Entry & Expansion Strategy

By: Arun Kumar

MBA 4th Sem.
MONIRBA

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Global Business Strategies

A. Internationalization of Business
B. International Market Selection Process
C. Market Entry Strategies
D. Strategies for Competitive Advantages

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 Operational Philosophy of Companies

Philosophy and style of operation of firms change over time with

change in their goals and strategies along with environments.
Stage One – Domestic  
Majority of companies come into existence with operation in
home country. Their focus, vision and operations are limited.
At this stage, companies focus upon domestic market, domestic
suppliers and domestic competitors.

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In general, the mind-set of stage-one companies is “If it is not
happening in home country, it’s not happening anywhere neither it
is worth happening” – it is referred to as ‘Ethnocentric’
orientation.
It is best signified by “ Sare Jahan Se Accha Hindustan Hamara”.

Stage Two – International

On being attracted by opportunities abroad or otherwise, companies
extend one or more of their business functions like marketing,
manufacturing etc, to foreign countries. Thus company’s operation
become international.  
But the company follows same strategies, products, promotion and
distribution policies in all countries. It practices only extension of
same strategies.
i.e. its orientation continues to be Ethnocentric.
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Stage Three – Multinational
In operating at different country markets, firms realize
difference in demand pattern in them and also learn that they
need to change their approach, marketing mix etc. to succeed in
markets.

That is when the company goes into different strategies in different

markets, called multidomestic approach, i.e. the company formulates
unique strategy for each country which is referred to as
Multinational operation. 
This approach emanates out changed orientation from ethnocentric to
Polycentric mindset of company. 
Thus Multinational companies respond to difference in environments
of host countries and evolve different strategies to deliver
satisfaction to customers in different nations.
For example, MacDonalds market Mac AluTikki in India in contrast 5
to their burgers in US and European markets.
Multinational companies (MNC) view the World as
conglomeration of national markets that are distinctly different.

So, strategies of a MNC in different nations may simulate a bouquet

of flowers (of different variety) in contrast to strategies of
International companies that resemble a bunch of flowers (same
variety). 
Thus, MNCs assort marketing mix elements like product, price, path
and promotion in manner that suit to satisfy the country customers.  
MNCs generate competitive advantages over local and other players
by focusing their business strategies upon
     Manufacturing at lowest cost
     Differentiation of products from competitors and
     Evolving and exploiting market protection.
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 Stage Four – Global
 
In next stage of operation company focuses either upon Global
marketing strategy or Global sourcing strategy but not both.

That is, a Global company tries to satisfy customers located all

over the globe by sourcing the product from home country. For
example, Sony’s Walkman, Harley Davidson motorcycles etc.
Sony generates competitive advantage of ‘economy of scale’ by
producing Walkman sets at one location in Japan unlike other
players and market it all over the world. 
Similarly, Walmart in US, procure value-added products from all
over world and provide those to costumers in their home country
through their more than 13000 retail stores.

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In global operation, key activities are marketing and sourcing. The
suppliers and customers bear a hub and periphery relationship.

Orientation of Global companies is mixed of ethnocentric and

polycentric. 

Stage Five – Transnational 

Next type of operation integrates global resources with global
markets at profit carried out by Transnational corporations (TNC). 
A TNC thinks globally but acts locally. It adopts strategy “to add
best value to product or service by making use of resources from
wherever those are best and economical globally to provide greater
satisfaction to customers universally”.
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For example, News Corporation Ltd. ( Star TV of Rupert
Murdoch), Caterpillar Ltd. etc. Most of automobile giants are
going to become TNCs soon.

A TNC integrates key functions like finance, R&D, New product

development, purchasing etc in global fashion to generate
substantial competitive advantage. 
Orientation of TNCs is Geocentric i.e. ‘ vasudaivya kutumbakam’
meaning ‘whole world is my family’. 
Therefore, TNCs do not possess any national bias in selection of
human and material resources. They pick the best for optimum
value-addition to deliver customer satisfaction at profit. 
Key assets of TNC are dispersed, interdependent and specialized

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International Market Selection Process
 
There are 213 markets in World and resource of companies are
limited, therefore companies require to exercise systematic
approach in selection of market for operation abroad.
 
The firms carry out Preliminary Screening of worthwhile markets
based upon secondary data available from different sources like
       UNCTAD
       World Bank (IBRD)
       International Monetary Fund (IMF)
       World Trade Organization (WTO)
       International Trade center (ITC), Geneva
       Centre for Promotion of Imports from Developing Countries,
Netherlands
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       Directorate General of Commercial Intelligence and
Statistics, (DGCI&S)
       Commercial banks
       Foreign and Indian Missions
       Indian and foreign Chambers of Commerce
       Export Promotion Councils, Commodity Boards, FIEO etc.

Parameters of Market Selection

       Market Related Factors
       Firm Related Factors
Market Related Factors :
1. General Factors : related to market as whole like
       Economic Policies include Industrial policy, Foreign investment
policy, Commercial policy, fiscal and other economic policies.

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       Economic Factors include GDP growth rates, income
distribution, per capita income, sectoral distribution of GDP, nature
of and trends in foreign trade, BOP, indebtedness etc.
       Currency Stability : one of very important factors for market
selection.
       Business Regulations include industrial licensing, restrictions,
mergers, takeovers, foreign remittances, tax laws, import restrictions,
export obligations etc.
       Bureaucracy and Procedures
       Infrastructure includes physical infrastructure like power supply,
roads, transportation, ports, telecommunication and business
infrastructure like banking system, stock exchanges, type of
middlemen, marketing research, advertising agencies etc.
       Political Factors : Nature of political system, behavior of ruling
and opposition parties, political stability, govt. system etc
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• Ethnic Factors difference in characteristics of people and its impact o
business

     Market Hub: Ability of a market to act as base for operation in

contagious markets.
2. Specific Factors – related to specific industry like
  Trend of domestic production and consumption
  Future estimates of demand and production
  Trends of imports and exports with estimate of future
  Nature of competition
  Supply scenario of inputs
  Nature and number of market segments with price expectation

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 Firm Related Factors :
        International business objective of the firm
  Extent of resources (finance, HR etc.) that can be assigned
• Mindset or orientation towards foreign operation

The firms based on their experience ascribe weight to above factors

towards their contribution in deciding attractiveness of host markets
called Evaluation Matrix.  
Thus ‘Total weighted score’ of each market is arrived at by multiplying
above weighted average with raw score of every factor, then comparing
for all nations.

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 Market Entry Strategies 
International operation of a firm may be as simple as to produce
the items in home country and make available abroad;
Alternately, carry out all operations to produce before making those
available in foreign countries. 
Most companies adopt an in-between mode of entry into
foreign markets like
1. Indirect Exports
     Products of a company are sold in foreign markets but not by
manufacturing firm.
     Merchant Traders buy title of stock from producer and export to
different countries abroad, called Export Trading companies, e.g.
sogoshoshas of Japan.
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     Through domestic export agents who do not take title of
stocks, only renders requisite services against fees or commission.

     Sometimes one manufacturer exporter exports non-competing

products of another producer also called Piggyback exports.
     Sometimes a number of producers of commodities form an
association to export jointly called Export cooperatives.
For small and new entrants, indirect exports offer a number of
advantages.

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 2. Direct Export
       In this case market research, market contact, pricing, export
documentation etc. are done by manufacture who actually exports.

      Manufacturer exporters may make use of export agents’

specific services.
       Mostly used by large and medium sized firms. Scope of profit
substantially higher as is the risk.
 

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3. Contract Manufacturing
It is a process in which a firm’s products are manufactured in foreign
nation by another manufacturer under contract. The firm only
undertakes marketing.

It is advantageous in that the firm need not invest in labor and

manufacturing of products abroad.
It is useful when competitive advantage of firm lies on marketing.

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 4. Licensing and franchising
It is another method in which a firm’s product is produced in
foreign county by another party under license.
A firm (called licensor) having technology, know-how or strong
brand image may give license to one or more companies in foreign
countries ( called licensee) to use
        Patent right
        Trade mark rights
        Copyrights or
        Know-how
to produce and market products covered by the right in a given territory
in exchange of stipulated payments.
For example, Coca-cola, Pizza-Hut etc. have licensed Indian companies
to use their know-how in producing and marketing their products.
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5. Management contract
Under this process, the firm provides ‘management know-how’ to a
company in a country abroad the skill to manage an integrated
service against a compensation.

For example, Holiday Inn Hotels Inc. managed hotel in Pune. Tata
Tea manages tea-plantations in Sri Lanka etc. 
6. Turnkey Contract
In these contracts the firm (seller) agrees to supply the buyer with
facility fully equipped and ready to be operated by buyer’s
personnel, who will be trained by seller.
Generally this type of contracts are made in oil-exploration and
Drilling industries, fast-food franchising business etc.

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7. Joint Ventures
It is the most common foreign market entry strategy practiced.
In joint-ventures, the firm joins with a company in foreign nation
with sufficient equity as to have a voice in management but not
dominate totally. Extent of equity participation depends upon law of
the land. MNCs prefer this mode of entry in India e.g. Hindustan
Unilever Ltd., Pfizer Ltd. etc.

Joint ventures draw home benefits of cheaper resources on profit

sharing basis. Choosing a suitable local partner is crux of JV’s
success.

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8. Wholly Owned Manufacturing Facility  
Wholly owned facility means 100% equity in the production facility
in foreign country. More than ownership it means total control on
production and quality. It also signifies greatest commitment to
foreign market.

Generally, 100% equity ventures are established abroad through

  Merger and acquisition of a going concern – it is a quicker method
than setting up of new facility. Also called ‘Brown-field project’.
  Acquiring equity share of J V partner – in 80% of cases, one partner se
shares to other partner (statistically after 7 years).

 Foreign Direct Investment or Green Field Projects – the firm sets

up manufacturing facilities abroad starting from scratch. It
becomes company’s subsidiary abroad.
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9. Strategic Alliance
A firm may form an alliance (not JV) with a company abroad (generally,
a competitor) to share each others’ strength on reciprocal basis.

For example, P&G formed a strategic alliance in 1990s with Godrej

Consumer Products Ltd. to share their distribution network in India in
exchange of P&G’s successful consumer product marketing know-how.

Or, an Indian pharmaceutical company may form alliance with a

German pharmaceutical company to distribute and promote each
others’ products in their respective countries.

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10. Countertrade
These are export and import transactions that are settled between
themselves instead of being squared up through payment in terms of soft
or hard currency.
These are unconventional modes of entry into foreign markets.
Common forms being :
        Barter – Direct exchange of goods of equal value between two
parties internationally.
        Buy Back – Suppliers of plants, technology etc. may receive
payment in form of goods produced.
        Compensation Deals – Seller receives part payment in cash and
rest in products.
        Counterpurchase – Seller receives full payment in cash but
agrees to spend the whole amount in importers’ country within stipulated
time. 24
 11.    Third Country Locations
Large MNCs in their bid to globalize are creating “Regional
Manufacturing Hubs” from where they supply value-added products to
adjoining countries. These allow benefits of economy of scale and
convenient logistics.

For example, Diamler Benz, Ford and others are setting up

manufacturing units in India not only for supplying to Indian market
but also for other countries.

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 Strategies for Competitive Advantages 
Competition :
As economy of nations liberalize, newer players find their way into
markets i.e. more and more players emerge in industry with fresh
capacities. These players exert interacting forces upon each other
which is called Competition.

Common objective of players in national and international markets

is to attract customers toward their product or service by providing
greater values under these interacting forces of competition. 
Such of those firms who are able to develop competences to deliver
factors critical for success (like needs, wants, value expectation of
customers) outperform other competitors. It is called Competitive
Advantages.

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Forces that influence Competition : 
Michael Porter indicated that following forces influence competition
in any industry :
1.     Threat of New Entrants
2.     Threat of Substitute Products
3.     Bargaining Power of Buyers
4.     Bargaining Power of Suppliers &
5.     Rivalry among Competitors.

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 These forces of competition exert substantial pressure on profitability
of companies.
1. Threat of New Entrants
New entrants into an industry in a nation bring
       Increase in manufacturing capacity
       Desire to snatch market share
       Suitable strategy to satisfy customer needs.

Generally entry of new players are outcome of following barriers

a) Economy of Scale:
Existing players’ enjoying economy of scale in marketing,
manufacturing, R&D etc..

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 b)     Product Differentiation
High level of ‘Product differentiation’ by an existing brand acts as
entry barrier for new players.
 c)     Overall Capital Requirement
Requirement of huge capital to initiate operation reduces future
competition. 
d) Switching Cost
When customer perceives cost to change product or supplier in
the form of retraining, ancillary equipment cost etc. is high –
it acts as entry barrier for new players. 
e) Access to Distribution Channel
Establishing suitable marketing channel takes lot of investment,
training and time. 
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f) Government Policy
Extent of ‘protection’ and treatment meted by host country
government.

g)     Other Advantages

Favorable location, govt. subsidies, access to cheaper raw material
etc.
h) Competitor Response
Expected vigorous and unpleasant response from existing
Players discourage new entrants.

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2. Threat of Substitute Products
Availability of substitute products limits price that market leader can
charge.

3. Bargaining Power of Buyers

Organized buyers like industrial customers gain leverage
upon sellers because
        they buy in large quantities
        they bargain hard to lower price as there are many suppliers
        there is possibility of backward integration.

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4. Bargaining Power of Suppliers
Raw material and other suppliers enjoy bargaining power
   when demand exceeds supply
   when number of suppliers are limited
   when product supplied is specialized in nature.
5. Rivalry among Competitors
In order to improve their positions and gain advantages, firms
quite often resort to
   intense price competition
   advertising wars and increased margin to channel members
   competitive ‘product differentiation’ and ‘positioning’.
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Competition and Competitive Advantages
In today’s economic scenario competition is hoting up nationally and
internationally, therefore for any firm to prosper or even to stay
afloat
        it should be aware of competition and
        possess competence to deliver greater value to customers.

This competence is competitive advantage which varies from market

to market, industry to industry even market segment to segment.
Firms achieve competitive advantages through
        Creating greater value as perceived by customers than the
competitors – Generic Strategies.
        Creating newer advantages faster than competitors – Strategic
Intent Concept.
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1. Generic Strategies for Creating Competitive Advantages
Michael Porter developed this model of creating competitive
advantages to beat competitors adopting following approaches
         Overall Cost Leadership -- Firm gears up marketing
machinery to achieve larger volume of sale nationally and abroad,
then go for economy of scale manufacture. This brings down unit
cost of manufacture and sale compared to competitors, enabling
selling at lower price providing greater value to customers.  
This cost leadership is further accentuated with Learning curve and
Experience curve cost reductions.
       Product Differentiation – It is a very appreciable competitive
advantage. The firm develops a unique product and by superior
marketing efforts create a brand image through ‘Product
Differentiation’.
It allows the firm to charge premium price.
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         Narrow Focus Advantages -- The firm studies need pattern of
different segments of market and then try to satisfy a narrow segment
through narrow differentiation.
For example, Willy’s jeeps, Fair & Lovely Cream etc. focuses on
satisfying specific needs of customers.

         Cost Focus – The firm may exploit its lower cost of
manufacture to offer cut-throat price competition to win over a
narrow market segment. 
These generic strategies produce sustained result when are
backed by trade barriers.
e.g. Hindustan Lever’s strategy and success till 1990s.

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2. Strategic Intent Concept
C.K. Prahalad and Gary Hamel established that most of the generic
competitive advantages are not long-lasting. Because competitors
imitate those in no time.

So Prahalad and Hamel insist that real competitive advantages come

from creating advantages faster than competitors can copy. 
This strategic intent is based upon Deming’s Principle that says a
company should commit itself to continuous improvement to win
this battle of competition. 
Hamel and Prahalad established that firms gain competitive
advantage by disadvantaging competitors through competitive
innovation. They suggest following approaches :

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  A. Building Layers of Advantages
Wider is the portfolio of advantages of a firm, more shall be its
chance to outwit rivals.
B. Look for Loose Bricks
Identify weak spot of competitors and then direct your efforts to
penetrate into market through these vulnerable zones.
C. Change the Rules
Adopt strategies totally different to leader and other players in
market. For example, Eureka Forbes. 
D. Collaborate
The competitor is formidable it may be worthwhile to join them.
It involves in using their know-how, patents etc. through joint-
venture, partnership agreements etc. For example, Sony’s
taking license of transistor technology in 1950s from AT&T for
US $25000, rest is history. 37
Global Competition & National Competitive Advantages 
We are in realm of universal competition; human beings,
companies even nations are in state of competition with other
nations. It is referred to as Global Competition. Growth in global
trade is giving rise to global competition.
Major benefit of Global Competition
It creates greater value for customers through reduced price and
improved quality products and services. 
A nation A cannot remain untouched for long when a company in
nation B offers a better product at lower price. The company in
nation B shall start supplying customers in nation A with the value-
added product soon thus affecting competition in both nations.
For example, India’s automobile industry.
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 Some nations attract prominent players of certain industries like
computers, automobiles, movies etc. to US; chemicals, luxury cars,
heavy machineries etc. to Germany and so on.

The elements of vital concern in locating these industries are value-

chain activities driven by National Attributes that provide competitive
advantages to nations. 
These attribute of nations have been identified by Michael Porter as
National Diamonds viz.
1.     Factor Conditions
2.     Demand Conditions
3.     Related and supporting Industries &
4.     Firm Strategy, Structure and Rivalry
5.     Influence of Government 39
1. Factor Conditions
Michael Porter indicates that factors (of production) which are created
within a country are of special importance as its attributes like
A. Human Resource Factors
Quantity of workers available, skills possessed, their wage levels and
overall work ethic constitute the nations’ Human Resource factor.

B. Physical Resource Factors

Availability, quantity, quality and cost of -- land, water, minerals
and other natural resources determine nations’ Physical Resources
factor.
In addition proximity to markets, sources of supply; transportation costs
add credence to this factor.
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 C. Knowledge Resource Factors
Availability of significant population with scientific, technical
And market related knowledge constitute nations’ Knowledge
Resources Factor.

D. Capital Resource Factors

Availability, amount, cost and type of capital in a is its Capital
Resources Factor. It mainly depends upon its savings rate, interest rate,
tax laws and government deficits.
E. Infrastructure Resources
Availability and cost of usage of infrastructure elements like banking,
health care, transportation, communication system are important in
generating competitive advantage for nation.

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 2. Demand Conditions
The nature of home country demand for product or service lends
an edge to nations’ competitive advantage. The determinant factors
being :
        Composition of Home Demand
        Size and Trend of Home Demand
        Rate of Home Market Growth

3. Related and Supporting Industries

Related and supportive industries provide raw and other material at
competitive rates and of superior quality. Thus may add competitive
advantages.

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4. Firm strategy, Structure and Rivalry
Differences in management styles, organizational skills and
strategic perspective create advantages or disadvantages for
firms.
Domestic rivalry keep the firms to be dynamic and continually
under pressure to innovate and improve. It makes them develop
new products, technologies, improve existing ones, quality and
service, lower costs and prices.
Domestic rivalry is not restricted to market and profit only, it
extends to better employee talents, R&D break through and
prestige in home market.

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5. Influence of Government
Government influences demand conditions as largest buyer and
indirectly by through monetary and fiscal policies; it influences
resources through suitable policies and also develops infrastructure
and controls competition.

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THANK YOU

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