Benefits and Risks of Entering New Market Quickly - Coursework Example

Internationalization Name of the Class Professor Name of the School City and State Where it is Located Date Introduction Over the decades, players in the various industries have evolved in a significant manner and in respect to these, a great number of them are engaging in worldwide expansions of their operations. Initially, there was slowness on the process of internalization and this was based on the fact that the management teams in organizations were more risk averse and they lacked the ability to tap relevant information and knowledge. The fact that the internalization process seems to be speeding up now can be better explained by the fact that management tend to be less risk averse and at the same time they have better and easier access to relevant information. The increased level in which organizations are globalizing may be seen as a major force that is behind the pace of internalization of a great number of companies. The faster pace can also be attributed to the fact that there are a great number of professionals who have cross national experience and inter cultural competence and additionally the founders of companies also have international skills, networks and experience than the earlier ones. This essay sets out to suggest and analyze an example of a firm that has internationalized too rapidly. In relation to these, there will be a discussion of the benefits, costs and risks of entering new markets rapidly. In addition to these, there will also be a discussion of alternative strategy that would have been advisable for the management team to adopt. Benefits of entering new market quickly One of the major benefits of entering a new market quickly is that firms are likely to increase their sales. If a business is succeeding in one market, expanding the business to other locations will in a way lead to increase in revenue. By moving to other markets, one targets a greater number of customers and this means that there will be additional sales from such an activity. In instances when companies have certain unique products or have some advantageous aspects than others in the proposed market, they need to take advantage of these and it will more likely lead to the success of the business in the new market. A good example of these is when companies majors on selling software products by adding additional version through the use of various languages. The market for the product will be increasing in a great way and this will mean that the company will sell more software’s and thus gain more revenue in the long run (Acedo & Jones 2007). Another advantage is that by entering a market rapidly, the company can lower the costs. A great number of firms that usually compete in the international markets mainly hope to gain some cost advantages. In instances when a firm can increase their sales volume by entering a new market, they may eventually attain economies of scale which will lower their production costs. Entering in new markets also has some implications when it comes to dealing with the suppliers. The growth that comes along with new markets usually leads to businesses making more purchases. This therefore offers the firms with a stronger leverage and more so when they are negotiating the prices with the various suppliers and they end up purchasing from those suppliers that offers them the best deal (Fernhaber, McDougall & Oviatt 2007). Additional, by entering new markets rapidly, firms can benefits from the aspect of off shoring. Off shoring has over some considerable amount of time become a popular but at the same time a controversial aspects which really helps when it comes to the reduction of costs. The aspect of off shoring involves relocating the business activities to another location that seems more favorable for the company. In respect to these, a great number of companies have closed their operations in their countries and created new operations in other locations where they feel that the cost will be lower and this is due to cheap labor that is available in certain countries and more so the developing countries. Entering new markets also diversifies the business risk. Business risks are a term that is commonly used to refer to the probability that a certain operation may fail. In instances when firms are highly dependent on one market, negative events in such market can ruin the firm completely. This firms in different sectors need to ensure that they put measures in place to reduce the business risks and the best way to do this is by operating in a number of markets (Kalinic 2009). Cost (and risks) of entering new market quickly Despite the above discussed benefits of rapid internalization kit, there is also some costs and risks. One major cost is that there are a number of uncertainties and this is mainly due having limited amount of knowledge of the new market and also limited resources (Kalinic 2009). Internationalizing firms also face constraints that are likely to arise from the intrinsic deficiencies in capabilities as well as in terms of resources. Such constraints usually posses major costs and challenges to a great number of firms. When firms are entering new markets, they require additional resources which may not be necessary in the previous market. This is based on the fact that the internationalizing firm will have to incur additional expenses that the local competitors will not incur and the lack of the required resources will have an negative impact on the mew market and the vice versa is also true for the local competitors. International businesses will also incur various costs as compared to those who may opt to operate in the domestic market (Eden and Miller 2004). Some of the costs at time stems from having different economic structures of the new markets involved. In addition, a great number of them tend to be closely linked to the efforts that firms make in trying to adapt to the local business into cultural systems and norms that tends to prevail in the new markets. Other costs and risks are closely associated with the psychic distance which is commonly defined as the factors that makes it very difficult for one to understanding new environments. Markets usually differ in terms of their culture, language, education, business practices, political systems and industrial development. Therefore, firms venturing into new markets need to adjust to a new market national culture and they also need to be prepared for the various challenges that they are likely to face and more so in relation to the cultural standards, lifestyles, consumer preferences as well as the purchasing power (Cavusgil 1980). Companies also face liabilities as a result of newness. A great number of companies that aim at internationalization tend to the lack the complementary resources that are needed for them to operate effectively in the new competitive environment. In instances when a firm enters into new markets, the competitive environment is bound to change and be different and thus it requires additional resources and most firms lack the additional resources. Such firms also face difficulties when it comes to establishing international partnerships and this is commonly seen as a limiting factor to the speed of internalization (Cavusgil 1980). The pace at which the international venture penetrates the new market is mainly affected by the firm’s ability to locate suitable partners, customers and close deals. When entering a new markets, the firms that are inexperienced are likely to incur a number of transactions costs, for instance, the search costs that are needed so as to find reliable locals agents, the costs associated with negotiations and this costs are incurred as companies tries to negotiate favorable contractual agreements, enforcements and compliance costs so as to monitor the deal effectively. Arenius (2005), shows that, another risk associated with rapid market entry is caused by the fact that the new forms tend to lack the legitimacy as well as the much needed influence in a new market environment a great number of the internalization ventures usually lacks the attractiveness and more so in the eyes of the potential partners and customers. This is because they have inadequate information about a ventures reliability and competence. Firms who enter a market rapidly also face the risk associated with foreignness. Firms lack the complementary resources that are required for new institutional environment. Firms that internationalize rapidly tend to suffer from the liability of foreignness and this is due to the fact that they are new in the market and at the same time, the firm has no active presence in the given market and thus they miss a shared context and history. International operations is seen as a risky venture and more so because it may lead to loss of assets due to any changes that may occur in the economic, political, legal and social factors in the new markets where they compete with the local firms. Difficulties are mainly created if the firm lacks the complementary resources that are needed to help understand the new institutions. Therefore so as to enhance the success of their operations in the new markets, firms ought to learn about the various institutions that tend to define how people interact and act in the new business environment. Thus, they need to learn the written convections, laws and norms, behavioral conventions, values and codes of conduct. This kind of liability implies that, when there is lack of knowledge of the local institutions and cultures, the rate of failure in the new market is likely to increase (Cavusgil & Knight 2009). Another risk is the perceived risk in the new market. The failure or the success rate of a company and more so when entering new markets is in a way linked to the level of threat to the company’s proprietary intellectual assets and more so to those companies operating in the high technology industry. The inability of defining the complete contract as well as the lack of resources so as to define their rights legally usually arouses an opportunistic behavior among the local competitors. This risk is further augmented since the local competitors tend to have better knowledge of the regulatory frameworks in addition to the business rules. Therefore, firms need to accept the imminent prospects of the additional technology transfers risk when entering a new market rapidly. The intellectual proprietary risk associated with entering a market rapidly includes but are not limited to the hold-up of certain assets, spill over of most essential information to the competitors and technology leakage (Di Gregorio, Musteen & Thomas 2008). Give a firm as example that enter too quickly (that imply a difficulty or a situation occurred) In respect to the speed of entry to a market there are firms that enter the market in a rapid manner while some takes their time before entering the market for them to have adequate information on the market. Rapid internationalization models are said to have emerged as a result of a great number of firms avoiding the incremental patterns that were associated with the internationalization process and claims that some firm could start their international activities from their inception (Jones & Dimitratos 2004). Companies that can be said to enter a market in a rapid manner are those companies that ate termed as born global companies (Cavusgil & Knight 2009). These are the firms that from their initial inception they operate internationally. A great number of firms adopt the rapid internationalization due to a number of external conditions, for example, advances in technology and more so in relation to communication, production and transportation and also due to the availability of entrepreneurs who have additional foreign market knowledge and experience. A good example of a company that internationalized more rapidly is Zara the company is among the well known born global companies. Zara is among the successful fashion retailers and it operates in a number of countries globally. The company opened their first store in 1975, and in the 1980s Zara expanded their operations in the domestic market. Their internalization process started when they opened a store in Oporto Portugal in the year 1988. By 2006, Zara operates in 59 countries and have numerous stores all over the globe. The major reason as to why Zara opted to internalize is based on the omitted growth opportunities in their home country and maturity of the market, there were also some notable changes in that Spanish spending behavior in that they shifted their spending top education, travelling and thus less amount of money was spent in clothing. The process of internationalization of Zara followed the strategy model in that it firstly entered geographical and culturally close markets before venturing into other markets (Cavusgil 1980). Most of the stores owned by Zara are based on Spain and for their international expansion in new markets they have applied a number of entry strategies so as to benefit much from the ventures (Aspelund, Madsen & Moen 2007). One such strategy is the use of their own subsidiaries and it is termed as a very expensive strategy since it involves high level of risks and control and more so in instances when the firms decides to exist the market. This strategy has proved to be effective in South American and European countries since they are perceived to have a high growth arte potential and very minimal business risks (Coviello 2006). Zara also make use of joint ventures which is a cooperative strategy and based on it the manufacturing facilities as well as the knowhow the company are combined with expertise derived from the foreign firm (Di Gregorio, Musteen & Thomas 2008). A good example of these is their venture with Gruppo Percasse and this helped them in overcoming the administrative barriers in Italy since the local traders re mainly charged with responsibility of decision whether the international brand can operate in area. In some areas, Zara made use of franchising and this strategy was mainly applied in the high risks markets which tend s to be culturally distant or markets which have small market and the sales forecast are expected to be low, this includes countries such as Malaysia, Kuwait and Arabia just to mention a few of them (Coviello 2006). The franchisees are mainly expected to follow a similar business model as that of Zara and more so in relation to the store location, product logistic, store design and the human resources. The franchisees are offered with the opportunity of retuning the merchandise but at the same time Zara can still open a store in the same area. If not too quick, what could be the options (hint: slower in motions imply what benefits?) In respect to the above discussion, a slower or not too quick approach would be better since it would play an essential role in solving the costs and risks have been identified above. The best way in which they would overcome the liabilities of newness is by actively acquiring nay necessary data as well as information about the new market. By doing so companies will have adequate information of what is required, the needs of the customers as well as their preferences. This will ultimately mean that the products and services that the company will offer will be more suited for the new market and enhance their success in the new market (Coviello & Cox 2006). Additionally, the acquiring the needed information the company will and get acquainted to any potential partners and from them choose those who seem to be more beneficial to them and they will also develop the complementary resources that will help them to compete effectively in the new market. Companies operating in new markets also need to overcome the liability related to foreignness. This can best be achieved by coming up with the complementary resources internally and at the same time there should be the development of tactic knowledge of the best way for them to operate in the new environment and also they should come up with new information sources to guide their future decision and operations in the market. Based on the fact that learning the institution and cultural differences takes a considerate amount of time, the internationalization process ought to be incremental and gradual. Based on research networks ties are essential resources when it comes to facilitating internationalization and more so to start up which have limited resources to engage in internationalization (Kontinen and Ojala 2011). Therefore, companies need to look for the best suited way to internationalize since not all ways are well suited for each business. By choosing the right way to internationalize a firm will more likely achieve the benefits of the chosen method or strategy. Conclusion Based on the above discussion, it is clear that some companies usually starts the Internationalization process immediately while some tends to wait. Thus, firms need to ascertain whether it would be better for them to start the internationalization process immediately after their inception in the same way that the born global companies do or they should postpone to a later date until when the firms have accumulated significant resources as in the case of IKEA. Therefore, firms that follows the prescription of the stage modes in instances when internationalizing needs to overcome the substantial inertia due to the domestic orientation. It would be crucial to note that firm that usually internalize earlier and more rapidly ought to overcome a limited number of barriers. The rapidly internationalizing companies may eventually outperform their close rivals that tend to wait for a longer period for them to internationalize. 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