Strategy of International Business - Case Study Example

Strategy of International Business Name: Institution: Course: Lecturer: Date: Executive Summary The world has experienced rapid development of internet. This has totally changed the ways of doing things. The advanced technologies have resulted to emergence of electronic-business firms which conducts their business online. This paper performs a thorough investigation of foreign market entry-mode of these firms. The analysis tries to find out if the prevailing international rules have changed for these companies. The evidence presented in the analysis suggests that establishing country-specific websites is quite insufficient for the companies entering foreign markets. Furthermore, this case uses partnerships as well as foreign-direct-investment as the entry mode. Further to this, the analysis tries to show how strategic planning related to foreign market penetration is ideal in embracing long-term influences as well as the results of the internationalization process. The ability to fully respond to foreign market opportunities and challenges depends on the firm’s resource-base and strategic foundation which includes international knowledge, skills, experience as well as networks. However, because of their nature, it is always hard to assess these aspects with a view of incorporating them into strategic planning cycle. Therefore, taking a broad view of their foundation to international operations, an organisation will be more prepared in responding to challenges of international market-place. The paper compares the propositions given using four important theories of internationalization. These are internalization theory, resource-based view theory, internationalization process model as well as eclectic framework. In explaining the entry mode of the selected company, it is quite inevitable to abandon these theories. Table of Content: Background..............................................................................................................................4 ASOS.com.................................................................................................................................5 Previous Study..........................................................................................................................5 Characteristics of Digital Market-place.................................................................................6 Foreign Entry Strategy for ASOS.com..................................................................................7 Business Partnership................................................................................................................7 Physical Presence....................................................................................................................10 Theoretical Contribution.......................................................................................................13 Internationalization Theory..................................................................................................13 The Eclectic Paradigm...........................................................................................................16 Resource-based View Theory................................................................................................17 Internationalization Process Model......................................................................................19 Conclusion...............................................................................................................................19 Background In the recent decades, globalization has compelled firms to make expansion of their businesses beyond domestic markets. Internationalization not only gauges the foreign markets to serve but also how to gain entry. The growing number of theoretical as well as empirical contributions towards global market-entry research depicts enormous significance of making the correct choice of market-entry-mode, since it acts as the sole determinant of success of international operation. This means that once a critical decision has been made, it become hard to revise it without serious implications of the organisation’s future performance (Kogut & Zander, 2003). One of the main drivers to internationalization is rapid development of ICT (information and communications technologies), and particularly advanced internet technologies. The internet has widely facilitated conventional business transactions. It has also offered new ways of conducting business which has lead to emergence of e-business companies. These are companies that are based on redefined business models; that is, the existing or newly created models. Specifically, e-business companies are firms that solely rely on both availability as well as use of internet, in order to fulfil their unique value proposition related to their business model (Chung & Alccer, 2002). This analysis review the market entry strategy used by e-business companies and particularly ASOS.com, a company based in the United Kingdom. The Case study describes important characteristics of electronic market space serving as a basis of comprehending internalization behaviour related to e-business. Next, study is made on internationalization theories in order to ascertain whether they possess the potential to highlight foreign market entry preferences of e-business, based on past cases. The analysis then concludes with a summary and brief discussion of the issues highlighted. ASOS.com ASOS.com is British e-business firm that deals with fashion and beauty. The company’s primarily targets young people in advancing it online products. In today’s world, the youth make up the highest percentage of online consumers. ASOS.com utilises this opportunity to reach her target market. The company has dominance in UK markets (local) and its strategy is focused on international markets such as Australia, Germany, Russia, United States, Italy and China. Previous Study Minor empirical study have attempted to make an investigation on the entry modes that e-business choose. One such company is a Danish e-marketplace Scan-market. This firm did not set up subsidiaries, but rather relied heavily on sales agents as direct export channel as well as partnering with other firms, particularly consulting companies in entering foreign markets. They were then responsible of acquisitioning new consumers, sales as well as after-sales support. These strategies were selected because of two reasons. First, the firm intended to expand rapidly with little resource commitment. Secondly, the company highly regarded personal interaction with consumers (Luo, Zhao & Du, 2005). While examining internationalization aspects related to Australian, New Zealand as well as Canadian e-business start-ups, a substantial number of these companies used their website together with partnering with large international firms in distributing and promoting their products. According to research, these companies treated their locations as well as locations of their consumers as fairly insignificant (Chung & Alccer, 2002). The same results are obtained in the study of European and American e-business companies. A higher percentage of these firms established partnerships with big global firms in selling their products. The partnerships not only provided these firms with balancing and tangible resources, but still the companies benefitted with more abstract resources. Characteristics of Digital Market-place It is paramount to comprehend how internet has brought about variations in conditions for those firms operating in electronic market-space. This necessitates comprehension of their internationalization behaviour. The peculiarities that influence the e-business while entering the foreign markets. First, with the growth of internet, products are partially and fully digitized and hence distributed through electronic media. Digital goods encompass those products or services that are sold through the internet. These products are intangible and act as a subset of category of information products. They are referred to as experience products which mean that it’s always difficult for customers to learn of their attributes. In the prevailing circumstances, the buyer is less-informed about the real features related to digital products prior to consumption. This market uncertainty makes consumers reluctant to strike business deals with unknown firms. This gap is sealed by undertaking the necessary actions aimed at building trust among the customers. Example of such action is delivering products with similar features as those displayed on the platform (Bunduchi, 2005). Secondly, it is fully acknowledged that internet decrease transaction costs. Internet decrease cost related to information search and also facilitating easier communication by linking different parties. This enhances quick exchange of information. Generally, the use of internet simplifies transactions leading to processes improvements for the concerned parties. In particular, possibility of coupling information processes of the parties mandates the business partners to include complementary products and services in their portfolio (Luo, Zhao & Du, 2005). Thirdly, fully digital and or partially-digital products exhibit unique cost structure. The products mostly exhibit heighted fixed costs as compared to marginal costs. The initial investment is normally high since it requires high capital outlay in terms of hardware, software as well as development of products. Nevertheless, costs of serving more additional consumers are relatively low compared to the initial investment. Thus, cost structure emanates from characteristics of digital products; that is, indestructibility (not destroyed whichever way they are used), transmutability (easily modified) and reproducibility (copied with no difficulties). Foreign Entry Strategy for ASOS.com Business Partnership Almost all operations within overseas markets are managed through subsidiaries that are staffed with local employees. ASOS decided to operate her international business in decentralized manner because the company is a retailer which sells as well as distributes physical goods. Serving a high number of her customers from UK, ASOS would incur significant costs in terms of shipping as well as high delivery times, which would act as considerable entry barrier to the international market. To become highly competitive as compared to her rivals located in foreign markets, the company should open and manage her local distribution centres. In this regard ISOS will acquire subsidiaries through acquisition and partnership with her main competitors (Baum, Calabrese, Silverman, 2000). According to this study, it is important to point out that international partnership is ideal for the not-so-established firms. According to previous studies, local firms that have aspired to go international regard this strategy as important in gaining entry into international market. International partnerships is considered as enduring inter-company cooperative arrangement that involves cross-border flows as well as linkages, which utilizes resources or governance structures of autonomous firms that are headquartered in a number of countries, for joint accomplishment of individualistic goals linked to corporate mission of each firm (Das & Teng, 2000). The main motive towards partnerships is leveraging complementary as well as crucial external resources. As such, international partnerships are considered as an important option towards facilitating initial market entry. In particular, midsized companies rely of such partnerships to expand globally because they lack the experience and financial muscles to jumpstart a global firm. According to research, partnerships impact performance of start-ups companies positively, since they provide the firms with the necessary resources and reduce cost drain (Amit & Zott, 2001). In this study, the ability of establishing international partnership with other e-business firms is ideal for ISOS. Example of such firms includes Amazon. Partnering with Amazon would assist gain first market entry or exist the already but minimal existing market. Since Amazon is an already established firm in the international arena, merging with it would reduce initial investments related to tangible assets. Moreover, accessing intangible resources, with an example of market knowledge would be the major contributing factor for partnering with Amazon (Baum, Calabrese, Silverman, 2000). Entering the new markets compels the firm to acquire as many consumers as possible because of the supply side as well as demand side effects, mainly indirect network effects. ISOS can only succeed in the market if it is able to deliver high valued products to her clientele. Moreover, the company should instil uniformity of the products posted online and the actual products it avail in the market. Establishment of an enormous customer-base requires ISOS to enlarge her popularity among potential consumers as well as overcome the main market uncertainties prone in the electronic market; that is, gain consumers trust. Promotional cooperation with some of the established firms (as indicated above) would assist the company accomplish these prerequisites. Such partnerships would assists the company curb the stiff requirements stipulated by the market such as licensing. Furthermore, partnership provides the firm with the opportunity to benefit out of the partner’s popularity. The association assists in building legitimacy and trust hence improving reputation as a result of spill over effects. Such partnerships make new entrants to the market send strong signals to the entire market a situation that assist them boost their value (Bunduchi, 2005). It is always important to consider a number of factors prior to partnership. First, the size of the company to partner with must be known. Secondly, the company’s popularity should be ascertained in advance. Thirdly, it would be prudent to access the nature of the firm. In this case, ISOS should conduct an analysis of the firm it intends to partner with. Partnering with other firms conducting e-business would be ideal for ISOS. This would position the firm to exploit network effects in the market. Furthermore, ISOS should partner with firms that provide products which are complementary to products of the online content providers. This would then enhance value for their customers. Partnering with a company that rely on internet expertise is ideal since the two firms can link their complementary products in absence of high integration costs (Baum, Calabrese, Silverman, 2000). This rationale is more evident with the development of global alliances which mandates companies to exploit the network impacts on a broad scale. In addition, lock-in effects imply that importance of such alliances is highest during the start of market entry. Research found out that companies engaging in the e-commerce business forms promotional partnership after market entry because marginal benefits trickling after formation diminish with time (Amit & Zott, 2001). Physical Presence It is common place that a firm seeking entry to international market will not solely depend on adapted websites in distributing its products. The strategy (of using the internet) is used to expand the market. Due to the overall cost reduction, internet plays an important role serving as virtual export channel in respect to digital products. This means that it can be used to expand into international markets with subsidised resource commitment which can assist the firm make use of economies of scale. In this case, setting up a website in each country is not sufficient in establishing a sizeable market presence, particularly in the key market segments. Therefore, the use of Foreign Direct Investment (FDI) is crucial in winning sizable market in the international circles. FDI demonstrates that physical presence is taken as an essential component for effective entry into the market as well as market penetration. Foreign direct investment is even more ideal for companies like ISOS which is offering physical products. In case of tangible products, the use of internet is not considered so ideal as far as bridging geographical barriers is concerned. Moreover, as aforementioned face-to-face contact cannot be compared to the use of online services. It is an important element that instils consumer royalty and trust meaning that it cannot be replaced entirely with internet. Another driver regarding physical presence is that it abides by market specialties, which is regarded as very critical for international success. Thus, ISOS will not be compelled to use foreign direct investment because of physical nature of her products. It is important for the company to tailor her services to the overall needs of local customers regarding website content (listed items, language and editorial content), payment options as well as customer service. Moreover, ISOS is bound to face selling regulations for her products that target the youth. For instance, stiff selling regulations for such products exist in markets such a Germany and France. Therefore, the company will be forced to establish mutual relations with distributors and retails of related products within those markets. However, in order to directly deal with these features, the company will have to run independent and foreign subsidiaries (Amit & Zott, 2001). Entry Strategies Average (in Millions) Std. Deviation Number Companies Very Low (Indirect Export) 31.7 21.6 16 Low (Direct Export) 45.4 34.2 26 High (Partnership) 15.7 13.9 7 Very High (Direct Investment) 86.9 35.0 21 The above table depicts differences regarding export performance of a number of companies basing on entry strategy mode. For instance, those firms that use direct investment records 86.9 million as compared to 31.7 million in indirect export (Sadaghiani, Dehghan & Navabi, 2011). The importance of adapting to the prevailing local-market conditions is attached with the need of gaining thorough knowledge regarding foreign markets. Gaining market knowledge, skills and relevant experience have been termed as important as far as internationalization process is concerned. These factors are relevant since they acts as major determinants to which companies are engaged in international operations. The more knowledgeable a company is the more it is willing to operate in a more capital intensive as well as riskier entry modes. Although internet assists the firm in gaining considerable knowledge about international market, experiential knowledge cannot be acquired through it. Possessing little foreign experience cannot be regarded as an obstacle to FDI. Rather, it acts as a motivating factor to its implementation (Kogut & Zander, 2003). Proximity to markets is thus deemed vital so as to fully know the customers. This necessitates development of products that are tailored to their needs. Despite the fact that partnership seals the gap of availing tangible products to the consumers, such an alliance is not adequate. Partnership gives the not-so-well-established companies an opportunity to feel what is in the market. This means that partnership acts as a stepping stone for the company’s internal development of international knowledge. Hence, alliances are considered a transitional stage of a company from market to hierarchy (Forsgren, 2002). There exist variations towards the use of the entry mode. This means companies are endowed with resources differently and thus could use different timelines in applying their strategy. Foreign direct investment may be used by the firm at the beginning of entering into the market. Alternatively, a firm may to use the strategy after it has been fully established in the market or after gaining some market space. Endowment of resources is a contributing factor towards seizing the direct market instantaneously. Thus, ISOS may employ green-field investment tactics or it can do acquisitions. The latter strategy is considered important since it mandate the firm eliminate existing competition as well as gain entry quickly. This strategy draws on all tangible facilities as well as the intangible assets related to the purchased firm, allowing the firm exploit the demand-side as well as supply-side effects. In such a case, full ownership of the firm plays a key role since partial ownership display enormous difficulties when trying to enter a distant foreign market alone. Theoretical Contribution Theoretical contributions explain the strategic pattern of the choice of entry into the foreign markets. The major theoretical contribution in this case includes theory of internationalization, eclectic paradigm, and resource-based view theory as well as internationalization process model (Contractor, 2007). Internationalization Theory This theory applies transaction cost theory in explaining existence of global firms. The theory acknowledges natural imperfection related to international markets which result from bounded rationality plus opportunistic behaviour depicted by market agents. Market agents lack all the important information relevant to the market such as prices or quality of products. This means that in a number of times, they do not trust each other. This makes market transactions less costly. However, cost of obtaining information, negotiations, monitoring as well as enforcement have to be incurred. In any level related to transaction cost, there exists an incentive for firms to create internal market; that is, integrating operations within company’s hierarchical structures. Nevertheless, internal governance structures get preferred in a situation where transaction cost is more than costs of internalization, for example communication plus coordination costs. Otherwise, market governance is always favoured (Fina & Rugman, 1996). According to this theory, there exist certain markets which are subject to internalization because they display market imperfections. These are markets that involve application of advanced knowhow. In our case such conditions of imperfects market exists (Dunning & Wymbs, 2001). The first situation emanates from the fact that ISOS plans to exploit its competencies in the foreign markets. The unique value related to e-business firms (ISOS in this case) crops up from their technological know-how, reputation and their goodwill. ISOS is known for offering assorted products through its online platform. Their technological platform is advanced in a way that it breaks geographical barriers in offering what the consumers want. This means that the company’s website makes it powerful and successful. Transferring this type of asset to the third parties during internationalization; that is, while using market mechanism results to transactional difficulties. This is due to risk of misappropriation as well as lack of control in using the brand properly. The other issue is that e-business companies must bridge their assets with the local resources, for example, market knowledge. However, the transfer of knowhow as shown in this case is subject to substantial transactional costs because it is hard to codify tacit knowledge detaching it from individuals (Dunning, 2001). Mode Conditions Favouring 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 spill overs 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 spill over Can be viewed as an insider Higher risk than other modes Requires more resources and commitment May be difficult to manage the local resources. The inefficiency related to market knowledge transfer cannot be regarded as the main source of soaring transaction costs. The deficiency of knowledge pertaining to local market creates market uncertainty which renders business processes for foreign firms difficult. In our case, ISOS faces foreignness liability just like traditional companies (Fina & Rugman, 1996). Despite the fact that internet displays its capability of reducing transactions cost, it cannot entirely offset these costs. Hence, high transaction costs play a role of making internalization attractive. However, a company will perceive less severe liability of foreignness if it exploits strategic moves of partnership and foreign direct investment. Such moves secure long-term profitability by first learning more about international markets and adapting to the specific market conditions (Contractor, 2007). The Eclectic Paradigm The eclectic paradigm gives a general analytical framework which suggests that a firm will choose an entry mode via consideration of a set of influencing factors. These are ownership advantages, the location advantages as well as internalization advantages. Ownership advantages crops up from property rights, unique intangible assets and advantages related to common governance. The location advantages depict market attractiveness, for example, accessibility of valuable resources. Internalization advantages revolves around transactions cost reduction (Dunning, 2001). Research makes a distinction of contractual resource transfers such as licensing, exports as well as foreign direct investment. In respect to OLI framework, companies will perform direct sales if the three advantages (described above) exist. If the firm find out that it isn’t profitable to apply its ownership, internalization and local factor inputs, then it will opt to serve the foreign markets via exports. The firm then decide to dispose or lease her ownership advantages to the foreign companies if internalizing her advantages results to be insignificantly beneficial (Fina & Rugman, 1996). The most important advantages for ISOS emanate from website-based marketing, technological knowhow as well as valuable intangible assets, for example, the brand names. ISOS is a typical start-up company concentrating more within the local market and with limited resources as well as advanced knowledge about foreign markets (Dunning, 2001). Location variables play an important role in deciding about entry mode for ISOS. In this case, market attractiveness is solely determined by the size and maturity. Maturity describes e-business penetration rate. Maturity signifies the level of demand which results to business growth opportunities. Maturity is also reflected by the existence and magnitude of the other firms present in e-business platform. These can be possible acquisition targets and or can act as an opportunity for partnering to access complementary resources (Chung & Alccer, 2002). According to this case, internalization advantages are considered as very important. First of all, market imperfections matters a lot. Secondly, internalization assists e-business Company’s access to complementary resources. In this regard, two types of the electronic market failure are identified; that is, market failures from consumers while doing business online, as well as market failures perpetrated by companies which results mainly from intangibility of competitive advantage. The initial market imperfection emanates from inherent uncertainty of electronic markets caused by information asymmetries. This type of failure is often linked to the liability of foreignness concept that causes consumers hesitate in conducting business activities with foreign companies. The concept also explains why embracement of partnership strategy is ideal in our case. The second imperfection in the market applies to this case in terms of transfer of technological knowhow, market knowhow and brand-name to the foreign markets (Dunning, 2001). Resource-based View Theory This theory suggests that portfolio of the distinctive resources (for example, capital, brand-name as well as know-how) which a firm controls acts a basis of achieving competitive advantage. Specifically, competitive advantage crops up since firms tend to differ in resources that they own. This heterogeneity remains because resources get imperfectly mobile across companies. In addition, possession of resources is not the only attribute that define the success of a firm but rather, its ability to utilise the resources. Therefore, a firm seeking an international expansion will need to evaluate how best to transfer their advantages to foreign markets. According to this theory, the choice related to foreign market entry is based on two effects; first, competitive advantage exploitation takes into account the existing pool as well as type of resources existing in a firm. Secondly, success within the local market is determined by capability of the firm to obtain the resources it lacks (Kirma & Rao, 2000). The RBV theory does not predict or define the circumstances or type of resource to be used in order to gain entry to international market. According to research however, a firm’s intangible resources can influence specific entry mode selection. In this case, internalization is understood to be appropriate for transfer of tacit company-specific knowhow because of ownership effects. Further argument is that the complexity of know-how determines which model to use. If the know-how is complicated to teach or transfer, then direct sale transfer mode will be used to reach the consumers (Dunning & Wymbs, 2001). A firm like ISOS that wish to expand fully into the international arena will need to devise mechanisms of overcoming resource constraints quickly. A common strategy is engaging in collaborative entry modes with a view of accessing complementary resources. Partnership plays a critical role for a local company to access diverse resources related to knowledge of foreign markets and reputation. These assist local firms overcome inherent market uncertainties. Access to an already established customer-base is crucial because of network effects. Internationalization Process Model The main basic assumption behind this theory is that lack of knowledge hampers internationalization. In this context, knowledge is classified into ways; that is, objective knowledge and experiential knowledge. Objective knowledge can be easily taught as well as accessed. Experiential knowledge is normally tacit which means that it is hard to detach it from individuals. Experiential knowledge is particularly knowledge regarding the firm and the market. This knowledge then plays a significant role as far as internationalization is concerned. Experiential knowledge governs the overall pace as well as the pattern related to international expansion (Contractor, 2007). A firm planning to internationalize follows specific sequence and stages of internationalization. This is referred to as establishment chain. Therefore, a more knowledgeable firm will chose a more resource-intensive entry mode as compared to a firm that is knowledge-constrained. Thus, development of such knowledge (experiential) is fully triggered by resource commitment particularly to international operations. In this case, experiential knowledge is therefore influenced by the prevailing foreign activities as well a commitment decisions. The pace as well as pattern pertaining to incremental internationalization is therefore determined by interplay of the aforementioned factors (Contractor, 2007). Conclusion This case has analysed an e-business company that offers digital goods to consumers. The company continues to take advantages availed by the internet in order to reach her local and international customers. The company uses the internet as virtual export channel. However, according to the study, setting up a website in each country is not adequate to yield success of internationalization. Just like the traditional firms, physical presence has been considered important. The major motive of establishing independent and foreign subsidiaries is to enhance proximity to the consumers. Therefore, foreign direct investment is considered an ideal entry mode in these markets (Kirma & Rao, 2000). Moreover, this study has shown that e-business firms use external networks in leveraging complementary resources requirements for international market entry. Thus, partnership strategy is more likely to assist the company to penetrate fast into the foreign markets. It has then been assumed as very critical in exploiting network effects. More specifically, marketing partnerships should be used to interconnect products and services offered. This is bound to assist the company overcome market uncertainties and making it gain rapid scale. The analysis has shown that internationalization behaviour related to an e-business firm is not different from traditional firms. Consequently, different theories of internationalization have been analysed. However, some of the theories tend to possess more power than others. Specifically, the concept related to experiential knowledge is quite ideal in explaining the entry modes of foreign markets. Moreover, market imperfections assumptions have been quite critical in our analysis (Contractor, 2007). References Dunning, J. H., 2001. The eclectic (OLI) paradigm of international production: Past, present and future. International Journal of the Economics of Business 8, 173–190. Chung, W., Alccer, J., 2002. 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Image accessed on 8th May 2017, http://www.marketingteacher.com/image/content/international_marketing_research.gif Table accessed on 7th May 2017, http://www.quickmba.com/strategy/global/marketentry/ Sadaghiani, Dehghan, Navabi (2011), Impact of International Market Entry Strategy on Export Performance1. The Journal of Mathematics and Computer Science Vol .3 No.1 (2011) 53-70 Read More