Market entry strategies and their applicability to SMEs - The winding road to foreign business

Table of Contents

Figures

Abbreviations

1 Introduction
1.1 Problem Formulation
1.2 Purpose
1.3 Approach
1.4 Definitions

2 SME Characteristics
2.1 Management & Structure
2.2 Experience & Knowledge
2.3 Finances

3 Evaluation criteria and entry modes – A basic framework
3.1 Internal aspects
3.2 External aspects
3.3 Derivation of market entry modes

4 Conclusion

Bibliography

Figures

Figure 1: SME classification

Figure 2: The three dimensions of market entry strategy

Figure 3: Internal aspects

Figure 4: External aspects

Figure 5: Balanced market structure

Figure 6: Market entry modes

Figure 7: Decision - Matrix

Abbreviations

illustration not visible in this excerpt

1 Introduction

1.1 Problem Formulation

“There will be hunters and hunted, winners and losers. What counts in global competition is the right strategy and success.”

Heinrich von Pierer^[1]

In business planning the globalization of the world market and the limits of domestic growth raise the question to what extent a foreign commitment should be considered if at all.^[2]

In Germany these considerations are particularly underlined by the strong integration into the world economy. German enterprises obtain a third of their total revenue in foreign business, 25 % of all jobs depend on foreign trade.^[3]

Contrary to expectations, going global is no longer subject only to large multi-national companies. Due to saturation tendencies in the domestic market, global competition and the dependency on international key-account customers small and medium-sized enterprises (SMEs) have been faced with the need for international activities.^[4]

Considering the fact that SMEs account for 97,3 % of all German enterprises, generating almost 45 % of the total revenue per year, the importance of future growth potential becomes evident.^[5] In general, SMEs are referred to as the “backbone” of German economy and many of them, the so called “hidden champions” have successfully faced the challenge of entering foreign markets.^[6]

Others have been afraid to take this step. For these, the need for adaptation remains and their continuity will depend on the competitiveness in the world market.

In general, entering new markets is connected with a multiplicity of chances and risks. SMEs especially, tend to underestimate the importance of profound information and the need for a realistic estimation of own capabilities.^[7] Accordingly, it becomes necessary to focus on a SME specific approach which considers major evaluation criteria for carefully developing market entry strategies.

1.2 Purpose

This study paper aims at correlating SME characteristics with the development of a basic orientation framework for foreign market entry. In order to systemize the complex process the author focuses on major evaluation criteria in terms of internal as well as external aspects that are subsequently evaluated towards their applicability to SMEs. Based on this evaluation, suitable market entry modes are derived indicating individual dimensions of foreign market entry.

1.3 Approach

This study paper is divided into four chapters. The first chapter refers to the introduction that contains problem formulation, purpose and the corresponding approach as well as necessary definitions.

The second chapter focuses on SME characteristics associated with the purpose of this study paper. Three major considerations are chosen to emphasize the specific conditions of SMEs representing the basis for the evaluations in chapter three.

Chapter three is the main focus of this paper. Major evaluation criteria of developing a basic orientation framework for foreign market entry is considered and subsequently evaluated towards its applicability to the specific characteristics of SMEs as indicated in chapter 2. Accordingly, in section 3.1 internal aspects are evaluated focusing on individual objectives, geographic expansion and timing. In section 3.2 selected external aspects are explained in terms of defining market potential, taking into consideration market barriers and analysing competition.

Consequently, sections 3.1 and 3.2 lead to the derivation of market entry modes as introduced in section 3.3 completing the initiated orientation framework that is concluded by illustration in a decision matrix.

The last chapter (chapter 4) concludes the previous evaluations and briefly provides a further outlook on successful SME foreign market entry.

1.4 Definitions

Market entry strategies

Market entry is defined as the first entry of an enterprise into a foreign market. Here, the author focuses on a market-seeking perspective and neglects sourcing opportunities. In the literature of international management the term ‘market entry strategies’, in general, refers to the action plan required to achieve certain goals such as successfully utilizing own capabilities and resources in foreign markets as well as considering various business conditions appropriately.^[8]

SMEs

SME is the common abbreviation for small and medium – sized enterprises. In reference to the European Union the Institute for SME Research in Bonn (IFM) defines SMEs as shown in figure 1:

Figure 1: SME classification

illustration not visible in this excerpt

Source: own illustration based on IFM Bonn (2000)

2 SME Characteristics

In addition to the quantitative classifications of the previous chapter more profound information is necessary to characterize SMEs. In general, they are non-subsidiary, independent and most commonly managed by the owner.^[9] They face traditional obstacles such as limited financial and human resources, difficulties in exploiting technology and constrained managerial capabilities. In contrast, SMEs show close customer contact and relationships, simple structures and consequently a high rate of flexibility^[10].

The following focuses on three major aspects of SME characteristics in terms of foreign market entry potential.^[11]

2.1 Management & Structure

By definition SMEs depend on limited human resources. Often owner and executive manager are one and the same person and the success of the business is very much focused on his or her vision and entrepreneurial capability.^[12] There is a limited number of staff to take on additional tasks as well as a general lack of internationally experienced employees. Most commonly there is one local manufacturing with local administration combined with a limited or no international network. SMEs are structured rather simply and the spirit of cross-functional communication causes a low willingness to introduce more sophisticated structures.^[13] Moreover, simple structures allow high flexibility as well as adaptability. A close customer contact and relationship enforced by the ability to adapt ensures a basis for specialization and successful niche strategies.^[14] In contrast, one has to take into consideration that in the complex process of entering foreign markets, simple structures may cause a narrow approach that is not suitable for the international challenge.

[...]

^[1] Dr. Heinrich von Pierer, President and Chief Excecutive Officer of Siemens AG:

Quotation cp. ‘TheGlobalist’ (2000)

^[2] cp. Hoppen (1999:144)

^[3] cp. Statistisches Bundesamt (2001:1.6)

^[4] Due to the IFM in Bonn (2000) SMEs intend to increase their foreign sales from an actual

average of 30 % to 50 % in 2020

^[5] cp. IMF Bonn (2000)

^[6] cp. Hibbert (2000:1)

^[7] cp. Brenner (1999:2 et sqq.)

^[8] cp. Schmid (2002:669)

^[9] cp. Hibbert (2000:6)

^[10] cp. Recklies (2001:3)

^[11] cp. OECD (2002)

^[12] cp. Weber (1997:130)

^[13] cp. Backes-Gellner, Huhn (2000:186)

^[14] cp. Weber (1997:105)