Strategic options to globalisation

Different organizations around the world strive to expand and grow. Igor Ansoff’s matrix is a tool that helps businesses decide their product and market growth strategy. Ansoff’s product/growth matrix suggests that a business’ attempts to grow depend on whether it markets new or existing products in new or existing markets. The output from Ansoff’s matrix is a series of suggested growth strategies that a set direction for the business strategy. They are as follows:

Market penetration. Selling existing products existing markets.

Product development. Selling new products to existing markets.

Market development. Existing products being sold to new markets.

Diversification. Selling new products to new markets.

The report explores the strategies mentioned above in detail and provides examples of global firms that have used the strategies.

INTRODUCTION

Globalisation is the gradual integration and growing interdependence of natural economies. It allows firms to view the world as an integrated market place. Firms will use different methods to expand.

METHODOLOGY

The contents of this report were acquired by research, that is, by reading different books as well as the internet.

MARKET PENETRATION

This strategy applies to selling an existing product in an existing market. It is suitable in a growing market which is as yet not saturated. Market penetration seeks to achieve four main objectives:

Maintain or increase the market share of current products- this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to personal selling.

Secure dominance of growth markets

Restructure a mature market by driving out competitors, this would require a much more aggressive promotional campaign supported by a pricing strategy designed to make the market unattractive for competitors.

Increase usage by existing customers, for example by introducing loyalty schemes.

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An example of market penetration is recognizing that software as a service can be a potent market penetration tool, Dell is assembling a services portfolio that now includes e-mail disaster recovery, spam/virus filtering and archiving via its messageOne acquisition.(www.soopertutorials.com). It is unlikely for this strategy to require much investment in new market research as it is likely that the firm will have good information on competitors and customer needs.

The typical risk of market penetration is that it may lead to price wars with competitors with the same strategy and low pricing could be detrimental to the perceived brand value and to the company reputation.

PRODUCT DEVELOPMENT

This involves developing new products to sell in existing markets. It is usually employed with branded goods so that the qualities of the new product are linked to the customer’s confidence in the established brand. This strategy may require the development of new competences and builds on customer loyalty.

New product development can be an amendment of existing products in order to produce products which are “new” to the market or it can totally be innovative. The Booz Allen Hamilton model outlines the stages of new product development as follows:

IDEA GENERATION

Ideas are collected from perhaps the sales force, distributors and customers. The company actively looks for opportunities, and new products can be produced in response to a perceived, or recognized demand. Ideas must be collected, considered feasibility and eventually passed to people who are responsible for screening.

SCREENING

The firm will set a certain criteria, for example the product must fit with the rest of the range; there must be a recognized level of demand; it must give a stated level of profit. Assuming some ideas meet the criteria, they are then passed on to people responsible for the next stage.

CONCEPT TESTING

This is not a product test but an idea test. The idea is taken to potential buyers as well as to the internal processing people to check on manufacture, packaging, distribution.

OUTLINING POSSIBLE MARKETING STRATEGIES

The results of the concept testing can help a company to decide just how it will market the product. Discussions made at this time depend a great deal not only on the results of the concept testing but also o the knowledge of the marketplace and the planning skills of the marketers involved. Knowledge of the marketplace is something which requires research.

BUSINESS ANALYSIS

It is here that potential profits are compared to the production and marketing costs to see if its worth proceeding. It is at this stage that products are often rejected as they do not demonstrate enough potential earnings in a given period of time, whereas given the appropriate support they may actually be products which could give huge profits over a longer period of time.

PRODUCT DEVELOPMENT

To begin manufacturing a new product is a risky venture. Because of this some manufacturers will choose to produce a prototype, or small batches, in order to test effectiveness before they give full commitment to production. The effort in producing in small quantities adds to the expense and time involved, not to mention the possibility of the competition becoming aware of what the company is doing.

TEST MARKETING

The product is introduced to a representative sample of the potential market. Although it may be expensive, it is better to use more than one testing area so that comparisons can be made. Different prices, advertisements, methods of distribution and perhaps even packaging may be used in different areas so that the company can see which methods are most effective. The problems that arise at his stage include:

Buyers – people often buy a product just to try it. They may like it and tell a researcher so, but will often revert back to their normal purchases because of brand loyalty.

Distributors and suppliers – they may be willing to give a new product exposure because of an introductory incentive, but once the incentive is withdrawn they may not be so willing to cooperate.

Competition – if they have relatively similar products, competitors may take defensive action and introduce promotional activity that will undermine the testing.

COMMERCIALISATION

This is the full scale manufacture and launch of the product onto the marketplace. If all of he stages have been carried out correctly, the product should have a good chance of success.

An example of a firm that used the product development strategy is Hewlett and Packard who practiced allocating work time to encourage new designs. Another example is the Apple iPhone has been such a success and the company now dominates the smart phone world.(Michael Malone) The risks of product development are uncertainty of new technology, teething troubles of the new products and time pressure due to competition.

MARKET DEVELOPMENT

This involves offering an existing product in a new market. This strategy is used when a regional business wants to expand, or when new markets are opening up. Market development might take three forms:

New segments. For example in the public services, a college might offer its educational services to older students than its traditional intake, perhaps via evening courses.

New users. Here an example would be aluminium, whose original users packaging and cutlery manufacture are now supplemented by users in aerospace and automobiles.

New geographies. The prime example of this is internationalization. The four risks of internationalization are commercial risk, currency risk, country risk, cross-cultural risk. When selecting an entry strategy, managers should consider the following six variables:

The goals and objectives of the firm, such as profitability and market share.

Unique conditions in the target country such as legal, cultural, economic circumstances, as well as the nature of business infrastructure, such as distribution and transport systems.

The nature and extent of competition from existing rivals and from firms that may enter the market later.

The characteristics of the product or service to be offered to customers in the market.

The financial, organizational, and technological resources and capabilities available to the firm.

The risks inherent in each proposed foreign venture in relation to the firms and objectives in pursuing internationalization.

A firm can use the following strategies when entering new markets geographically.

EXPORTING

Exporting is the strategy of producing products or services (often the producers home country), and selling and distributing them to customers located in other countries. There are two types of exporting

Indirect exporting which is accomplished by contracting with intermediaries located in the firms home market.

Direct exporting that is accomplished by contracting with intermediaries located in the foreign market.

Firms venturing abroad for the first time usually use exporting as their entry strategy. Exporting is also the entry strategy most favored by small and medium sized enterprises.

Advantages of exporting

Increased overall sales volume, improve market share, and generate profit margins that are often more favorable than in the domestic market.

Diversify customer base, reducing dependence on home markets.

It minimizes risk and maximizes flexibility as compared to other entry strategies.

It avoids substantial costs of establishing manufacturing operations in the host country.

Increases economies of scale therefore and reduces per-unit cost of manufacturing.

Lower cost of market entry since the firm does not have to invest in the target market or maintain a physical presence there.

This is how Sony came to dominate the global TV market, how Japanese automakers made inroads in the U.S market and how South Korean firms such as Samsung gained market share in computer memory chips.

location to the rest of the world.

The more successful managers use a systematic approach to improve the firm’s prospects by assessing the potential markets, organizing the firm to undertake exporting, acquiring appropriate skills and competencies, and implementing export operations.

FOREIGN DIRECT INVESTMENT

This is an internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant and equipment. Foreign direct investment is characterized by six key features.

It represents greater resource commitment. It has far more taxing on the resources and capabilities than any other entry strategy.

It implies local presence and operations.

It allows the firm to achieve global scale efficiency, which helps enhance the performance of the firm.

It entails substantial risk and uncertainty because establishing a permanent fixed presence in a foreign country makes the firm vulnerable to specific circumstances in that country.

Investors must deal more intensively with particular social and cultural variables presenting the host market.

Multi national firms increasingly strive to behave in socially responsible ways in host countries.

STRATEGIC ALLIANCES

Strategic alliances refer to cooperative agreements between potential or actual competitors. Strategic alliances range from formal joint ventures, in which firms have high equity stakes (Fuji-Xerox), to short term contractual agreements, in which two companies agree to cooperate on a particular task.

Advantages of strategic alliances

Strategic alliances facilitate entry into foreign markets.

Alliances allow firms to share fixed costs of developing new products and processes.

Alliances are a way of bringing together complementary skills and assets that neither company could easily develop on its own.

Disadvantages of strategic alliances

They give competitors a low cost route to new technology and markets. Unless a firm is careful it can give away more than it receives.

JOINT VENTURES

A joint venture entails establishing a firm that is jointly owned by two or more otherwise independent firms. The firm benefits from the local partners knowledge of the host country’s competitive conditions, culture, language, political, systems and business systems. When risks and costs of opening a foreign market are high a firm might gain by sharing these costs or risks with a local partner.

A firm entering into a joint venture risks giving control of its technology to its partner. However, joint venture agreements can be contracted to minimize this risk.

LICENSING

A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period and in return receives a royalty fee from the licensee. Intangible property includes patents, inventions, formulas, processes, designs, copyrights and trademarks. High technological firms routinely license their patents and know-how to foreign companies. For example, Disney licenses the right to use its cartoon characters in the production of shirts and hats to clothing manufacturers in Hong Kong. Disney also licenses its trademark names and logos to manufacturers of apparel, toys and watches for sale worldwide.

Coca-Cola has licensed its famous trademark to clothing manufacturers, which have incorporated the design into clothing.

Many firms have made the mistake of thinking they could maintain control over their know-how within the framework of the licensing agreement. RCA corporation for example, once licensed its colour TV technology to Japanese firms including Sony. These firms quickly assimilated the technology, improved on it, and used it to enter the US market, taking substantial market share away from RCA.

TURNKEY CONTRACTING

This refers to an arrangement where the focal firm or a consortium of firms plans, finances, organizes, manages, and implements all phases of a project abroad and then hands it over to a foreign customer after training local personnel. Turnkey projects are most common in the chemical, pharmaceutical, petroleum refining, and metal refining industries, all of which use complex, expensive production technologies.

For example, many Western firms that sold oil-refining technology to firms in Saudi Arabia, Kuwait, and other gulf states now find themselves competing with these firms in the world oil market.

FRANCHISING

Franchising is an advanced form of licensing in which the focal firm allows an entrepreneur the right to use an entire business system in exchange for compensation. The franchisor will often assist the franchisee to run the business on an on going basis. McDonalds is a good example of a firm that has grown by using franchising strategy. McDonald’s strict rules as to how franchises should operate a restaurant extend to control over the menu, cooking methods, staffing policies and design and location. McDonalds also organizes the supply chain for its franchises and provides management training and financial assistance. Another example is the curves fitness center which was ranked the number two franchise in 2004 by the entrepreneur magazine.

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DIVERSIFICATION

Diversification is the name given to the growth strategy where a business markets new products to new markets. This has the advantage of preventing the company from relying too much on its existing strategic business units. Diversification might be chosen for a variety of reasons, some more value creating than others. Potential value creating reasons for diversification areas follows.

Efficiency gains can be made by applying the organizations existing resources or capabilities to new markets and products or services. These are often referred to as economies of scope.

Stretching corporate parenting capabilities into new markets and products or services can be another source of gain. In a sense, this extends to a point above about applying existing competences in new areas.

Increasing marketing power can result from having a diverse range of businesses.

There are two types of diversification these are related diversification and unrelated diversification.

RELATED DIVERSIFICATION

This is when a company develops beyond its present product and market whilst remaining in the same area. This form of diversification can occur by:

Backward diversification, when activities related to inputs in the business are developed further backing the value chain.

Forward diversification, when activities are further forward in the value chain.

Horizontal diversification, when a company develops interests complementary to its current activities. An example, internet search company Google has spread horizontally into news mages and maps and other services.

UNRELATED DIVERSIFICATION

This is used to describe a company moving beyond its present interests, that is, it moves beyond its current capabilities and value network. Unrelated diversification is often referred to as a conglomerate strategy because there are no obvious economies of scope between the different businesses. Examples of unrelated diversification include:

the easy Group which consists of easy Jet, easy internet café, easy car, easyValue.com and easy.com.

Virgin media which moved from music producing to travels and mobile phones.

Walt Disney which moved from producing animated movies to theme parks and vacation properties.

The typical risks of diversification include

It requires a company to acquire new skills , new technologies and new facilities

Insufficient know how

Insufficient management span of control

May require risky acquisitions

Loss of brand focus or credibility

RECOMMENDATIONS

Market penetration is generally the cheapest strategy to adopt. It is the least risky and is especially suitable for small and medium sized firms that may not afford to develop new products and/or enter new markets.

Before taking up product development or diversification, a firm should ensure extreme research and development that the new product and/or venture is viable as it is costly to develop new products as new technologies have to be purchased and employees would have to be trained on the new practices. It takes time to be effective.

CONCLUSION

In conclusion it can be seen that global firms can apply any one of Ansoff’s strategies in an attempt to expand and grow be it in their existing markets or new ones, and their current product offering or new ones.