TITLE:

Importance of International Expansion

Course Title: Strategic Management
Course Code: MF 616

Submitted By-

Nazim Nazmul, Roll – 573

EMBA, Session-2019-2020
Batch-23rd (Executive for Engineers)
Major: Finance

Date of Submission- 01st February 2021

I declare that this assignment is entirely my own work and I have

acknowledged all the materials used from the published or unpublished works
of other people. All references have been duly cited

Faculty of Business Administration

University of Science and Technology Chittagong

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TABLE OF CONTENTS
Page

ILLUSTRATIONS.............................................................................................................3

ABSTRACT.......................................................................................................................4

ACKNOWLEDGEMENTS……………………………………………………………...5

1 INTRODUCTION...........................................................................................................6
1.2 Background…………………………………………………………………..6

1.3 Problem Discussion ……………………………………………....................7

2 REVIEW OF LITERATURE.........................................................................................10

2.1 Foreign Market Expansion Strategy.…….......................................................10

2.1.2 Diversification..................................................................................12

2.2 Foreign Market Entry Strategy.......................................................................14

2.2.1 Export...............................................................................................14

2.2.2 Foreign Direct Investment…………………...................................15

2.3 Conceptual Framework………………….......................................................15

3. CONCLUSION…………………………....................................................................16

REFERANCES………………………………………………………………………….18

ILLUSTRATIONS
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 Page

Table 1. Conceptual Framework………………………………………....................................5

Abstract

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The augmented developments of technology and falling barriers of trade are encouraging firms

everywhere the globe to internationalize. Not solely international firms however additionally

little and medium-sized enterprises achieve conducting business on foreign markets. once

deciding to internationalize, little and medium-sized enterprises face the requirement to develop

a distant market growth strategy similarly as a distant market entry strategy. Market growth ways

treat of the number of markets to enter and therefore the temporal approach chosen. the most

ways are country diversification and country concentration. A market entry strategy contains the

amount of commitment of resources planned for every market. Typical entry modes are export

and foreign direct investment. This analysis explains the interrelations inside and between

market growth ways and market entry ways. Our aim was to achieve deeper understanding

regarding the chances for tiny and medium-sized enterprises to mix market growth with market

entry ways. For that we tend to conduct a case study of a Swedish firm that's active on

international markets. As a result, we tend to note that the mixture of market growth and market

entry ways will diverge from theory. a very important issue touching a firm’s alternative of ways

is that the money background.

Key words: market expansion strategy, market entry strategy, internationalization, small and

medium-sized enterprises, export, foreign direct investment.

Acknowledgements
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For my support in writing the thesis, I like to thank Flora Bendt and Malgorzata Skropskafor. We

also thank our interviewees for giving useful insights into the choices that a business must take in

selecting its market growth and market entry strategies.

Nazim 2021

1. Introduction

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This chapter will introduce the main topic that will be researched throughout the report. It starts

with a background and is followed by a problem discussion.

1.1 Background

The globalization increases in today’s business society. Internet and other communication

systems, fast travel and low tariff barriers accelerate the global business (Czinkota 2001).

Individual business needs to follow the development of new competitive advantages such as

international relationships. The strategic choice of how to expand to new geographical markets

has remarkable influence on a company’s performance (Hollensen 2003). Constant and easy

access to information simplifies a firm’s opportunities to internationalize. Also, the fast-

technological improvements will create new opportunities for companies in the future (Gillespie,

Jeannet &Hennessey 2004). Smaller companies have gained better access and opportunities to

enter foreign markets through globalization (Knight 2001). SME is an abbreviation for small and

medium sized companies. It refers to companies in all industries as long as a given size is not

exceeded. The main criteria for a SME is to have less than 250 workers, a maximum of 40

million euros annual turn over and owning managers or their families as managers (Knight 2001;

EC 2005). One question that comes up is how SMEs may enter foreign markets to reach new

customers. There are great gaps between countries considering technology. Constant innovation

and technological leadership can be a starting point for growing companies to obtain a niche and

gain market shares (OECD 1997). Though, entering and establishing on foreign markets is a

complicated process affected by factors such as the choice of multidimensional competitive

strategies (Bradley 2005)

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To be successful in new markets, managers should formulate an appropriate market expansion

and market entry strategy. Bradley (2005) and Hollensen (2003) point out the first decision to

make is the type and number of markets to expand into before determining a concrete entry

strategy. The definition of market is broad; therefore, this thesis defines market as one foreign

country throughout the whole paper. This research places emphasis on SMEs' process of

internationalization. More specifically, the relationship of foreign market expansion strategies

and foreign market entry strategies shall be analyzed by comparing their degree of flexibility,

risk and control. Here, the ability to react on altering circumstances on the international market

determines the level of flexibility. Risk is defined as the risk to lose financial investments a

company undertakes when entering a foreign market. How high control a company has is

determined by the level of influence to affect the foreign market but also physical presence.

1.2 Problem Discussion

Ayal and Zif (1979) define two major expansion strategies a firm can choose between market

diversification and market concentration. in an exceedingly concentration strategy, a firm directs

all or most of its recourses to one or some markets. during this strategy, an SME chooses to

pursue an oversized share of 1 or some submarkets because it is predicated on a long-term view

of opportunities in international markets. The SME is more dedicated to constructing close

contact with customers, suppliers, and distributors. Prices are determined with an objective of

sales growth, therefore a corporation is over willing to sacrifice its short-term profits (Bradley

2005). Advantages with a amount strategy are gaining great market knowledge and a high level

of control that's obtained through the physical presence on the market. However, to enter a

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distant market, heavy investments are required which might be described as a high financial risk.

Furthermore, concentration strategy implies grade of low flexibility concerning the flexibility to

react to a sudden decrease of a market's demand (Hollensen 2003).

Diversification strategy allows the SME to penetrate an oversized number of markets. Bradley

(2005) portrays the strategy's intention to be generating a high profit at low costs. Advantages

with diversification strategy are a high level of flexibility and rapid obtainment of competitive

advantages. in step with Hollensen (2003), the strategy may be a risky option when expanding to

a replacement market with a replacement product because of operating in unfamiliar territory.

Moreover, the corporate doesn't operate physically within the foreign market which provides

them low control. However, diversification is a positive move to enlarge the demand of existing

capability within the corporate. Furthermore, an occasional level of investments reduces the

financial risks when expanding internationally.

According to Ayal and Zif (1979), the 2 expansion strategies converge towards one another

within the future. Still, it's only possible to conduct one expansion strategy at a time (Ibid). An

SME's strategic choice whether to conduct market concentration or market diversification doesn't

exclude the international expansion problems which will emerge. Both strategies have strengths

and weaknesses which makes it very difficult for the company's decision-maker to seek out the

link between the SME's situation and a possible strategy (Bradley 2005).

Another consideration must be exhausted terms of a fitting market entry strategy. Hereby, people

answerable must decide about the desirability and potential of flexibility, risk, and control on an

overseas market (Bradley 2005; Hollensen 2001). Market entry strategies reach from export over

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franchising, licensing, and joint ventures to foreign direct investment (FDI). per Bradley (2005),

there's a robust relationship between market expansion strategy and market entry strategy. the 2

commonest market entry strategies for SMEs are export and FDI (Lu & Beamish 2006).

Export includes rock bottom level of risk and control, at the identical time, it's considered to be

the best way for companies to require the primary step to enter a brand new market (Lu &

Beamish 2006). Small and medium-sized firms have few resources to attempt to the design and

implementation of internationalization processes. By not investing in foreign subsidiaries and

markets the financial risk for the corporate is restricted. Another advantage is that the high

flexibility. just in case of any political or legal changes adversarial to the firm’s business a quick

withdrawal from the market is feasible still as specializing in other attractive markets. Exporting

could be a fast way of entering new markets, also because the SME supplies other markets by

using existing production locations rather than building new ones abroad. With a coffee level of

investments and fast access to foreign markets export could be a likely entry strategy to attain

high sales volume (Lu & Beamish 2006).

Foreign direct investment on the opposite hand is an entry strategy with a high level of control

and risk and low flexibility. By establishing sales subsidiaries in target markets the firm is

confronted with the requirement for major investments (Bradley 2005). Advantages with FDI are

connected to the SME’s position within the foreign market. Business relations to local

competitors, clients and distributors are usually closer and easier to develop. Therewith, the

corporate can easier overcome the “liability of foreignness” (Zaheer 1995). Furthermore, FDI

holds the potential for a SME to realize valuable knowledge about operating in foreign markets.

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This organizational learning may be useful for further internationalization intentions (Lu &

Beamish 2006).

Considering market entry strategies several authors determine an inclination of adjusting them

hooked in to developing factors like market knowledge, experience and financial resources

(Bradley 2005; Bilkey & Tesar 1977). After creating preconditions, a corporation may gain

advantage from more complex entry strategies than export. in line with Bradley (2005) this is

able to display the event of entry strategies starting with export and ending with FDI.

2. Literature Review

This chapter will cover the main theories regarding SMEs that are going to operate

internationally. First an overview of the internalized world is presented followed by possible

reasons for companies to expand. Finally, market expansion strategy and market entry are

analyzed.

2.1 Foreign market expansion strategy

Different factors influence the critical decision of selecting a market expansion strategy (Ayal &

Zif 1979). the most question the firm must answer is that if they're trying to get many markets at

the identical time or concentrate their expansion to 1 country. In other words, they have to work

out if they enter markets simultaneously or incrementally (Hollensen 2003). It is more preferable

for a corporation to enter one smaller market if it's no experience of foreign markets. A firm can
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effectively gain knowledge to gradually enter more countries (Hollensen 2003). This strategy is

particularly advisable for companies that enter international markets late and already face hard

competition concerning local competitors (Gupta & Govindarajan 2000). Also, smaller

companies with limited resources, companies which require to expand so as to survive, favor to

enter one or only a few markets gradually. This choice is more preferable than committing them

to expanding into too many markets at the identical time. Though, there are companies that need

a more rapid entry into the world’s markets to achieve the maximum amount as possible from an

emerging opportunity like preventing competition (Ayal & Zif 1979). Another factor

recommending companies to decide on this strategy is that they obtain experience quickly on

many markets; enabling them to attain economies of scale in production and marketing (Bradley

2005). this can be made by integrating and consolidating operations across the various foreign

markets. Thus, it will be added that to forestall competitors the corporate has got to be a style of

an innovative or very significant technological advanced firm. To enter markets simultaneously,

financial and managerial resources a required (Hollensen 2003).

SMEs have a look at their own domestic market as a chance to create their resources that later

may be used when expanding internationally. The companies' strategy should be focused on its

core competence that may give the corporate competitive advantages abroad (Knight, 2001). the

foremost natural choice for SMEs to expand is thru an incremental strategy, entering one country

after the opposite. Thereby, companies try and guarantee consolidation and profitability before

they enter new markets. A typical lack of resources is one reason for SMEs’ preference of

choosing this expansion strategy (Hollensen 2003).

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The following subsections outline the 2 varieties of market expansion strategies: concentration

and diversification. As earlier mentioned, market could be a definition which will cover Western

Europe or one single country. during this thesis markets are considered as countries. Thus, the

term market and country have the identical meaning.

2.1.1 Diversification

This strategy sets a relatively equal spread of resources across many various markets. Market

diversification strategy is characterized by a quick rate of growth in a very number of markets

selected and entered in early stages of the expansion of the corporate (Ayal & Zif 1979). the

amount of commitment of resources and management is incredibly low. Advantages of this

strategy are flexibility, a reduced concentration and the simplest way to hastily capitalize

noteworthy competitive advantages. The commodities related to this strategy are standard

products that meet the desired general market preferences (Bradley 2005). a quick rate is

obtained by entering many markets at the identical time (Katsikeas & Leonidou 1996). More

specifically, the corporate can enter parts of the markets with limited resources and time.

Companies choosing diversification are generally looking for a market that offers them high

financial dividends. Therefore it's very likely that a number of the entered markets aren't

profitable and therefore the company will drop out of those markets and target those that

generate highest revenues (Bradley 2005).

Flexibility

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Diversification strategy provides an organization with flexibility thanks to diversified

investments. SMEs are more flexible on different markets compared to large companies

(Hollensen 2003). Closing down a business in one market to enter another is fairly easy (Bradley

2005).

Risk

The risks when choosing diversification strategy are fairly low. Risks are primarily a definition

on the performance level of an organization using the diversification strategy (Lee & Jang 2007).

When a corporation operates in many markets at the identical time, one downfall of 1 market can

easily be compensated through by growth in another market (Ayal & Zif 1979). Another factor

influencing the reduction of risk is that the general revenue may be stabilized through operating

on several markets. to cut back risks even more studies show that choosing countries just like the

domestic markets ease the company's entrance on the foreign market furthermore as activity of

business (Hirsch & Lev 1971). The two growth methods, as analyzed above, are distinct in the

short term. However, by looking at the implementation of plans from a long-term viewpoint,

parallels tend to appear.

2.2 Foreign market entry strategy

After a firm has analyzed which markets to enter it's to come to a decision how these should be

entered (Bradley 2005). reckoning on the character of the chosen market expansion strategy a

fitting market entry strategy must be picked so as to form a coherent set of selling and

organizational activities. There are two main approaches when deciding what entry strategy to

use. Either the choice is predicated on experience or on analysis. Of course, a mixture of both
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approaches is feasible (Albaum 1998). Market entry strategies reach from export over

franchising, licensing and joint ventures to sales subsidiaries and production subsidiaries on a

distant market. Regarding literature, market entry strategies strongly vary in their level of

involved flexibility and therefore the degree of risk and control (Hollensen 2001; Bradley 2005).

The degree of risk and control increases while the intensity flexibility to react to altering

circumstances in markets decrease as a firm improves its market entry strategy over time

(Bradley 2005).

The next segment reflects on the multiple business entry characteristics. As this report focuses on

the two most common methods, the review is carried out of exports and foreign direct

investment. The next segment reflects on the multiple business entry characteristics. As this

report focuses on the two most common methods, the review is carried out of exports and foreign

direct investment.

2.2.1 Export

Generally, any sales activity on international markets is described as export. Here, export as

entry strategy shall be defined as sale of unchanged products and services to non domestic

markets via foreign based agents or distributors (Albaum 1998). By using international agents or

distributors, a firm gets affordable access to exclusive market knowledge without self analyzing

the country, culture, national politics, laws and native customer (Ibid). Thus, the cooperation

with foreign based agents or distributors is favorable for firms committed to direct export but

inexperienced in doing business outside known markets (Albaum 1998). These considerations

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cause the idea that export including foreign based agents or distributors may be a suitable entry

strategy for SMEs.

2.2.2 Foreign direct investment (FDI)

Establishing a subsidiary abroad comes together with high investments in new properties,

marketing, and human resources (Bradley 2005). Differences in language, culture taste, logistics

and laws have to be analyzed so as to begin and conduct successful business on the foreign

market (Verwaal & Donkers, 2002). this happens especially when FDI is chosen as entry

strategy.

2.3 Conceptual framework

Based this conceptual framework on the theories reviewed above. Figure 1 shall illustrate the

interrelations within and between the market strategies. The arrow between export and foreign

direct investment show SMEs’ tendency to evolve their market entry strategy from starting by

export to establishing foreign sales subsidiaries (Johanson & Vahlne 1977; Bradley 2005). The

connection between the market expansion strategies is clarified by two arrows. As they're

positioned towards one another the arrows outline the long-term convergence of the 2 market

expansion strategies (Ayal & Zif, 1979). The interrupted lines between the 2 boxes demonstrate

the connections between the market expansion and market entry strategies. Since export and

diversification moreover as foreign direct investment and concentration show alike levels of

flexibility, risk and control, they're connected and positioned on the identical height. Since the

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third research question targets the relation of several entry strategies to at least one expansion

strategy, the lines are interrupted.

Foreign Direct Concentration

Investment

Export Diversification

Figure 1: Conceptual Framework

Source: Authors construction based on literature from Ayal and Zif (1979), Bradley (2005), Johanson and
Vahlne (1977)

3. Conclusion

Companies in general prefer to enter markets that rank high in attractiveness, low in market risk

and where they can enjoy a competitive advantage. Even though classified as high-risk

environments, it is demanded to do further consideration in the development of international

operations and offer research ground for the study of market selection within an increasingly

challenging global market environment. Lack of a specialized approach to assess their potential

may be one reason why most firms overlook opportunities in expansion. It is proposed that the

application of the additional criteria will compensate for the go-no-go approach taken by the
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normative market selection methods by providing a matter-of-fact exposure and will complement

them in preliminary assessment before the immediate measures of macro-economic variables,

country risk and profit conversion potential.

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