Strategic Market Entry Project
by
Dr. William L. Ferguson, CLU, CPCU, ARM*
and
Dr. Tamela D. Ferguson
2009 Les B. Strickler Innovation in Instruction Award
American Risk & Insurance Association
*Contact: Dr. William L. Ferguson
University of Louisiana at Lafayette
B.I. Moody III College of Business Administration
Department of Economics & Finance
P.O. Box 44570
Lafayette, LA 70504 USA
O: (337)-482-6664
F: (337)-482-6675
ferguson@louisiana.edu
Project Assignment:
•
You are part of a consulting team that has been contracted by a major foreign insurer
or reinsurer “client.” [Note: Your team must choose whether that client is domiciled in
either Asia (limited to: Japan, Korea, Australia or New Zealand), the EU (any current
member) or North America (limited to: Canada or the USA).]
•
Your task is to investigate and prepare a written report and formal presentation to the
client’s Board of Directors [i.e., the class] concerning the results of the strategic
competitive analysis your team performs to help them evaluate the decision as to
whether or not they should commit resources to entering a particular domestic market
(“line of business”) of a “target” country. [Note: Your team must also choose the
target and line(s) of business to enter.]
•
Your team may have to avail themselves of the luxury of making certain simplifying
assumptions. However, you should try to make very few such decisions, and any
assumptions that you do make must not be either illegal, immoral or unethical. Apply
a basic “Mother Test”.
2
Basic Macroeconomic Information
Your report should include basic information about the “target” country/economy, including:
(1) A very brief history of the country,
(2) Level of economic development, trade patterns, and recent economic trends (inflation
rates, membership in regional or global trade agreements, etc),
(3) Relevant demographic and socioeconomic data,
(4) Legal/regulatory/administrative environment (applicable tariffs, minimum capitalization and
licensing requirements, taxation, funding of regulators, etc),
(5) Economic, political and cultural environment for international business (degree of economic
liberalization, popular sentiment that may impact client, level of bureaucracy, impact of
corruption, prevalence of litigation, etc),
(6) Managerial and labor climate (availability of skilled managers, labor pool, strength of
unions, etc)
(7) Financial environment (stability of currency, exchange rates, repatriation of profits, etc)
Note: Any important recent developments in any of the above subject areas impacting the
client’s home country would also be important, and worthy of including in your report!
3
Strategic Market Entry Mode Choice
•
Modes differ dramatically in resource commitment, risk, potential return
and degree of control
•
Client (“Home”) and Target (“Host”) country factors, and interaction
effects, plus industry factors may impact mode choice differently as well
•
Hierarchical Model [see: Pan & Tse, 2000, J Int’l Bus Studies, 31(4):535-554]
– Non-Equity Modes (tend to be weaker)
• Service Export (direct/indirect cross-border sales)
• Contractual (licensing name/products; alliances; cooperative strategies)
– Equity Modes (likely preferred)
• Equity Joint Venture
– Types: Minority stake vs. 50%-50% vs. Majority stake
• Wholly-owned subsidiary
– Types: “Greenfield” start-up vs. Acquisition vs. Other
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Purpose of Strategic
Competitive Analysis
• Designing viable competitive strategies for a firm
requires that strategic decision makers have a
thorough understanding of their organization and
its industry, as well as competitive environment
• Must analyze the organization (and competitors)
– Refer to Organization and Competitor Analysis (later)
• Also, must answer four basic questions:
–
–
–
–
(1) What are the boundaries of the industry (market)?
(2) What is the structure of the industry (market)?
(3) Which firms are competitors?
(4) What are the major determinants of competition?
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Some Observations regarding Competition
• What is an “industry” (“market”)?
– A collection of firms offering similar products or services (or, at least customers perceive
products or services are substitutable for one another)
• Importance of defining boundaries:
– Helps strategic decision makers determine arena of competition
– Helps firm to identify competitors and producers of substitute products/services
– Helps strategic decision makers determine key factors for success
• Competitive Advantage and First Mover Advantage:
– Global competition requires a complex set of organizational capabilities
– Capabilities can be rooted at either the firm, industry (market) or country level
– Sustainable competitive advantage requires competencies that are valuable,
rare, costly to imitate and with few substitutes
Î can be price and/or product (service) -based
– “First mover” advantage tends to be short-lived, depending upon imitability and
various “learning curve” effects
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Industry (Market) Structure
Variations among industries generally attributable to:
1) Concentration - the extent to which industry (market) sales are
dominated by only a few firms
2) Economies of Scale – the extent of savings firms within an industry
(market) may achieve due to increased volume
3) Product differentiation – the extent to which customers perceive
products/services offered by firms in the industry (market) as being
different
4) Barriers to Entry (Exit) – the obstacles a firm must overcome to
enter (or, leave) an industry (market)
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Competitive Industry (Market) Analysis
Must Answer Seven (7) “Basic” Questions:
•
What are the dominant economic traits of the industry (market)?
•
What is competition like and how strong are each of Porter’s “five competitive
forces”?
•
What causes change in the competitive structure and business environment of
the industry (market)?
•
Which firms are in the strongest (weakest) competitive position?
•
What strategic moves are rival firms likely to make next?
•
What are the key factors for competitive success?
•
Is the industry (market) attractive and what are its prospects for above-average
profitability?
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(1) What are the dominant economic
traits of the industry (market)?
• Market size and growth rate?
• Scope of competitive rivalry?
• Number and relative sizes of buyers and sellers?
• Ease of entry and exit?
• Are sellers vertically integrated?
• How fast is basic technology changing?
• Extent of scale economies and experience curves?
• Are rival products/services standardized or differentiated?
• Overall profitability?
et cetera …
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(2) What is competition like and
how strong are each of Porter’s
“five competitive forces”?
Porter’s Five Competitive Factor Model*
•
•
•
•
•
Rivalry among competing sellers
Presence of attractive substitutes
Potential for new entry
Leverage of sellers
Bargaining power of customers
Determine whether each is Strong, Moderate or Weak --- and WHY??? What
sort of competitive strategy will the firm need to employ to insulate the firm
from each factor?
* See: Porter, Michael E. 1980. Competitive Strategy (New York: Free Press).
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(3) What causes change in the
competitive structure and business
environment of the industry (market) ?
Most common “driving forces”:
•
Long term industry (market) growth rate?
•
Changes in buyer composition?
•
Product innovation?
•
Entry or exit of major firms?
•
Globalization?
•
Changes in cost structure and efficiency?
•
Changing buyer preferences for standardized vs. differentiated products?
•
Regulatory influences and government policies?
•
Changing societal and lifestyle factors?
•
Reductions in uncertainty and business risk?
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(4) Which firms are in the strongest/
weakest competitive position?
• Strategic group “mapping” – a valuable tool for understanding
similarities, differences, strengths and weaknesses inherent
in the market positions of rival firms.
• Strategic group = rival firms with similar market competitive
approach and position
– comparable product lines/breadth, similar distribution channels,
degree of vertical integration, offer similar services/technical
assistance, essentially similar product attributes to appeal to buyers,
depend upon similar technological approaches, sell in same
price/quality range, etc
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(5) What strategic moves are rival
firms likely to make next?
• Identify strategies of competitors
• Identify which rivals likely to be strong
(weak) contenders
• Evaluate competitive options
• Predict future moves of competitors
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(6) What are the key factors for
competitive success?
• Strategy - related actions
• Competitive (core) capabilities
• Business outcomes
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(7) Is the industry attractive and what are
prospects for above-average profitability?
•
Factors making industry (market) attractive/unattractive?
•
Special industry (market) issues or problems?
•
Long {short) term profit outlook (favorable/unfavorable)?
Evaluative Dimensions
• Nature of competitive rivalry
–
•
Bargaining power of suppliers/customers
–
•
Sales volatility, cyclical nature of demand, market growth, capital intensity, labor market, etc
Financial factors
–
•
Technological maturity/stability, market diversity, barriers to entry, flexibility of distribution, etc
Economic factors
–
•
Relative size and number of players, ability to vertically integrate, importance of purchases
from/sales to, etc
Threat of substitute products and new entrants
–
•
# and size of competitors, strength of corporate parents/partners/alliances, price wars, etc
Average profitability, typical leverage, credit practices, currency stability, exchange rates, etc
Socio-political and cultural considerations
–
Government regulation, licensing, taxation, bureaucracy, community support, ethical
standards, corruption, etc
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ORGANIZATION (AND
COMPETITOR) ANALYSIS
General Overview of the Process
•
Identify/analyze the Mission Statement of the Organization
–
•
Identify/analyze the Objectives of the Organization
–
•
Comparable to Competitors?
Identify/analyze Competitive Strategies Available to the Organization
–
•
Comparable to Competitors?
Identify/analyze Environmental Opportunities + Threats Facing the Organization
–
•
Are they Clear? Concise? Achievable? Comparable to Competitors? etc
Identify/analyze Strengths + Weaknesses of the Organization
–
•
Is it appropriate? Is it complete? etc
Appropriate given objectives, strengths, weaknesses, opportunities and threats?
Identify/analyze Likely Competitive Landscape Facing the Organization
–
What will competitors do? Does organization have competitive advantage? Will change in competitive
strategy cause a competitive response? What and How to respond?
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Strategic Mission of an Organization
The Role of the Mission of an Organization
•
A “mission” is a very general statement about fundamental strategy of an
organization, but can take many forms
•
Addresses basic questions about the organization:
1) Who are we?
2) What type of organization are we (what makes us unique)?
3) What is our strategic vision (what do we want to become)?
4) What does our organization stand for?
5) What impressions do we want key constituencies (e.g., customers, employees, citizens,
regulators, etc) to have of us?
•
Clear answers to these provides the cornerstone for the rest of the strategic plan;
clarity is necessary before alternative strategies can be formulated. Thus, the
mission can serve as a “screen” to identify strategic approaches that best “fit.”
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Strategic Mission (cont’d)
•
Could also include a specification of:
–
–
–
–
•
Business Scope (products/markets in which organization does/does not want to compete)
Growth Direction (products/markets of the future)
Essence or core of functional area strategies (what/how the organization is going to do)
Key assets and skills on which the mission is based
The mission also is a vehicle for promoting the values of the organization that helps
stakeholders establish a sense of organizational purpose, identity and commitment
Fundamental Nature of a Strategic Mission
• Declaration of Attitude
–
–
–
•
Resolution of Divergent Views
–
•
To support fundamental negotiation and compromise needed for strategic formulation activities
Reflection of Anticipated Operating Philosophy
–
•
Allows for development of feasible alternatives, without stifling creativity
Must be broad enough to effectively reconcile differences among stakeholders
Should motivate action, arouse positive feelings/emotions, encourage support in stakeholders
Stakeholder orientation
Declaration of Social Policy
–
Able to be integrated into all activities of the organization
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Organizational
Goals and Objectives
• Goals
- Attainable (realistic)
- Consistent (internal and across functions)
- Comprehensive (clarification of roles of all parties)
- Involve at least some element of organizational “stretch”
• Objectives
- Definite target
- Stated current and desired levels of performance
- Time period for accomplishing the goal
- Specify responsibilities for accomplishing desired outcome
• Note: A particular goal might require several
objectives in order to monitor progress!
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SWOT Analysis
Strength
–
something the organization does well or a characteristic that gives it an important capability
Weakness
–
something the organization lacks or does poorly (in comparison with others) that puts it at a
competitive disadvantage
Opportunity
–
Event emanating from the external environment that can help the organization achieve its
objectives
Threat
–
•
Event emanating from the external environment that can prevent the organization from achieving
its objectives
Purpose: To better draw conclusions regarding the attractiveness
of the organization’s situation and possible need for strategic
action(s)
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What to look for in conducting a SWOT analysis:
Potential Internal Strengths
•
Core competencies in key areas
•
Adequate financial resources
•
Well-thought-of buyers
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Acknowledged market leader
•
Well-conceived functional area strategies
•
Access to economies of scale
•
Insulated from strong competitive pressures
•
Proprietary technology
•
Cost advantages
•
Better advertising campaigns
•
Production innovation skills
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Proven management
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Ahead on experience curve
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Better manufacturing capabilities
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Superior technology skills
•
Others???
Potential Internal Weaknesses
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No clear strategic direction
•
Obsolete facilities
•
Below average profitability due to …
•
Lack of managerial depth or talent
•
Missing key skills or competencies
•
Poor track record implementing strategy
•
Plagued with internal operating problems
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Falling behind in R&D
•
Product line too narrow
•
Weak market image
•
Below-average marketing skills
•
Unable to finance needed changes
•
Higher overall unit costs than competitors
•
Others???
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What to look for in conducting a SWOT analysis:
(cont’d)
Potential External Opportunities
• Ability to serve additional groups or
expand new markets or segments
• Ways to expand product line to better
meet broader range of customer
needs
• Ability to transfer skills or technology
‘know-how’ to new areas
• Integrating forward or backward
• Falling trade barriers in attractive
foreign markets
• Complacency among rival firms
• Ability to grow rapidly due to strong
increases in market demand
• Emerging new technologies
• Others???
Potential External Threats
• Entry of lower-cost foreign competitors
• Rising sales of substitute products
• Slower market growth
• Adverse shift in foreign exchange
rates and trade policies of foreign
governments
• Costly regulatory requirements
• Vulnerability to recession and business
cycles
• Growing bargaining power of
customers or suppliers
• Changing buyer needs and tastes
• Adverse demographic changes
• Others???
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Key Internal Sources of Strengths and Weakness:
Marketing
•
Products/services; breadth of product line
•
Ability to gather information about markets
•
Market share (submarket shares)
•
Life cycle of key products/services
•
Expansion potential
•
Channels of distribution
•
Effective sales organization/knowledge of consumer needs
•
Concentration of sales
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Product/service image, reputation and quality
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Imaginative, efficient and efficient promotion/advertising
•
Pricing strategy
•
After-sale service and follow-up
•
Goodwill/brand loyalty
Finance & Accounting
•
Ability to raise capital: ST, LT, Debt, Equity
•
Working capital
•
Corporate resources
•
Cost of capital relative to industry/competitors
•
Tax considerations
•
Relations with owners, investors and stockholders
•
Leverage position
•
Cost of entry and barriers to entry
•
Financial planning and budgeting practices
•
Effective cost controls and ability to reduce costs
•
Financial size
•
Efficient/effective accounting system (cost, budget, profit planning)
Production/Operations/Technical
•
Raw materials cost and availability
•
Inventory control systems
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Location of facilities
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Technical efficiency and capacity utilization
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Effective use of sub-contracting
•
Degree of vertical integration: value added and profit margin
•
Efficiency and cost/benefit of equipment
•
Effective operation control procedures: design, scheduling, purchasing, QC
•
Costs and technological competencies relative to industry and competitors
•
Research & Development/technology/innovation
•
Patents, trademarks and similar legal protections
Personnel
•
Management personnel
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Employee skills and morale
•
Labor relations/costs relative to industry and competition
•
Effective and efficient personnel policies
•
Effective use of incentives to motivate performance
•
Ability to level peaks and valleys of employment
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Employee turnover and absenteeism
•
Specialized skills
•
Experience
Organization/General Management
•
Organizational structure and control system
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Reputation, image and prestige of organization
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Record of achieving objectives
•
Organizational climate
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Top Management skill, capabilities and interests
•
Use of systematic procedures and techniques in decision making
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Specific Sources of Opportunities and Threats
in External Environment Segments:
Industry Segment
•
Customers
•
Competitors
•
Suppliers
Demographic Segment
•
Population size
•
Age structure
•
Geographic distribution
•
Ethnic mix
•
Income distribution
Economic Segment
•
Inflation rate
•
Interest rates
•
Trade deficits or surpluses
•
Budget deficits or surpluses
•
Personal savings rate
•
Business savings rates
•
Gross domestic product
Technological Segment
•
Product innovations
•
Process innovations
•
Applications of knowledge
•
Private and government supported R&D expenditures
•
New communications technologies
Political/Legal Segment
•
Antitrust laws
•
Taxation laws
•
Deregulation philosophies
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Labor training laws
•
Educational philosophies and policies
Socio-cultural Segment
•
Women in the workforce
•
Workforce diversity
•
Impact of religious beliefs
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Aesthetics
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Attitudes about quality of life
•
Attitudes about quality/value of work
•
Concerns about the environment
•
Shifts in work and career preferences
•
Shifts in preferences regarding product/service
characteristics
Global Segment
•
Important political events
•
Critical global markets
•
Degree of industrial development
•
Cultural and institutional attributes
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“Blue Ocean” Strategic Initiatives?*
[“Effective blue ocean strategy should be about risk minimization and not risk taking.” (p. 23)]
•
•
High performance unsustainable: competition, globalization, commoditization, etc
Thus, must seek out new market space for growth and profit opportunities
Î value innovation [simultaneous delivery: differentiation + lower cost]
ƒ
ƒ
ƒ
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Which factors can be eliminated that the industry takes for granted?
Which factors can be reduced well below the industry standard?
Which factors can be raised well above the industry standard?
Which factors can be created that the industry has never offered?
Guiding Principles
•
Reconstruct Market Boundaries (↓Search Risk): Make the competition irrelevant
[Across: ‘alternative’ industries, strategic groups, complementary offerings, buyer chains/function/emotional appeal, time]
•
“Big Picture” Focus (↓Planning Risk): visualization vs. number-crunching
•
Create/capture New Demand (↓Scale Risk): commonalities vs. segmentation
[3 tiers of non-Customers: “soon-to-be”/edge jumpers, “refusers”( don’t use/beyond means), “unexplored”(distant )]
•
Proper Sequencing (↓Business Model Risk): utility+ → strategic pricing→ target costing [“P-”]→ adoption hurdles
Execution
•
Overcome Obstacles (↓Organization Risk): “tipping-point” leadership
[People, acts, activities which have disproportionate influence on performance over: cognitive, resource, motivation,+ political hurdles]
•
Build Execution In (↓Management Risk): fair process (engage/explain/expect) → trust/commitment → voluntary cooperation
* See: Kim & Mauborgne. 2005. Blue Ocean Strategy (Boston: Harvard Business School Press).
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Sustaining Competitive Advantage?
(Barriers/difficulties imitators may face diving into your “Blue Ocean”)
•
•
•
•
•
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“Conventional logic” impedes response?
Natural monopoly/no support for 2nd competitor?
Patents or other legal permits/constraints?
High volume perpetuates cost advantage?
Network externalities?
Imitation requires significant political, operational
or cultural change in existing business practice?
• Brand buzz/customer loyalty?
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