Battle plan

Once corporate leaders have decided to flex the company's muscles and pursue customers in foreign markets, the two most important issues that must be addressed are: choice of markets, and the choice of an entry strategy for each selected market. In this article, we outline the strategic logic that should guide smart companies in making these choices:

The sequence in which a globalizing company enters foreign markets should be guided by two factors: the strategic importance of the market, and the firm's ability to exploit that market by satisfying customer needs better than competitors while remaining profitable.

The strategic importance of the market depends on two factors: size of the market, and the learning and reference value of the market. The importance of market size is obvious and that is why every Fortune 500 company is migrating to markets such as China and India. However, on occasion, some markets must be deemed as strategic even if they are not very large in terms of market size.

Consider, for example, the Nordic countries of Sweden, Finland, Norway, and Denmark. This region is globally among the most advanced in mobile telecommunications. Thus, if your company is a provider of technology or applications for the mobile telecom market, being a player in the Nordic region can have significant learning and reference value.

In addition to the strategic importance of a market, executives must also examine their ability to succeed in the particular market. Chasing a strategic market without factoring in whether you can win in that market is an almost certain route to disaster. This is a costly lesson that many European retailers learned in their forays into the US market, often termed as the graveyard for foreign retailers.

Many European retailers - such as the UK's Marks & Spencer - assumed that because they were leaders in their home markets, they had what it took to also succeed in the US. Yet, they ignored the fact that, unlike European retail markets that have historically been smaller and more protected, the US is the largest, most open and most competitive retail environment in the world. Thus, particularly on its home ground, even a second- or third-best American retailer may be more competitive than the best retailer from UK, France or Germany.

Putting the two dimensions together, it is clear that the most rapid entry should be into those strategic markets where the company is reasonably confident of its ability to compete and win. Some good examples would be Huawei's aggressive push into developing countries, India-based Infosys' aggressive push into the US, and Yum Brands - parent of Pizza Hut and KFC - aggressive push into China.

What if the market is clearly strategic but you doubt your company's ability to succeed there for any number of reasons - very different market characteristics, very intense competition, and so forth? In such a case, the company should first explore a beachhead market where the risks are low and yet the market offers a huge opportunity to learn how to succeed in the eventually targeted strategic market. Take the case of Haier's entry into the US market. In the initial stages, Haier was very smart in only targeting college students living in dormitories.

This segment had been neglected by American home appliance manufacturers. Thus, it offered a relatively uncontested market space to Haier. Also, since college dormitories are very small, Haier could export its small refrigerators from China without the shipping costs becoming prohibitive. This reduced the need to make large and risky investments in local manufacturing in the early stages of the company's entry into the US.

Haier was extremely successful in this beachhead segment. Since then, it has used the learning from it, as well as growing brand recognition and channel relationships, to attack other more important market segments in the US.

As another example, consider the case of Japanese car companies that entered the US market in the 1970s by focusing on the least-important but also the least-defended small car segment, a nice beachhead for ultimate assault on the far bigger mid-size and luxury car segments. The initial push by Indian pharmaceuticals into the generic drug segment in the US is yet another example of how a beachhead can serve as a valuable launching pad for eventual migration into the far more lucrative patented drug segment.

Often, succeeding in 10 small markets does not deliver the same financial returns as succeeding in one mega-market. On the other hand, there is no reason to leave money on the table if it is there for you to pick up. Finally, in the case of non-strategic markets that are too difficult to crack is very clear, you are better off by leaving them alone.

Designing an entry strategy

There are many components of entry strategy. For reasons of space, we focus here on two of the most crucial ones: Should you go alone or partner with a local player? And, should you target the end-customer directly by investing in your own brand name or should you serve as a back-end - or private label - supplier of goods and services to a local company who interfaces with the customer? The right answer to both questions may differ from one market to another and depends on the company's capabilities at the time of market entry and long-term ambitions.

Leaving aside the need to take on a local partner when local laws dictate this to be the only way to enter the market, there are many situations where pure business logic would suggest that partnering is better than going alone. The choice rests principally on how different the local market is compared to other markets where the globalizing company already has experience.

The more different the local market, the greater the need for local know-how and, thus, for a local partner. Take the case of Wal-Mart, the American retailer. Its first move outside the US was to Mexico in 1992. Although Wal-Mart was already well above $50 billion in revenue and Mexico is right next door to the US, the company's leaders were acutely aware that Mexico's per capita income is a mere fraction of that in the US. Also, Mexico's Latin culture and Spanish language make it a culturally very different market from the US.

Not surprisingly, Wal-Mart entered Mexico through a 50-50 joint venture with a local retailer. Having learned from its Mexico experience, Wal-Mart then entered Brazil, this time with a 60-40 joint venture. Having learned from both Mexico and Brazil, Wal-Mart's next move into Argentina was through a 100 percent owned operation.

The answer to the question of whether you should target the end-customer directly or serve as a back-end private label supplier rests on how crucial and how easy it is to build a direct relationship with the end customer. If your company sells standard hospital beds at low prices to hospitals in, say, the state of Florida, then it's clear that a brand name is relatively inconsequential and front-end selling abilities are easy to develop. Thus, in this case, you would deal with the end customer directly. But, what if you are manufacturing dishwashers or bicycles in China and want to penetrate the US market.

In the case of both dishwashers and bicycles, brand names are important in the mature US market. Yet, it can take many years, often decades, to build a strong brand name. In such a case, the two equally viable options are to either become a private label supplier to a local company or acquire a foreign company with a strong brand. China's Wuxi Little Swan, which supplies dishwashers to many foreign companies on a private label basis, is an example of the former. In contrast, the case of India's Tata Tea, which acquired the UK-based Tetley Tea, a well-known Western brand, is an example of the latter.

Anil K. Gupta is the Ralph J. Tyser Professor of Strategy at the Smith School of Business, The University of Maryland at College Park. Haiyan Wang is Managing Partner of China India Institute, a research and consulting organization.

They are the co-authors of The Quest for Global Dominance, Jossey-Bass/Wiley, March 2008. They can be reached at agupta@rhsmith.umd.edu and hwang@chinaindiainstitute.com.

(China Daily 01/28/2008 page7)