Marketing Consultancy Division (MCD)
Export Consultancy Unit (ECU)
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Export in Focus
Export Market Expansion
Strategies
Rabi-I, 1427 (April, 2006)
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Export Market Expansion Strategies
Introduction
It is clear that globalization and the concept of foreign trade have
predominated in most business literature and practical experience for the
last five decades. Besides that, there has been considerable development in
terms of methods of communication and means of transportation. As a result of
the decline or removal of trade barriers and the reduction in communication
and transportation costs an organization no longer has to be large to operate
internationally.
Consequently, many local companies have tried to expand their operations and
obtain a foothold in new foreign markets. Reasons for the expansion in international
business can be explained by a rapid increase in technology, liberalization of
government policies, development of institutions facilitating international
trade and increased global competition.
One of entry mode strategies that available for SME's is exporting. In fact,
the option of exporting requires a bundle of issues that should be coped to
guarantee readiness of SME's for exporting to foreign markets. After
making sure of the readiness of a company for exporting, the first issue
should be discussed is type of export market expansion strategy. Indeed,
the type of market strategy varies from one company to another company.
And selecting a particular market strategy depends on several factors and deep
analysis for the external and internal environment. In this report, available
export market expansion strategies and factors that might influence a decision of
selecting one of these strategies would be discussed.
Export Market Expansion Strategy
Export market expansion strategy is defined as the long-range strategic
decision as to the rate of export market expansion over time and the
allocation of marketing efforts among different export markets. Market
expansion strategy relates to the number of countries that a firm want to
enter. Basically, the company has two generic market strategies to choose
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from, a market concentration strategy or a market diversification/spread
strategy. Market concentrators are focusing on a few selected markets
while organizations utilizing a diversification strategy are focusing on a
larger number of markets. However, The organization and the surrounding
environment affect the choice of a company's market expansion strategy.
There are moreover, three dimensions an organization has to consider when
choosing a market expansion strategy. These dimensions can be described as
international spread, international penetration and international coordination.
International spread can be described as the quantity of countries the
company is engaged in. The second dimension international penetration is the
extent of the turnover, international investments or types of activities in one
country or in the international market compared to the home market. The
third and last dimension, international coordination means the synchronization
of the international activities. These dimensions and the combination of them can
serve as a base when a company considers its choice of market expansion
strategy.
Diversification / Spread Strategy
The main objective with a market diversification strategy is to achieve
high rates of return while a low level of resources is allocated to each market.
Advantages with this strategy include flexibility and the possibility to
diversify risks and investments. A company operating in many countries can
reduce risks since a downturn in one country can be compensated by growth in
another. This might also stabilize an organizations overall earnings. Furthermore,
since competition varies among markets profits in less competitive countries can
be directed to markets where the competition is more intense. An
organization following this strategy usually chooses easily available target markets
and the entry mode is likely to be exporting or licensing. The success of this
strategy is therefore dependent on the firm selecting the most appropriate
distributors and licensees. Furthermore, to make it easier and less expensive to
be present in numerous countries product modifications are unlikely to be more
than necessary to meet general needs and preferences in the market. Moreover,
the organizations are generally seeking high margins and will therefore try to
charge high prices. However, in the longer term some authors believe that a
diversification strategy will result in a reduction in the number of markets
as some markets becomes less profitable.
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Concentration / Key Strategy
A concentrated strategy is characterized by a slow rate of growth in the
targeted markets. Advantages with this strategy include specialization,
economies of scale and a high degree of control. A concentrated strategy is
based on a longer-term view on opportunities, profits and sales in a market.
When entering foreign markets a firm following this strategy commits a lot
of resources with the aim for long-term profitability through market
penetration. Moreover, the organization tries to establish long-term
relationships to ensure that the firm's products, image and reputation are handled
in an appropriate way. The company also tries to develop good relationships with
suppliers, customers and governmental institutions. Further, concentration on
key market provides firms with the choice to specific requirements, design
and develop offerings adapted to meet buyer needs, establish and maintain a
long-term marketing presence, and minimize costs while maximizing the returns
from individual markets. Prices are charged on the basis of sales growth, which
increases the chance of gaining a competitive advantage in pricing. Furthermore,
the firm is likely to adapt its product to satisfy particular needs and
preferences in each of the foreign markets.
Influencing Factors
Needles to say that, a decision of market expansion are influenced by a number
of factors. These, factors can be categorized into company, product, market and
marketing factors. Indeed, each factor includes a number of issues that
should be considered in the formulation of a market expansion strategy. With
regard a company's factors, objectives and goals of a firm and a mindset of
management play a significant role in determining a market expansion
strategy. Furthermore, nature of product that is intended to be exported
and its stage of life cycle influence the decision of an expansion strategy.
Moreover, characteristics of market such as size of segment and level of
competition have a considerable impact on a market strategy decision. Finally,
marketing activity used by a company such as communication and advertisement
shape a market expansion strategy. All these factors should be analyzed
together to select the suitable market expansion strategy. The table below
illustrates framework of the situational factors influencing the choice of
market expansion strategy.
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Factors Favouring Country Diversification
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•
•
•
•
•
•
•
•
•
•
•
•
•
•
Factors Favouring Country Concentration
Company factors
Little market knowledge
• Ability to pick best markets
High management risk consciousness
• Low management risk consciousness
Goal of growth through market development
• Goal of growth through market
Internal barriers
penetration
Proactive export stimuli
• Internal barriers
• Reactive export stimuli
Product Factors
Early or late in product life cycle
• Middle of product life cycle
Standard product saleable in many market
• Product requires adaptation to different
Few changes in the production process
markets
Nature of the product (niche product)
• Many changes in the production process
o
Limited use
• Nature of the product (general product)
o
Low sales volume
o
General use
o
Non-repeated buying behaviour
o
High sales volume
product
o
Repeated buying behaviour product
Market Factors
Small markets-specialized segments
• Large markets-high volume segments
Many similar markets
• Limited number of markets
New or declining markets
• Mature markets
Low growth rate in each market
• High growth rate in each market
Large markets are very competitive
• Large markets are not excessively
Low customer loyalty
competitive
• High customer loyalty
Marketing Factors
• Standardized communication in many markets
• Communication requires adaptation to
• Low communication costs for additional
different markets
markets
• High communication costs for
• Low order handling costs for additional
additional markets
markets
• High order handling costs for
• High spill over affects among countries
additional markets
• Low spill over effects among countries
Source: Adapted from Hollensen, (1998)
Conclusion
An exporter should formulate a generic export strategy properly to meet with
his external and internal environment. Also it is recommended for an exporter to
consider possible influences in terms of company, product, market and
marketing factors. In the same context, ECU should advice any new exporter
to determine the export market expansion strategy (generic export strategy)
and apply above analysis to come up with the appropriate strategy, which fit
with his situation.
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