The Analysis of the Ecuadorean Market - Dissertation Example

?Strategic Market Directions for Foreign Firms in Ecuador Introduction 1 Background of the study During the third quarter of the twentieth century, globalisation was considered a largely political issue, with implications concerning foreign dominance and power wielded by rich, developed nations over the developing and underdeveloped Third World countries. As a consequence, the globalisation commitment entered into by countries in multilateral agreements was met with slow progress and considerable suspicion by political and civic groups. Businessmen were quick to see the advantages, however, of gaining access to new markets opening up across borders. The advancements in digital communications technology and the further strengthening of multilateral trade ties have created an environment in the 21st century more receptive than that which characterised international business a few decades ago. A greater understanding and familiarity with other countries’ cultures, laws, and social institutions has greatly diminished the uncertainty and distrust that held countries back from openly participating in international trade and business. Furthermore, the faster pace of technology transfer and development of productive capacity in less developed economies have created new markets that provide added impetus for cross-border trade. The United Kingdom is one such developed economy that may itself benefit from, as it may benefit others through, increased participation in other markets. A country which presents attractive opportunities for expanded trade relations is Ecuador. The prospects have to be examined further, however, and a basis for the formulation of a viable marketing strategy has to be established before concrete plans could be drawn. 1.2 Research aim This study aims to examine implications and directions for strategic marketing that U.K firms may explore in their effort to establish a presence in the Ecuadorean market. Existing macroeconomic and industrial data for Ecuador, industry information on U.K. firms, and the use of established strategic theory in a competitive environment shall provide the context and constraints within which the aim is to be attained. 1.3 Objectives In order to satisfactorily accomplish the above-stated aim, the proposed study seeks to attain the following objectives: 1.3.1. To describe the social, political, economic, technological, ecological, and legal situations in Ecuador that may impact upon the business opportunities of foreign firms wishing to enter the market, using the PESTLE country analysis framework; 1.3.2. To identify industries in Ecuador where U.K. firms may successfully enter and create a significant impact, citing particular advantages and disadvantages, through use of Porter’s Diamond Framework. 1.3.3. To suggest strategic directions that U.K. firms may take for the industry or industries identified, in order to initially effect entry, and thereafter to sustain competitive performance in the Ecuadorean market, through the three fundamental marketing strategy paradigms, namely (a) standardization-adaptation, (b) concentration-dispersion, and (c) integration-independence. 1.4 Research questions The study shall strive to achieve the aforestated objectives, guided by the following research questions to which it shall provide relevant answers: 1.4.1 What are the social, economic, political, technological, ecological, and legal conditions existing in Ecuador that may influence the business environment? 1.4.2 On the basis of the results of the environmental scan on Ecuador, what possible industries may be engaged in by U.K. firms seeking to enter the market in this country? 1.4.3 In relation to the industries identified, what possible strategic marketing directions may U.K. firms adopt in entering into and sustaining performance in these markets? 2. Literature review 2.1 International marketing strategy In deciding upon entering a foreign market, a firm takes on considerable risks, but foresees that there is an opportunity to earn considerable returns as well. It will therefore base its decision on whether or not there is a favourable trade-off between risks and returns – that is, whether the chances of earning returns significantly higher than it would in the local market would exceed the risks that it may be facing. This is the crux of the normative decision theory. On the other hand, behavioural theory suggests that a firm may also consider entry into foreign markets depending on the trade-off between the relative availability of resources in the targeted site compared with the home site, as against the degree of control that may be exercised, which is seen to diminish the more distant the host site (Agarwal & Ramaswami, 1992). Three types of determinant factors are relevant in deciding to penetrate international markets: first, the ownership advantages of a firm; second, the location advantages of a market; and third, the internalization advantages of integrating transactions within the firm (Agarwal & Ramaswami, 1992). Ownership advantages refer to firm size, multinational experience and those superior skills and assets that enable the firm to develop differentiated products and thus earn economic rent from the external markets (Albaum & Tse, 2001). Internalization advantages, on the other hand, refers to the retention and integration of assets and skills within the firm as against taking advantage of the scale economies of the marketplace which, however, lowers controls. Finally, location advantages are defined by the target market potential balanced against the risk of investing in that market. The various modes of entry into a market include exporting, joint venture, sole venture, licensing and franchising, and more conventionally, the internet and international agencies (Wind, Douglas & Perlmutter, 1973; Hisrich, 2009; Pride &Ferrell, 2010). The various entry modes shall be useful in the study in so far as determining the manner by which a firm may best initiate commercial activity in the Ecuadorian market, but required supplementation by way of discussion on the continuing operations of the firm after entry. 2.2 International marketing orientations During the early years of contemporary globalization, various theories on the conceptualization of international marketing strategies emerged, one of which is the E.P.R.G. framework. “E.P.R.G.” refers to ethnocentrism, polycentrism, regiocentrism, and geocentrism, and each of these refers to attitudes or orientations towards aspects of internationalisation. They are also linked to the phases of development of international operations: ethnocentrism referred to the home country orientations phase, polycentrism to the host country orientation, regiocentrism to a regional orientation, and geocentrism to a world orientation (Wind, Douglas and Perlmutter, 1973). It will be noticed that these distinctions are grounded on geographical underpinnings. In 1973, such may be overriding realities and crucial determinants, but in the 21st century there are many products and services that move seamlessly across borders because of marketing and distribution methods employing electronic media. For instance, outprocessed business functions such as call centre operations, or digital content production such as motion picture animation or application software development could quickly and easily be transported across borders almost instantaneously, allowing not only multinationals but also smaller, localised firms to avail of cost efficiencies in other destinations. 2.3 International Marketing Strategy Models International marketing strategy is characterised in different ways, but theoretical discourses tended to revolve around three fundamental paradigms: standardization-adaptation, concentration-dispersion, and integration-independence (Lim, Acito & Rusetski, 2006). The standardization-adaptation perspective refers to the degree to which uniformity is imposed in the choice of marketing mix elements (i.e. product design, pricing scheme, promotional campaign, and distribution channel) among all the different markets where the firm has a presence. The concentration-dispersion dimension is founded on the premise that multinational firms ought to seek to optimize the geographic distribution of their value-chain activities in order to explore synergistic relationships and comparative advantages that may exist in the different locations and host communities. The degree of dispersion or concentration of value chain activities therefore impacts upon the differentiation of marketing strategies that the multinational may successfully employ. Finally, the integration-independence approach concerns itself with the orchestration of competitive marketing activities across the various locations. The distinction to be made is whether the subsidiaries in the different host countries are considered as standalone profit centers, or are part of a system of units that perform according to an integrated design. The implication on market strategy is that in an integrated system, tactics will be differentiated pursuant to the level of consultation among units, and the performance of certain markets may be briefly sacrificed for the competitive bids of other markets to be enhanced (Lim, et al., 2006). The predominance of studies that concentrate on these attributes have shaped the way academics and practitioners view the strategic cross-border options available to multinationals firms. On this basis, the study of Lim, et al. (2006) suggests that a multinational firm would greatly benefit from the greater efficiencies and more robust performance brought about by a holistic and integrated approach to marketing strategy. 2.4 Standardization and performance One of the principal issues encountered in international marketing is the degree of standardization and the effect it has on performance in the host market. The level of standardisation that the firm imposes on the subsidiary influences and is influenced by the organisational structure and the marketing strategy employed in the locality. Long-term locality studies have tended to suggest that marketing structure follows marketing strategy, and that the degree to which the structure is centralized qualifies the link between the marketing strategy and the performance of the local subsidiary. Empirical studies showed that the more centralized the structure, the less effective the market strategy in terms of subsidiary performance. Findings tended towards the decentralization and adaptation of marketing strategy to local markets in order to enhance performance (Ozsomer & Prussia, 2000). Certain approaches to standardization distinguish between two sub-components: standardization of resource allocation across the variables pertaining to the marketing mix that comprises the focus of the firm’s marketing strategy; and standardization of the strategic content that pertain to the individual marketing mix variables. With regard to the first type, which is more tangible to study and discern in an academic inquiry, studies have found that market structure variables provide certain advantages when integrated together with competitive strategy, across the firm’s markets, where the markets share strong similarities (e.g. Western economies of the US, the UK, Canada and Western Europe (Szymanski, Bharadwaj & Varadarajan, 1993). 2.5 Adaptation of components of marketing strategy in foreign markets with domestic markets. A firm adapts varying international marketing strategies in the course of its cross-border expansion. Its initial market strategy is at the point of market entry, after which it employs and adaptation strategy that brings its internal processes into the decision process. The firm’s resultant international marketing strategy thereafter affects its broadened corporate strategic orientation (Albaum &Tse, 2001). Many studies have concentrated on market entry strategies in overseas markets, however, few if any have investigated the changes and adjustments in strategy a firm undertakes after it has established its presence. For one, executives have confirmed that increased familiarity and knowledge of a foreign market provides the firm a motivation to develop products better suited to the needs of that locality. Therefore, the marketing strategy of the firm adapts to its new market, and the firm is faced with new strategic options. Further development of the marketing and distribution infrastructure subsequently engages a broader incorporation of this strategic input into the corporate decision making process (Albaum & Tse, 2001). 2.6 Ecuador as target market Ecuador represents a small- to medium-size market for the export products of most countries. It is currently ranked by the World Bank as 130th out of 183 countries based on the ease of doing business, wherein Singapore occupies top position. Ecuador was likewise ranked according to different criteria, in the manner shown in the following table (Source: World Bank-IFC 2011) Ecuador’s Ranking (Source: WB, Doing Business 2011) Criterion Rank Ease of doing business 130 Starting a business 158 Dealing with Construction Permits 88 Registering Property 69 Getting Credit 89 Protecting Investors 132 Paying Taxes 81 Trading Across Borders 126 Enforcing Contracts 100 Closing a Business 133 Further data on Ecuador are presented as secondary data in the chapter on data and discussion. 2.7 Synthesis Throughout the years, there have been various models propositioned by which international markets may be conceptualized, in order to facilitate the determination of market strategy. Of the models shown the triple paradigm consisting of the standardization-adaptation, concentration-dispersion, and integration-independence approaches (Lim, Acito & Rusetski, 2006) provides the broadest application and most appropriate framework by which the strategic directions sought may be qualified and described. It shall thus be the principal paradigm used, together with qualifications suggested by other models, in formulating an answer to the third research question, on the formulation of strategic directions for foreign firms in Ecuador. 3. Research design The method by which the research shall be carried out will be qualitative in approach, for the reason that the study seeks to arrive at an indepth description of the Ecuadorean macro-economy and its industries. The description of the country’s business environment is intended to provide a basis for the recommendation of broad strategic directions for foreign firms, and in particular corporations in the United Kingdom, wishing to do business in Ecuador. Because of the interrelationship of various elements in the economy, a qualitative treatment is better suited for this study than a restrictive and tightly delimited quantitative study. The study shall furthermore employ an inductive rather than deductive approach. It shall begin with information and observations about the Ecuadorean economy to be gathered from existing secondary data reported by credible and renowned institutions and organisations (i.e. the World Bank, the International Finance Corporation, the UNCTAD, and similar international and governmental agencies and instrumentalities. From the resultant findings it shall arrive at, the study shall draw generalizations and principles which may form the basis for policy formulation and decision making. The study shall likewise draw data, both quantitative and qualitative, from the databases of major international institutions concerned with the economic development of Ecuador. Central to the research design is the use of at least three important paradigms widely used in international business strategic management. These are the PESTEL framework, Porter’s Diamond Model, and the triple paradigm advanced by Lim, et al. (2006). The PESTEL framework involves the gathering and analysis of data on the target country’s political, economic, social, technological, ecological, and legal attributes. The PESTEL draws attention to the various facets of a country’s development that impose constraints and expose opportunities for the entering firm. Secondly, Porter’s Country Diamond framework (more formally referred to as Porter’s Diamond of National Advantage, describes the interplay between factor conditions, demand conditions, related and supporting industries, and the strategy, structure and rivalry in the industry of the home country, and how these four elements can contribute to the increased international competitiveness of firms and industries in the home country (Rugman & Verbeke, 2005, p. xv). In this study, while the PESTEL framework provides insightful analysis of the host country, Porter’s Diamond model provides a foundation from which to gauge the readiness of the host country to compete in the international market. Finally, the triple paradigm explained in the survey of academic literature, relies on the categorization of the strategic approach to be employed by the entering firm in the host country, in terms of standardization-adaptation, concentration-dispersion, and integration-independence. While not necessarily explicit in describing in operational terms the market strategy of the entering firm, the paradigms are helpful in providing a direction, and the rationale therefore, to management in terms of addressing the Ecuadorean economy and industry. The implications of the continuum described in each of the three approaches should provide some analytical foundation for the formulation of a workable marketing strategy. On the bases of these models, the secondary data gathered describing aspects of Ecuador and the United Kingdom shall be integrated and analysed according to the technique described in the next section. 4. Data analysis plan Data analysis shall employ the qualitative data analysis (QDA) technique. As the name implies, the QDA is a technique for analysing qualitative data. It may be observed that between qualitative and quantitative data, qualitative data provides a much more profound basis for insight and understanding of a phenomenon. However, the quantitative analysis technique provides a more clear-cut and objective process of evaluation, since it abides by established rules of statistics or econometrics. Furthermore, the relationships tested by quantitative methods are streamlined and simplified, usually to establish links between only two sets of variables, or one dependent variable against a set of independent variables, which greatly simplifies the analytical procedure. Qualitative analysis, on the other hand, may be considered wieldy, intuitive, and largely unstructured, and therefore must be thoroughly explained in order for the resultant finding to be persuasive. The QDA is an attempt to describe and inform qualitative analysis. For this purpose a visual model is provided in the figure on the next page to assist in conceptualizing the QDA. Qualitative Data Analysis Model (Source: Seidel, 1998) There are three steps to the QDA, namely collect things, notice things, and think about things. The steps so designated are arranged in a circular rather than linear fashion, suggesting that it is an iterative or repetitive cycle. However, the cycle is not strictly serial; arrows in the form of spokes in the middle of the circular diagram indicates that it is possible to jump from one step to another without passing through the other steps sequentially. More definitively, the QDA process is described by the following attributes (Seidel, 1998): Firstly, QDA is iterative and progressive. In other words, it is cyclical and repetitive. When one thinks about things, for instance, he tends to notice new things in the information. He collects these new information, and thinks about them again. There is no point at which one may say that the thinking, or the collecting, or the noticing ends the process. Secondly, QDA is recursive, meaning that any one phase can require the researcher to return to ay one of the previous, or other, phases. While the researcher is busy collecting data, for instance, he may notice new things to collect again; or having thought about the thing, finds that he may need for information, and therefore returns to the data collection stage. Finally, QDA is holographic. This means that each step of the process involves all the steps in the entire process. This is due to the conceptual nature of the process. As the researcher first notices things, in his mind he is already “collecting” the thing, or more specifically the idea or essence of the thing, and in extracting the idea the researcher is also thinking about the thing. Therefore, noticing, collecting, and thinking happen simultaneously as a single mental process. While the analytical process may be described simply and the ideas are readily understandable, the process itself is complex and the manner taken to arrive at the finding may not be readily evident. Still, these do not detract from the effectiveness and reliability of the QDA process when performed correctly. The QDA process has been likened to solving a jigsaw puzzle, where the various bits of information (in the form of puzzle pieces) are turned over in one’s mind many times until a logical and meaningful picture may be constructed that employs all the bits of information. 5. Conclusions The conclusions expected to be arrived at will be a set of strategic directions which are similar to recommended course of action, but fall short of actual market strategies, for want of more direct observations involving primary data. The study, being more of a strategic environmental scan, intends nevertheless to establish concrete directions in the form of those industries in Ecuador recommended for entry by U.K. firms, the manner or mode of entry, and further strategic policies which may be taken after the firm has established itself in the country. 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