International Business Entry Strategy

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Executive summary

Greener is a multinational corporation in the Argentina specializing in timber production. The company intends to enter the North American market to enhance their global trade. This article discusses the international entry strategies that can be employed by the company in order to enhance their chances of success.

Moreover, the paper discusses the reason for entry in the different market and how management deals with the different cultural practices of the new country. The paper also observes the organizational systems and the controls that the company may adopt to succeed in the new market.

Lastly, there is comprehensive discussion on how the company may use the technology adopted from the new market to enhance trading activities in their country of origin.

Background of the Study

With the increased competition and saturations in the domestic markets, it has become inevitable for companies to increase their market share by going global. For the companies to ensure that they survive, increase their income and grow, they are forced to exploit and find opportunities in newer environments.

However the process of invading, penetrating and the coming up with an internationally acceptable product is a tedious activity. A company entering into a new market faces a variety of challenges since it lacks a lot of the basic requirements that enhance success.

With no basic infrastructure such as marketing structure, organizational structure, organizational control and no prior knowledge of the new market the efforts required to penetrate are similar those observed in the early entrants.

Pan and Tse (2000) intimated that the entry of a firm into a new market is similar to an early entry strategy in a business. Greeners Company is faced with similar challenges when choosing to enter the market in Canada

Companies choose to enter the global market due to a variety of reasons. Usually the principle reason for seeking new markets is the observation that indicates there is demand in the new market. Besides this fact, companies may choose to enter the global market scene in a move to unsettle its competitors who have entered into such a market recently.

This move is usually made in order to disallow the competitor a chance to gain significant merit by trading alone in the new market (Brouthers and Brouthers, 2000; Singh, 1995). It is becoming a practice of corporations to enter new markets in order to learn from the different business culture.

Learning process can be induced through partnering with local distributors also referred to as joint ventures or establishing wholly owned ventures. Researchers have found that learning through partnerships is usually ineffective and tedious means of acquiring information (Aulakh et al., 2000; Kostova and Roth, 2002; Kuada and Sorensen, 2000).

Moreover, it does not contribute the process of a company establishing itself as a viable global competitor. Apart from the reasons mentioned above companies may choose to penetrate into the foreign markets in order to gain the advantage of receiving government aid.

Some governments offer incentives to companies that export in order to boost countries exports. This incentive may act as a source of drive to companies and lead to them entering international market (Fisman, 2001; Doh, 2000).

Companies employ a variety of methods and strategies to enter into new markets. Among the strategies used is a pattern known as ‘increasing commitment’ (Souvik, 2006). This pattern is used by companies to reduce the risk involved in entering a new market. Under this strategy, the company starts by exporting a negligible amount of its products to the target company.

Thereafter, the company may employ the services of a local distributor to enhance their knowledge of the market. After gaining sufficient knowledge of the prevailing market conditions the company may start operating a directly controlled branch since it can compete more or less equally with the other businesses in the industry.

Choice of modes of market entry strategy is generally determined by the degree of risk, amount of control required, costs and the amount of returns that a company expects from the new market (Dow, 2000; Davis et al., 2000). Companies that adopt a low profile entry strategy usually minimize their risks. These companies are not burdened with task of establishing offices.

Moreover, they have no responsibility of investing in distribution infrastructure, extensive staff recruitment and marketing campaigns. However, such companies will also have very little knowledge on most elements that are in existence in the market where they are operating (Eden and Miller, 2004).

Information such as the market share that they command, information on consumer behavior and information on prevailing prices will generally be missing in the database of such companies.

On the other hand, companies that choose a high profile entry strategy are faced with the problem of exposing themselves to high intensity of risk (Souvik, 2006). However, these companies have greater control of the information flow. Information on matters pertaining to consumer behavior, prevailing price levels, and the market share will be available for companies that choose high profile market entry strategy (Souvik, 2006).

Companies choose their market entry strategy depending on the amount of risk they can handle. Companies that have a low propensity to handle risk will choose the low profile entry strategy while companies with a high propensity to handle risk may decide on either of the two strategies depending on company policies and governance.

Risk is one of the factors that determine market entry strategy. However, firms experience risks in various forms (Salas-Porras, 1998). This paper concentrates on the role played by financial and marketing risks in choosing a market entry strategy. Most entities have the sole objective of maximizing profits. Therefore, the financial risk involved while entering a new market is one of the major considerations that companies observe.

Low profile entry minimizes the financial risks involved when entering a new market. However, in such a case the marketing risk increases since the parent company has no direct control over the subsidiary.

In order to beat the marketing risks companies have to be able to handle the financial risks presented by the market. Therefore, most companies that are not well equipped to handle the financial risks choose to ignore the market risks when entering via low profile market entry strategy (Hunt, 2000; Scott, 1999).

The general assumption among multinational corporations is that market entry strategies that served their purpose previously in one market may be equally good in another market. The strategies used by these corporations are usually for the purpose of enhancing their competitiveness by ensuring that the brand name, their suppliers and managers are well recognized in the market.

However, these strategies ignore the fundamental principles of marketing (Schlossberg and Deford, 1992). Each market is unique on its own way according to the principles of marketing. Therefore, to penetrate a new market, companies need to study the uniqueness of the market. This will enable the companies to identify the requirements that will lead to success.

Simple economics require companies to adapt their commodities to meet the market demands and conditions. Multinational corporations that are more experienced in penetrating new markets devise means of adapting to the local market conditions. This achieved by coming up with new brands, new packaging methods, and new distribution channels (Souvik, 2006).

Brief Background of the Company

Greeners Limited is a multinational company specialized in logging. The company is located in Mexico City and operates several wholly owned subsidiary companies in Malaysia.

The main activities in the subsidiary sawmills involves converting raw tree logs into high quality building grade timber to sell in the Malaysian market. Greeeners Limited releases timber products that are standardized in order to meet the market demands of the countries it is operating.

Each country has its own standards. Greeners Producer Limited has been operational for the last fifteen years with the subsidiary companies in Malaysia being operational for the last five years. Throughout this time, the company has been working effectively and efficiently by ensuring it incurred minimum operational costs to achieve maximum output.

To support the general activities in the company, Greeners has adopted a general organizational structure that is composed of a general manager who controls all the operations of the company including the subsidiaries.

Under the general managers are the junior managers who head the subsidiary companies within Mexico and those outside Mexico.

All the subsidiary companies are divided into four major departments: logging, production, packaging, and shipping and maintenance. Most of the timber products from the company are sold within the market of production and aggressive marketing is unnecessary due to the small difference in timber products.

The company’s major objective is to become a leading producer of timber products in the world. Moreover, the company intends to maximize its profits by minimizing operational costs and achieving maximum outputs.

Therefore, the directors and managers of the company are usually under pressure to exploit opportunities in new markets. With this in mind, the company is looking for options in different countries where it can expand its market and global power.

Market entry strategies and risks involved

For market entry strategy, Greeners Limited may choose either of the modes of entry (low profile entry or high profile entry). The low profile entry may be used to avoid financial risks. Since Greener Producer Limited originates from a Latin American country, the cultural business practices are different from those that operate in Canada (Dominguez and Brenes, 1997).

A direct entry into the market may be risky for the company. Therefore, to achieve their goal of getting a fully owned subsidiary without risking much of their finances the company may start by using foreign direct investment in a saw mill in Canada (Grosse and Trevino, 1996). Once it is able to grasp sufficient knowledge of the Canadian industry, then the directors can move to fully own the business entity.

Another method of entry into the Canadian market may be by the high profile direct entry. The company can choose to invest fully into the market in Canada and experience the market forces first hand.

However, entering the market via high profile entry requires a lot of commitment from the parent company. This is because the company may face a variety of challenges. Example of challenges facing a multinational that tries to penetrate a new market includes:

The challenge of choosing a location
Cultural challenge
Organizational structure
Technological challenges.

Therefore, a multinational that chooses to use high profile entry strategy has to consider these challenges in order to survive the market.

Factors Leading To Choice of Country

Recently the management of Greeners Limited has detected an opportunity to increase their global market share by penetrating the Canadian market. The major reason for the company’s decision behind investing in Canada is the availability of timber and ready market for timber products. The Canadian economy depends on its forests (Dufour, n.d.).

The forest covers an approximate of 418 million hectares that has been approximated to be 45% of the total area of Canada (Dufour, n.d.). This is approximately 10% of the world’s forest cover. The forest products earning in Canada exceed the amount of earnings generated by agriculture, automotive, and fishing industry.

Canada’s lumber industry has experienced stability in the prices and production after the world’s recession (John, 2008). Despite the fact that the lumber prices are still a bit lower than those in the previous prices before recession, these prices represent a significant increase in prices.

Therefore, the timber companies in Canada and the rest of the world are bullish about the prices of timber. These factors combined with the fact that the Canadian lumber sectors have undergone restructuring presents an attractive prospect for Greeners Limited to enter into the market.

However, while entering a new market a company requires a convenient location to set up their subsidiary. The best choice of a location is dependent on various factors. The most important factor to consider is the nature of business. Business entities should ask themselves questions such as

What are the company objectives?
What are the market demands?
Is labor available at the location?
is power/energy available?

With these questions in mind then the business entity is ready to choose a location. The best location for a timber processing company is near the source of raw material. This is because timber is a bulky product and transporting it over long distances may lead to incurring a lot of costs. When considering the second question about the market demands the company should consider the needs of their customers.

In some industries the customers come to the business to collect the products while in some businesses it is the responsibility of the producers to supply the goods. In cases where the customers come to the producer then the location of the producers can be located where they can minimize their costs. Availability of labor is also an important factor in determining the location of a business.

A business entity is usually located in areas where the company can obtain labor cheaply and conveniently. The prime objective of the organization being to minimize costs while having maximum output, the company should find a location that suits their goal. The location should be easily accessible and close enough the source of timber to minimize transport costs.

A good location to locate a mill in Canada would be Highland East Ontario. This location is ideal since it was once a mining community (HECP, 2011). This means that the area has enough labor to enhance the process of logging. Moreover, a highway passes close to the area (HECP, 2011).

This means that the means of transporting the logs from and to the market is available. The area is also close to the area where the logging activities take place is therefore an ideal place where costs of logging process and labor can be minimized.

Cultural challenges

Canada and Mexico are two countries with different business cultural practices. According to Doh et al. (2003), the Latin American business culture is affected by corruption. This is unlike the Canadian market where corruption may be considered negligible. Therefore, when management of Greeners Limited attempts to enter the Canadian market, the differences in business cultural practices may be a major barrier.

Whereas in Mexico and Malaysia corruption is high and multinational exploit the resources without consideration of the people (Adeola, 2001; Chandler and Werther, 2006). A good example is the case of Malaysia Penan tribe of Borneo rainforest. This tribe faces major social challenges due to invasion of the forest by the government and multinational corporations.

Corruption by the government and the multinationals is rampant and affects the indigenous people. Taking a multinational companies operating under these conditions, like Greeners Limited, and incorporating them into the Canadian market, they tend to find operations difficult. Another cultural barrier that Greeners limited may experience is the difference in language.

While Canada is an English speaking country, Mexicans speak Spanish. Therefore, the difference in language may pose a challenge to the parent company. Therefore, in order for Greeners Limited to penetrate the Canadian market, the company needs to overcome these cultural barriers.

The best way of overcoming the issues on corruption is by strictly adhering to the rules set by the Canadian government and regulations set by the forest authorities in Canada. On issues to do with language barrier, the company may use the force from within Canada and avoid outsourcing.

Moreover, their general managers can undergo training to ensure that they are well versed in English language. This enhances the process of communication between the parent company in Mexico and the subsidiary in Canada.

Organizational Structure and technological Challenges

When a multinational company enters into a new market, the organizational structure and control structures are bound to change (PRS, 2004). A company in a new market is faced by new challenges that require new ways to manage them. Experienced multinational corporations employ a small degree of change to their structure in order to adapt to the new markets.

Canadian lumbering industry, for instance, has adopted new structure to enhance the demand of their timber product. Unlike in Malaysia and Mexico where the marketing is not needed Canada has high competition among companies (Dufour, n.d.). Their timber products are differentiated by the packaging methods and the technology employed in processing.

The higher the quality of technology used the higher the quality of the timber products. Therefore, for Greeners Limited to maintain the quality of production and the degree of competitiveness, it must adopt the technology used by the companies in Canada.

These technologies can be exported back to the other subsidiaries and the parent company to ensure that the company can meet its objective of becoming a world leader in timber production. Moreover, Greeners Limited needs to change its organizational structure and incorporate a marketing department that is highly efficient. This would ensure that the company competes with the other companies in Canadian market.

Apart from these two factors, Greeners Limited is required to incorporate new control systems in their company structure. Controls ensure that the company assets are safeguarded. Moreover, controls ensure that the company can keep track of its labor force. Lastly, controls ensure that employee adherence to management policies.

Choosing the time of entry

Another challenge that faces Greeners Limited is the time of entry. Choices on time of entry into a market are affected by several key factors (Rodger, 1999). To analyze the most suitable time of entry, directors of Greeners may use the PESTLE model.

This model will enable the company to comprehensively determine a precise time to entry enter into the Canadian market. This model involves six important factors that may interfere with the time of entry, analyses them and provides the means of determining the time of entry.

To choose a comprehensive time of entry, Greeners Limited must gain knowledge on the political situation in Canada. Factors, such as the foreign policy between Canada and other countries, are usually determined on a political basis.

Moreover, the degree of government intervention in the markets may also be influenced by politics. Therefore, the most suitable time for Greeners to enter the Canadian market would be during the time when the political environment were calm and could accommodate a new entrant from different markets and countries. Since Canada is highly democratic and the country is not at war, Greeners may enter the market at any time.

Economic factors are also important in determining Greeners’ time of entry. Factors, such as the market interest rates, inflation and rates of exchange, may influence the time of entry as well. It is advisable for Greeners Limited to consider these factors before the company starts trading in a new market.

Higher interest rates reduce the level of investment; inflation, on the other hand, induces higher wages, thus the rate of exchange may affect the levels of profits (Rodger, 1999). Taking these into account, Greeners will be able to enter the market at a time when those factors do not greatly interfere with the company’s profits.

Social factors include tribes and social groups that segregate humans interfere with the market trends (Rodger, 1999). It is important to observe the social factors before entering a new business environment. This is because social structure determines the buying habit of consumers.

To maximize their profits, Greeners is supposed to enter the market after doing a thorough research on the society it is going to run business with. Therefore, Greeners Limited may only ether the market at a time when the company has sufficient knowledge on the society it is going to trade with.

To choose a suitable time of entry, Greeners is supposed to observe the technology advances in Canada. Thereafter, it must incorporate this technology into its production process. This will enable the company to compete with the other sawmills in Canada. Therefore, Greeners Limited can only enter into the Canadian market after adopting all the necessary technology.

In the lumbering business, environmental factors play a major role in determining the time of entry. This is because the growth of trees is highly dependent on the climate, and weather conditions. Moreover, the ease of timber is dependent on the weather.

Therefore, in case Greeners Limited wants to enter the Canadian market, the company should avoid the winter season. Legal reasons also play a major role in determining the time of market entry. A company may begin trading only if it acquires all the legal documents that allow it to trade in a given market.

Similarly, Greeners must obtain all the legal documents required in Canada to begin trading. Therefore, after taking all these factors into consideration, Greener Limited can decide to enter the market in a period of one year after scouting the market and ensuring it fulfills all the requirements that will enable the company to trade.

Recommendations

As discussed above, Greeners Limited is required to choose a location that will meet its objective of cutting costs. Preferably, Highland East Ontario, this is because this region posses all the characteristics of a good location for setting a business. On the case of cultural issues, the company should find a means of adhering to the laws and business culture in the Canadian markets.

Adoption of technology to enhance the activities of the multinational is a recommendation to management of Greeners Limited. In addition to this, the company ought to adopt new organizational structures and new control systems to enhance its activities in the global market.

Conclusion

The strategy used by a multinational corporation in entering a new market is crucial for its survival in the market. High profile entrants tend to expose their companies to financial risks while low profile entrants expose their companies to market risk. Therefore, before entering new markets multinational ought to consider the cultural barriers, technological barriers, and environmental barriers such as location.

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