Management and Organizational Studies 2285 Lecture Notes - Lecture 3: Comparative Advantage, Market Saturation, Switching Barriers

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MOS
LECTURE 3
ENTERING NEW MARKETS: INTERNATIONALIZATION
- Internationalization: the process of operating in markets other than their domestic one
- There are four parts to the internationalization process
1. Deciding whether to go
A strategic decision based upon the firms needs, resources and capabilities, environmental conditions
and goals
Firms must both have a good reason to and the ability to internationalize (in other words it must be
strategic) or the process will fail
Not really the focus of this course
2. Deciding where to go
Not all countries are right for all firms there needs to be a match between why the firm is
internationalizing (ex. What it needs from a country and what it can do and what the country can offer
the fi. This is the out’s opaatie adatage
What is a comparative advantage to one firm may not be so for another?
Requires a lot of analysis this is the focus of this course
3. Deciding what to do there
Internationalization is not just selling things in a different country
Thee ae a tpes of iteatioalized opeatios MNCs follo…
1. Selling old products made in their home country for consumption a new country (global product)
2. Selling old products made in a different country for consumption in that country (local tastes)
3. Selling old products made in many different countries for consumption in one specific country
(portfolio, local taste)
4. Selling old products made in many different countries for consumption in many countries
5. Selling old products from their home country, for consumption in their home country but made
entirely on one or more countries other than their home country
6. Bringing in raw materials from one country to manufacture old products in their home country for
domestic consumption
7. Bringing in raw materials from several countries to manufacture old products in their home country
for domestic consumption
8. Bringing in raw materials from their home country to another country to manufacture old products
to sell in their home country
9. Bringing in raw materials from their home country to another country to manufacture old products
to sell in that country
10. Bringing in raw materials from their home country to another country to manufacture old products
to sell in other countries
11. Bringing in raw materials from other countries to another country to manufacture old products to sell
in that country
12. Bringing in raw materials from other countries to another country to manufacture old products to sell
in many different countries
13. Bringing in raw materials from other countries to many different countries to manufacture old
products to sell at home
14. Bringing in raw materials from other countries to many different countries to manufacture old
products to sell in one or more different countries
4. Deciding how to go
Not all entry modes will work for all MNCs (multi-national corporations)
Firms need to understand what they need out of their internationalization, what they do in the country
and what each mode will give them depending upon the environment of the country or countries into
which they will enter
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Rationale
- Fis eoe iteatioal i sope fo a aiet of easos…
Desire for continued growth
Unsolicited foreign orders
Domestic market saturation
Potential to exploit a new technological advantage
- The dominant reason relates to performance
- Internationalization is driven by needs for efficiency and market share increases
- Hoee, iteatioalizatio is oe tha sipl doig usiess outside the hoe out it is an
organizational mindset
Process
- Internationalization is the process by which
Firms increase their awareness of the influence of international activities on their future
Establish and conduct transactions with firms from other countries
- Iteatioal tasatios a ifluee a fi’s futue i oth diet ad idiet as. Busiess deisios ade
in one country, regarding such things as foreign investments and partnership arrangements, can have significant
impact on a firm in a different countryand vice versa. The impact of such decisions may not be immediately and
directly evident
Dimensions of internationalization
- Internationalization has both inward-looking and outward-looking dimensions
- Outward-looking:
Perspective incorporates an awareness of the nature of competition in foreign markets when you
enter them
Ofte follos hat is alled the seuetial poess includes the following modes of activities. Each
step has less risk than the next
The theory suggests that as firms build confidence, experience and success they move from one level
of complexity to the next (1 4)
- Inward-looking:
Perspective incorporates an awareness of the nature of competition in the market from foreign firms
coming to your market
Has an opposite mindset wherein you operate at home as you facilitate an MNC coming to your
market
The related modes of activity have an inverse risk level
Operating a WOS is like operating a hotel (they own a building
and land around it, but will hire a cleaning company, food
seie et. these people do’t hae to o aout if the
hotel does well, but staffing it (low risk)
- Many firms have an appreciation of the global environment but do not seek out international opportunities in
countries that differ greatly
- Questios to eploe…
What poduts/seies a e gloal’?
WOS = wholly owned
subsidiary
IJV = international joint
venture
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How can a firm know if it has a globally competitive product?
How can the firm successfully take a product global?
- Internationalizing is complex, difficult, risky, uncertain and time consuming, HOWEVER it can be done and have
huge rewards
Timing of entry
- When an MNC enters a market, it is a by definition either the first one there or a follower
- First-mover: first firm in the market, either foreign or domestic (ex. Pepsi was the first pop brand to go into the
Soviet Union, and was leading for decades)
First-mover advantages
First-mover disadvantages
- Preempt rivals and capture demand by
establishing a strong brand name
- Pioneering costs: costs an early entrant must bare
that a late-entrant avoids
- Build sales volume and ride experience curve
ahead of rivals cost advantage over late comers
- Costs arising from the difficulty of entering a
market that has no prior experience with what is
brought
- Create switching costs that tie in customers
- Costs of promoting and establishing new products
or services
- Late-mover: not the first (or last) to market, but entering when other firms (domestic or foreign) have established
themselves
Late-mover advantages
Late-mover disadvantages
- Learning from first-movers and following good
examples and avoiding problems
- Opposite of first mover advantages
- You learn from the first movers
- Exploiting opportunities made by others at their
cost
- Changes in regulations that are more
advantageous
Scale of entry
- How much money do you want or have to spend to establish a new business?
- Speed of entry: all at once or over time will affect the scale required
- Strategic commitment:
Long-term impacts on the firm as well as the market and may be difficult to reverse
Actions may alter the firm by committing huge resources thereby locating a majority of the company
internationally (taxes)
Actions may alter the PEST environment of the new market potentially opening it up or closing it off
to competitors need to be prepared for consequences
- The tpe of et has the poe to sigal the seiousess of the aket to…
Domestic competitors: could weaken or strengthen
Local governments: could lead to subsidies or barriers
Global competitors: could seek to enter your new market or domestic market where there is less focus
or other new markets because your attention is elsewhere
- Scale needs to be balanced against risks of too little and inflexibility of too much, potential return on investment,
and PEST conditions and risks
- Smaller scale makes it difficult to earn critical mass in market share and efficiencies to gain competitive and first-
mover advantages
- Sometimes big is not always better
- “alle sale allos…
Flexibility to pull out with little iestet if thigs do’t go ell
Relatively easy and inexpensive learning to set up next step in Sequential Entry
The PEST system
- Each country has PEST forces within firms must operate
- The PE“T eioet has a stog ifluee o fis’ atiities and behaviors, both domestic and foreign
- Helps deteie a out’s opaatie adatage
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