Foreign Market Entry Modes

The decision of how to enter a foreign market can have a significant impact on the results. Expansion into foreign markets can be achieved via the following four mechanisms:

• Exporting

• Licensing

• Joint Venture

• Direct Investment

Exporting

Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since exporting does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses.

Exporting commonly requires coordination among four players:

* Exporter
* Importer
* Transport provider
* Government


Licensing

Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance.

Because little investment on the part of the licensor is required, licensing has the potential to provide a very large ROI. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost.

Joint Venture

There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships.

Such alliances often are favorable when:

• the partners' strategic goals converge while their competitive goals diverge;

• the partners' size, market power, and resources are small compared to the industry leaders; and

• partners' are able to learn from one another while limiting access to their own proprietary skills.

The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions.

Potential problems include:

* conflict over asymmetric new investments
* mistrust over proprietary knowledge
* performance ambiguity - how to split the pie
* lack of parent firm support
* cultural clashes
* if, how, and when to terminate the relationship

Joint ventures have conflicting pressures to cooperate and compete:

• Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position.

• The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources.

• The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control.

Foreign Direct Investment

Foreign direct investment (FDI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise.

Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment.

FDI movement is basically derived from financial transactions and non transaction factors such as price changes, foreign exchanges and other changes during the reference period. In other words, the movement is derived from the differences between the closing and opening positions of the year.

Why is FDI important for any consideration of going global?

The simple answer is that making a direct foreign investment allows companies to accomplish several tasks:

• Avoiding foreign government pressure for local production.

• Circumventing trade barriers, hidden and otherwise.

• Making the move from domestic export sales to a locally-based national sales office.

• Capability to increase total production capacity.

• Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc;

Market Share

Sales figures do not necessarily indicate how a firm is performing relative to its competitors. Rather, changes in sales simply may reflect changes in the market size or changes in economic conditions.

The firm's performance relative to competitors can be measured by the proportion of the market that the firm is able to capture. This proportion is referred to as the firm's market share and is calculated as follows:

Market Share = Firm's Sales / Total Market Sales

Sales may be determined on a value basis (sales price multiplied by volume) or on a unit basis (number of units shipped or number of customers served).

While the firm's own sales figures are readily available, total market sales are more difficult to determine. Usually, this information is available from trade associations and market research firms.

Reasons to Increase Market Share

Market share often is associated with profitability and thus many firms seek to increase their sales relative to competitors. Here are some specific reasons that a firm may seek to increase its market share:

• Economies of scale - higher volume can be instrumental in developing a cost advantage.

• Sales growth in a stagnant industry - when the industry is not growing, the firm still can grow its sales by increasing its market share.

• Reputation - market leaders have clout that they can use to their advantage.

• Increased bargaining power - a larger player has an advantage in negotiations with suppliers and channel members.

Ways to Increase Market Share

The market share of a product can be modeled as:

Share of Market = Share of Preference x Share of Voice x Share of Distribution

According to this model, there are three drivers of market share:

• Share of preference - can be increased through product, pricing, and promotional changes.

• Share of voice - the firm's proportion of total promotional expenditures in the market. Thus, share of voice can be increased by increasing advertising expenditures.

• Share of distribution - can be increased through more intensive distribution.

From these drivers we see that market share can be increased by changing the variables of the marketing mix.

• Product - the product attributes can be changed to provide more value to the customer, for example, by improving product quality.

• Price - if the price elasticity of demand is elastic (that is, > 1), a decrease in price will increase sales revenue. This tactic may not succeed if competitors are willing and able to meet any price cuts.

• Place (distribution) - add new distribution channels or increase the intensity of distribution in each channel.

• Promotion - increasing advertising expenditures can increase market share, unless competitors respond with similar increases.

Reasons Not to Increase Market Share

An increase in market share is not always desirable. For example:

* If the firm is near its production capacity, an increase in market share might necessitate investment in additional capacity. If this capacity is underutilized, higher costs will result.

* Overall profits may decline if market share is gained by increasing promotional expenditures or by decreasing prices.

* A price war might be provoked if competitors attempt to regain their share by lowering prices.

* A small niche player may be tolerated if it captures only a small share of the market. If that share increases, a larger, more capable competitor may decide to enter the niche.

* Antitrust issues may arise if a firm dominates its market.

In some cases it may be advantageous to decrease market share. For example, if a firm is able to identify certain customers that are unprofitable, it may drop those customers and lose market share while improving profitability.

ValueReporting Framework

ValueReporting™ Framework, a comprehensive approach for measuring and managing corporate performance and structuring communications about this performance. ValueReporting™ is a real working model, and the framework enables you to communicate value in a language that investors understand.

The ValueReporting™ Framework consists of four categories of information:

1.Market Overview – Describing the industry dynamics facing the company, including the competitive, regulatory and macro-economic environments.

2. Strategy – Covering the company's strategy, goals and objectives, organisational design and governance structure.

3. Value Creating Activities – Describing the activities and relationships that underpin financial performance, including key non-financial areas relating to customers, people, innovation, brands and the supply chain, and environmental, social and ethical concerns.

4. Financial Performance – Presenting the metrics used by management to monitor financial performance, and linking them to the company's strategy. This section should clearly detail issues such as business segmentation and the relationship between risk and return, as well as the ability to generate cash and reconcile internal performance measures to those reported externally to stakeholders.

Applying ValueReporting™, you will benefit in different ways:

• better clarity and transparency to investors and other corporate stakeholders

• increased management credibility

• more long-term investors

• greater analyst following

• improved access to and lower cost of capital

• higher share prices (if justified)

Miles And Snow's Strategies

Miles and Snow identified four business-level strategies: defender, prospector, analyzer, and reactor.

Defender Strategy. Organizations implementing a defender strategy attempt to protect their market from new competitors. As result of this narrow focus, these organizations seldom need to make major adjustments in their technology, structure, or methods of operation. Instead, they devote primary attention to improving the efficiency of their existing operations. Defenders can be successful especially when they exist in a declining industry or a stable environment.

Prospector Strategy. Organizations implementing a prospector strategy are innovative, seek out new opportunities, take risks and grow. To implement this strategy, organizations need to encourage creativity and flexibility. They regularly experiment with potential responses to emerging environmental trends. Thus, these organizations often are the creators of change and uncertainty to which their competitors must respond. In such an environment, creativity is more important then efficiency.

Analyzer Strategy. Organizations implementing analyzer strategies attempt to maintain their current businesses and to be somewhat innovative in new businesses. Some products are targeted toward stable environments, in which an efficiency strategy designed to retain current customers is employed. Others are targeted toward new, more dynamic environments.

They attempt to balance efficient production for current lines along with the creative development of new product lines. Analyzers have tight accounting and financial controls and high flexibility, efficient production and customized products, creativity and low costs. However, it is difficult for organizations to maintain these multiple and contradictory processes.

Reactor Strategy. Organizations that follow a reactor strategy have no a consistent strategy-structure relationship. Rather than defining a strategy to suit a specific environment, reactors respond to environmental threats and opportunities in ad hoc fashion.

Sometimes these organizations are innovative, sometimes they attempt to reduce costs, and sometimes they do both. Reactors are organizations in which top management frequently perceive change and uncertainty occurring in their organizational environments but are unable to respond effectively. Therefore, failed organizations often are the result of reactor strategies.

Mintzberg six basic parts of organisation

Mintzberg defined organisational structure as "the sum total of the ways in which it divides its labour into distinct tasks and then achieves coordination among them". Each configuration contains six components:

1. operating core: the people directly related to the production of services or products;
2. strategic apex: serves the needs of those people who control the organisation;
3. middle line: the managers who connect the strategic apex with the operating core;
4. technostructure: the analysts who design, plan, change or train the operating core;
5. support staff: the specialists who provide support to the organisation outside of the operating core's activities;
6. ideology: the traditions and beliefs that make the organisation unique.

The organisation's structure depends on the organisation itself, its members, the distribution of power, the environment and the technical system. Design decisions can be grouped into the:

* design of positions;
* design of superstructure;
* design of lateral linkages;
* design of decision making system.



Work constellations are quasi-independent cliques of individuals who work on decisions appropriate to their level in the hierarchy. These groups range from the formal to the informal.
Mintzberg used the components, flows, work constellations and coordination mechanisms to define five configurations:

1. Simple Structure

Entrepreneurial setting: relies on direct supervision from the strategic apex, the CEO.

2. Machine Bureaucracy

Large organisations: relies on standardisation of work processes by the techno-structure.

3. Professional Bureaucracy

The professional services firm: relies on the professionals' standardisation of skills and knowledge in the operating core.

4. Divisionalised Form

Multi-divisional organisation: relies on standardisation of outputs; middle-line managers run independent divisions.

5. Adhocracy

Project organisations: highly organic structure with little formalization; relies on mutual adjustment as the key coordinating mechanism within and between these project teams. In later work Mintzberg added two more configurations:

6. Missionary Form

Coordination occurs based on commonly held ideologies or beliefs: standardisation of norms.

Each configuration represents a force that pulls organisations in different structural directions. For example, operators want to professionalize in their drive to control their work. Therefore, they favour a professional bureaucracy based on the standardisation of skills.

The structure an organisation chooses depends, to a great extent, on the power of each of Minzberg's six components.

For those studying ACCA P3: Business Analysis :)