Master Thesis
MSc BA Small Business & Entrepreneurship
The Challenge of International Expansion
“What is a feasible market entry strategy for young high-tech firms?”
by
KIM LIANE SEYFERT
University of Groningen
Faculty of Economics and Business
March 2015
Student number: 1988050
Supervisor: Dr. Ir. H. Zhou
Co-assessor: Dr. A.J. Rauch
[Word count: 36278]
Oosterstraat 67C
9711 NS Groningen
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COPYRIGHT
This publication is an original intellectual product of the author Kim Seyfert and has been anonymized regarding names and data to protect the privacy of the company, its investor and employees that were the focus of this study. Moreover, this publication may not be (partly) reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic/mechanical methods, without a written permission of the author and company X, except for personal use by company X. For permission requests, contact the author.
Author: Kim Seyfert Oosterstraat 67 C 9711NS Groningen kim.seyfert@hotmail.de Company supervisor: Heide J. 9718 AW Groningen (address is classified)
PREFACE
With the finalization of this master thesis, I successfully completed the Master of Business Administration with a specialization in Small Business & Entrepreneurship at the University of Groningen. During the process of writing this thesis, I gathered valuable information about my own strengths and weaknesses, received insights in different functions and challenges of small firms and obtained valuable information about future possibilities regarding my personal development. Hence, this undertaking was much more than just a simple graduation project, because it supported the development of my personal insights, skills and strengths and outlined the first steps of my professional working life.
I would like to thank and acknowledge everyone that supported and encouraged me on this journey, because it would not have been possible without them. First of all, I like to thank dr. ir. Haibo Zhou, my academic supervisor at the University of Groningen, for introducing me to company X as well as for the valuable guidance, feedback and support regarding the writing process of this final project. Secondly, I would like to thank Heide and Chintan, my company supervisors from company X, for their support, constant availability and guidance, constructive feedback and openness of sharing information as well as facilitating the existence of this study. Additionally, I would like to thank all employees of company X and its investor for participating in interviews, their patience, help and support whenever I had a question or last-minute request. Finally, I like to thank my parents and friends for believing in me and the provision of support whenever necessary.
Keywords: internationalization, international expansion, entry mode, strategic analysis, firm growth,
young high-tech firms, small business challenges, strategy, academic problem solving, go-to-market strategy, internal organization, external environment, innovation, industry development
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ABSTRACT
This study aimed to derive deep insights into the internationalization process of young high-tech firms in order to contribute to the theoretical as well as practical field of international expansion. By solving a business problem and simultaneously answering the research question, sound managerial and theoretical implications were derived. More specifically, the case firm had difficulties in developing a feasible market entry strategy for the German market. The overall research question of this study was therefore:
“What is a feasible market entry strategy for young high-tech firms?”
This study used an academic problem solving approach to solve the business problem and answer the research question. The analysis was based on a conceptual research model (derived from the literature review) that included all elements of a strategic analysis (internal and external environment), the motivation for internationalization and available market entry modes. The results of the analysis were combined into a thorough solution design that builds upon the specific strengths and weaknesses of a particular firm as well as the external environment characteristics. More specifically, this study identified the contractual entry mode via licensing as the most feasible one for young high-tech firms, because it solves common issues of young high-tech firms. Such issues include significant resource constraints, inexperience and/or internal insufficiencies. Hence, the contractual entry mode is most feasible, because it only requires low resource commitment, while at the same time offering benefits such as local knowledge, market experience and credibility as well as established customer relationships and distribution networks via contractual partners.
Contents
INTRODUCTION ... 8
Introduction of company X ... 8
Business problem ... 8
Theoretical relevance ... 8
Literature gap and research objective/ questions ... 9
Link between theory and practice ... 9
Structure of the study ... 10
LITERATURE REVIEW ... 11
Firm Growth ... 11
Defining firm growth ... 11
The process of firm growth ... 12
Internationalization as a growth strategy ... 12
Market entry modes ... 13
Strategic Analysis ... 16
Firm boundaries ... 17
External environment ... 18
Internal organization ... 21
Strategic positioning ... 22
Conceptual Research Model... 25
METHODOLOGY ... 25
Data collection and interview structure ... 26
Outline of Company X ... 27
ANALYSIS ... 28
Firm characteristics ... 28
Boundaries ... 28
Business Model ... 29
Motivation for internationalization ... 31
Internal organization ... 33
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Culture ... 36
External environment ... 38
PEST-Analysis ... 39
German street lighting and intelligent control market ... 40
Competitor identification and five-forces analysis (Porter, 2008)... 45
Strategic positioning ... 47
Entrepreneurial orientation ... 48
Innovativeness ... 48
Competitive advantage ... 49
Strategic focus ... 50
SWOT-analysis ... 51
Synergy... 54
DISCUSSION ... 56
Solution design ... 57
Academic reflection ... 62
Theoretical implications ... 62
Managerial implications... 62
Limitations ... 63
Recommendations for future research ... 63
CONCLUSION ... 64
REFERENCES ... 66
Literature ... 66
Internet research ... 71
APPENDICES ... 73
1.
Conceptual Research Plan... 73
2.
Survey results (comparison) – internal organization ... 74
2.1 Internal structure ... 74
2.2 Internal culture ... 74
3.
PEST-Analysis ... 75
4.
Hofstede’s cultural dimensions ... 81
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6.
Survey results (comparison) – strategic positioning ... 83
7.
Interviews ... 85
7.1 Interview guide and overview ... 85
7.2 Interview: Firm characteristics ... 89
7.3 Interview: Motivations for internationalization ... 92
7.4 Interview: Internal organization ... 94
7.5 Interview: Strategic positioning ... 97
8.
Interview Transcripts ... 103
8.1 Firm characteristics – CEO ... 103
8.2 Motivations for internationalization – Commercial director ... 106
8.3 Motivations for internationalization – Investor A ... 109
8.4 Motivations for internationalization – Investor B ... 110
8.5 Internal organization – Account manager ... 112
8.6 Internal organization – Financial manager/ HRM ... 115
8.7 Internal organization – Procurement manager ... 118
8.8 Strategic positioning – CEO ... 123
8.9 Strategic positioning – Commercial director ... 128
8.10 Strategic positioning – Investor A ... 133
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LIST OF TABLES
1 Key characteristics of different entry modes (Hill et al., 1990; Efrat and Shoham, 2013) 13
2 PEST-analysis components 19
3 Overview of different types of market competition (Besanko et al, 2013, p. 173) 19
4 Overview of the three ‘basic’ organizational structures (Flamholtz, 1990) 21
5 SWOT matrix (adapted from Hay & Castilla, 2006) 24
6 Results of the survey regarding the motivation/reason for internal expansion 32
7 Results of the survey regarding the motivation/reason for internal expansion 32
8 Assessment of company X’s organizational structure (based on survey) 35
9 Assessment of company X’s organizational culture (based on survey) 38
10 Differences between the 2 different types of contracting for street lighting (Berliner
Energieagentur GmbH, 2013) 42
11 Overview of financing possibilities for street lighting modernization 43
12 Overview of company X’s competitors in Germany 45
13 Results of the strategic focus survey, divided by Porter‘s (1980) scale 51
14 Overview of company X’s SWOT analysis regarding the German market 53
LIST OF FIGURES
1 Illustration of the observations/findings regarding the choice of market entry strategy based
on current literature 15
2 Business Model Canvas (adapted from Osterwalder & Pigneur, 2010) 18
3 Five forces that shape industry competition (Porter, 2008) 20
4 Culture Traits Framework (adapted from Denison & Mishra, 1995; p.216) 22
5 Three Generic Strategies (adapted from Porter, 1980; p.39) 23
6 Conceptual research model regarding determining factors for a feasible market entry strategy 25
7 Value chain company X 29
8 Business model of company X 30
9 Organizational structure of company X (U-form) 34
10 Technical condition of German street lighting systems (dena, 2012) 40
11 Cost-structure of street lighting management (dena, 2012) 40
12 Share of mercury vapour lamps in communal street lighting (dena, 2012) 41
13 Usage of LED-lighting (in %) in public street lighting (dena, 2012) 41
14 Most mentioned reasons by public street lighting owners why NOT to modernize (dena,
2012) 42
15 Ownership/possession distribution of public street lighting (dena, 2012) 42
16 Management modules of communal street lighting (dena, 2012) 42
17 Smart Lighting Control System Industry Analysis (Porter’s five forces, 2008) 46
18 Setup of company X’s competitive advantage 50
19 Summary and illustration of analysis results of company X and their interdependence 55
20 Illustration of the proposed go-to-market strategy for company X regarding the German
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INTRODUCTION
This introduction is dived in several parts. First, company X is introduced as it is the object of this research, which is followed by the presentation of company X’s business problem. Thirdly, the theoretical relevance of studying this subject matter is explained. Fourthly, the here from resulting literature gap and subsequent research question are introduced. Next, the link between theory and practice is explained. The last part includes an overview of how this research was structured.
Introduction of company X
The high-tech company X was officially founded in 2011 and operates in the area of intelligent system control for street lightening. This is a new market niche with large potential and the company aims to be the pioneer in this industry with its patented dynamic lighting control technology. More specifically, the firm desires to be one of the top 5 lighting control companies in the world. However, this mission creates challenges: Even though company X has grown by 3000% since its establishment (based on number on employees) and accomplished international (press) recognition, further growth is necessary to be profitable and secure a leading market position. However, since the market demand in the firm’s home market (The Netherlands) is limited, there is a need for international expansion to increase sales and market share.
Business problem
This situation faced by company X, is common for young high-tech firms. Young high-tech firms are characterized as an independent entity that is maximal five years old, flexible, innovative and opportunistic in nature, and has a strong scientific-technical base (Berry, 1998). As such, they resemble a certain strategic type of firm what Miles et al. (1978) call the ‘prospector’ with the main characteristics including innovativeness, risk-taking and proactiveness, because those firms are focused on exploring, identifying and exploiting new market/ product opportunities. In regard to this, young, high-tech firms usually have very specialized, innovative products/services which reach the maturity stage in the home market (especially in small countries) fairly quickly which results in limited market demand. As a consequence, such firms are often looking to internationalize early on in order to survive and/or to increase their profitability and market access (Crick and Spence, 2005; Zhou et al., 2012). However, issues regarding the need of a sufficient resource base, the presence of new liabilities and the firm’s unfamiliarity with the new environment makes internationalization a costly and risky expansion strategy according to traditional internationalization literature (Brouthers and Nakos, 2005; Knight, 2001; Kocak and Abimola, 2009). Based on that, young high-tech firms must make a careful choice regarding the most appropriate market entry mode in order to successfully internationalize (Burgel and Murray, 2000). However, many of these young, inexperienced firms, such as company X, struggle to select the best fitting market entry mode due to uncertainties. In their case, company X has faced difficulties in extending its market to the neighboring Germany. The problem statement of this study is therefore: Company X has difficulties in developing a feasible market entry strategy
for the German market. Theoretical relevance
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internationalization strategies (and hence, entry modes) became increasingly important lately due to the issue of globalization (Burgel and Murray, 2000; Efrat and Shoham, 2013). However, studies of the choice of market entry modes and what led to it mostly focused on firms who internationalized the ‘traditional’ way (thus, first establishing a solid market position in the home country before expanding to foreign markets) and not on firms that are internationalizing when they are still young and small (Efrat und Shoham, 2013). As mentioned, scholars agree that the right choice of the market entry mode is of utter importance for young high-tech firms due to resource scarcity (Burgel and Murray, 2000; Efrat and Shoham, 2013). However, little is known about which factors determine the choice of an appropriate market entry strategy regarding young (high-tech) firms. Instead, scholars extensively described which entry modes are most often chosen by a particular type of firm, without explaining what led to this choice (Burgel and Murray, 2000). Based on this issue, Efrat and Shoham (2013) recently attempted to identify factors which are influencing the entry mode choice of born globals, and proposed that the external environment of the host country has a major influence. However, additional research needs to be conducted to further explain the process and determining factors which influence the choice of market entry modes in the context of young high-tech firms, in order to derive a deep understanding of this issue and offer sound managerial implications.
Literature gap and research objective/ questions
Based on the theoretical relevance, there is a literature gap regarding a common understanding of how young high-tech firms choose the most appropriate market entry strategy when expanding internationally. It is therefore of great interest to study this topic more thoroughly and identify which factors are most influential during the process of internationalization. Additionally, studies in this direction might help to solve the business problem of company X and may result in specific guidelines for young high-tech firm owners/managers. This in turn, may improve the chance of survival and/or success regarding young firms during the internationalization process. In conclusion, this research attempts to solve the stated business problem by filling the literature gap through performing an in-depth case study of company X. The resulting research question is therefore: “What is a feasible market entry strategy for young high-tech firms?” Based on this main research question, the following sub-questions have to be answered as well to fully understand the concept of firm growth regarding internationalization:
Why do young high-tech firms internationalize early in their life-cycle?
What are different types of strategic entry modes?
What types of entry modes/strategies are most often chosen by young high-tech firms?
Which factors determine the appropriate choice of an entry mode/strategy?
Link between theory and practice
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(based on the German market), which results in a proposal of the most suitable market entry strategy for company X, solving the business problem. Additionally, the elaborate study of company X also contributes to filling the described literature gap, because company X is used as a case study of a young high-tech firm that pursues international expansion. More specifically, the specific findings of company X are converted into a more generic solution, based on the process of conceptualization (Hennink, Hutter & Bailey, 2011). Hence in conclusion, this research is based on an academic problem solving approach in order solve the business problem as well as filling the literature gap (based on the research question). The exact approach is described in more detail in the methodology chapter of this paper.
Structure of the study
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LITERATURE REVIEW
A firm can either grow domestically or by expanding into foreign markets. The latter is commonly called international expansion or internationalization and is usually the most complex form of firm growth as well as the focus of this research (Fernandez & Nieto, 2005). In order to develop a feasible strategy for international expansion, the concept of firm growth in general as well as in connection with internationalization should be fully understood. Hence, the following literature review is structured as follows: First a short definition of general firm growth will be given, which is followed by an explanation of the causal mechanisms of firm growth. More specifically, Penrose’s (1959) resource-based theory of sustainable firm growth is evaluated, where the core idea is that firms are administrative entities made up of potentially valuable resources and it is the manager’s function to decide what resources to deploy and what activities to carry out in order to gain a competitive advantage (Penrose, 1959).
The next part presents a detailed evaluation regarding internationalization as a growth strategy and its meaning for young high-tech firms. Thereafter, possible market entry modes are introduced and current findings of academic literature regarding the choice of young high-tech firms are presented. Together, these three sections (firm growth, internationalization and market entry modes) will provide a general understanding of the concept of internationalization and as well as they answer the first three sub- (research) questions: Why do young high-tech firms internationalize early in their life-cycle? What are different types
of strategic entry modes? What types of entry modes/strategies are most often chosen by young high-tech firms?
Based on the described importance of resources by Penrose (1959) as well as the findings by academic literature regarding the risks of international expansion (e.g. resource constraints, environmental uncertainties, management shortcomings), the last section of the literature review includes the concept of strategic analysis. More specifically, firms must find a fit regarding the firm characteristics/dynamics and the external environment in order to develop a feasible market entry strategy, which makes a detailed analysis of both necessary. Finally, the overall findings of the literature review will be combined to form a conceptual research model that will serve as the basis for the subsequent empirical research.
Firm Growth Defining firm growth
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The process of firm growthThe probably most popular as well as most lasting influential work about the growth process of a firm is Penrose’s (1959) resource-based growth theory (Lockett and Wild, 2013). The core idea of the theory is that firms are administrative entities made up of potentially valuable resources and it is the manager’s function to decide what resources to deploy and what activities to carry out in order to gain a competitive advantage (Penrose, 1959). More specifically, her work presents an explanatory logic of how a firm’s resources, capabilities, productive opportunities and profitable firm growth are linked together to form a competitive advantage (Kor and Mahoney, 2004). Hence, Penrose (1959) argues that profitable growth is the result of the ‘right’ choices between the available resource base of a firm and firm-level performance in order to achieve an optimal rate of growth (neglecting such critical factors about the rate and direction of firm growth can create inefficiencies and ultimately lead to a loss of the competitive advantage). Additionally, a firm should always keep close attention to the present capabilities and knowledge bases over time, and innovate/ adapt the combination of such in order to renew economic value and protect the current competitive advantage (Kor and Mahoney, 2004). Hence, all-in-all, the key ideas of Penrose’s (1959) resource based growth theory are about the creation of a competitive advantage, efficiency, economic profit and profitable growth through the effective use and combination of a firm’s resources.
Internationalization as a growth strategy
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successful expansion. Thus, literature argues that certain conditions must be met for successful internationalization. As such, Oviatt and McDougall (1994) propose that small firms are able to successfully internationalize early, if they have valuable and inimitable resources, if internal communication and structures are efficient and if the host market is very similar to the home market. Empirical research confirmed the importance of such unique and valuable resources/capabilities for internationalization (Knight and Cavusgil, 2004), which is in line with Penrose’s (1959) resource-based growth strategy and the complementary resource-based view of Barney (1991). This is supported by other studies, because the environment of high-tech firms is often volatile and thus, firms operating in such an environment have to be dynamic in order to be able to respond to changing market conditions. Therefore, results from Crick and Spence’s (2005) study show, that the internationalization process of small high-tech firms is repetitive in nature and strategies are created rather ‘ad hoc’ instead of being a result of long-term, systematic planning. More specifically, successful international expansion strategies of small high-tech firms are found to be based on entrepreneurial orientation, short-term goals, and opportunistic strategies (Boter and Holmquist, 1996). Thus, the often used stage-models of corporate growth are not very applicable. Instead, one should acknowledge the value of resource-based theories and networking as well as paying attention to external changes (Crick and Spence, 2005). As such, Li et al. (2012) found that young, high-tech firms are able to enter new markets successfully, if they have a high R&D intensity, efficient advertising, and effective alliances, because it improves the firms’ overall performance. Moreover, firms that are active in high-tech industries are found not only to internationalize more rapidly than firms in other industries, they also use different market entry strategies as will be described in the next section (Crick and Spence, 2005; Oviatt and McDougall, 1994). In summary, young small high-tech firms are able to expand internationally faster than the common SME if they are flexible, possess of unique and inimitable (intangible) resources, an entrepreneurial/opportunistic mindset, efficient internal communication and management, low market demand in the home-country, and the need to recover R&D costs quickly (profitability seeking).
Market entry modes
If a young high-tech firm plans to expand internationally successfully, the right choice of the market entry strategy is of utter importance due to resource scarcity (Burgel and Murray, 2000). According to Hill, Hwang and Kim (1990), there are three general modes of foreign market entry which are differentiated by the degree of resource commitment, dissemination risk and level of control (see table 1 for an overview). Next to that, a firm can also choose to merely export their products/ services to the new market either indirectly or directly via an agent or distributor (Efrat and Shoham, 2013). This kind of growth obviously comprises the lowest level of commitment and risk, but it is also a low-control entry mode.
Table 1: Key characteristics of different entry modes (Hill et al., 1990; Efrat and Shoham, 2013)
Entry Mode Control Resource
commitment Dissemination risk Export
(direct/indirect) Low Low Low
Contractual
(licensing/ franchising) Low Low High
Shared Equity
(joint venturing/ alliance) Medium Medium Medium
Full equity
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According to Hill et al. (1990), the first entry mode involves that a firm establishes a contractual relationship (such as to franchise or to license its business) in the new market which results in a non-equity entry mode. This hybrid entry mode has the advantage, that the home-country firm does not have to invest heavily in the new market and is therefore, less exposed to risks. Nevertheless, since control over the franchisees/licensees is low, it could lead to a bad brand reputation if they do not act in the best interest and dissemination risk is high. The second mode is that a firm could establish an alliance or joint venture with a local partner (or more) in the foreign market which results in an equity-based cooperative (hybrid) entry mode and is most appropriate in a market where environmental uncertainty is high (Luo 2001). This entry mode has the advantage that risks are shared and the firm in the home country can benefit from the knowledge and experience of the foreign partner. However, profits must also be shared, control is limited, and the requirements for trust and commitment for both parties are high (Burgel and Murray, 2000). The third mode is that a firm has the choice to enter a new market based on full equity by establishing a wholly owned subsidiary through acquisition or Greenfield investment. This entry mode offers the highest degree of control, but also involves high costs and resource commitment which makes this entry mode risky, because it takes longer to become profitable due to the high investments (Teece, 1982). Hence, in general a firm has to choose between an export-, contractual- or equity type of entry mode with each one requiring different levels of involvement in terms of risk, commitment, and control (Efrat and Shoham, 2013). Therefore, small firms must make a careful choice regarding the entry mode (involving complex and very strategic trade-offs), because it may have severe consequences for both the generation of costs and revenues, and therefore performance and ultimately survival (Burgel and Murray, 2000; Zhou et al., 2012).
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distinctive strategic orientation is the underlying reason why it operates differently than its competitors in the same environment (Dess and Davis, 1984). Based on the four different types of strategic orientation, young high-tech firms are usually found to be ‘prospectors’ due to their entrepreneurial orientation (Knight and Cavusgil, 2004). However, the ‘right’ strategic orientation is not sufficient: Efrat and Shohman (2013) argue that the strategic orientation of a firm should be aligned with the external environment, because the latter influences a firm’s (international) performance (Miller, 1992). Therefore, it is important to analyze the potential risks in a foreign market thoroughly. More specifically, risks regarding the country- as well as market-level should be taken into account: Country-level risks involve uncertainties regarding the political, economic and cultural circumstances in a particular host country, whereas market-level risks are derived from the market potential and competitive intensity (Whitelock, 2002; Efrat and Shahom, 2013). To summarize, results of the study by Efrat and Shahom (2013) indicate that ‘prospector’ oriented high-tech firms favor high-commitment entry modes if there is environmental stability and a potentially large market. In turn, if uncertainties regarding the country- or market-level risks are very high, low-commitment entry modes are favored.
In summary, young high-tech firms prefer low-commitment entry modes when the perceived environmental risks are high and/or when the firm has a significant lack to resources (financial and/or knowledge). Moreover, young-high tech firms favor high-commitment entry modes, if perceived environmental risks are low and/or if a high level of dissemination risk is present. In this study, low-/medium-commitment entry strategies involve export, contractual, and shared equity modes; whereas high-commitment entry strategies are considered as full-equity modes. The above is based on the assumption, that the firm is a ‘prospector’ possessing of key attributes known to young high-tech firms. Moreover, motivations to engage into international expansion are included as well. Those findings are summarized in figure 1.
Figure 1: Illustration of the observations/findings regarding the choice of market entry strategy based on current literature
MARKET ENTRY MODES
Motivators for international
expansion:
- Limited home market demand - Need to recover (R&D) costs
quickly Firm characteristics: - Innovative - Risk taking - Proactive - Flexible - Young - High-tech based Expansion seeking ‘Prospector’ (young high-tech firm)
Low- to medium commitment: - Export (direct vs. indirect) - Contractual (licensing, franchising) - Shared Equity (alliance, joint venture)
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When combining the theory about the growth process of a firm to the earlier described characteristics of young, high-tech firms (see figure 1), it can be argued that the dynamic capabilities of high-tech firms enable them to manage their resources in a way to outperform competitors (Wu, 2007). Especially in dynamic and unstable environments research has shown that the development and enhancement of such dynamic capabilities (hence, improving the resource base) are necessary for survival which is in line with Penrose’s (1959) theory. Additionally, Wu (2007) found that abundant entrepreneurial resources within a high-tech based firm (which are especially present in such firms due to their innovativeness) are likely to raise the readiness of external parties to join into cooperative networking activities. At the same time, the enhancement of dynamic capabilities is also spurred through an effective, cooperative network. Conclusively, the successful performance of a high-tech firm can be explained by the resource-based growth theory by Penrose (1959) due to the firm’s ability to manage their dynamic capabilities so to outperform competitors. The findings of Wu (2007) suggest that entrepreneurial resources are also important for finding cooperative partners for efficient networking. This is applicable to medium commitment entry mode strategies by which young high-tech firms seek internationalization through cooperation with external parties (e.g. alliance). Hence, a young high-tech firm’s entrepreneurial resources and dynamic capabilities may be crucial for a successful business expansion. Based on this, the following part deals with strategic analysis, which combines the organizational level (internal analysis regarding resources, capabilities, strategy, boundaries, structure, culture etc.) with the external environment (level of competition, market structure and dynamics).
Strategic Analysis
In order to develop a feasible market entry strategy, a firm must find a fit regarding the firm characteristics/dynamics and the external environment. Hence, a (market entry) strategy refers to the choice of a business model through which the firm will compete in the market place (Casadesus-Masanell & Ricart, 2010). More specifically, a strategy involves the creation of a unique and valuable position, involving a different set of activities (Porter, 1996). In regard to this, strategic planning broadly involves the decision-making process about the future direction of an organization as well as the organizational capabilities that are needed to achieve the organization’s goals (Flamholtz, 1990). Additionally, it involves the analysis of the firm’s external environment to assess future opportunities and threats, formulation of objectives and specific goals as well as the development of an action plan to attain them. Another important factor an effective strategy deals with the internal capabilities of an organization required for future growth. As such, a good strategy defines the company’s market segment/ niche and can create a sustainable competitive advantage (Flamholtz, 1990).
This study will focus on the economic perspective regarding strategic analysis, because this approach requires the analyst to be very precise about all key elements involved in a specific process (Besanko et al, 2013). Thus, the following objects of the economic model have to be identified as thoroughly as possible:
Decision makers (who are actively involved?), goals (what is pursued by the decision makers?), choices
(what kind of actions are considered?), and the relationship between choices and outcomes (what are the causal mechanisms? Is uncertainty present which may complicate the relationship?).
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(potential) external environment. Based on this, firms can develop feasible strategies for the future, such as a market entry strategy.
Firm boundaries
Essentially, a firm’s boundaries define what is inside the company regarding capabilities/resources and operations. Moreover, they determine the conditions for the division of labor in regard to other firms (Gadde, 2014). Thus, there are horizontal boundaries (referring to economics of scale and scope) and vertical boundaries (referring to the issue of make vs. buy (or both)), which will be presented in more detail in the following. It is important to note, that the definition/redesign of a firm’s boundaries is crucial for organizational design due to issues of efficiency and effectiveness, and thus competitiveness (Jacobides and Billinger, 2006; Pisano and Shih, 2009). Moreover, firm boundaries are dynamic in nature as well as interdependent: if one type of boundary is changed, it affects other types of boundaries. Thus, firm boundaries are “constantly created and recreated, drawn and redrawn, constructed and reconstructed,
negotiated and renegotiated” (Paulsen and Hernes, 2003; p.303). Therefore, the definition of a firm’s
boundaries is essential when developing a market entry strategy in order to choose the most feasible organizational design.
Horizontal boundaries refer to economics of scale and scope. The former can allow firms to achieve cost advantages over their competitors by spreading fixed costs over a (increased) range of output. The latter describes the situation where firms achieve savings by increasing the variety of the produced products/services. Thus, it describes the idea that is more cost efficient for a firm to produce both products A and B, instead of one firm only produces product A and the other product B. As such, a firm’s horizontal
boundaries identify the variety and quantity of the firm’s products/services (Besanko et al, 2013). Vertical boundaries describe to what extent a firm ‘buys’ (firm relies on other firm(s) to perform an activity)
or ‘makes’ (firm performs an activity itself) a product/service (Jacobides and Billinger, 2006). Moreover, often it is not a question of ‘either or’, but rather a question of ‘how much’. Thus, a firm can choose for a hybrid form, by both ‘making’ and ‘buying’ a product in order to e.g. increase knowledge sharing and coordination (Conner and Prahalad, 1996) or to increase flexibility (Grant, 2005). Hence, the vertical boundaries of a firm describe the extent of integration of upstream/downstream activities within the ‘vertical’ value chain of a company (Besanko et al, 2013).
Moreover, an effective way to achieve an overview about a firm is to have a look at the firm’s business model. According to Osterwalder and Pigneur (2010), a business model describes “the rationale of how an
organization creates, delivers, and captures value” (p. 14). Based on this, a business model consists of four
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Figure 2: Business Model Canvas (adapted from Osterwalder & Pigneur, 2010)
External environment
A careful analysis of a firm’s external environment is crucial for developing and executing strategies successfully. In essence, businesses must fully understand the market they are competing in, since successful performance is neither the outcome of chance nor accident according to Porter’s (2008) influential work of
Competitive Strategy. Therefore, the following will deal with the components of a market and competitive
analysis, namely an evaluation of the overall environmental conditions (PEST-analysis) as well as a careful identification of competitors and the assessment of the degree of competition based on industry analysis (Porter, 199; Besanko et al, 2013).
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Political- Government stability - Tax policy
- Environmental law (street lighting)
- Copyright, patents/ Intellectual property law - Establishment of companies
- (Foreign) Investment regulations - Labor market
Economic
- Growth rates - Inflation rate
- Trade flows and patterns - Price fluctuations - Economic freedom
Socio- Cultural
- Cultural dimensions
- Attitudes toward saving and investing
- Attitude toward product quality/customer service - Attitudes toward “green” or ecological products - Emphasis on safety
Technological
- Rate of technological change
- Spending on research & development - Technology incentives
- Technology level in industry in question - Communication infrastructure
- Access to newest technology
Table 2: PEST-analysis components
Having identified the external environment conditions, the entering firm has to perform a competitor analysis. Logically, a competitor analysis cannot be performed when the competitors are unknown. In order to identify competitors, one starts with the idea that “competitors are the firms whose strategic choices directly affect
one another” (Besanko et al, 2013; p. 166). Based on this, the following method can be applied to identify
competitors: Firms that produce similar products (substitutes) compared to the particular firm in question, are likely to operate in the same market and are thus, competitors. As such, firms are competitors when the following three conditions apply (Besanko et al, 2013): First, the other firm’s product has similar performance characteristics. Second, both products have similar occasions for use. Lastly, both products are sold in the same (geographic) market. Having defined all possible competitors, it is also important to identify the degree of competition within a given market. Based on this, a market structure/concentration represents the amount and distribution of companies (hence, a market structure can range from perfect competition to a monopoly) and significantly affects the financial performance of the present firms. This is commonly measured by the Herfindahl index, which squares the market share of each competing firm and sums the resulting numbers. Table 3 provides an overview of four types of market structure.
Competitive nature Herfindahl value Intensity of competition (based on price)
Perfect competition < 0.2 Fierce
Monopolistic competition Usually < 0.2 Depending on product differentiation: fierce or light Oligopoly Between 0.2 and 0.6 Depending on firm rivalry: fierce or light
Monopoly > 0.6 Light (unless threatened by new entry)
Table 3: Overview of different types of market competition (Besanko et al, 2013, p. 173)
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of suppliers, because a very powerful supplier (e.g. supplier that offers an important, but highly differentiated
input product) can transfer part of the value to itself by e.g. asking high prices. If this is the case, powerful suppliers can eliminate market profitability, when the firm is unable to pass the higher price on to its customers (Porter, 2008). The third force involves the power of buyers and is therefore, the flip-side of the second force. Powerful buyers can erode the profitability of a market, if they are able to negotiate very low prices or demand very high quality products/services (which lead to increased costs for the firm). The forth force is about assessing the threat of substitutes. If this threat is very high, through e.g. the switching costs are low for buyers or there is a better price-performance trade-off in the market, it can erode market profitability (and often also growth potential) due to lower product prices and demand. The final force of Porter’s (2008) model that is of utter importance is the rivalry among existing competitors. Rivalry can limit the profitability of a market and emerges due to e.g. fierce price competition, new innovative products/services, or very convincing advertising campaigns. Thus, it is not only the intensity of competition that is important, but also the basis of competition. For example, fierce price competition is likely to be more harmful to market profitability, because it directly redistributes value from the market to the customer. On the other hand, competition that is based on other dimensions than solely price (e.g. differentiated product, brand image, etc.), is less likely to limit profitability due to improved customer value which supports high prices (Porter, 2008). Hence, all five forces influence the structure and therefore, the profitability of a market, with the first four forces influencing the last force (degree of rivalry) as illustrated above. Moreover, the influence of factors (not forces!), such as the government of complementary products/services, should be analyzed for each force separately, because such factors are neither always good nor bad.
Figure 3: Five forces that shape industry competition (Porter, 2008)
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Internal organizationIn order to implement a business strategy successfully, the internal organization must be aligned with it (Besanko et al, 2013). In short, the organization of a business depicts the way of how resources will be utilized and how information is spread throughout the business. Additionally, adequate internal organization is able to align the interests of individuals within the firm with the overall goals of the firm. Hence, the internal organization in terms of culture and structure of a business is very relevant to the execution of (market entry) strategies and has thus, major impact on firm performance (Meijaard, Brand & Mosselman, 2005).
Every business that starts hiring employees has to decide on a certain organizational design, and hence structure. Usually, the actual structure of a firm is a combination of deliberate choices and emergent, unconscious developments regarding the division of responsibilities, privileges and the presence of control mechanisms (Meijaard et al. 2005). Based on this, the division of labor and mechanisms of coordination depict the firm’s complexity of structure (Mintzberg, 1979; Meijaard et al. 2005), where the former is about the distribution of activities and tasks (degree of specialization), whereas the latter is concerned with the degree of standardization and formalization (presence of fixed procedures and codes). Moreover, the level of centralization (locus of authority regarding decision-making) is major determinant for the classification of coordination, for which Mintzberg (1979) introduced three different types, namely standardization, mutual adjustment and direct control. Based on the above, there are three main forms of organizational structure (see overview in table 4) with an indefinite number of hybrids existing between those basic forms (Flamholtz, 1990; Harris & Raviv, 2002). The functional structure (also called U-form) illustrates the situation where separate departments are present for different functional specializations. If firms have a divisional structure (M-form), divisions a created based on different sets of products or customers. Lastly, the matrix structure is a combination of the previous two (Meijaard et al, 2005). Each structure has its advantages and disadvantages as can be seen in table 4.
Functional Structure (U-Form)
Divisional structure
(M-form) Matrix structure
Description
Roles are organized according to the various functions that have to be performed to achieve the firm’s overall mission, e.g. engineering, sales, personnel,
finance, etc.
Groups related clusters of products and customers together. Thus, creation of divisions for e.g. electronic
devices, corporate service, etc.
Tries to achieve the best from the prior two structures: Various functional areas with each various
programs, projects, products and an overall manager.
Advantage
Provides for greater specialization of function,
allows people to develop very specialized skills in each
area.
Creates focus on specific market segments
Permits focus on the customer and the project and also allows for functional specialization
Dis-advantage
As the firm size increases, the focus of its executive is
spread so thin that certain products receive considerable attention while others are not.
Results in duplication of functions in different divisions and creates the need
for coordinating among divisions
Requires a high degree of coordination to be effective
Table 4: Overview of the three ‘basic’ organizational structures (Flamholtz, 1990)
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Organizational culture and effectiveness can be investigated based on four traits: involvement, adaptability, consistency and mission. The first tow traits (involvement and adaptability) are indicating the degree of openness, responsiveness and flexibility within an organization and highly correlated to firm growth. The latter two traits (consistency and mission) indicate the level of integration, vision, and direction and are correlated with profitability. Moreover, Denison & Mishra (1995) state that all four traits are good indicators regarding quality, employee satisfaction, and overall performance, which together determine the efficiency of a business (for an overview of the culture traits framework see figure 4). However, it should be noted, that the described four traits do not directly represent the culture of a firm. Rather, the four traits are summarized characteristics of the processes and culture of a certain business. However, since culture is a broad and intangible concept that is difficult to measure and assess correctly, the use of a trait concept is most appropriate given the purpose of this paper (developing a feasible market entry strategy by analyzing all aspects of a company (internal and external), that influence performance, growth, and/or efficiency.
External
Orientation
Adaptability
Mission
Internal
Integration
Involvement
Consistency
Change & Flexibility
Stability & Direction
Figure 4: Culture Traits Framework (adapted from Denison & Mishra, 1995; p.216)
In conclusion, the organizational culture and structure of a firm has a major impact on the successful performance of a firm as well as its degree of (sales) growth. Moreover, the organizational structure is also part a firm’s strategy, where ‘structure follows strategy’ (Besanko et al., 2013). Based on this, organizational structure is a dynamic concept that should be adapted or revised if the firm’s strategy changes, for example due to new market entry.
Strategic positioning
This last section deals with of how a firm competes and on what basis. In that sense, a superior strategic position is able to achieve a sustainable competitive advantage by retaining the distinctiveness of a firm (Porter, 1996). Based on that, it concerns all resources and capabilities that are involved in the firm’s competitive advantage. Logically, entering a foreign market successfully is only possible when a firm is able to position itself adequately within the new market. Moreover, the strategic orientation of a firm is often connected to the ability to deal adequately with challenges and uncertainties. Therefore, the following discusses strategic orientation, options of strategic focus, the underlying concept of a competitive advantage, level of innovativeness, and the importance of strategic marketing. Finally, the concept of SWOT-analysis is introduced as a tool to achieve an overall overview of the different parts of strategic analysis.
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As such, firms with EO are found to better find and/or discover new (market) opportunities, which differentiates them from competitors and can therefore, create a competitive advantage (Wiklund & Shepherd, 2005). Moreover, empirical results show that the effect of EO is always positive, despite of differing environmental conditions and access to finance (however, EO has the strongest effect in stable environments with limited access to finance, because it can help to overcome resource constraints). Therefore, it is important to assess the degree of EO of young (high-tech) firms, because a high level of EO may be beneficial and more importantly, influential for a successful market strategy.
According to Porter (1980), there are three generic strategic positions firms pursue. The first one describes the situation where a firm is able to produce it goods more efficiently than competitors and is thus able to lower prices. This is called a “cost advantage” and is a strategic position often chosen by larger firms due to mass production and thus, significant economies of scale. Secondly, firms can choose to outperform competitors by offering products/services that provide more benefits (e.g. quality) which makes them unique compared to competitors. This is called “differentiation”, and results in high switching-costs for consumers. Both the cost advantage and differentiation strategy is about broad-coverage (industry wide). The last possible strategic position is called “focus” which describes the situation where a firm ‘specializes’ in certain customer group, geographic area or product type, thus only concentrates on a specific segment. Of course, it is possible for a firm to pursue a mix of the mentioned options. However, this usually does not lead to superior performance, because it is unlikely that a firm is excellent in everything (problem of “stuck in the middle”). Lastly, a firm should consider the reaction of competitors regarding the choice of a strategic focus (Porter, 1980). For an overview of the three generic strategies see figure 5.
STRATEGIC ADVANTAGE ST R A TE G IC TA R G ET Uniqueness Perceived
by the Customer Low Cost Position
Industry wide Differentiation Overall Cost Leadership
Particular
Segment Only Focus
Figure 5: Three Generic Strategies (adapted from Porter, 1980; p.39)
This paper already mentioned several times the term ‘sustainable competitive advantage’, without explicitly explaining it. However, it is important to understand the sources that form a (sustainable) competitive advantage, because it can help in designing the most feasible market entry strategy. According to (Barney, 1991), a sustainable competitive advantage is a “strategy not simultaneously being implemented by any
current or potential competitor […] and is sustained if it continues to exist after efforts to duplicate that advantage have ceased” (p.102). This definition is based on the assumption that firm’s resources are
heterogeneous and not perfectly mobile (Barney, 1991). Moreover, resources must full-fill several criteria in order to have the potential for a sustainable competitive advantage. More specifically, a resource must be ‘VRIN’: valuable (able to exploit opportunities and/or neutralize threats in the external environment), rare (regarding the firm’s competition, both current and potential), imperfectly imitable, and non-substitutable
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(non-existence of strategically equivalent substitutes). Impediments to imitation can be the result of legal restrictions, superior access to inputs/ customers and/or size and scale economies. Moreover, causal ambiguity (simply do not understand the causes of the competitive advantage), history (e.g. learning curve), or social complexity can make a resource imitable (Barney, 1991).
Since company X is a high-tech business, it is also important to assess their actual level of innovativeness, because this is likely to be one of the most important strengths. Moreover, innovation is often linked to sales-growth regarding young high-tech firms (Carden 2005; Coad & Rao, 2008). However, measuring innovativeness is not an easy task and approaches are incoherent throughout literature. Possible innovation indicators include investments in R&D, patent counts, patent citations and/or new product announcements (Hagedoorn & Cloodt, 2002). This paper will make use of a combination of two innovation measures, namely the number of patents applied for by the company and the amount of R&D undertaken (Coad & Rao, 2008). Since both measures have drawbacks when considered individually, a combination of them is more likely to correctly represent the level of innovativeness (e.g. the consideration of only the number of patents is unlikely to be an exact measure of innovation, because not all innovations are patented. R&D investments on the other hand, are also not a sufficient measure for innovation, because it may lead to an underestimation of the innovativeness of a small firm, because many innovations are done informally outside the ‘R&D-lab’ (Coad & Rao, 2008)). Thus, combining the amount of R&D (input of innovative efforts) and patents (output of innovative efforts) will provide a more complete picture of firm innovativeness.
The design of a feasible market strategy is a complex process as seen in the above sections, with success being dependent on the correct fit between the firm’s resources/capabilities and the external environment (Houben, Lenie & Vanhoof, 1999). A helpful planning tool is conducting a SWOT analysis. SWOT stands for the strengths and weaknesses of a specific firm and the firm specific opportunities and threats that originate from the environment (see SWOT matrix in table 5). Based on what was discussed previously, a SWOT analysis ‘summarizes’ the results of the several strategic analysis tools introduced in this paper. As such, the results of the identified competitive advantage and internal analysis represent the ‘strengths’ and ‘weaknesses’ of the firm, whereas the results from the industry analysis (Porter, 2008) and environment evaluation (PEST analysis) are synonymous with the environmental ‘threats’ and ‘opportunities’ a firm faces. Together, they form an important step for the development of a feasible (market entry) strategy.
Helpful
to achieving the objective
Harmful
to achieving the objective
Internal
(attributes of the organization) Strengths Weaknesses
External
(attributes of the environment) Opportunities Threats
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Conceptual Research ModelBased on the theory described above, a conceptual research model was developed which illustrates the factors that determine a feasible market entry strategy (see figure 6). The ultimate goal of a feasible market entry strategy should always be performance based, such as firm growth and/or survival. Based on this, all actions undertaken in the internationalization process should incorporate this ultimate goal. In the course of this research, the specific goal of company X will be specified, however, it is out of scope to also evaluate the results of the proposed feasible market entry strategy (which is why that part is illustrated in dotted lines).
Figure 6: Conceptual research model regarding determining factors for a feasible market entry strategy
METHODOLOGY
As mentioned in the introduction, this research is founded on the academic problem solving approach. It is based on the problem-solving cycle, and most commonly used when there is a type of business problem that is interesting to examine and has not been addressed or solved in the literature in an adequate way (van Arken, Berends & van der Bij, 2012). Hence, the focus of this research is not only on the specific business problem of company X, but also on a generic type of business problem.
In general, a sound business problem-solving (BPS) project has to satisfy several quality criteria (van Arken et al., 2012). First of all, the primary objective of the research project should be performance-focused. In other words, performance improvements in means of developing a valuable solution for the specific (as well as generic) business problem is the most important outcome of the research project, whereas the analysis and design phase are ‘only’ means to achieve that. Secondly, a sound BPS project also has to be
design-oriented which means that I will control the activities during the research through a sound research-project
plan (see table 6) in order to overcome the issue of improvisation. Thirdly, the project has to be theory-based. This means that problem analysis and solution design should be based on comprehensive, critical and creative use of the literature in order to ensure the quality and validity of the research (use of object-, realization-, and process-knowledge). Fourthly, a sound BPS project should be justified in means of justifying the proposed solution towards the company in question, hence company X (description of the research process and why the solution will solve the problem). Finally, the project should be client-centred. This implies that the company as a whole should be treated respectfully.
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Moreover, in order to ensure the overall quality of this study, the research criteria of controllability, reliability and validity should be satisfied. In order to achieve this, I will rely on the guidelines proposed by van Arken et al. (2012). First of all, controllability - which is a prerequisite for the evaluation of validity and reliability (van Arken et al., 2012) - is ensured by a detailed description of how the study was conducted in the methodology section and thus, enables others to replicate the study. Secondly, the study should be controlled for researcher-, instrument-, respondent-, and circumstance-biases to ensure reliability. Since this paper is only coded by the author, researcher-bias cannot be controlled for, which might have decreased the inter-reliability of this study. To control for instrument-biases, multiple research instruments will serve as a basis for data collection which is called triangulation. More specifically, data such as in-depth interviews and observation (primary data) as well as documents (secondary data) will be collected. Additionally, respondent-biases will be controlled for by having as many individuals as possible in the respondent group from as many work areas as possible. Due to the limited size of the company, it is however, not possible to choose the respondents randomly. Finally, circumstance-biases will be controlled for by conducting the study at different points in time in order to avoid situational distortion. The last quality criterion of research is the issue of validity which depicts to what degree the results of a study are justified in the way they were generated (van Arken et al., 2012). This will be ensured by having my supervisor to overlook the interview questions (construct validity), and by studying the problem area from multiple perspectives (theoretical triangulation; internal validity).
Based on the above, a conceptual research plan (see table 6) was developed in order to systematically study the research question ‘What is a feasible market entry strategy for small high-tech firms?’. As such, the research plan (see appendix 1) illustrates the business phenomenon not adequately described in literature and the subsequent selection of the business problem of this study (“Company X difficulties in developing a feasible market entry strategy which decreases their chance of success or even survival”). Thereafter, the research plan depicts the process of analysis and diagnosis, which is followed by an illustration of the solution design and subsequent academic reflection.
Data collection and interview structure
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The choice of the appropriate interviewees for each interview was handled carefully, because only knowledgeable individuals are able to provide accurate and in-depth insights. Therefore, the decision regarding the appropriate interviewees was made jointly with the CEO of company X since he knows best about his employees’ competences and fields of expertise: The first interview (firm characteristics) was conducted with the CEO itself, because he founded the business and is thus most knowledgeable about the business model and boundaries of company X. Secondly, the interview about the reasons for internationalization was conducted with the commercial director (internal respondent) and the investor of company X (external respondent). This decision was made because the commercial director knows most about the direction of sales and future necessities of company X. The investor was also interviewed in order to gain an external perspective and discover possible misfits between the reasons/motivations of company X and the ones of the investor. The third interview (internal organization) was conducted with three respondents (sales manager, the financial/HR manager, and the procurement manager) due to the complexity and intangible nature of this topic. The financial manager can hereby be considered the most knowledgeable, since he joined company X in the very beginning. However, the other two respondents also know the company and its organization very well due to their long-term involvement in it. Finally, the interview about the strategic positioning was held with the CEO, the commercial director and the investor, because these three respondents are the main decision makers within company X and are thus most likely to have deep insight knowledge about the pursued strategy and why it was chosen. An overview of the respondents per interview can be seen in appendix 7.1. Moreover, additional informal interviews were held with other long-term employees as well as an ex-employee who played a big role during company X’s first business year. Those informal interviews (or talks) were helpful in gaining a complete picture of the nature of company X and how it evolved (and why).
Outline of Company X
The idea that eventually led to the foundation of Company X in 2011 first surfaced in 2009. The initial idea was to develop a system that would allow for significant energy savings which in turn reduces CO2 emission and light pollution. Based on this initial idea, a real business opportunity emerged that proposed a wireless sensor technology for motion-activated street/public lighting. Motion-detectors are nothing new itself; however, the technology that is required in order to implement such sensors in any environment (e.g. bad weather, small animals crossing the street, moving tree branches, strong wind, etc.) is what makes this business opportunity very innovative. The wireless motion-detecting technology was patented in 2014 and allows for up to 80% of energy savings and 50% of maintenance-costs, since the system not only able to provide light on demand, but is also able to track and report malfunctions in real-time.
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ANALYSISIn the following an in-depth analysis will evaluate and discuss all factors presented in the conceptual research model. Hence, the first part involves the nature and organization of company X, followed by an external analysis of the German market. The last part assesses the company’s strategic position as well as summarizes the identified strengths, weaknesses, opportunities, and threats (SWOT) which will eventually represent the basis for the formulation of a feasible market entry strategy.
Firm characteristics
Company X is active in the lighting control industry (mostly outdoor such as public (street) lighting and industrial lighting) and is jointly owned by the CEO (founder of the business) and the investor, whereby the latter owns more than 50%. However, the investor has no influence on the management or day-to-day activities of company X but only on investment issues. Instead - until the commercial director entered the company in spring 2014 - the decision authority was solely at the CEO, which reflects a centralized management system. Currently, it is still centralized but the decision authority lays jointly at the CEO and commercial director, hence the direction of the business. This is reflected in the CEO’s statement “many
things we decide together” (p. 103). In terms of business development, the company grew more than 3000%
(based on the number of employees) since its establishment. More specifically, the company started with just the founder in late December 2011. In 2012, five full-time employees and one part-timer were hired, which increased to fourteen full-time employees and two part-timers in 2013. This reflects a growth rate of more than 260% between 2012 and 2013. Moreover, in 2014 (current status) company X employs twenty-five full-timers and 6-parttimers (in several locations), which indicates an additional growth rate of 100% between 2013 and 2014. Sales increased in the same time span (2012 -2014) by more than 160%. However, due to the high investments in human resources, R&D, operations, and sales, company X had to register losses in each year, which increased between 2012 and 2014 by 850%. As explained in one of the next sections, the need for profitability is one of the major reasons for internationalization. Moreover, the following illustrates the current business model of company X as well as the firm boundaries.
Boundaries
As described in the literature review, every firm has horizontal and vertical boundaries. In terms of the former (economies of scale and scope), company X basically offers 4 different products, that can be combined to an all-encompassing solution for lighting control. The key-product hereby is the most advanced one and is also the product that differentiates company X from its competitors. It’s based on sensor technology and is currently in the premium-category, but company X wants to make it more suitable for mass-consumption, by “making it more affordable by lowering the prices” (CEO, p.105). The second product is a receiver that can be combined with product 1 which in turn makes the overall project cheaper for the customer. The third product is the cheapest version of the first product with only basic lighting control functions. As such, it is more of a strategic, affordable product (or “IKEA-product” (p.105) as the CEO calls it) for customers that cannot or do not want to invest a lot. The final product is kind of an internet-based platform from which “the lights can be remotely controlled” (CEO, p.105). In terms of scale, the company’s production volume increased by 43% in 2014. Based on the scale and scope and company X, the company can be classified as a specialist for (intelligent) lighting control with a rather narrow product range and a production volume that is not yet sufficient for a dominant market position.
