International market entry strategy: organizational planning and risk-benefit analysis

International Business

Shenkar & Luo (n.d.) note that "international business strategy must aim to find the most effective balance between global integration and local responsiveness" when entering new markets. Thus, firms need to balance all of the different factors that go into the market entry decision in order to enjoy the best outcomes. Among the key issues are timing of entry and mode of entry.

There has been considerable research with respect to the different options that are available to the firm. Gielens and Dekimpe (2001) note in their study that firms that enter a market early -- first movers especially -- and greenfield will tend to have the best success. Which of these elements is most important, however, is subject to debate. When Starbucks entered Japan and China, it met the criteria of having a novel concept and first-mover advantage, but the company used local partners rather than avoiding local partners and acquired assets. Gielens and Dekimpe were studying firms entering Eastern European markets, however, which are less "foreign" than Asian ones.

Hill, Hwang and Kim (1990) make the case that the ideal choice for the type of market entry is related to "the strategic relationship the firm envisages between operations in different countries." To use a couple of examples, Starbucks has a low degree of interconnectedness between operations in different countries, so the franchise model is perfectly reasonable. The grocery stores moving into Eastern Europe are seeking to capture economies of scale by integrating these operations with the Western European ones, so Gielens and Dekimpe rightly found greenfield was the best approach. Likewise, FedEx's move into Subic Bay was primarily to deliver Intel chips produced nearby either to Chinese assemblers or to North America. When Intel closed, FedEx had no reason to keep the operation running. Thus, the way FedEx envisioned the business was central to its market entry and exit strategies.

Many of the risks associated with international entry strategies are political and market in nature. Therefore, companies often seek to mitigate these risks when designing their strategies. Starbucks used local franchises to mitigate both forms of risk; there was less risk for the European grocers so they did not need to use local help. Davis, Desai and Francis (2000) note that synergies between the company's internal environment and the foreign country's institutional environment were a key factor in determining the mode of market entry. Businesses clearly seek to ensure that they understand the foreign market and then make their choice about market entry based on that knowledge.

Choosing where to enter also seems to be related to these synergies. Some firms seek to enter high-growth markets and ensure that they do so quickly. Other firms are more conservative in nature and not only take a long time with market entry decisions but seek countries that have fewer risks. We can compare Walmart and its rival Target here. Walmart has a risk-taking, leadership-oriented culture that allowed it to enter China in 1996, when China was considered a very high risk. Rival Target is making its first international move next year -- to Canada. This example highlights that firms with different internal characteristics craft their strategies based on how those characteristics align with the external environment. By carefully considering such alignments, firms can better ensure that the benefits of foreign market entry exceed the risks associated with that entry.