Quiz 13: Entering Foreign Markets
G# entered the market in China in 1997 when the market was hardly 400,000 vehicles. Exporting was not an option since Japan and South Korea were geographically nearer and the freight cost from the US would render the vehicles uncompetitive. So they entered into a JV with S#, who had themselves been an early entrant into the Chinese market. However G# saw the benefit of the first-mover advantage and went in with a large scale investment of $1.6 billion which was the largest FDI in the Chinese automobile industry at that time. This investment gave them: 1) Economies of scale. 2) First-mover advantage. 3) A chance to move down the experience curve very quickly. 4) Use location economies. 5) Establish a brand in the market. 6) It enabled the JV to develop vehicle models that were suited for the Chinese market. 7) It affirmed G# commitment to remain in the market, hence buikding trust. These were the strategic reasons for G# to enter the Chinese market with a JV.
a) Tesco's global expansion strategy has been rather unique in the grocery industry. Rather than competing head-to-head with established retailers in developed markets like the United States and Western Europe, Tesco chose to pursue markets with strong growth potential, but little current competition. The strategy allows the company to use its expertise to grow international market share, without incurring the costs of establishing itself in already crowded markets. b) The keys to Tesco's success in its international operations is its ability to spot markets with strong underlying growth trends, identify existing companies in those locations that have a deep understanding of the local market, form a joint venture with those companies and transfer its expertise in the industry to the venture, and later buy the partner out. The strategy is highly successful, supplementing the company's UK earnings with an additional ?7.6 billion in revenues in 2007. Tesco is now the number four company in the global grocery industry. c) Tesco's strategy of entering foreign markets via joint ventures has proven to be highly successful. The company is able to bring its expertise in retailing as well as its financial strength to the venture where it is paired with the partner's knowledge of the local market. Local managers are hired to run the operations, with only support coming from expatriate managers. This format allows Tesco to use its core strengths to get into the market, and then later, after the ventures have become established, buy out its partner. d) Most students will probably agree that while Tesco's entry into the crowded market in the United States represents a departure from its traditional strategy of focusing on developing nations with little existing competition, the strategy still reflects the company's traditional strategy in that the format the company has chosen to use, Tesco Express, still avoids the head-to-head competition that the company has steered clear of in developing markets. In that sense, the strategy could prove to be highly successful. The company can enter the market using its Tesco Express format, avoid major competition while it gains brand recognition and experience in the market, and then later, expand into the traditional grocery business.
The selection of markets for any international business to enter is based on a number of criteria. Some of them are: 1) Size of Market. This alone is not a good indicator. China and India are the largest markets but the GNI is very low. So this factor has to be seen along with other factors like demographics. Size of the middle class. Upward mobility of the population. 2) Purchasing Power. Both Indian and China have a large middle class which is upward mobile so even though the GNI is low there is enough purchasing power. 3) Political and Economic Stability. This is very important from the long-term perspective. Some African countries have the purchasing power within a certain portion of the population but their economies are very weak, and they are also politically unstable. A stable democracy is always preferable. 4) Type of Economy. A market economy is always preferable to a command or mixed economy. Here the chances of any protective tariffs or punitive measures against a foreign firm are low. 5) The Value that can be Created in a Market. This is the value that the product that one is selling will have in the market. Greater value translates into an ability to charge higher prices. If it does not exist in the market, it may offer greater value, but the introduction may not be all that smooth. On the other hand if competitive products exist either from foreign or local manufacturers, does one's product offer greater value? These are some of the factors that determine the choice, when deciding which market to enter.