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This paper intents to specified the different strategies that can be used to enter into international markets, it also emphasizes the advantages of international strategies and the tools that could be used to analyze the entry, exit and profit margins factors of foreign markets.
Refers to creating value in a different demographic area where there's a possibility to create a competitive advantage. When a business matures in its local industry, expansion becomes flat and competition is at a high level. To gain competitive advantage many firms look into expanding internationally, this expansion may be on any part of the business structure, value chain or a full transition of the company into an international market. International strategies are tools to help the management team in making decisions about entry, implementation, and exit of international markets. These strategies can be international (one country), multinational (more than one country) and Global (competing in most of the markets that the specific industry allows)
When thinking about an international strategy the firm must assess the company's standings and figure out the advantages or value created from internationalization, the following points should be taken into consideration.
Executive summary: list the firm's competitive advantages in a domestic and foreign Plainfield. Present situation: Identify the business unit that would create the must value by entering a foreign market. Objectives: develop a long-term objective and explain how exporting/importing/decentralization will help achieve that objective. Management: Make sure that all managerial teams are onboard with the decision to expand internationally. Description: What are the advantages/disadvantages of the product/service in the target market? Market analysis: What are the entry/exit barriers in the market? Target customers: analyze the demographic and socio-economic profile of the target market (Pestel and CAGE frameworks) Existing competition: Analyze the current competitive environment within the target market. Calculated risk: Performed a five year study of the forecasted performance. Marketing strategy: decide on a marketing strategy taking into account the demographic and socio-economic aspects of the target market. Intellectual property (IP) plan: Analyze the limiting factors that might exist to protect the firm's IP assets.
Pricing and profitability: Analyze pricing and currency exchange rate stability to determine profitability. Methods of distribution: Determine your distribution routes and geographical barriers. Advertising: be aware of legal restrains on advertising, when translating try to translate the meaning and avoid a literal translation, be aware of cultural and religious issues. Business relationship: establish a standard framework to develop business relations, cross-cultural training is a must when dealing with culturally distant countries. Financial projections: Make projections that are achievable. Balance sheet: demonstrate the financial strength of the company. Source and use of funds: determine if financing will be necessary to support and international strategy.
Advantages of international strategies
Better economies of scale due to the access to a wider margin of customers
Possible use of cheaper international resources - labor, raw materials
Possible extension of the product's/service's life cycle
Possible competitive advantage by being the only provider of a product to a market
Cross subsidization between international and domestic branches.
Elongated business cycles.
Diversify operational risks
Brand recognition(“quick MBA”, 1997)
CAGE (Culture, Administrative, Geographic, and Economic) framework refers to a tool that allows the firm to analyze the cultural, administrative, geographic and economic aspects that create distance in reference to global expansion. The CAGE framework analysis allows the company to decide if to enter a new market (country/region).i.e.
The PESTEL analysis is a tool that allows firms to get a clearer picture of the macro-environment surrounding their company or industry; it also allows firms to study the impact (or the lack of) that their product/company is having in the target market, where are the major risk areas and where are the grater marginal profits.
PESTEL is an acronym that stands for Political, Economic, Social, Technological, Environmental and legal factors. When performing the analysis first, all the factors have to be graded in accordance to the importance to the firm. Second the information that is relevant to each factor must be categorized and third, once all data is gathered and final analysis and conclusion must be performed.
In the political factor the PESTEL analysis takes into consideration the target market's current and future taxation policy, the political environment ( i.e. support or lack of support towards the company's industry), any funding/incentives that may be available from local government and the impact that war or hostile political situations might have on the market.
In the economical factor the managerial team examines the impact that economic changes such as inflation, tariffs, fluctuation in exchange rate and interest rates would have in the target market.
The social or cultural factor refers to analyzing the product/service compatibility with the target market in terms cultural barriers, religion, and social structure.
The technological factor is of great importance to must industries because it dictates the ability of the firm to produce more cost effective products while supporting a reasonable level of quality.
The environmental factor can be view from two perspectives, first the firm's access to raw material and distribution routes, and second the environmental waste and pollution.
The legal factor refers to any legal barriers that might limit the company's potential, i.e. a new law that prohibits the sale of cigarettes would be a limiting factor for a tobacco company.
Entry vehicles into foreign marketsWhen formulating an international strategy the managerial team must decide on the entry vehicle that's best suited for the company's goals Exporting Licensing Joint Venture Direct Investment Exporting Refers to an expansion strategy in which the firm relies on an importer to distribute its products in a determined market. Exporting is the easiest form/vehicle expansion strategy; its cost is usually lower than the other three strategies. The added cost of exporting is mostly limited to marketing and distribution. Licensing Licensing refers to the temporary sell of rights over intangible property. It requires little investment from the licensor however; it only creates a certain amount of value, since most of the returns would go to the licensee. Joint Venture Joint ventures consist of the cooperation of two companies that have a similar goal, these companies usually create a separate firm that carries on the business venture and dissolves once the goals are achieved. In some instances when a separate firm isn't created companies adopt what is refer to as equity alliances. In equity alliances one company usually takes partial ownership of the other. In a joint venture ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources are the main factors to be considered Foreign Direct Investment Direct foreign investment refers to the direct investment of capital into a new venture, FDI is usually the most expensive of the four vehicles for international expansion, and thus it often require the collaboration of two or more firms to reduce the risk of entry. FDI also provides the firm with a greater degree of control over its resources or value chain. Comparison of Foreign Market Entry Modes Mode Conditions Favoring this Mode Advantages Disadvantages Exporting Limited sales potential in target country; little product adaptation required Distribution channels close to plants High target country production costs Liberal import policies High political risk Minimizes risk and investment. Speed of entry Maximizes scale; uses existing facilities. Trade barriers & tariffs add to costs. Transport costs Limits access to local information Company viewed as an outsider Licensing Import and investment barriers Legal protection possible in target environment. Low sales potential in target country. Large cultural distance Licensee lacks ability to become a competitor. Minimizes risk and investment. Speed of entry Able to circumvent trade barriers High ROI Lack of control over use of assets. Licensee may become competitor. Knowledge spillovers License period is limited Joint Ventures Import barriers Large cultural distance Assets cannot be fairly priced High sales potential Some political risk Government restrictions on foreign ownership Local company can provide skills, resources, distribution network, brand name, etc. Overcomes ownership restrictions and cultural distance Combines resources of 2 companies. Potential for learning Viewed as insider Less investment required Difficult to manage Dilution of control Greater risk than exporting a & licensing Knowledge spillovers Partner may become a competitor. Direct Investment Import barriers Small cultural distance Assets cannot be fairly priced High sales potential Low political risk Greater knowledge of local market Can better apply specialized skills Minimizes knowledge spillover Can be viewed as an insider Higher risk than other modes Requires more resources and commitment May be difficult to manage the local resources. References http://www.quickmba.com/strategy/global/ http://exinglobal.typepad.com/going_global/2006/05/china_or_india_.html http://rapidbi.com/pestle/