International Marketing: Entry Strategy - Term Paper Example

International Marketing: Entry Strategy The focus of this essay is to answer two s. In section one of this report, the focus will be directed towards answering why it is that a company may choose to enter into a foreign market specifically the entry strategy employed. This section will touch on such topics as FDI, barriers to entry, strategy, risk etc. Section two of this paper will highlight a case of a company that has entered into a foreign market in the last three years. Specifically focusing on what type of entry was employed, as well as providing an analysis of the risks, advantages and disadvantaged will also be examined. The essay will conclude with a series of recommendations that the company in question should employ to potentially have a higher level of success in the foreign market. Entry Strategy The focus of this section will address the fundamental question of why a company may choose to enter into a foreign market, followed by certain strategies that they might employ. Secondly this paper will look at many of the issues that a company must consider before making an internationalization strategy. According to Dunning (1998) Companies have basically three separate motives for pursuing an internationalization strategy, which are market seeking motives, resource or asset seeking motives and/or efficiency seeking motives. In the case of market seeking motives, according to a recent article by Schwartz and Saltmarsh writing for the New York Times (2009)a great deal of the future growth in the world economy will be seen in emerging economies specifically the BRIC nations (Brazil, Russia, India and China). Companies that are based in developed economies which have economic growth rates that are stagnating may choose to pursue a strategy of entering a foreign market simply because there is expected to be a higher rate of return in the emerging market. This strategy can be considered a market seeking motive. By extension it may also be the case that by expanding into a new market, companies may gain exposure to a vast market base. One example of this would be Nestlé which is a company based in Switzerland. If the company were to specifically focus on the domestic market they would have exposure to approximately 7.7million customers (CIA WorldFactbook,2009) By expanding their operations to include a nation such as China, the company would have exposure to more than a billion potential clients. In the circumstance of resource seeking motives it may be the case that companies pursue a strategy in which they seek to gain access to resources that they might not otherwise be able to have in their own domestic nations. These resources that a company is looking to capitalize on can be anything from raw materials (Coal, minerals, pineapples etc.) through to less tangible resources such as access to knowledge (IT specialists, linguists etc.) Lastly it may be the case that companies have an internationalization strategy for efficiency seeking motives. While these motives may be more company specific, it can be simply the case that a company looks to capitalize on country or market specialization. An example of this could be an American automobile company which sources key components from variety of different locations. More labour intensive components could be produced in Mexico where manufacturing wage rates are lower than in the U.S., furthermore electronic components could be sourced from Japan which theoretically has an advantage in a number of technology sectors. This strategy could be employed to ensure that each component is produced in a facility that is best suited to produce the necessary component. Once it has been established that a company wishes to expand into new markets there are a number of considerations that an entity must address before moving forward. Risk: It is the case that there is a number of different risk factors that a company must consider. Some specific types of risk that a company will encounter are as follows. Political risk is where the company must consider how stable the existing government is, or how likely it is that the unfavorable legislation could affect the company. Infrastructure risk is in relation to how easy or difficult it would be to gain full access to the country or region via its transportation network. Exchange risk emphasizes that wild changes in the value of the currency used in relation to the domestic country’s currency could hurt the bottom line. Security risk determines how safe the market would be for employees or for maintaining the security of sensitive data. Market risk deals with the potential for a new market to simply be unresponsive to your business model and could in turn severely hurt the profitability of the organization. Furthermore it may be the case that a nation in which you are hoping to enter may have lax intellectual property rights and as such you as a business entity run the risk of encountering Tariff and Non-Tariff Barriers: It is the case that in many nations the free flow of goods in certain sectors is imply not an option because of officially and unofficially imposed restrictions. These barriers represent a type of protectionism which may be imposed on imported or exported goods. The reasoning behind the imposing of a tariff can be for many reasons but typically is put into place to artificially protect a domestic industry from increased competition. In regards to a non-tariff barrier, these barriers represent the same motive politically as a traditional tariff but do so through different means. Some specific examples of non-tariff barriers are anti-dumping measures, export subsidies, foreign exchange controls, or a domestic ‘buy national policy’. While there are many different ways to achieve these means it is the case that they become important to companies interested in FDI because it may directly affect their strategy. If there is a strong sentiment against the country that your company is headquartered in for whatever reason, it may be in your best interest to postpone transactions with that nation until the situation settles. Types of Entry Strategy: Once the decision has been made to pursue an entry strategy to a foreign nation there are a number of different strategies that may be utilized. According to the FAO Corporate Document Repository (2009) there are several different ways for a company to pursue an internationalization strategy. Direct Exporting: Under this strategy it can be that a firm produces a good or service domestically and simply transplants the end product to a foreign nation. This could represent a low level of risk depending on how involved the producer is trying to move into the foreign market. As part of this strategy, a company could offer a counter trade scenario wherein one product is traded for another which theoretically is a win-win situation, where both trading partners get something they are not otherwise able to produce themselves. Foreign production: The next method of Entry Strategy involves actual foreign production which may take on the following forms. Licensing: under this method the domestic brand licenses a foreign producer the right to produce a product or service with their own means (Though typically to a very high standard as per the requirements of the domestic company). This is a strategy that is often employed by clothing companies which design and market clothing brands but allow for the production by individual facilities. Joint Ventures: Under this strategy it is the case that a domestic company enlists the help of a foreign company in effort to ‘break-in’ to the new market. This may be due to any number of reasons, but typically is pursued because a government regulation mandates it or because the domestic company wishes to capitalize on knowledge or brand recognition of the foreign company. An extension of this is ‘Piggybacking’ which is a method of entry strategy wherein an organization with little knowledge of the export industry can capitalize on the skill that another organization has. An example of this would be several smaller firms consolidating their orders to take advantage of bulk pricing. Ownership: under this strategy it is the case that a company typically simply invests in new facilities in a foreign nation in order to exert the mot control over their production capabilities. This strategy can be pursued by any number of methods depending on the nature of the firm. It should be noted that companies may enlist a combination of the above methods such as building a new production facility but enlisting the help of a foreign marketing agency or logistics firm. Case Study Lidl in Slovenia The company that will be examined that has entered a foreign market in the Past 2-3 years is Lidl (Lidl Stiftung & Co. KG) The reasoning behind this choice is that the company has a broad sweeping strategy of foreign direct investment in a number of countries since 2006 with plans for expanded foreign market entry right through to 2015. The format of this section will first highlight some basic company information followed by an explanation of why Lidl chose Slovenia as a market to enter into. Secondly a number of assumptions made about Slovenia and Lidl will be highlighted, followed by a Risk analysis. Finally the advantages and disadvantages Lidl’s FDI in Slovenia will be examined concluding with some recommendations for continued success in the market. Company Info: According to the company website (2009) the history of the organization goes back to the 1930’s when in Germany the company was founded as a grocery wholesaler, but through systematic market expansion has become one of the leading grocery chains across Europe. The store transformed into the discount sector format that we now know when it first opened in West Germany in 1973 but by the 1990’s started expanding outside their national borders and now has operations in most countries across Europe. According to the company website there are approximately 8,000 stores in 23 countries with plans to move into eight more in the coming years. Lidl operates a very simple business strategy which is to keep the price of goods down. This is achieved by maintaining an efficient distribution network, purchasing goods in bulk, standardization of the store layouts, and cutting costs in the stores by cutting down on time consuming activities such as stoking products on palates rather than unpacking individual items. It is the case that with the increased standardization of the business model and products offered; Lidl does not always take into consideration local tastes and preferences which could theoretically be to the detriment of the organization. According to Moreau (2008), in early 2007 Slovenia was the target of international expansion by Aldi, the discount grocery retail giant and direct competitor of Lidl. Building on this point, Aldi saw a high level of success in Slovenia and since that point has grown its operations across the Balkins. It has been further argued that Lidl did not want to have a major competitor grab total control over an emerging market, and it was the case that Lidl opened their first location in Slovenia by the end of 2007. The entry into Slovenia was part of a maser strategy to open up new facilities across Southern and Eastern Europe which according to Moreau (2008) which was part of a greater diversification strategy owing to saturation in the home markets for both Lidl and Aldi. Assumptions: For the purpose of this analysis some assumptions will be made about Slovenia and Lidl. Firstly it would be assumed that there is no sort of industry specific incentives in Slovenia in place to bring Lidl into the market such as favorable tax breaks or bribes. Secondly it will be assumed that Lidl had adhered to all reasonable business practices such as not engaging in price gouging, or product dumping to gain a foothold on the Slovenian market, and it if because of ethical business practices that lead to the continued success in the Slovenian market. Some of the risks that are associated with Slovenia will now be examined. Political Risk: It is the case that the country had a turbulent past. According to the CIA World Factbook (2009) After WWII, Slovenia was a mere republic under the greater umbrella of Yugoslavia. After the fall of communism, Slovenia expressed dissatisfaction with how power was being used by the greater Yugoslav political entity and its Serb rule an as a result ended up engaging in a 10-day war which brought independence to the nation. Since that time Slovenia has joined the EU, European Monetary Zone as well as NATO. In terms of real risk, as mentioned earlier it is the case that Slovenia has a high level of state control in its business enterprises however it seems unlikely that the nation will encounter wild fluctuations in its political structure in the near future. Infrastructure Risk: As highlighted by the CIA World Factbook (209) Slovenia boasts an excellent infrastructure network, with over 39,709 km or roadways, 1,228 km of railways, 6 airports with paved runways and a major port and terminal. It seems unlikely that any company that wishes to utilize Slovenia’s infrastructure would encounter major problems. Exchange Risk: As it is the case that Lidl is a company based in Germany which uses the Euro currency, and Slovenia is also a Eurozone country, as such there is no exchange risk between the two nations because they both use the same currency. Security Risk: While it is difficult to disseminate which crime statistics would indicate a serious security risk, it is the case that Slovenia is seen by the CIA World Factbook (2009) as a minor transit point for illicit drugs. However the overall crime statistics for Slovenia seem to be at the same levels with much of Western Europe so Lidl would not encounter an environment that is much different than what they are used to. Intellectual Property Rights: As Slovenia is a member of European Union as well as the World Trade Organization, the country is legally bound to adhere to a number of property rights laws. Furthermore if there are any disputes with the nation, the country does have a well established legal system, and any international disputes can be brought to the WTO. It would appear that the country poses very little risk over any other Western European nation. Market Risk: This is the factor that brings about probably the highest level of risk for Lidl. While one can assume that the tastes of consumers in Slovenia would not be much different than in their neighboring nations it can be that that Slovenians would simply be unresponsive to the Lidl Business model. Having said that, Lidl is fortunate in the Aldi had already entered the market and was enjoying a level of success which would indicated that the Slovenian market would be responsive to discount grocery retail outlets and as such one can assume that the level of Risk in this category would be low. Strategy: The strategy employed by Lidl was to open up retail outlets in Sovenia and simply connecting them to the already established distribution networks which sourced food products from many companies across Europe. It could be argued that the company was in a way piggybacking on the strategy of Aldi by allowing them to introduce the business model to Slovenia and waiting to see if the consumers would react favorably. Moreover it could be argued that the entry strategy employed was direct investment as Lidl owns the facilities outright. The only partnerships that the firm could potentially employ would be with domestic (Slovenian) service providers such as energy, construction, etc. In the past two years Lidl has seen an explosion of growth in Slovenia and as grown from one store at the end of 2007 to twenty-seven stores across the country by the end of 2009 (Lidl Slovenian language Website, 2009). This is an impressive level of growth when taking into consideration that all of this growth transpired in the wake of a global economic downturn. An analysis of the advantages and disadvantages in entering the Slovenian market will be examined. Advantages: By entering into Slovenia, Lidl gets a major geographic advantage in that the country rests between Italy, Austria, Croatia and Hungary. It can be that the country represents a major stepping stone for distribution into their already established markets as well as branching into new markets. By investing in Slovenia it is the case that the company gains access to the entire infrastructure available in Slovenia, including a major port in Koper. Furthermore by investing in Slovenia, Lidl potentially gains access to additional food producers in the country. Slovenia also represents a reasonably large market with approximately 2 million inhabitants. Lastly it was indicated that Slovenia has an excellent educational standard, and by having operations in Slovenia, Lidl may be able to better recruit people for their management team. Disadvantages: While the discount grocery retail market may presently be strong in Slovenia, as the country steadily becomes richer it may be the case that consumer tastes will change in the near future. It is also the case that as Aldi is already established in the nation there would be a high degree of competition. As the market is highly regulated by the government it may be that unfavorable legislation may be enacted that could affect Lidl’s operations. While expanding into Slovenia may have been a tremendous success for Lidl the standardization of their practices may prove to be a disadvantage for the company. As the economy grows in a number of Eastern European states it may be the case that consumers will demand more than simply the lowest prices. Recommendations: As the country has experienced rapid growth in the Slovene market any recommendations many recommendations could be retroactive in nature. There are still some recommendations which could be employed for continued success. Lidl should pay close attention to the shifting demographics in Slovenia. As the country is becoming wealthier they should ensure that their business model adjusts to accommodate any changing tastes that come with this shift. Secondly, Lidl should look to take advantage of Slovenia’s infrastructure network as a tool for improving their product distribution. As Lidl simply opened new stores in Slovenia and utilized their existing distribution network it can be that they could capitalize on the excellent facilities in Slovenia to make improvements to their system. Given the centralized location of Slovenia it may be that opening up new distribution centers in the country could prove to be advantageous. Lastly, Lidl should look to Slovenia as a country in which they could capitalize on the well educated workforce. With such a high level of university education, Lidl may be able to capitalize on this local knowledge and experience to help them expand into new markets. Reference List CIA World Factbook: Switzerland (2009) Available online at https://www.cia.gov/library/publications/the-world-factbook/geos/sz.html Accessed November 26th 2009 CIA World Factbook: Slovenia (2009) Available online at https://www.cia.gov/library/publications/the-world-factbook/geos/si.html#Econ Accessed on November 27th, 2009. Dunning, J.H. (1998): Location and the Multinational Enterprise: A Neglected Factor? Journal of International Business Studies, 29, 1, 45-66. FAO Corporate Document Repository (2009): Chapter 7 Market Entry Strategies. Available online at http://www.fao.org/docrep/w5973e/w5973e0b.htm Accessed on November 27th 2009. Lidl Online: Company History (2009) Available online at http://www.lidl.co.uk/uk/home.nsf/pages/c.service.au.history.index Accessed on November 27th 2009. Lidl Online Slovenia: Store Finder (2009) Available at http://www.lidl.si/cps/rde/xchg//SID-3F2B7556-819F5B15/lidl_si/hs.xsl/5869.htm Accessed on November 27th 2009. Moreau, R. (2008) Aldi and Lidls global expansion strategies. Euromonitor International. Available online at http://www.thefreelibrary.com/Aldi+and+Lidl%27s+global+expansion+strategies.-a0205910738 Accessed on November 27th 2009. Schwartz, N.D. & Saltmarsh, M: Developing World Seen as Engine for Recovery. (June 2009) The New York Times Online. Available at http://www.nytimes.com/2009/06/25/business/global/25oecd.html Accessed on November 26th 2009. Read More