The aim of this report is to assist the board of Metricum in a strategic review of its international business strategy. The organisation Metricum is a company which manufactures materials handling equipment and intelligent handling solutions. It now plans to establish a stronghold in the country of Ukraine. The report would try to assess the market potential, the market entry strategy and would highlight how to assess and understand unfamiliar markets.
A business strategy would be provided highlighting the ways to counter the possible barriers to market entry and the challenges which the organisation could face in the international competitive atmosphere.
The report would also stress on how to build the internal skills and knowledge base of the company so as to allow entering the Ukrainian market effectively and efficiently.
Metricum is a business which manufactures material handling equipment and intelligent handling solutions. Materials handling equipment is the equipment related to the movement, control, storage and the protection of all the materials, goods and products throughout the process of manufacturing, distribution and also matters pertaining to the consumption and disposal of the corresponding goods and services. Materials handling equipment is all the mechanical equipment that is used in the complete process.
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Metricum is based in England and has supporting operation based out of China, Sweden and Romania. Now Metricum wishes to globally expand in other eastern European markets such as Ukraine, but before the decision is taken the market conditions needs to be assessed and the political and economical stability of Ukraine taken into account.
UNDERSTANDING AND ASSESSING UNFAMILIAR MARKETS AND MARKET POTENTIAL
How does an organisation decide which market to enter? This is the question which this part of the report would look at. The choice to enter a foreign market is mostly based on the assessment of the nation's long run profit potential. The potential is a combination of several factors including the political, economic, technological and the legal systems of the region. These are the various constituents that influence the potential attractiveness of a foreign market. The attractiveness ofÂ the country as a potential market for an international development project also depends on balancing all the costs, risks and benefits which would be associated with carrying out a successful business operation in that country. To assess the market conditions prevailing in the country, certain other areas also need to be looked at namely such as the size of the market, in terms of the demographic, also the present wealth of the potential consumers in the market need to be assessed, the present wealth implying the purchasing power of the target consumers, there needs to be a cautious forecast made which would give the firm an idea about the future wealth of the consumers.
Also the costs and risks associated with doing international business in economically advanced and politically stable countries is less when compared with other foreign markets where the right technology, the infrastructure and political stability is missing.
It is also a probability that the current state of affairs in a market might change drastically over a short period of time and the market follows a steady pattern of economic growth owing to an establishment of a free market system coupled with an encouraging government support.
If the international firm can offer products and services that are not widely available in the targeted market it would lead to the satisfaction of an unmet need and the consequent value of the product offered to the consumers would be much higher. Greater value would enable the organisation to charge more and would allow it to build sales volume more rapidly.
Market potential can be defined as the capacity of the market or the country to possibly become or to grow as a potential demander of goods and services offered by the international firm. The calculation of the market potential is the most vital step before entering into a foreign territory. The following steps need to be ensured to carry out a successful market potential research:
- Preliminary screening for attractive country markets.
- Calculation of the present and the future demand in each of the selected markets.
- The measure of the potential demand for the products and services offered by the international firm.
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It provides a basis for the evaluation of the business viability and helps in estimating the maximum total sales potential for a foreign market that the firm wishes to internationally explore. For calculating the market potential specific information is required; which are the number of possible buyers (N), average selling price (P) and the average annual consumption (Q). These variables can be used to compute a formula which calculates the market potential for a region,
Market potential = N*P*Q
When a firm wishes to set up international operations in an unfamiliar market it is of vital importance that the potential market is understood, assessed and the market potential calculated so as to enable the organisation to make an informed decision. There are some points that the investing firm should keep in mind when exploring unfamiliar markets:
- Type of business or customers that would buy the product or service offered by the organization.
- Location of the potential consumers.
- Number of potential consumers.
- The nature of indigenous and foreign competition.
- The probability of the future growth of the market.
- The share of the market which the international company would be able to capture.
Considering all the points that are mentioned above it can be concluded that to asses and understand unfamiliar markets the firm must look into the political, economical, social andÂ technological aspects of the market that it wishes to enter and all of these can be accomplished by calculation of the market potential of the interested region.
MARKET ENTRY STRATEGY
A market entry strategy can be defined as a method which is planned by the organisation to deliver its products and services to a target consumer base and the distribution methodology adopted to ensure their circulation within the market. To develop a market entry strategy a critical and thorough analysis of the potential competitors and possible consumers must be taken into account. Market entry strategy is concerned with making informed decisions about the scale of entry, the timing of the entry and the mode of entry and evaluation of the possible barriers to market entry. All these concepts are discussed in brief in the following part of the report.
Scale of Entry
A very important issue to be considered when contemplating market entry strategy is the scale of entry.
Large scale entry:
When entering a market on a large scale commitment of significant resources (finances, manpower etc.) is required. The large scale implies rapid entry and is associated with resulting strategic commitments which are long-term and are extremely difficult to reverse.
A large scale entry into a market enables the company to capture the first mover advantages which are associated with demand pre-emption, switching costs and economies of scale.
Small scale entry:
Small scale entry would enable a firm to learn the various dynamics of the foreign market while limiting the company's exposure to potential risks, such as faced by a rapid and a large scale entry. Though the financial risks are limited when entering a foreign market on a small scale, but it also reduces the ability of the organization to capture the first movers advantages and capture a sizeable market share.
Timing of Entry
Another issue to be considered when mapping a successful market entry strategy is the timing of the market entry into the unfamiliar market. When an international business enters a market before any of its competitors, the advantages which it gets are known as the first mover advantages like the company gets the ability to outdo potential rivals and capture the demandÂ Â by establishing strong brand name, the ability to create switching costs which tie the consumer to the product, thus gaining an up on other competitors.Â
Moving first into an unfamiliar market can also have disadvantages such as pioneering costs, which the first mover bears that a later entrant can avoid. These are the costs which a firm needs to incur to adapt to the new conditions presented by an unfamiliar market environment. The dynamics of a new market can be so different from the one which the international company is used to that it has to invest valuable expenses, time and effort to learn the rules of the game.
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Pioneering costs also include the cost of establishing a product and the constant promotion required to educate the consumers.
Another disadvantage is when the regulations of the host country change in a way that diminishes the value of an early entrant investments relative to a later entrant.
When an international firm has decided to enter a foreign market, the entry mode which best suits the business must be considered. There are six different modes by which a company can enter a foreign market namely, exporting, turnkey projects, licensing, franchising, establishing joint ventures or to set up a new wholly owned subsidiary in the country. The following part of the report would discuss each mode briefly followed by the advantages and disadvantages of each.
Exporting simply means selling goods and services produced in one country for sale in another country, it has many advantages such as avoidance of costs related to establishing manufacturing processes in the host country, it also helps a firm achieve experience curve and location economies.
Disadvantages include trade barriers, high transport costs, and problems with the local marketing agents.
2. Turnkey Projects
These are the types of projects that are constructed by a developer and are then sold or turned over to a buyer in a ready to use condition. The advantage is the ability to earn returns from the process technology skills in countries where FDI is restricted. The disadvantage can be the creation of an efficient competitor.
This is a business arrangement in which one organisation gives another company permission to manufacture its product for an agreed upon payment. The licensor would grant the right of intangible property (such as patents, processes, formulas, copyrights, designs, and trademarks) to the licensee for a specified period of time for which the licensee pays a royalty fee to the licensor. The advantages are low development costs and risks. Disadvantages include lack of control over technology and an inability to realize location and experience curve economies.
This is an arrangement where one party, known as the franchiser grants the other party the franchisee the right to use its trademark, and provides a basis for the establishment of certain business systems and processes, to produce, market and distribute the products of the franchiser according to certain specifications.
Low development costs and risks are the advantages. Lack of control over quality and the inability to engage in global strategic coordination are the major disadvantages.
5. Joint Ventures
It is a business agreement in which two or more parties would agree to develop for a finite time, a new business entity and new assets by contributing equity in a before discussed agreed manner. The firms would exercise control over the new entity and would consequently share revenues, expenses and assets.
The advantages include access to the local partner's knowledge, there is sharing of development costs and risks and are politically acceptable. The disadvantages include lack of control over technology and the inability to realize location and experience economies.
6. Wholly owned subsidiaries
In this the firm owns hundred per cent of the stock. Setting up a wholly owned subsidiary in the foreign market is normally done in two ways, the first being to set up a new operation in the country known as a green field venture or the second method where the international firm acquires an established firm in the host nation and then using the services of the acquired company to promote its goods. A wholly owned subsidiary is associated with a high level of costs and risks but offers many advantages like the protection of technology and the firm's ability to realize location and experience economies enabling it to engage in global strategic coordination.
BARRIERS TO MARKET ENTRY
These are the factors that restrict the ability of a new competitor to enter and begin business operations in a new and unfamiliar market. There are six major sources of barriers when a firm wishes to enter unfamiliar markets; the following are discussed in brief:
1. Economies of Scale:
It occurs when the unit cost of a product decreases as the production volume increases. When the indigenous competition has achieved the economies of scale, it is a barrier forcing the new entrant to accept a cost disadvantage or enter the market on a large scale which might not be possible for companies with limited financial resources. Some other cost advantages which an existing company has over a new entrant are proprietary technology, government subsidies, favourable locations and experience and learning curves.
2. Product Differentiation
This creates a possible barrier to market entry by forcing the new entrants to spend ample amount of time, effort and money to differentiate their products from the one being offered by the competitor which with time has earned customer loyalties through their advertising campaigns and customer service efforts.
3. Capital Requirements
The new entrants to enter an unfamiliar market have to invest a large amount of financial resources to establish a base in the host country which is a possible barrier for companies with limited funds.
4. Switching Costs
These are the costs associated when a consumer switches from one supplier's product to another's. High switching costs are a potential barrier with the new entrant forced to provide incentives to the consumers to adopt their products.
5. Access to channels of distribution
To acquire a distribution system for the circulation of their products the new entrants have to provide incentives in the form of price discounts, promotions, and cooperative advertising. Such expenditures are a barrier reducing the profitability of the new entrants.
6. Government policy
Government policies can restrict the entry of an international firm into the country by regulatory laws, thus proving to be a barrier for the new entrant.
UKRAINE AS A POTENTIAL MARKET
Ukraine is the second largest country in Europe after Russia. It gained independence from the erstwhile USSR on the 24th of August 1991. Since then the modern economical, political, social and technological infrastructure has been established in Ukraine. It holds much potential for becoming a new market open to international trade and investment.
The Economy and the Financial Sector
Ukraine in the recent years has shown a steady 6-9 % growth in the national GDP. The industries are growing at a good rate in all the sectors dominated mainly by construction, manufacturing and processing, gas and electric, transport and the retail. The rate of inflation is under tight control by the National Bank of Ukraine and the country maintains a stable exchange policy. The strong currency policy and good management of the external debt-service obligations has encouraged the stability of the national currency.
Banks are the key financial intermediaries in the Ukrainian financial sector. The Ukrainian banking system is a two-tier structure comprising of the National Bank of Ukraine and other commercial banks of various types and forms of ownership. The National Bank of Ukraine is the central bank which enforces a uniform state monetary policy to ensure the national currency stability. The National Bank of Ukraine has gained a reputation as a strict enforcer of the monetary policy and sound financial practices. Due to that Ukraine has stable national currency and low inflation rate.
International and domestic companies are permitted to have an unlimited number of current bank accounts. Ukrainian payment system is very reliable. Ukraine uses the Electronic Payments System (EPS) which has shown that it fulfils all the requirements for a national system of inter-bank payments and it is considered one of the best in Europe. Foreign companies no longer encounter delays in converting currency and remitting profits in foreign currency.
Foreign Policy and Investment
Ukrainian foreign policy is to achieve a strategic balance between the Russian and the Western models. It has diplomatic relations with 170 countries and is a member of many international organizations such as UN, IMF, the World Bank, the EBRD and many more and cooperates closely with the OECD. Accession to the EU is a strategic goal. To encourage foreign companies, Ukraine has been taking significant steps to streamline the legal framework, when it comes to the issue of FDI. The government has overhauled the legislation structure to match those of their international counterparts. Liberalization of foreign trade has made possible for the Ukrainian companies to engage in trade with foreign investors without special permission from the authorities.
Legal Guarantees to Foreign Investors
The following are the legal guarantees offered to international firms entering the Ukrainian market:
- A10 year protection period against any changes to the investment treatment in the law at the moment when the investment was made.
- Investments cannot be expropriated, except in case of national emergency and with appropriate compensation.
- The right to compensation for damages, resulting from the negligent acts or failure to perform its duties by the state bodies.
- The right to repatriate the original investment in the event of termination of the investment without payment of customs duties after the 6 month prior notice.
Vehicles for Foreign Entry
The Ukrainian government prescribes the following methods to enter the market:
- Formation of a new business entity with a Ukrainian company or purchase of an interest in an existing Ukrainian firm.
- Establishing a wholly-owned subsidiary, branch or acquiring an existing Ukrainian firm.
- The acquisition of any kind of property which is not directly prohibited by the applicable Ukrainian legislation.
- Investments that are based on cooperation agreement with a Ukrainian partner.
Forms of Foreign Investments
The Ukrainian government does not impose any restrictions in the manner in which foreign investments can be made into the economy. Investments are allowed by the following means:
- Foreign hard currency
- Ukrainian currency used to re-invest into an existing or a newly established company.
- By the means of shares, bonds and other securities or corporate rights.
- Intellectual property rights evaluated in hard currency, including copyrights, trademarks, brand-names, patents and industrial know-how.
- Rights to carry on separate types of business evaluated in hard currency.
Taking into account all the above mentioned points, an idea can be formed about the market conditions prevailing in Ukraine.
BUILDING THE INTERNAL SKILLS AND KNOWLEDGE BASE
To assess the market data provided and to make the decisions based on it whether to invest in Ukraine or not, it is very essential that the internal skills and the knowledge base of the company are developed. Internal efforts such as training and investing in R&D would intensify interaction among individuals and amplify the existing knowledge base. The investment of a firm in human resources training, development of the organisational structure and design of the firm, establishing procedures within the firm that would help to retrieve information codify knowledge and distribute that within the firm and effectively recognise and search problems should be considered among the elements that would enhance the knowledge base.
Metricum should establish a marketing department as it has none; the department would be a key in expanding the knowledge base of the company.Â
The marketing team would promote the business and the mission of the company.
A team building system is required where the marketers could share resources, materials and their experience. The staff has to be kept motivated by offering them incentives for making great sales, contests can be conducted and sharing of some per cent of profits with them for reaching the top in sales. The staff should be provided with resources, necessary tools and training.
The aim of such a department should be to highlight the firm's core competencies, closely observe the competition, analysing of industrial trends, setting prices and figuring out new ways to promote the firm's brand and focus on making the business superior. The aim of the team should be to improve the competitive advantage and develop customer bases for the product and services provided by the firm and help decide what new items would enhance the sales.
The team should focus on public relations; contacts need to be made with print media, radio and television so as to enable an advertising campaign to educate the consumers about the products. Research should be targeted towards customer, the ever changing global environment, market conditions and campaign effectiveness.
By scanning the external information that is available from the competitors and following a strategic alliance of cooperation with them, the firm's knowledge base can be expanded.
In every industry, the competitors confront each other globally in every potential international market. To make profits in such a cutthroat environment the firm should make a clear and a viable strategic choice regarding its position on the efficiency frontier and take actions at the operational and strategic level that would support its business operations. Thus, strategy is concerned with identifying and taking actions that will lower the costs of value creation and will differentiate the firm's products through superior quality, design, service and functionality.
When looking at forming a global strategy for a firm it must be kept in mind that the strategy should be consistent with the environment in which the firm operates and its compliance with the organisational structure. If the strategy is not in accordance with the business environment the organisation's performance will be affected.
There are four international business strategies which are summarized below in the form of a table:
Mixed centralizedÂ and decentralized
Need for coordination
Need for cultural
(Source: Hill. C.W (2005), International Business)
Key resources required for building a global strategy:
- Funding: a global strategy requires substantial funds, there are many costs to be considered such as expenses incurred for marketing, business set-up costs, public relations etc.
- Quality: systems need to be in place for critical quality control and setting up of procedures to ensure its maintenance.
- Time: global strategies are built over number of years. The time horizon should be considered before deciding on the strategy.
- Senior management commitment and effort: the CEO and his team need to believe that the benefits of a global strategy are greater than the costs. The team then needs to work to achieve this.
- Innovation: this means investment in R&D.Â Without innovation the company would not be able to compete in the global competitive environment.
The above discussion outlines the resources required for forming a global strategy. The aim of any international strategy should be to create value by transferring valuable skills and products to foreign markets where the indigenous competitors lack those goods and services.
CONCLUSION AND RECOMMENDATIONS
The aim of the report is to assist Metricum in the review of the international strategy that it should formulate so as to allow entry into the Ukrainian market. The following would summarize the findings of the report and provide recommendations for business expansion in Ukraine.
Ukraine has amended its foreign investment laws to allow foreign investors various state guarantees, the most vital being the unhampered and immediate repatriation of profits at the time of investment. Over the past few years, Ukraine has eliminated most licensing requirements, reduced regulation, liberalized its markets and eliminated major restrictions on foreign exchange.
The findings suggest that the Ukrainian market is open to foreign investors and firms in the sector but there are certain barriers to market entry in Ukraine.
Importers face troublesome customs, licensing, and certification procedures.Â Local companies are subject to high payroll taxes and unfair tax collection practices.Â An underdeveloped market for financial assets, weak protection of ownership rights and a huge shadow economy pose obstacles to the efficient use of capital. Corruption is a significant problem throughout the government. A lack of a comprehensive legal framework leads to problems in guarantying and enforcing private property rights. Adherence to contractual obligations and corporate agreements is another issue coupled with ineffective corporate governance.Â
Ukrainian government is all set to address these problems by reducing the tax burden on international businesses and have introduced favourable conditions for investment activities such as concessions and product sharing agreements. The business environment is complex presented with great opportunities for investors who align their own needs with that of the Ukrainian market.
Business in Ukraine is mostly based on personal relationships. The rule of law is not yet firmly established in the economy, the depth and quality of key business relationships are the best protection against loss and the key to a successful market entry.
Selection of a local partner is probably the most important decision a company has to make in its market entry strategy. A foreign company starting business here has the choice of forming a a wholly-owned subsidiary, limited liability company, a joint stock company or a representative office or. A representative office can carry out promotional, marketing and other auxiliary functions.
Looking at the Ukrainian market, the report does not recommend franchising as a viable alternative for market entry.Â The report also does not recommend joint venture as a viable structure for business development because of the inexperience of Ukrainian and Western business partners and weaknesses in the Ukrainian legal system more likely to
Licensing a product for local manufacture, on the other hand, is a very viable market entry strategy, but one that has not been widely attempted.Â Ukrainian manufacturers can often offer low-cost production plus an already established set of customers and distributors both in Ukraine and the former Soviet Union.Â Intellectual property protection is weak, however, and U.K companies should avoid sharing critical technologies.
The report recommends the setting up of a wholly owned company in Ukraine if Metricum intends to carry out manufacturing processes.
Rather than trying to impose sales policies used in the western economy a flexible and cooperative approach, oriented toward a long-term presence in the market, is much more likely to bring desired results.