000 300.000 2.400,000 2,400.000
What is the preferred market expansion strategy for a firm which is planning to invest $300.000 of marketing effort in three identical markets? Under consideration arc two strategic alternatives; (1) Concentrate all marketing effort in one market (2) Diversify marketing efforts equally among the three markets (invest $ 1 (X).(KX) in each). The outcome of each strategy, depending on the assumed sales rc.sponse funutinn. will be the following: (preferred strategy indicated by *)
TABLE 2 Product/Market Factors Affecting Choice Between Diversification and Concentration Strategies
Product/Market Factor
1. Sales response function
2. Growth rate of each market
3. Sales stability in each market
4. Competitive lead-time
5. Spill over effects
5. Need for product adaptation
7. Need for communication adaptation
8, Economies of scale in distribution
9. Program control requirements
10. Extent of constraints
Prefer Diversifi- cation if:
Concave
low
low
short
high
low
low
low
low
low
Prefer Concentra-
tion if:
S-curve
high
high
long
low
high
high
high
high
high
tlxpansion Strategy 1. Concentrate on one market 2. Diversify into three markets
Com ave function $2.400.(X)0 $3,000.000*
S-curve function $2.400.000* $1.800.000
number of markets served would Increase rapidly, but the effort diversification index would show a slow rate of growth.
(3) Sales stability in each market. When demand in each market is unstable, the firm can spread the risk through judicious diversification. To the extent that markets are independent with resf>ect to demand, an increase in the number of markets is likely to increase sales stability. This was demonstrated empirically by Hirsch and Lev (1971). When sales stability in each market is high, the firm can concentrate its market expansion effort while still satisfying the need for sta- bility.
(4) Competitive lead-time. The lead-time that an innovative firm has over competitors and potential im- itators is an important consideration in selecting a mar- ket expansion strategy. When competitive lead-time is short and there is a major advantage to being first in a market with a new innovation, there is a strong motiva- tion to follow the route of diversification. In this situa- tion, the firm faces a favorable response function for a limited period. The urgency to enter many markets quickly is diminished if the innovative firm has a long lead-time, or when there is no innovative advantage.
Market Expansion Strategies / 89
This argument of competitive lead-time was expressed by an executive of a small computer equipment com- pany: "The compelling reason for entering Europe now . . . was to capitalize on our innovative advantage. We consider our products to be well ahead of competitors' . . . but in our fast moving field—data entry systems and input equipment—this could change rapidly" (Sweeney 1970).
(5) Spill-over effects. Spill-over of marketing ef- fort or goodwill from present to new markets is another factor favoring diversification. This spill-over effect can be the result of geographical proximity, cultural influence, or commercial ties. It is common in TV and radio coverage of close national markets. There is ob- viously a strong motivation to take advantage of spill- over effects by diversifying into new markets which are influenced by current and past effort in presently- served markets.
(6) Need for product adaptation. The experience curve phenomenon of systematic reduction in variable cost with an increase in accumulated production vol- ume has a major impact on international market share strategy (Rapp 1973). Firms that grow faster than their competitors are able to reduce production costs faster and as a result enjoy a major competitive advantage. When the same product is sold in different international markets, market expansion is not only a vehicle for diversification and new profit opportunities, but it also can increase profits by reducing costs in currently- served markets.
Frequently, a company cannot sell the same product in all international markets. There is a need to adapt the product to the standards and regulations of a new coun- try, as well as to the special tastes and preferences of new consumers. The magnitude and nature of the adap- tation costs are an important consideration in choosing an expansion strategy. In particular, a firm should as- sess whether adaptation to new markets requires only a small fixed investment or whether a major change is necessary. If entry into new international markets re- quires major changes in the production process, the company will not only have to invest a significant amount before entry, but will probably be unable to enjoy the full cost advantage of accumulated experi- ence. In this case there will be a lesser motivation to expand geographically than in the case of an investment that has positive effects on potential economies in pro- duction.
(7) Need for communication adaptation. Adapta- tion may be necessary not only for the product, but also for the marketing or communication program. In many situations, the communication program is more impor- tant than the technical specifications of the product, ln a recent study of international expansion of U.S. fran-
chise systems, 59% of the 80 respondent firms indi- cated alteration in strategy upon entry into international markets (Hackett 1976). Twenty-five percent of the firms reported a change in product (or service) to fit local tastes, while all other changes were related to communication adaptation. If communication adapta- tion requires a large investment in consumer and adver- tising research and in production of new programs, the temptation to follow a diversification strategy is di- minished.
(8) Economies of scale in distribution. When dis- tribution cost is a significant expense and there are economies of scale with increased market share, there is motivation to follow a concentration strategy. A strategy of rapid expansion into many new markets can frequently increase distribution costs substantially as a result of increased transportation distance and a low level of sales over a large territory. Efficient distribu- tion can, however, be achieved in different ways de- pending on the product and specific channels. For example, it is possible that diversification with respcci to countries and concentration with respect to segments (strategy 3 in Table 1 ) can lead to an efficient distribu- tion system.
(9) Program control requirements. Extensive re- quirements for control are typical of custom-made and sophisticated products and services which require close and frequent communication between headquarters (R&D, production, marketing) and clients. The cost of managerial communication with clients and agents, per unit of sales, is likely to increase with the number ol markets served. A comparison of average contact costs in concentrated and diversified markets suggests that the difference in favor of a concentrated market is increasing with the number of contacts (Buckiin 1966). We can, therefore, expect that when the program con- trol requirements are extensive, a concentrated strategy of market expansion will have an advantage.
(10) Constraints. There are a number of con- straints on management action in international markets. External constraints include import and currency bar- riers created by government authorities in the target markets. There may also be difficulties in finding or developing an effective sales and distribution organiza- tion. Internal constraints are based on the availability of resources in order to function in new markets. Trained managers and salesmen may be limited, financial re- sources may be scarce, and production factors may be in short supply.
In the previously mentioned study of international expansion of franchise systems, respondents were asked to rank problems encountered in international markets (Hackett 1976). The five most important prob- lems were: (1) host government regulations and red
9 0 / Journal of Marketing, Spring 1979
tape, (2) high import duties and taxes in foreign envi- ronments, (3) monetary uncertainties and royalty ret- ribution to franchisor, (4) logistical problems inherent in operation of international franchise systems, and (5) control of franchisees. The spectacular rate of interna- tional market expansion, and the reported plans for lurtherexpansion by the respondent firms, indicate that ihese obstacles were surmountable in most cases. This was partly due to a strategy based on franchisee-owned outlets, which is a form of diversification with limited resources.
External or internal constraints place a limit on the capability or the profitability of market diversification. While some constraints can be overcome, extensive barriers in many markets will lead to market concentra- tion.
Decision Criteria The expected value and the variance of the net present value of each expansion alternative are common deci- sion criteria. To use these criteria, it is necessary to estimate and express the product/market factor consid- erations in quantitative terms of sales, prices, costs, and timetable.
Many firms frequently will supplement these prof-
itability estimates with other criteria based on the mul- tiple objectives of the firm. Objectives of international market standing and prestige are frequently stated as major causes for fast diversification with limited regard to profitability consequences. For example, Koor. the largest industrial concern in Israel, established a trading company and decided to enter the European Common Market with a strategy of fast diversification by setting up sales offices in seven European countries within one year (Perry 1977). The major objective was: "to be- come the largest and most important Israeli commercial organization in Europe." It is interesting to note that profitability results in the short-term quite disappoint- ing.
The criteria used by business firms to select alterna- tives for action are outside the scope of this study. We merely suggest that these criteria can be another major cause for preference of one market expansion strategy over another.
Application
Selecting a market expansion strategy based on the product/market factors of Table 2 is bound to raise a few application questions. These questions can be clarified by reviewing the case of a leading electronics
TABLE 3 Case Study: Analysis of Product/Market
Product/Market Factor
1. Sales response function
2. Growth rate of each market
3. Sales stability in each market
4. Competitive lead-time
5. Spill-over effects
6. Need for product adaptation
7. Need for communication adaptation
8. Economies of scale in distribution
9. Program control requirements
10. Extent of constraints
Factors by Product
Communicition
Direction Concave
High
Low
Long
High
Low
Low
Low
High
High
Line
Equipment Implied Strategy
D
C
D
C
D
D
D
D
C
C
Control
Direction S-curve
High
High
Long
Low
High
High
Low
High
Low
Systems Implied Strategy
C
C
c
c
c
c
c
D
c
D
Market Expansion Strategies / 9 1
FIGURE 4 Case Study: Market Expansion Graphs by Product Line Number of National Markets in
t
9
8
7 _
5
4
3 -
2 _
1 -
Communication Equipment
Sales Agents
Control Systems
Sales Agent Sales Subsidiary
65 66 67 68 69 70 71 72 73 74 75 76 77 Years
FIGURE 5 Case Study: International Sales by Product Line
International Sales by Index Numbers
10
9
8
7
6
5
4
3_
2 .
Communication Equipment
Control Systems
65 66 67 68 69 70 71 72 73 74 75 76 77 Years
manufacturer in Israel (name withheld at request of company executives). The firm is a subsidiary of a large and internationally known American firm. Two rela- tively sophisticated product lines are being exported: communication equipment and control systems. The communication equipment was developed by the parent company while the control systems were developed in Israel. Table 3 and Figures 4 and 5 present, for each product line, a summary analysis of the product/market factors, market expansion graphs, and international sales.
One question of application is illustrated by Table 3. The 10 factors do not point in one direction; some imply market diversification, while others imply mar- ket concentration.
Two explanatory remarks can clarify the dilemma: (I) Management must weigh the relative importance of the product/market factors in selecting a strategy. Al- though some factors such as the sales response function will be important in all cases, the relative importance of other factors such as distribution cost are likely to change from case to case. (2) The concepts of market concentration and market diversification should be
92 / Journal of Marketing, Spring 1979
viewed in relative terms. Occasionally, the choice be- tween concentration and diversification is not clear-cut in absolute terms and a middle course should be selected. In comparison with extreme alternatives, however, the strategic choice is clear.
In the case of control systems most factors point to a concentrated strategy (Table 3); the firm followed this strategy with respect to both markets and segments. The direction implied by the factors for communication equipment is more mixed, and the firm followed a middle of the road strategy of "'prudent" diversifica- tion, or fairly rapid concentrated expansion. The strat- egy was diversified with respect to segments. Figure 4 demonstrates that the expansion ofthe communication equipment is much more diversified relative to the concentrated expansion of the control systems.
A second question of application also can be clarified by reference to the case. A summary analysis like Table 3 assumes that the markets under considera- tion are quite similar and that the effects of the prod- uct/market factors can be estimated prior to entry. This is not always the case, as can be seen by the withdrawal from two communication equipment markets in 1973 (Figure 4).
A few pcïints should be made in response to this question: ( 1 ) A summary table, like 3. is applicable to a group of similar markets. When different groups of markets are being considered, it' is advantageous to analyze each group separately, since a different expan- sion strategy may be appropriate for each group.
(2) An investment in market research prior to entry can reduce uncertainty, but not eliminate it. Penetration into international markets which are politically and economically unstable is liable to produce surprises with changing events. This was the case with the com- munication equipment that was introduced into devel- oping Asian and African markets.
(3) A firm may prefer to acquire information by actual testing in the marketplace, rather than by costly and prolonged market survey prior to entry. This policy is particularly applicable when quick entry is impor- tant, or when market diversification with limited re- sources is employed. Abandonment of some markets, following testing, is quite likely under this policy.
(4) Market expansion is a discrete process based on a market by market entry. It is therefore possible and desirable to view it as a leaming process, and to correct strategic decisions as more information becomes avail- able. This leaming process can explain the expansion curve of the control systems (Figures 4 and 5). After three unsatisfactory years in one market, the firm de- cided to switch from a sales agent to a sales subsidiary, and a second market was penetrated only after eight years of international experience with the product line.
It is interesting to note that in spite of necessary correc- tive action, a different and distinct long-term strategy for each product line was pursued, and that these strate- gies were consistent with the evaluation ofthe product market factors.
Conclusion This paper presents a framework for planning and evaluation of market expansion strategies. In particular it focuses on the rate of entry into new markets and the allocation of effort among markets. The framework can be used in national or regional marketing, but has special relevance for international expansion. A careful review of the literature did not reveal any other framework which serves the same purposes.
This framework aids managerial action in multina- tional marketing in the following ways:
• It helps management specify market expansion alternatives for decision making purposes. In addition to the comparison of the two major and opposing strategies—market concentration and market diversification—the paper aids in defin- ing additional strategic options. By considering market segments within national markets, four viable market expansion strategies are identified (see Table 1). By considering resource com- mitments to new markets, three strategic options are specified and many more are implied.
• It helps management to systematically analyze the problem of choice among the major alterna- tive strategies. Ten key factors affecting this choice are summarized in Table 2. discussed in some detail in the body of the paper, and illus- trated by examples and a case study. In each application it will be necessary to separately as- sess each factor and its relative importance for comprehensive evaluation of the alternatives.
• It offers guidance for measuring market expan- sion. Two specific measures suggested are the number of countries and market segments served, and an effort diversification index, both as a function of time. Measuring market diver- sification can be used not only for evaluating the firm's own expansion policy, but also for evaluating competitive moves. The factors af- fecting the choice of strategy can be used to interpret competitive assumptions.
A systematic approach to identification of alterna- tives, analysis of choice, and performance evaluation will clarify managerial planning and help reduce mis- takes and disappointments in expansion to new mar- kets.
Market Expansion Strategies / 93
We hope that this paper will aid in directing re- search attention to this important and interesting area. Further research can benefit by the following points:
• Comparison of market expansion strategies based on the direction of change between two static measurements—as used in past empirical research (see 4)—may not be sufficient. Figure 1 and the following discussion of dynamic mea- sures point out the complexities of identification and offer some direction.
• Decision making models based on one kind of response function (see 2) are useful in some situations, but can be quite misleading in others. Only by exploring alternative response functions and examining their assumptions and implica-
tions, can reliable guidance to action be pro- vided.
• The framework of this paper is useful for plan- ning additional research. Identification of a mar- keting expansion strategy can be used as an explanatory variable for other marketing deci- sions. As an example, we have used this framework for studying the related problem of competitive market-ehoice in multinational mar- keting (Ayal and Zif 1978). Specific priorities for additional research include further empirical investigation of the relationships among the product/market factors, strategies followed, and business outcomes. There also is room for model building that will offer quantitative analysis of the product/market factors.
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