International Market Entry and Strategic Business Development
Unit 7: Strategies for Penetrating Foreign Markets
Selecting the Target Country
- Growth Forecast
- Economic Risk
- Political Risk
- Difficulties Operating in the Local Market
Entry Mode Strategies
- A- Exporting
- B- Contractual
- C- Direct Investment Abroad
A- Exporting
Exporting is the most traditional and simplest way to enter a foreign market. Production remains in the country of origin, from where different countries are supplied, and the product or service is modified if required by the foreign market. There are two types:
- Direct Exporting: The company uses its own resources to sell abroad.
- Indirect Exporting: The firm uses independent intermediaries to manage its sales in the target market.
B- Contractual Arrangements
Contractual arrangements are forms of indirect investment. No capital is contributed by the original firm, but instead, rights are transferred to foreign companies according to specific terms and conditions in exchange for financial compensation.
C- Direct Investment Abroad
Direct investment abroad involves committing capital in a target country, posing higher risks. Key considerations:
- Whether the investment is shared, as in joint ventures with at least two shareholders, including one in the target market.
- Whether it involves acquiring a local firm (external development) or establishing a subsidiary (internal development).
Unit 8: Strategic Planning
Strategic planning is the formal process of shaping a business’s future and defining how to achieve it. It involves selecting programs and allocating resources for upcoming years.
The Activities of Strategic Planning
According to David (2013), strategic planning includes four fundamental elements:
- Annual Goals
- Action Plans
- Policies and Procedures
- Resource Allocation
Firm Growth and Development
Firm growth involves increasing size metrics like assets, output, sales, profits, or staff, signaling health, competitiveness, and aligning with top managers’ goals. Firm development is broader, encompassing qualitative changes in scope, and may or may not involve growth.
Direction for Development
A firm’s scope evolves with changes in mission, technologies, customer needs, and resources. Ansoff (1965) identifies two main development strategies: expansion, focused on traditional products or markets, and diversification, involving new markets and products. Both strategies include variations with specific approaches.
Directions for Strategic Development
- Consolidation: Maintains current performance, often in mature or declining industries.
- Expansion: Focuses on traditional products, markets, or both.
- Diversification: Enters new products and markets; can be related or unrelated to the current business.
- Vertical Integration: Becomes its own supplier (backward) or customer (forward), integrating the full product cycle.
- Restructuring: Reorganizes or closes businesses, often reducing size.
Expansion Strategy
Expansion strategy focuses on growing traditional products and markets, leveraging existing technical, financial, and commercial resources. Variations depend on the relationship between new and current products or markets.
A- Market Penetration
Market penetration focuses on increasing sales of current products to existing or new customers without changing the firm’s scope. Achieved through marketing tactics like promotions and advertising, it suits expanding industries, untapped demand in mature markets, or opportunities arising from competitors exiting declining sectors.
B- Product Development
Product development focuses on creating new or improved products for existing markets. It is essential in dynamic, competitive industries with short product life cycles, where constant innovation is critical for success.
Market Development
Market development expands traditional products into new markets, which may include:
- New industry segments (e.g., different customer types or distribution channels).
- New applications for existing products.
- New geographical areas (local to international).
Key drivers: Emerging efficient distribution channels, saturation of current markets, and underutilized production capacity.
Firm Diversification
Firm diversification involves entering new markets with new products, requiring new knowledge, techniques, and organizational changes.
Key Reasons:
- External: Market saturation, declining demand, obsolete products, or new technologies in traditional markets.
- Internal: Reduces long-term risk (“don’t put all your eggs in one basket”), utilizes surplus resources, and generates synergies through shared resources or interrelated strategies.
- Other: Adapts to significant technological changes affecting core activities.
Types:
- Related Diversification: Shared resources, markets, technologies, or distribution channels.
- Unrelated Diversification: Entering entirely new, disconnected markets and products.
Risks of Related Diversification
While logical, related diversification carries risks, including:
- Coordination Costs: Increased effort required for organizational coordination, especially as the business portfolio grows and becomes more varied.
- Compromising Costs: Generating synergies requires shared resources, leading to constraints on managing businesses independently.
- Inflexibility Costs: Interdependencies between businesses may limit flexibility and responsiveness to competitors’ actions.
Vertical Integration
Vertical integration occurs when a firm expands its role in the production cycle by becoming its own supplier (backward/upstream integration) or customer (forward/downstream integration). New businesses involved may be related or unrelated to current operations, blending related and unrelated diversification. Strategically, firms must determine the appropriate level of integration to meet their needs.