Entering a Foreign Market: How to Remain Small?

Introduction

Entering a foreign market provides several advantages for a business, such as mitigating the impact of volatility in the home state and increasing the demand for products. One path of growth for a company is entering new markets, which provides access to more consumer opportunities in regards to sales and revenue. Some ventures choose to remain small while establishing themselves in a new market to avoid direct competition with large organizations, which would result in significant financial losses. This paper aims to examine the strategy of entering and remaining small in the context of the sequential game, identify the role and attributes of commitment, and present a case study that illustrates the discussed approach.

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Background

While many models of entering a foreign market exist, managers have to evaluate the potential risks associated with each approach to choose the best strategy for their products. Glowik (2016) states that the international product life cycle model can be used to explain the specifics of the foreign market entry and differences in strategies when compared to those applied in a home state. This model was developed by Vernon, who argued that the information exchange between different nations is limited, and a company’s products are subjected to changes that affect the entry strategy of a business.

The three stages presented in Vernon’s model explain how products are developed, established, and their decline in the international market. At the final stage, the competitors offering a similar product mitigate the novelty offered by the original inventor, thus affecting the sales. This model provides a simplified explanation of why businesses have to evaluate different strategies and market entry options to ensure that they mitigate competition, enabling them to work efficiently in a new market. Small businesses are generally viewed as less competitive, and large organizations tend to overlook them when developing strategies for internalization (Mesu, Sanders, & van Riemsdijk, 2015; “Staying small, while growing big,” 2017).

The transformations and changes in technology and business practices affected both small and big ventures. This enabled the “smaller players to marshal the expertise and resources of many larger players without the holding cost of owning those resources” (“Staying small, while growing big,” 2017, para. 2). Therefore, the commitment to develop and grow as a small company can be beneficial by mitigating the adverse effects outlined in the international product lifecycle model.

Entering small and remaining small can be an advantageous entry strategy because it minimizes the need to engage in direct competition with large and established ventures. Partially, this is because this approach requires the resources necessary to compete with such corporations. However, when evaluating emerging markets, it is essential to mention that in most cases, small businesses account for the majority of enterprises. Sequential game is a concept describing one opponent choosing the strategy before the other acts implying that the first individuals possess some information about the decisions of the second individual (Coninx, Deconinck, & Holvoet, 2018).

It is a part of the game theory, which explains interactions between people engaged in making strategic decisions. According to Kuuttiniemi (2017), there are three models describing market entry in accordance with the game theory: “1) sequential quantity competition with the model of Von Stackelberg or the Spence-Dixit model of capacity competition, 2) sequential price competition with identical firms or sequential price competition with differentiated products and 3) sequential quality choice” (p. 5). In essence, these models describe how different parties act in foreign markets to maximize their competitive advantage and revenue.

From the perspective of the sequential game, a commitment to being small allows organizations to avoid unnecessary bureaucracy in the decision-making process. Thus, it is possible to act based on the information about the competitor’s plans right away, without a need to communicate the plan with several managers. Additionally, innovation and ability to respond to market changes in another vital element of entering a new market (“Staying small, while growing big,” 2017; Taneja, Pryor, & Hayek, 2016). Small companies have a better chance of responding to market changes when compared to big enterprises.

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Researchers focus on the decision-making process of the companies aiming to enter a foreign market because it enhances the understanding of the factors that impact the strategy, and commitment is an important element of understanding small entrants. Ahi, Baronchelli, Kuivalainen, and Piantoni (2017) argue that choosing a market entry strategy is as important as deciding on a country to which the business will expand, while according to Buuri (2015) the topic has been the center of attention for researchers since 1930s. Companies who chose to develop as small enterprises are deprived of the benefits such as extensive resources and access to financial support, available to large companies.

Commitment to being small comes as a result of evaluating the advantages of this strategy. As was previously mentioned, this allows a company to avoid a head to head competition with larger enterprises. Additionally, small businesses can respond to market changes faster, which provides them with better flexibility when making changes to their original strategy (“Staying small, while growing big,” 2017). In the context of the sequential game, this allows managers to enhance their decision-making process and actions they take based on their knowledge about the competitors, because they can implement changes faster.

Thus, the role of commitment is in maintaining the primary advantages of a small entrant, which are flexibility and adaptability. As a business grows and expands, it rewires more resources for functioning. This includes human resources and advanced skills necessary to operate, which in its turn results in several rules and regulations developed to control the company. The attributes of commitment are effective leadership, understanding the connection between the organization’s design and strategy, allow independence of new branches when expanding (“Staying small, while growing big,” 2017). The final element is crucial because it is the key determinant in the commitment to the small business’ development and growth.

Discussion

Based on the examined research and relevant theories, it can be argued that entering and staying small is a valid approach that businesses can use when expanding to foreign markets. This strategy can work if an organization has a product that offers consumers a competitive advantage, such as price or unique features. Additionally, if the company can respond to market changes, including alterations in consumer preferences due to its size more quickly, this strategy can be beneficial as well.

However, probably the most crucial advantage of this strategy is the fact that big companies fail to recognize the possibility of disruption, which is the case when a small enterprise achieves a significant market presence (Ojala, A., & Tyrväinen, 201). Due to this, large companies focus on the current customers and profitability instead of working towards unmet needs of the market.

In the context of the current environment, this strategy can prove to be beneficial. Buuri (2015) argues that in recent year’s companies have been internationalizing at a much faster pace, requiring managers to apply different strategies for achieving competitive advantage. In cases when an enterprise aims to focus on a specific need of the market or when innovation and creativity are vital aspects that determine success within an industry, the strategy discussed in this paper will work.

Case Study

Although the theory can provide valuable input when describing specific strategies in the context of business, the knowledge transfer problem implies the need to examine the practical application of the concepts outlined above. Buuri (2015) provides an example of a Finnish company CH-Palvelu Oy that decided to enter a Russian market as a small enterprise. The reasoning behind this decision and the market choice is the proximity of the two countries and the economic impact that Russia has on Finland. The company operates in the market of Pulp and Paper, which has been declining in Finland in recent years (Buuri, 2015).

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This factor is one of the key elements if the decision making process of entering a new market by this company. The company decided to operate from Finland, which is a common approach of small enterprises that differs them from large organizations (Buuri, 2015). Exporting agents were used to export goods, which allowed leveraging their expertise and knowledge about the local market.

In the context of CH-Palvelu Oy entering a foreign market as a small business appears to be a reasonable solution. Firstly, the decline of the industry in the home state is a significant factor that impacted the revenue of this business. It is likely that the current trends will continue, which will result in bankruptcy for CH-Palvelu Oy due to lack of clients and subsequently revenue to fund operations. Secondly, due to the nature of this business and the home market issues, it is difficult for CH-Palvelu Oy to locate funding that would allow them to compete with large enterprises in Russia. Therefore, choosing to enter as a small company and adjusting to the county’s market demands appears to be a reasonable solution.

The choice of market, however, could have been more effective. As Buuri (2015) emphasize, there are a lot of barriers that exist in Russia from the political and legal point of view. Although the company chose the market located the closest to it, the outlined difficulties affect its operations. Buuri (2015) does not provide a substantial description of the competition in the company’s industry.

However, it is clear that CH-Palvelu Oy was able to leverage the market opportunity in a foreign country and by doing so, avoided the negative impact of the industry’s decline in Finland. The fact that the company decided to enter as a small eternize allowed it to avoid facing significant competition from established enterprises and thus mitigating the need to spend considerable money, which it did not have. Thus, the overall strategy chosen by CH-Palvelu Oy is valid, although market can be changed for more efficiency.

Conclusion

Overall, this paper assesses the advantages of entering a foreign market as a small business and remaining small. In the context of the sequential game, entering small and staying small can be beneficial because the strategy provides more flexibility when responding to the competitor’s actions. Commitment is essential in adapting this strategy because its expansion can offer substantial benefits to the organizations, in the form of resources. The attributes of commitment involve flexibility and adaptability, adequate leadership, the correlation between a company’s structure and strategy, and independent operation of branches.

References

Ahi, A., Baronchelli, G., Kuivalainen, O., & Piantoni, M. (2017). International market entry: How do small and medium-sized enterprises make decisions? Journal of International Marketing, 25(1), 1-21. Web.

Buuri, J. (2015). Entering Russian markets, case: CH-Palvelu Oy. Web.

Coninx, K., Deconinck, G., & Holvoet, T. (2018). Who gets my flex? An evolutionary game theory analysis of flexibility market dynamics. Applied Energy, 218, 104-113. Web.

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Glowik, M. (2016). Market entry strategies (2nd ed.). Boston, MA: Walter de Gruyter.

Kuuttiniemi, K. (2017). Theory of market entry: Dynamic game. Web.

Mesu, J., Sanders, K., & van Riemsdijk, M. (2015). Transformational leadership and organisational commitment in manufacturing and service small to medium-sized enterprises. Personnel Review, 44(6), 970-990. Web.

Staying small, while growing big. (2017). Web.

Taneja, S., Pryor, M., & Hayek, M. (2016). Leaping innovation barriers to small business longevity. Journal of Business Strategy, 37(3), 44-51. Web.

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StudyCorgi. (2021, August 24). Entering a Foreign Market: How to Remain Small? Retrieved from https://studycorgi.com/entering-a-foreign-market-how-to-remain-small/

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"Entering a Foreign Market: How to Remain Small?" StudyCorgi, 24 Aug. 2021, studycorgi.com/entering-a-foreign-market-how-to-remain-small/.

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StudyCorgi. "Entering a Foreign Market: How to Remain Small?" August 24, 2021. https://studycorgi.com/entering-a-foreign-market-how-to-remain-small/.

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StudyCorgi. 2021. "Entering a Foreign Market: How to Remain Small?" August 24, 2021. https://studycorgi.com/entering-a-foreign-market-how-to-remain-small/.

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StudyCorgi. (2021) 'Entering a Foreign Market: How to Remain Small'. 24 August.

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