Excerpt
TABLE OF CONTENTS
1 Introduction
1.1 Background and Problem discussion
1.2 Problem formulation
1.3 Purpose
1.4 Limitations
2 Theory framework
2.1 Introduction
2.2 Current Phase
2.2.1 Internationalization
2.2.2 Market Entry Strategy
2.2.3 Market Entry Modes
2.2.4 Porter´s Five Forces – Model
2.3 Next Phase
2.3.1 Change factors
2.3.2 Market entry strategy change
2.4 Adjustments
3 Methodology
3.1 Research Journey
3.2 Research Method
3.2.1 Qualitative versus Quantitative Methods
3.3 Access
3.4 Data Collection
3.5 Scientific Credibility
3.5.1 Validity
3.5.2 Reliability
4 Empirical Data
4.1 The Micropower case
4.2 Results from another study
5 Analysis
5.1 Introduction
5.2 Current Phase
5.2.1 Internationalization
5.2.2 Market Entry Strategy
5.2.3 Market Entry Mode - Exporting
5.2.4 Porter´s Five Forces – Model
5.3 Next Phase
5.3.1 Change factors
5.3.2 Market Entry Strategy Change
5.4 Adjustments
6 Conclusions
7 Recommendations
References
Appendix
1 Introduction
1.1 Background and Problem discussion
Any company that starts to do business in foreign markets goes through a process, which is triggered by proactive and/or reactive factors. This process starts generally by finding and selecting a target market, decisions which frequently are made on the basis of marketing research. An important part of the research is to locate the market entry barriers, when entering in the foreign market. With this information the company has to develop a strategy to enter the market. Within the strategy formulation the company also has to choose an appropriate mode of entry. There are several different market entry modes and no one is the correct one, since they all have advantages as well as disadvantages. They are, however, more or less suitable depending on the company, its resources, its products etc. (Czinkota, 1993, p. 329-331, Johansson, 1997, p. 208 ff, Taylor, C. 2000).
However, a company’s internationalization process does not stop here. As the company gains experience from its current activities, it may want to make additional investments in the market, due to factors that could be described as internal or external. These factors could also motivate a change of entry mode. Extreme views even say that once the internationalization process has started, it will tend to proceed regardless of whether strategic decisions are made in that direction or not (Randoy, T. 2002, Wheeler, 1996). Although a lot of theory has been written on internationalization and on the choice of entry mode, there is little to be found on the internationalization process and particularly on the changing of entry mode.
To realize that the company could find itself in such a situation, where they need to develop in the foreign market, can be difficult. The fact that the strategy and in that also the entry mode chosen needs to be changed can be hard for a company to grasp, because change is always connected with a high degree of uncertanity. Research has shown (Randoy, T. 2002, Wheeler, 1996) that companies have found themselves in situations where their strategies and entry modes needed to be changed and, more importantly, research (Randoy, T. 2002, Wheeler, 1996) has shown that companies has managed to change entry modes. However, what the research lack is more indepth analysis of the process of changing entry mode. For reasons indicated above, a company in the relevant situation may need some help, some recommendations, which could make the change process less uncertain. A company that may be in such a situation is Micropower, located in Växjö, Sweden. The sales staff is built up of three employees. Since the start about twenty years ago they have exported their battery chargers through agents and distributors. Today they export to 16 different countries all over the world. In general the system has worked well but the system of agents and distributors limits the company’s options of selling to the markets, hurting their competitiveness and thereby restricting their possibilities to grow internationally. One of Micropower ´s export markets is Germany. The company has been contacted by customers wanting to do business directly with the company, unwillingly of going through the agent/distributor. This puts Micropower in a difficult dilemma: on one hand they cannot steal market from their agent/distributor but on the other hand they might loose important customers. Maybe it is time for Micropower to make additional investments in Germany to take the next step in the internationalization process.
1.2 Problem formulation
The discussion above leads into the following problem:
- What characterizes the process of changing an entry mode in a small technology-based company?
By characteristics we mean, for example internal and external factors that trigger the change process.
1.3 Purpose
The purpose with this case study is to explore the characteristics of the process of changing an entry mode in a small technology-based company doing business internationally.
1.4 Limitations
The results of this study are not meant to be valid for more companies than Micropower. That is because we believe that every company is unique. The results will be affected of the fact that Micropower is a small technology-based company in a special branch that has used agents and distributors for exporting for almost twenty years. We also limit ourselves to one market, Germany, since we believe that the situation in that specific market is different from that in other countries.
2 Theory framework
The theory framework consists of two parts. The first part consists of theories about internationalisation and to evaluate a company´s situation, whereas the second part is about theories to explore the process of changing entry mode.
2.1 Introduction
According to the authors Ellis and Williams[1] and Wheeler the internationalization of a company is a process, which means that the company develops in the market after the initial establishment, which can be described as the company’s current phase. The process which causes the company to develop is triggered by either external or internal factors or a combination of both. Due to these factors the company has to formulate a new strategy, which will bring them to the next phase in the company’s internationalization process. However, Ellis and Williams argue that this process can work both ways, saying that the company may be forced to withdraw from the market if required. Wheeler does not agree, he reasons that once this process has started it will tend to develop forward (Ellis and Williams, 1995, pp. 50-55, Wheeler, C, 1996).
2.2 Current Phase
2.2.1 Internationalization
Internationalization has been defined by various authors in different ways. What internationalization is about is that it is a process, by which a company starts doing business transactions with parties in other countries. This process is triggered by either proactive or reactive factors (motivations). Proactive motivations are initiated by the firm´s management and reactive motivations are the responses of management to environmental changes and pressures. Typical proactive and reactive motivations for going international are shown in the appendix (Figure 2.1). Whatever the factors for the company’s internationalization are - it is most effective when developed as a carefully planned process for increasing penetration of international markets (Oakley, E. 1999, p. 49, Albaum, 2002, p. 4-5, 50, McAuley, 2001, p. 80, Czinkota, 1993, p. 329-331).
2.2.2 Market Entry Strategy
The success of a company under internationalization depends in large part on the formulation and implementation of strategy. The entry strategy will be logically considered, where and how to open the new market and reflects the company´s short- and long-term responses to the challenges and opportunities posed by the business environment. Companies execute strategies to attract customers and deal effectively with competitors, suppliers and scarce resources. The selection of markets and entry modes lies at the very heart of any international strategy (Knight, 2000, Koch, 2001)[2].
2.2.3 Market Entry Modes
An international market entry mode is defined by Root as:
“…an institutional arrangement that makes the entry possible of company’s products, technology, human skills, management, or other resources into a foreign country.” (Root, 1994, p. 5).
There are different types of market entry modes such as indirect and direct exporting, contracting manufacturing, licensing, franchising, joint ventures and foreign direct investments[3]. There is no optimal entry mode. All the different entry modes have their advantages and disadvantages depending on the characteristics of the company and its environment. Whereas direct exporting through distributors/agents is a relatively low-risk way to begin international expansion or to test out an overseas market. Little investment is involved, and fast withdrawal is relatively easy (Taylor, 2000 and Root, 1994, p. 6-7, 57).
In this case study we will focus on direct exporting via distributors/agents due to our research problem and our research purpose mentioned in chapter one.
Direct exporting relies on two principal channels: the foreign agent/distributor channel and the foreign branch/subsidiary channel. Agents and distributors are often used synonymously to eachother, which is wrong because there is at least one distinct difference: A distributor is a merchant and therefore a customer of the exporter, whereas an agent is a representative who acts on behalf of the exporter (Albaum, 2002, p. 300-301).
2.2.4 Porter´s Five Forces – Model
We used this model in order to understand external triggers and to understand Micropower´s situation in the German market. Based upon Porter´s model we will analyze the most important force(s) in relation to Micropower. Therefore we will only concentrate on the most interesting component(s) in the later section. In every industry, whether it is domestic or international or produces a product or a service, the rules of competition are embodied in five competitive forces: Threat of new entrants; Bargaining power of suppliers; Bargaining power of buyers; Threat of substitutes; Intensity of rivalry among the existing industry competitors. The strength of each of the five forces varies from industry to industry and is a function of industry structure, or the underlying economic and technical characteristics of an industry. The five forces framework allows seeing through the complexity and helps to identify the critical factors of the battery chargers market. Additionally it identifies those strategic innovations that would most improve the industry´s profitability (Porter, 1985, pp. 4-8).
2.3 Next Phase
2.3.1 Change factors
The internationalization process is the outcome of both external and internal factors to change. External change factors relate to factors operating either at the meta-level, at the level of industry competition or at the firm-specific level. Any of these or a combination of them can trigger the change process. Although, it could occur that external triggers may be present without triggering change, due to the company’s internal context. In such cases, change is likely to be triggered by internal factors, which enable a fundamental reappraisal of the company’s strategy. Internal change factors consist of two sets of factors. The first set is the vision of the company and the mindset of the organization. The other set are the organizational dynamics, which consist of the core competence, the resources and the ability to adapt and learn, which are vital to implementing any changes. When there’s a match between these two parts, vision/mindset and organizational dynamics, the company’s internal context may be described as balanced. The objective of managing organizational change is to bring about an improvement of business performance, bringing the company’s internal context into a new balanced situation (Ellis and Williams, 1995, pp. 134-166, Constantinos, 1999). According to Randoy, apart from change factors, new strategic objectives are of importance in explaining strategy change. The three most important strategic motives are diversification of products and markets, growth objectives, and increased importance of a foreign market (Randoy, 2002).[4]
2.3.2 Market entry strategy change
According to Ellis and Williams the change in strategy is expected to result in adjustments of the market entry strategy, due to unacceptable business performance. However, they argue that the company should only make necessary corrective adjustments, because only those adjustments are financially defensible. These can be devided into three levels, starting with the lowest: (i) review of implementation, (ii) review of entry strategy, and (iii) review basis for screening and market selection. If the adjustments does not lead to improvement in business performance the company should consider to withdraw from the market (Ellis and Williams, 1995, p. 247).
2.4 Adjustments
In the case of an adjustment at the level of reviewing the entry strategy, the transaction costs analysis theory and the bargaining power theory can be used to analyze the change of entry mode. Together, these two theories answer the question of whether the company is likely to succeed with the change or not. The objective of the transaction costs analysis theory is to answer the question of what the company wants. It starts with the assumption that the company may want to internalize its transactions and enforce higher control. In this situation the company should make a comparison between the possible benefits of internalization and the cost of integration. The positive result of the comparison should be that the company benefit more than it will pay. The objective of the bargaining power theory is to answer the question of what the company can get. It is based on the company’s ability to bargain with its partner, which can be a government, a supplier, a customer or a middleman such as an agent or a distributor. For example, in a negotiation between a company and its middleman, the middleman can gain significant bargaining power over manufacturers when he can influence costumer’s buying decisions (Palenzuela, V. 1999, Porter, M. 1991, pp. 13-17).
3 Methodology
In this chapter we will briefly present the methodological choices to describe the way of how this case has been developed and why the study has been done in a certain way. The methodology chapter starts by presenting the research journey followed by the research method. Afterwards the access and the data collection as well as the scientific credibility will be presented.
3.1 Research Journey
In the fall semester 2002/2003 we started our research with a relatively broad preunderstanding about different problems with international marketing and export management. Based on this, our different experiences and the intention to write a case about a topic which includes the international market entry of technology-based firms, we decided to focus on the area of market entry modes and in particular the changing of market entry modes of firms going abroad.
We used literature from various fields, such as marketing, export management and business psychology in order to build a profound theoretical framework. The major task of the theory chapter is to present and explain the most important export management models as well as market entry modes. The theoretical framework represents the basis for the next step in this research. We decided to select various factors that characterize the process of changing entry modes, mentioned in the existing export management models, that are most likely able to show significant differences and similarities in importance for going abroad. After the selection of the assumed relevant influence and characteristic factors, we wanted to test our model against empirical data. However, we excluded factors that are too complex to be tested within the framework of this project. The concept was tested on a firm named Micropower. After conducting the interviews with the relevant marketing manager of the firm, the empirical data was processed for the purpose of analysis.
3.2 Research Method
3.2.1 Qualitative versus Quantitative Methods
An investigator can choose between different methods to conduct a research, quantitative and qualitative. Researches that are based on a quantitative approach are mostly built on a representative selection of statistical analysis and measurements and there is a focus on a specific situation. Whereas a qualitative method is concerned with a concept of understanding rather than explaining. Examples for a qualitative method are open-ended interviews and case studies. The researcher her-/himself is integrated in parts of the studied object and so very close to it (Gummesson, 1991). Due to the fact that we based our study mainly on theories and on the analysis of our questionnaire we can describe it as being a qualitative study. Nevertheless it is also possible to find quantitative elements within our study. We had interviews and meetings with the head of marketing at Micropower concerning the whole procedure and strategy of the cooperation and the topic of the study.
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[1] For further readings we recommend appendix: Figure 2.2 and Ellis & Williams, 1995
[2] We will recommend following author for further reading in this area: Koch, A., 2001
[3] For further explanation on the different entry modes we recommend: Root, 1994
[4] For more detailed information please read Ellis and Williams, 1995