Market entry strategy for the Paspomaat

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WHAT’S IN A NAME?

Market entry strategy for the Paspomaat

Author: Elif Cengiz

Rijksuniversiteit Groningen

Faculty of Management and Organization 1st supervisor: R. de Vries

2nd supervisor: J. van Kesteren Supervisor Ergotrans: D. Eimers Apeldoorn, June 2006

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Preface

This thesis is written in the scope of my master International Business at the University of Groningen. I would like to thank my supervisors at the Faculty of Management and Organization, Rudi de Vries en Jos van Kesteren. Also my acknowledgement to my supervisor at Ergotrans Dick Eimers, and Jan Fraanje for their advice and feedback.

Special thanks for the executives at the municipalities for making time in their busy schedules for the interviews.

All the employees of Ergotrans, thank you for the nice time during my internship. At last but not least thanks to my family and friends for their support.

Elif Cengiz

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Management Summary

The objective of this research was to determine a strategy for Ergotrans to market the Paspomaat in Europe. The strategy included the selection of target countries and the choice of a market entry mode for these target countries.

Entry modes are classified in export entry modes, contractual entry modes and the investment entry modes. Export entry modes are indirect exporting, direct exporting through agent/distributor and direct exporting through branch/subsidiary. The production in the home country and the transfer to the target country is the main characteristic of export entry modes. Indirect exporting and direct exporting through agent/distributor require low resource commitment and are a low cost manner to go abroad. The disadvantage however is the low control over the foreign activities than with exporting through branch/subsidiary. Franchising, licensing, management contracts, construction/turnkey contracts and contract manufacturing are contractual entry modes. Franchising and licensing are the most common used and known. Both entry modes employ the same concept: transferring technology or human skills from the international company to the company in the target country. The difference however is that franchising also involves the transfer of marketing and management. The advantages of franchising and licensing are low cost and low political risk, but the control is low also. The investment entry modes are a sole venture: new establishment, sole venture: acquisition and joint venture: new establishment/acquisition. These entry modes require high resource commitment by the international company. This disadvantage is compensated by the high control over the foreign activities.

The market entry mode for the countries depends on several factors that can be divided in internal and external factors.

The internal factors are fixed and don’t vary per country and include the product factors, which consist firstly of the differentiation of the product. The product, the Paspomaat, is a unique system to store and transport valuable documents and differentiate itself from other products. Differentiated products offer the seller to set high prices, even if high tariffs and transportation costs are involved these products are profitable via exporting. The adaptation of the product shows if products need to be adapted per country. The fact that the Paspomaat is (merely) a standard system and little adaptations are needed, for example the software, no physical presence of the company and production unit is required in the target countries. The technological intensity of the Paspomaat is high and can lend itself for licensing or franchising. The technological intensity has also a risk: dissemination, but Ergotrans is willing to share the technology with partners. The Paspomaat is also a service and requires pre and especially after sales service. The current users of the Paspomaat emphasized the importance of quick service at potential problems. The service aspect of the Paspomaat obliges the seller to be near situated to the users. The resource commitment factors are the other part of the internal factors. The global

maturation of the firm and the willingness to commit resources are the factors within. Ergotrans does perform international activities, but is situated in the first stages of internationalization. Products are exported through distributors, which requires low commitment and offers low control. The willingness of Ergotrans to commit resources in the target countries is low. Ergotrans has no plans to invest highly in both capital and resources in order to serve the foreign market.

After the analysis of the internal factors, the selection of the most suitable target countries is the next step.

The research initially included fifteen countries in West Europe: Germany, Belgium, Luxembourg, United Kingdom, Ireland, France, Sweden, Norway, Finland, Denmark, Italy, Spain, Austria, Switzerland and Portugal.

In the preliminary screening of the countries, especially the process of issuing in the several countries was researched. All countries have the production of their documents at a central location, except for

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the Portuguese passport. The physical delivery of the documents pointed out differences between countries. In Ireland, the United Kingdom and Switzerland the applicants don’t need to collect their document in person at an issuing point, the document is posted to them. In all other countries the delivery takes place after the identification of the applicant in person at an issuing point.

The physical issuing points differ also. Sweden, Denmark, Finland, Norway, Spain and Italy issue the documents through police offices whereas in Germany, Belgium, Luxembourg, France and Austria the municipality is the physical issuing institution.

The Scandinavian countries (Sweden, Norway, Denmark and Finland), United Kingdom and Ireland do not have an obligation to carry identity papers, contrary to all other countries.

In order to select the most suitable countries for Ergotrans, the countries were ranked based on relevant criteria.

The two most essential and absolute criteria were central production and physical storage and issuing of the documents. The first is critical because central production of the documents means that the documents are transported to the physical issuing point and need to be stored until the applicant collects its document. With local production only blanc documents need to be stored, because the document is produced when the applicant is at the counter. Portugal is eliminated because the Portuguese passport is produced locally.

The physical storage and issuing is essential because it needs a storage system. In Ireland, the United Kingdom and Switzerland where the documents are posted to the applicants such a storage system is not required, because physical collecting is absent. Hence these countries are excluded also.

After the elimination of four countries the rest of the countries were valued and ranked based on four variables. The most relevant variable is the issuing location, municipality or police office. The countries that issued through municipalities were valued higher, as Ergotrans has experience with municipality customers in the Netherlands and the institutionalisation theory. This theory argues that institutions look similar because of three reasons: coercive, normative and mimetic. Based on this theory approaching the countries in which documents are issued via municipalities is more likely to be successful.

The obligation to carry identity papers increases the issue frequency of documents and thus the market size. Germany, France, Belgium have such an obligation. Luxembourg, Spain, Italy and Austria have also an obligation to carry identity papers but the number of issuing points is more limited than in France, Belgium and Germany.

The innovative character of the Paspomaat requires a certain innovative attitude and openness to new concepts and ideas and is equally relevant. Germany, Sweden, Norway, Finland and Denmark are innovative countries.

The last variable is the risk of copying the product. The Scandinavian countries are very innovative and create a risk, as well as Germany (strong in technique) and Italy (imitating many products). The ranking pointed out Germany, France and Belgium as the most suitable countries for Ergotrans. The external factors for Germany, Belgium and France are discussed per country and result in a choice of an entry mode. The external factors vary per country, but it was shown in the research that the different external factors were very similar for Germany, Belgium and France. The first factor market size is relatively small, due to the fact that the Paspomaat is not a consumer good andthe potential clients are municipalities and limited. For this reason for all countries the market size is small and small markets favour entry modes with low break even points (direct exporting through

agent/distributor, through branch/subsidiary, franchising, licensing). The competitive structure in the three countries was similar too. A research showed that no identical systems were produced in the world, thus no direct competitors exist in the countries. A monopoly position makes it possible for Ergotrans to set high prices and serve the market from a distance. The potential candidate distributors are present in Germany, Belgium and France and this means that exporting through an

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for all countries is the political situation. Thanks to the stability all entry modes are suitable and none need to be excluded. The costs of labour in the three countries are more the less on a same level, so there is no motive to move production to one of these countries in order to reduce production costs. The legislation concerning storage of valuable documents lacks in the target countries, and no restrictions exist about importing etc. meaning that all available entry modes can be employed. The last factor that shows little difference between the countries is the innovation attitude. Germany proves to be more successful in e-government and more open to innovation than Belgium and France. But it isn’t significant enough to make difference for the decision of the entry mode.

The internal factors turn the scale in the choice of an entry mode; the external factors do not favour a specific entry mode.

The fact that customers demand immediate service requires physical presence in the target country. But the not undeveloped marketing activities within Ergotrans make clear that it is more rational to leave these activities to a partner company. Plus the stage of internationalisation of Ergotrans it is logical that export modes are to be preferred. Direct exporting through an agent/distributor is then the most suitable entry mode for Ergotrans to employ in the target countries. Physical presence and marketing are under control of the agent/distributor, while Ergotrans does the production.

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7.1.1 Germany... 61 7.1.2 Belgium... 61 7.1.3 Luxembourg... 62 7.1.4 United Kingdom... 62 7.1.5 Ireland... 62 7.1.6 France... 62 7.1.7 Sweden... 63 7.1.8 Norway... 63 7.1.9 Finland... 63 7.1.10 Denmark... 63 7.1.11 Italy... 64 7.1.12 Spain... 64 7.1.13 Austria... 64 7.1.14 Switzerland... 64 7.1.15 Portugal... 64 7.1.16 Conclusion... 65

7.2 Classification and ranking... 65

7.2.1 Classification... 66

7.2.2 Ranking... 67

Chapter 8 Market analysis... 70

8.1 Germany... 70 8.2 Belgium... 72 8.3 France... 73 8.4 Conclusion... 75 Chapter 9 Conclusion... 76 9.1 Entry modes... 76 9.2 Ergotrans... 76

9.3 European market characteristics... 77

9.3.1Screening and ranking... 77

9.3.2 SWOT Analysis... 79 9.3.3 Germany... 80 9.3.4 Belgium... 81 9.3.5 France... 81 9.4 Research objective... 82 Reflection... 83 Bibliography... 84 Appendix

Appendix 1 Organisation chart Appendix 2 Questionnaire

Appendix 3 Target countries screening Appendix 4 Culture dimensions by Hofstede

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Chapter 1 The research

1.1 Introduction

Have you ever thought about what could happen if someone stole your identity (documents)? You could be robbed or worse: accused of crimes you didn’t commit.

In the last few years fraud with documents is a hot issue, not only does it cost governments billions, it is also seen as a means that terrorists use to simplify their attacks.

An instrument, designed and produced by Ergotrans, to help municipalities to store and transport their valuable documents in the safest way is the Dutch product called the Paspomaat. This thesis contains a strategy of the Paspomaat going international.

In this first chapter the structure of the research is presented, which is in fact the fundament of the research. The chapter starts with a brief introduction of the organisation and the background of the research; the research problem and the sub questions will be discussed next. After the research problem, the definitions are operationalised and the relevant literature will be reviewed. The methods of research are explained in the following section. Next, a conceptual model of the research shows the components of the conducted research. Finally the structure of the thesis is presented.

1.2 Ergotrans b.v.

Ergotrans b.v. (Ergotrans) is a small Dutch company specialised in the design and production of internal logistic systems. There are three product groups: tube transport, rail transport and other applications for example industrial logistic systems and Paspomaat® systems. All product groups are customer-specific; at the end the customer decides how the product is going to look like. The systems can vary in size of the tubes, length of the system, the pipe system and other technicalities.

Tube transport

Tube transport is, contrary to its image, a modern and cost-cutting transport system, which transports small goods quietly in a tube from one to another station. Examples of goods are: money, paper, documents, medicine etc. The transport takes place in the pipes by suction and push power of air.

Rail transport

Rail transport is a hanging transport system for transporting goods like documents, books and printing plates. The system consists of rails and cars with own drive and power supply. A container is fixed to the cars in which the goods are transported.

Industrial logistic systems

The essence of industrial logistic systems is similar to rail transport. It uses the same rails and the same transport principal. The difference is however that industrial logistic systems use larger bins to transport the goods.

Paspomaat® systems

The Paspomaat® systems (the Paspomaat) are a safe and automatic way to store, transport and issue valuable documents, for example identity cards and passports. This product/system is unique and provides municipalities an effective, efficient and safe way of handling their valuable documents. In chapter four Ergotrans and the activities will be presented and analysed in detail.

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1.3 Background research

At the beginning of 2003 the city of Apeldoorn came to Ergotrans with a special request. The municipality wanted Ergotrans to develop a system for issuing valuable documents, initially passports and identity cards, in a secure and automatic way. In cooperation with the city of Apeldoorn, Ergotrans developed a system that guarantees safe storage and transport (to the counters) of valuable documents. This system makes it possible to issue documents in an automatic and safest way. After the city of Apeldoorn more and more municipalities became interested in the product and at the end of 2005 eight municipalities in the Netherlands have purchased the system. The growth of the market is increasing and the management of Ergotrans was interested in the question: can the Paspomaat also be marketed in Europe? The two most important reasons to want to go abroad were:

Increasing the market;

The Paspomaat is a unique system; Ergotrans has the intention to serve the (international) market before competitors appear. This motive is called market-seeking behaviour by Bartlett and Ghoshal; this motivation is particularly strong in companies that have intrinsic advantage typically related to their technology or their brand recognition that gave them competitive advantage abroad1.

1.4 The problem definition

In the previous section the reasons for the research were discussed, the problem definition that will be presented next arises from this background. Before the problem definition is presented, a research model visualizes the steps that are taken to reach the research objective: determining a strategy to market the Paspomaat in Europe.

Figure 1 Research model Verschuren en Doorewaard (1998:45)

As seen in the model the first step is to gather information about the European market and Ergotrans. The term information is a widely one, but the information needed for this research will be specified in the next sections. The analysis of both Ergotrans (including the Paspomaat) and the European market,

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Bartlett, C. and Sumantra Ghoshal, Transnational Management, 2000; 5 Research instruments Literature review Ergotrans European market Research objective: Determining a strategy for Ergotrans to market the Paspomaat in Europe. Data collecting

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the second step, is acquired to point out what the market demands and what Ergotrans b.v. can offer. This will result in the third step: determining a strategy for Ergotrans to sell the Paspomaat in Europe. The next sections cover the problem definition. According to Verschuren2 the problem definition is divided in two parts: the research objective and the research question. The research objective answers the question why the research is conducted and the research question tells what information is needed to reach the objective.

1.4.1 The research objective

The research objective is the basis for the research question and controls the process of acquisition of knowledge3. The objective of Ergotrans is to find out if, and if so, in which countries there is a market to sell the Paspomaat; determining a strategy became the main objective.

Research objective: Determining a strategy for Ergotrans to market the Paspomaat in Europe.

1.4.2 The research question

After having formulated the research objective it is important to know what information is needed to achieve this objective. In this research the information that is acquired, is data about the European market and Ergotrans, resulting in the following research question:

Research question: Which market-entry strategies are the most suitable ones considering the characteristics of Ergotrans and the characteristics of the potential European market for Ergotrans?

Finding the answer to the research question can not be achieved at once, it needs to be accomplished in steps. Presenting sub questions is the solution to structure this process.

Sub questions:

1. Which market-entry strategies are defined in the literature and which factors influence the choice of market-entry modes?

Answering the research question is not possible without knowledge about the different market-entry modes. An introduction to the market-market-entry modes provides the reader with more insight in the research and the objective of the research. The theories on market-entry modes offer different factors that affect the market-entry modes choice. Not all variables mentioned are relevant for this research and there are variables that are not stated in the literature but play a role in this research. All the relevant variables for Ergotrans will be presented in a specified model of market-entry mode choice.

2. Who and what is Ergotrans, what are the characteristics of its environment and what are the features of the Paspomaat?

In this sub question Ergotrans will be analysed in order to create a total image of the company and its characteristics. This includes the organisation’s mission and vision, the structure, the culture and the core business. The variables of the framework concerning the internal and external environment of Ergotrans b.v. are discussed in three chapters.

The features of the Paspomaat influence the choice of a market-entry mode. With the analysis of the needs and expectations of the customers regarding the Paspomaat, the relevant variables will be analysed.

2

Verschuren, P., De probleemstelling voor een onderzoek; 1986:16

3

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3. How is the process of issuing documents regulated in Europe and what is the market size?

Before selecting the countries that meet the requirements and are the most suitable ones, a global analysis of the each potential country is necessary. The screening will point out the potential countries that qualify for the analysis in chapter 8, using the variables in the framework.

It is relevant to know whether the production of the documents is central or local, because a central production necessitates storage of the documents until the physical issue. The documents must be stored safely until the applicant comes at the counter. With local production the document is produced when the applicant is at the counter, a blanc documents is not as valuable as a personalized document. Also the design of the physical issue plays a great role in the analysis. Besides these characteristics, the factors that determine the market size and the issue frequency provide the research relevant data. In the next section these variables are explained.

4. Which classification of the countries can be made and which countries are the ones with most potential and what are the characteristics?

Determining strategies for all countries separately is unnecessary if countries show similar characteristics. The countries will be classified where possible.

The answers of sub question three are the input for this question. The countries that are pointed out as the most suitable ones are analyzed more thoroughly based on the variables determined in the entry mode framework (chapter three).

5. Which strategies should Ergotrans employ in order to market the Paspomaat in Europe and what are the strengths, weaknesses, opportunities and threats for Ergotrans?

With the answer of sub question four a fit between Ergotrans and the European market will be discussed. After studying the different entry modes and the priorities of Ergotrans the most suitable ones will be selected.

The SWOT-analysis is a useful instrument to obtain answers on this sub question. The answers of the sub questions two, three and four are used as input for the SWOT-analysis.

1.4.3 Operationalising the definitions

In order to understand the problem definition in the right way it is needed to make the definitions operational. This means that the definitions are translated into variables that are understandable for everybody and measurable at the same time.

Europe: Ergotrans has made the decision to conduct a research only for mainly the West of Europe. The following countries are included in this research: Belgium, Luxembourg, Germany, Denmark, Sweden, Norway, Finland, France, United Kingdom, Ireland, Italy, Austria, Switzerland, Portugal and Spain. The selection of these countries is made during the research together with the management of Ergotrans.

Strategy: The market-entry strategy.

Market size: The number of potential municipalities/institutions physically issuing the documents and the issuing frequency.

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Issuing frequency: the issuing of valuable documents per annum, determined by: number of documents

issue date validity duration

obligation to carry ID papers

if there is no obligation to carry ID papers: number of holidays abroad and the destination of holidays abroad by municipality residents

1.5 Literature review

This section contains the literature used in and for this research. The different theories will be briefly mentioned below, later on in this thesis they are employed and explained in detail.

The five forces model of Porter can be used to partly tackle sub question three. The five forces model of Porter analyses the bargaining power of suppliers, the bargaining power of customers, the availability of substitutes and complementary goods, the threat of new entrants and the internal competition on a market. Also the political, economical and legal environment will be discussed in order to create a total image of Ergotrans and the environment. The framework shows that the environmental factors have great influence on the entry mode choice.

As mentioned in §1.3.2 the SWOT-analysis is a relevant instrument in answering sub question five. A SWOT-analysis covers both the internal and external environment of a company. The internal analysis includes the strengths and weaknesses and the external analysis shows the threats and opportunities for Ergotrans in the external environment. These results will be used to make the entry mode decision, the results can exclude certain entry modes or especially favour an entry mode.

Without the knowledge of the different entry modes it is almost impossible to make the right decision. The different market entry modes are discussed based on the literature of Root (1994).

International market entry modes is described by Root as: an institutional arrangement that makes possible the entry of a company’s products, technology, human skills, management, or other resources into a foreign country.

Besides the several entry modes also the factors influencing the choice are relevant. Which factors are the most relevant in the decision are these factors also apply in this research? Root (1994) developed a model that identifies the factors influencing the market-entry mode choice. Along with other theories on market-entry modes, Driscoll and Paliwoda (1997); Brouthers, Brouthers and Werner (1994); Anderson and Gatignon (1986), a framework for this research is constructed.

The institutional theory states that institutions become similar because of three reasons: normative, coercive and mimetic reasons (Dimaggio and Powell 1983). The institutional theory is used to explain the similar answers of the executives.

Hofstede (2004) analyses the cultures of 53 countries through the dimensions masculinity-femininity, individualism-collectivism, power distance, uncertainty and long term orientation - short term orientation. The dimension uncertainty avoidance is relevant in this research, it shows the acceptance of innovation by countries/people. This theory is chosen because of the novelty of the Paspomaat, the assumption that people open for innovation and new ideas are more acceptant to this system. In this view it is important to research which countries (and if possible municipalities) are innovative.

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1.6 Methods of research

The research strategy and the method of data collecting are determining the methods of research, both will be discussed in the next sections.

1.6.1 Research strategy and approach

The research strategy that is operated in this research is a case-study. A case study is defined as the probing study of one or a small number of cases with the objective to link general conclusions4. This definition is similar to what Robson defines: a case study is the development of detailed, intensive knowledge about a single case, or a small number of related cases5.

Given the duration of the research and the fact that the interviews take place only once, the research will be cross-sectional, studying a particular phenomenon at a particular time6.

According to Baarda and de Goede there are three types of research which can be conducted: descriptive, exploratory and hypothesis testing research.

Descriptive research is conducted when the problem definition contains frequency questions. Describing and categorizing of characteristics are the main goals of this type of research; it is not focused on developing a theory or a hypothesis7. Exploratory research begins with vague assumptions and hypotheses about reality; the objective of this type is developing a theory or a hypothesis8. The last research type is hypothesis testing. In this case there is a clear hypothesis and the goal of the researcher is to test the hypothesis in real life9. The type of research conducted in this case has an exploratory character; the objective is to develop a model for Ergotrans that can be used also in the future for further research in other potential countries.

In this research the inductive approach is employed: deriving general assertions from a number of particular empirical assertions10. There are theories available about internationalisations of firms, but there isn’t a specific one that can be used as a hypothesis for this research.

With the collected data and the literature, a specific model will be presented for Ergotrans which will result in an advice. When Ergotrans will use this strategy in the future, the deductive approach: testing a hypothesis11, will be applied.

1.6.2 Data collecting

Primary data will be gained by interviewing customers and employees of Ergotrans in order to make an analysis of Ergotrans and the environment. The interviews with customers of Ergotrans will mostly have a structured character. In order to compare the data, the same questions must be asked to see in what degree the answers differ. But also semi-structured interviews will be used to get a better and more detailed impression of the customer’s opinion about Ergotrans. In interviewing the employees structured interviews will be employed, the goal in this case is asking general questions about Ergotrans to point out the difference of views. Besides the structured interviews, semi-structured interviews will be used also; these interviews will be specifically related to the employee’s job and activities and will contain open questions.

4

De Leeuw, A.C.J., Bedrijfskundige methodologie; 1996: 96

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Saunders, M., Lewis. P., Thornhill, A., Research methods for business students; 2000: 94

6

Ibidem: 96

7

Baarda, D.B., De Goede, M.P.M., Methoden en technieken; 1997: 21

8

Ibidem: 21

9

Ibidem: 22

10

De Leeuw, A.C.J., Bedrijfskundige methodologie; 1996; 51

11

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For the analysis of the European market both primary and secondary data will be collected. Distributors and customers abroad will be helpful in obtaining the information needed about the potential markets. Websites of governments and the EVD present secondary data; most of the quantitative data required for the research can be found on government sites and related websites. Doing desk research also implies seeking for literature that provides links to the sub questions and gives answer to the main question. Especially theories about internationalisation processes and market-entry modes are very valuable (§1.4).

1.7 Conceptual model

The conceptual model on the next page visualizes the objects and variables that need to be researched in order to reach the research objective.

The conceptual model shows that in order to answer the research question: “What are the characteristics of the potential European market for Ergotrans and which market-entry strategies are most suitable considering these characteristics and the characteristics of Ergotrans?” four main dimensions must be discussed. The first dimension is the internal environment of Ergotrans; in the framework in chapter three it becomes clear that internal factors influence the choice of a market entry strategy. The structure, strategy, the product groups and of course related to the internal environment, the operating environment especially the needs and expectations of the customers. The customers of Ergotrans can point out the strengths and weaknesses of Ergotrans and at the same time nominate the adjustments/improvements of the products resulting in the opportunities for the Paspomaat. With the feedback of the users the most important characteristics of the Paspomaat are determined, which will serve as a guideline for the marketing in Europe.

The European market includes the countries that meet the criteria discussed in chapter seven. These countries are analysed on the basis of the factors in the framework for market entry selection. The market (and competition structure), the legislation concerning documents (particularly storage and distribution), culture, the political situation, the marketing infrastructure and the costs of labour are the external factors relevant for the analysis.

The last dimension is the availability of market entry modes; after the analysis of the internal and external factors, it will be discussed which market entry strategy is suitable for which country.

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Macro environment Europe Operating environment European market Opportunities Paspomaat Ergotrans Market structure Market-entry strategy Legislation Innova-tion Political situation Labour costs Marketing infra-structure Internal environment Modes of entry Sub-stitutes Com-petitors Customer needs and expectations

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1.8 Structure of the thesis

The structure explained in this section follows the order of the research questions; each chapter is linked to a research question.

This chapter presented the introduction of the research and its structure. The next chapter will discuss the theories available on entry modes and explains the characteristics, advantages and disadvantages. Several authors and their view about the entry modes and the similarities or differences between authors will be analysed.

Chapter three includes the factors that influence the choice of the entry mode. Related to chapter two, in this chapter the factors will be presented and linked to the various entry modes. Also it is considered which factors favour certain entry modes. At the end of the chapter a model for Ergotrans is presented, which will be used in later chapters to analyse the selected countries.

In chapter four Ergotrans and its product groups are tackled. The Paspomaat naturally gets more attention, also the view of the current customers is included in this chapter. The customers of the Paspomaat are an important source of information. They can point out the most relevant characteristics that play a role in the positioning of the system in the market. Besides the positive features, the weaknesses and the negative aspects of the Paspomaat must be spotted in order to improve and adapt the system for future customers.

The strategy and objectives, the structure and processes of Ergotrans, thus the “anatomy” is discussed in chapter five. The sixth chapter covers the environment and related to this subject the competitive strategy of Ergotrans and the global maturation.

The countries mentioned in section 1.4.3 are all screened in the seventh chapter. Variables like the production of passports and identity cards, the responsible institution issuing the documents and the market size in general are investigated aiming to filter those countries that meet the requirements. After the screening in the first part of chapter seven a classification of countries is made aiming to point out similarities between countries and make a selection of the most suitable countries for further research.

The selected countries are submitted to deeper research in chapter eight. The most important information in this chapter is the presence or absence of regulations concerning the storage and distribution of documents and the determination of the exact market size next to the analysis of the characteristics of the framework.

Chapter nine contains the SWOT-analysis; this instrument will be used to present the relevant data about Ergotrans and the market in a schedule. Derived from this analysis and the researched data on the European market and Ergotrans, the most suitable entry modes for the selected countries are chosen.

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Chapter 2 Market-entry modes

Choosing a market-entry mode is one out of several steps that together form the market-entry strategy. In this research the market-entry strategy is carried out until the step of the decision of a market-entry mode, but all the stages in the market-entry strategy are explained in this chapter.

The emphasis is however on the entry modes. The different entry modes are explained, the advantages and disadvantages are mentioned and in why the entry modes are preferred.

2.1 Market-entry strategy

The term market-entry strategy suggests that this concept consists of only one element, but the opposite is true. Several stages must be completed to realise the strategy12.

Firstly the decision on the choice of a target/product market is needed. A thorough research on the countries that are potential target countries will point out the market potential and the fitness. After determining the target countries the objectives and goals in the country must be defined. The objectives and goals clarify the plans of a company in the foreign market. A plan structuralises the actions and increases the chance of success.

The choice of an entry mode to penetrate the target country is the third element in this process. The three classes of entry modes are export, contractual arrangements and investment arrangements. Selecting an entry mode depends on which factors the organisation values highly.

Making a marketing plan to penetrate the target market includes the decisions on prices, choosing the promotion and distribution channels. The last stage is the decision of a control system to monitor the performance in the target market. Monitoring the performance in the foreign market is proof of the commitment to the foreign market and the objective to gain a permanent position.

Without a market-entry strategy a company employs the sales approach. One of the differences between a sales approach and a market-entry strategy approach is the time. The sales approach is focused on the short term, whereas the market-entry strategy plans long term success. A sales approach does not select the target countries systematically, but randomly. Another difference is related to the term difference; the firm with the sales approach is interested in immediate sales, the company that employs the market-entry strategy aims to achieve a permanent position in the target country. Recapitulating the overall difference between the sales approach and the market-entry strategy approach is the short-term versus long-term planning and the structure of the decisions and actions. According to Root (1994) a sales approach is not viable in a world of international competitors who plan and act to create foreign market positions for long-run success.

2.2 Entry modes

An international market entry mode is an institutional arrangement that makes possible the entry of a company’s products, technology, human skills, management, or other resources into a foreign country. For a domestic company located in the country that contains its market, the question of entry mode as distinguished from market entry (the marketing plan) simply does not arise. In contrast, the international company initially stands outside both the foreign country and the market it contains, and it must find a way to enter the country as well as a way to enter the market. Hence, the international company must decide on both an entry mode and a marketing plan for each foreign target market13.

12

Root, F., Entry strategies for international markets; 1994: 3

13

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Various authors classify the entry modes differently. Brouthers, Brouthers and Werner (1994) employ the following classification: cooperative modes (joint ventures and strategic alliances), integrated modes

(acquisition) and independent modes (licensing, franchising and agent/distributor). In this classification exporting is excluded because the research focuses on services and most services can not be exported according to the authors14.

Driscoll and Paliwoda on the other hand operate the same classifications as Root (1994): export modes, contractual modes and investment modes15.

In this research the last classification is used. Although the Paspomaat is a product that requires service, for the completeness and accuracy of the research no entry modes should be excluded.

The classification of the entry modes is: Export entry modes

Indirect exporting Direct agent/distributor Direct branch/subsidiary Other

Contractual entry modes Licensing Franchising Technical agreements Service contracts Management contracts Construction/turnkey contracts Contract manufacture Co-production agreements Other

Investment entry modes

Sole venture: new establishment Sole venture: acquisition

Joint venture: new establishment/acquisition Other

Only the entry modes that are important and most common are discussed (Root 1994 and Agarwal & Ramaswani 1992).

2.2.1 Export entry modes

The main characteristic of export entry modes is the production of the product in the home country of a company and the transfer to the target country.

A firm going international for the first time will deal with uncertainty and unknown situations. The aim is then to minimize the risk; control over the activities will not have high priority. Firms can serve the target market without high investments and start up costs and still make profits. For these reasons exporting is the most suitable mode for companies starting their international experience16. Exporting

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also offers companies an international learning experience compared to other modes. At the start the company gets to know the foreign market and the experience to serve foreign markets.

Export entry modes include indirect exporting, direct exporting through an agent/distributor in the foreign country, direct exporting through a branch/subsidiary in the foreign country.

Indirect exporting

Using domestic agencies in the home country as intermediaries to export products to foreign markets is called indirect exporting. The company does not export the goods on his own and has little control over the foreign marketing of its product. Indirect exporting is an appropriate mode for entering the international market for the first time, because it demands no knowledge of the foreign market, but at the same time this becomes a disadvantage because the exporting firm remains ignorant of the foreign market.

Indirect exporting is preferred by companies that do not want to invest in capital and aim to avoid risks. They demand little or no control over the foreign activities and have no ambition to expand and intensify the international activities.

Direct exporting

When a company wants to serve the foreign market in an active way, it will choose for direct exporting. Direct exporting also uses intermediaries for exporting products to the foreign country, but the difference is that agencies are located in the foreign country instead of the home country.

Direct exporting has several advantages for the exporting organisation. Firstly the exporting company plays a partial or full role in the decisions concerning the foreign pricing, distribution, promotion, product (marketing). Also the company has concentration on the marketing effort on its product line, which improves the effectiveness of the marketing in both the home country and the foreign country. An active role in the foreign market simplifies the availability of information and feedback about the foreign market, which can be employed to make adaptations in the marketing. The last advantage is a better protection of goodwill, trademarks, patents etc. It has to be noted that these advantages are only for those companies that take the responsibility to make marketing efforts.

Of course direct exporting has also disadvantages compared to indirect exporting. The company has to learn the payment procedures and shipment rules of the foreign country. Higher start up costs are required to be successfully involved in the international activities. The advantage of the presence of information on the foreign market has another side; you must have means to access the information, which means investments. Higher risks are the last disadvantage of direct exporting.

Two intermediaries are available for direct exporting: the foreign agent/distributor and the foreign branch/subsidiary. Mail-order exporting and representatives of the company working in the foreign market are a third channel, but not common. These direct export channels are the link between the producing company in the home market and the final buyers in the foreign company. The agencies can be one or a few independent men or hired by the home country company.

The foreign agent is in principal an independent salesman who only represents the producer in the foreign market and does not take title for the goods of the producing company. The compensation of the agent is a commission based on the sales. The agent receives orders from clients and sends it to the manufacturer, but has no further role in the process. The goods and the bill go directly to the buyer. A foreign distributor is also an independent intermediary, but the essential difference is that a distributor does take title to the goods of the producing firm. The foreign distributor has more functions than the foreign agent: he does the promotion of the product in the foreign country; has inventory in the foreign market, does the physical delivery and provides service in product maintenance and repair17. The decision between an agent and a distributor depends on the costs and

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the match between the intermediary and the specifications set by the producer. An agent has fewer functions than a distributor but is also less difficult to control than a distributor.

The second channel is the foreign branch/subsidiary. This channel requires more investment and resources than the first one. The manufacturer transfers the marketing activities to the foreign country. This transfer includes the personnel performing these activities. The use of this direct export channel provides the international organisation greater control than with the direct export through an agent/distributor.

2.2.2 Contractual entry modes

Contractual entry modes are long-term non-equity associations between an international company and an entity in a foreign target country that involve the transfer of technology or human skills from the former to the latter18.

Contractual entry modes are primarily means for the transfer of knowledge and skills, but they can also create export possibilities. The difference with the investment modes is the non-equity character of the contractual modes compared to the investment modes.

Licensing

Licensing contains a variety of contractual arrangements whereby domestic companies (licensors) make available their intangible assets (patents, know-how, trademarks and company name) to foreign companies (licensees) in return for royalties or other compensation19. Sometimes the licensors also transfer the technological services to the licensees; this is more common with franchising which is discussed later in this section.

There are several reasons why a company licenses abroad. One of the reasons is that they want to gain extra income on technology that has been already used in the home country. Also licensing can be employed as cross-licensing: the research output of the international firm is exchanged for the research output of the domestic firm.

The fact that a licensor can avoid import barriers (tariffs that increase the costs and quotas that limit the quantity of exports) is the most relevant advantage of licensing. Many organisations used licensing as an entry mode when it became clear that the import barriers no longer made the export of products profitable. The transport costs from one to another country that sometimes make the export of products not cost-effective can be eliminated by licensing.

Another advantage is the lower political risk than with equity investments. Also the absence of physical assets in the target country lowers the risk of failure. In the worst scenario the licensor can lose the licensing income, which is not definite for the bankruptcy.

Companies producing a service instead of a physical product can not physically transport their service, thus they are to choose for licensing or franchising or for export through a subsidiary/branch. Licensing is then preferred because of the lower risk and the lower resource commitment.

The lack of technology, trademark or another intangible asset disables a company to use licensing as an entry mode.

Besides advantages licensing has naturally also disadvantages. The lack of control over the marketing of the licensee is the most important one. The licensor has no influence on the marketing and the performance of the licensee, only offering assistance is a way to compensate the lack of control. The lack of control over the foreign licensee is the same as with the foreign distributor.

The licensing income the licensor receives is absolute. Exporting to a foreign country or investing in a foreign country offers relatively more income. Also the defined duration of the licensing agreement is considered as a disadvantage.

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A disadvantage that is usually ignored, but is very risky for the licensor, is the fact that a competitor can be created. The licensee can use the technology of the licensor to become a serious competitor in the foreign market after the licensing agreement is ended. The licensor can lower this risk by making agreements with the licensee about limitations of the geographic sales market or disabling him legally to use the transferred technology. It has to be noted that this restrictions are sometimes not allowed by the government of the target country.

Franchising

Franchising uses the same concepts as licensing. Additional to licensing franchising also offers the tangible assets. The franchisor gives the franchisee the right not only to use the trademark, company name, technology, but also assists the franchisee in the marketing and management for a permanent period of time. The franchisee operates under the franchisor’s company name and does business according to the procedures of the franchisor. Franchising is mostly seen in the sectors fast-food, car rental, soft drink and hotel business.

Franchising too offers both advantages and disadvantages. The first advantage is the possibility to go abroad with low costs. The franchisor makes almost no investment in the target country, only the assistance offered to the franchisee is noticeable. Secondly, the marketing of the franchisor is standardized and characteristic, which helps to distinct itself from the competitors. The right to use the trade name of the franchisor, the distinctive image and assistance in management and marketing motivates the franchisees. The last advantage is the low political risk for the franchisor. As with licensing and indirect exporting the indirect entry in the foreign market lowers the political risk for the entering company.

The disadvantages of franchising are quite similar to the disadvantages of franchising. The yield of the franchisor is limited, control over the franchisee’s business is only partial, there is the possibility that the franchisee becomes a competitor and the government can restrict the conditions of the franchise agreement.

Franchising is mostly preferred by companies producing goods that can not be exported to a foreign country, that don’t want to invest in the foreign country as a manufacturer, and of which the business operations can be transferred to another company in the foreign country. For these reasons franchising is popular in the service industries that can be managed by low capital and a low level of skills20.

Management contracts

An international management contract gives a company the right to manage the day-to-day- operations of an enterprise in a foreign target country21. The management does not include the authority to make investments, make management or policy changes or change ownership contracts. The control only involves the operational business of the firm.

Firms rarely make management contracts apart from other agreements. Management contracts are usually combined with joint-venture or turnkey contracts. With this combination of contracts a company can get control over another company without equity in investment.

A sole management contract provides low-risk in entering the foreign country, but this advantage is accompanied with disadvantages. For example, the revenues are limited; the company can not build a permanent position in the foreign country and the commitment of management talent.

In combination with other arrangements, management contracts can sometimes help fashion a better package for both parties22.

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Construction/ turnkey contracts

With a turnkey contract the owner gives a foreign contractor the order to construct a project and obligates him to turn over the project at the point that operation is possible. The contractor is then required to provide assistance in management and after construction services to help the owner. Turnkey contracts are complex and require legal assistance. Governments are usually a party in a turnkey contract, which increases the political risk.

Contract manufacturing

In contract manufacturing, an international firm sources a product from an independent manufacturer in a foreign target country, and subsequently markets that product in the target country or elsewhere23. The international firm offers its technology and assistance to the local producer in order to produce goods that meet its specifications. Contract manufacturing is a mix of licensing and an investment entry mode.

The advantages of management contracts are low level of financial resources and management, quick entry into the foreign market, control over the marketing and no local ownership problems. Companies prefer management contracts when the target market is not large enough for investment and exporting is too expensive.

The disadvantages of management contracts are also similar to the disadvantages of licensing. The risk of creating a future competitor is present with management contracts, identical with licensing and franchising. Finding an appropriate local partner is not simple and technical help could be needed to “educate” the firm.

2.2.3 Investment entry modes

Production investment in foreign countries is employed by companies because of the presence of raw sources for production, lower production costs caused by cheaper labour costs and serving local markets. The decision to invest is a complex process and requires an analysis of the investment climate and the investment project.

Investment entry modes involve ownership by an international company of manufacturing plants or other production units in the target country24. Manufacturing plants can vary from just assembly of products in the host country to full production. Ownership and control are the main characteristics of these entry modes.

Sole venture: new establishment

A new establishment in a foreign target country involves the transfer of not only products, technology or skills, but the whole company. A company that has disposal of all its skills and assets is more successful to building a permanent position in the target country. Located in the target country the firm can profit from the resources and low costs. The fact that logistics costs are eliminated is one of the other advantages of an investment entry mode. Having a production unit in the target market enables the company to make product adaptations to local preferences. The last advantage is the higher investment in marketing in sole ventures. Because the organisation has more to lose than with other entry modes (export and contractual), the marketing gets more attention in order to be successful. Besides the advantages of a sole venture, the disadvantages are influential. A new establishment in a target country requires high capital, resources and management. Related to the high investment in resources high risk is inevitable.

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Sole venture: acquisition

Acquiring a foreign company can have various motivations. Product diversification, geographical diversification, acquiring specialised assets (for example technology and distribution channels), sourcing of raw materials are examples of the reasons.

Acquisition can be classified in 4 types: horizontal, vertical, concentric and conglomerate. Horizontal acquisition stands for the acquisition of a company producing similar products or located in the same market. Vertical acquisition involves the acquisition of a company that is a supplier or a customer (in the same industrial column) of the acquiring firm. The acquiring company has then more companies in the industrial column. Concentric acquisition occurs when the acquired firm has the same technology but a different market as the acquiring firm or different technology but in the same market. The last type is the conglomerate: the acquired firm is located in a different industry than the acquiring firm25. The most relevant advantage of an acquisition is the availability for the acquiring firm to serve the market in a short period of time. The acquired firm has already products and personnel and is operational. A potential advantage can be presence of a scarce resource (material, personnel). The last possible advantage is the acquisition of a product lines, it is however important that the product line is similar to the product line of the acquiring firm, otherwise this advantage can turn into a disadvantage. Restrictions set by the host governments, that prefer new ventures over acquisitions can be revealed as a disadvantage.

Joint venture: new establishment/acquisition. Joint ventures take place when an international company shares in the ownership of an enterprise in a target country with local private or public interests26. Joint ventures can be classified in majority, minority and 50-50 dependable of the equity of the shares. The disadvantage of a joint venture compared to a sole venture is the partial control over the company and the profit share.

Host governments of especially the developing countries discourage foreign companies to invest in a sole venture. Because of this reason companies are “stimulated” to a joint venture. However, a joint venture can provide companies also benefits: knowledge of the host country and business, personal contact with local suppliers and customers, local prestige. The difficulty is in selecting the appropriate local partner.

2.3 Conclusion

The classification of Root consists of the export entry modes, contractual entry modes and the investment entry modes.

Indirect exporting, direct exporting through agent/distributor and direct exporting through branch/subsidiary are the export entry modes. These modes characterize themselves through the production of the product in the home country and the transfer to the target country. The first two modes require less resource commitment than exporting through branch/subsidiary, and thus are a low cost way to go abroad. But the disadvantage is however that the control over the marketing is lower than the last mode.

Contractual entry modes consist of franchising, licensing, management contracts, construction/turnkey contracts and contract manufacturing. The first two modes are the most common and used.

Franchising and licensing are basically using the same concept: transferring technology or human skills from the international company to the company in the target company. The main difference between the two entry modes is the transfer of also marketing and management with franchising compared to licensing. Also these two forms of entry are a low cost way of going international and offer low political risk. As with exporting the control over the partner is low.

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The investment entry modes are sole venture: new establishment, sole venture: acquisition and joint venture: new establishment/acquisition. Investment entry modes involve ownership by an international company of manufacturing plant or other production units in the target countries. It doesn’t need explanation that these modes of entry require high resource commitment but at the same time offers high control over the activities.

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Chapter 3 A Framework of entry mode choice

3.1 Introduction

In the previous chapter the entry modes are discussed. The factors that influence the choice of the entry modes are presented in this chapter. The choice of entry modes also depends on the priority companies give to certain factors and what they prefer. These situations are mentioned too. In the last section a framework for Ergotrans will be developed to analyse the selected countries.

3.2 Factors influencing the choice of entry modes

A company’s choice of its entry mode for a given product/target country is the net result of several, often conflicting, forces27. This is a complex process and the choice depends partly on the preferences of the companies. Root (1994) presents a model which includes the factors classified in internal and external factors (Figure 2).

Figure 2 Factors in the entry mode decision (Root 1994)

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The internal factors can be influenced by the companies contrary to the external factors. Those factors are shaped by the external environment of organisations and can only stimulate or deter the choice of an entry mode.

3.2.1 External factors

Target country market factors

The first factor with great influence on the entry mode is the market size of the target country. The market size is related to the break even point of the sales. Entry modes with low break even points (indirect and agent/distributor exporting, licensing and some other contractual arrangements) are more suitable for small markets. Large markets favour entry modes with high break even sales (branch/subsidiary exporting and equity investment in local production). It follows from this that in general the indirect entry modes are preferred in small markets and direct entry modes in large markets.

The competitive structure is another force of the target country market. The competitive structure shows the number of competitors in the target country. A competitive structure can vary form atomistic (many nondominant competitors) to oligopolistic (a few dominant competitors) to monopolistic (a single firm)28. A market with many non dominant competitors can be served through export, because the competition is less though than in a monopolistic situation. A monopolistic or oligopolistic structure of the market requires enterers to build a stronger presence in the target country. A stronger position can be accomplished best by equity investment, because of the assets and skills that are present in the target country and in control of the entering firm, as discussed in 2.2.3. Target markets where the competition is too strong for export or equity investment, companies prefer to enter the target market through contractual arrangements like licensing.

Another dimension of the target market is the marketing infrastructure, especially the availability and the quality is important. Finding a good agent or distributor can be hard in the target country, in the absence of a good intermediary an organisation can decide to employ direct exporting through a branch/subsidiary.

Target country production factors

The costs, quality and presence of labour, raw materials and other resources in the target country and the quality and presence of the economic infrastructure (transport, logistic possibilities) can influence the choice of the entry mode. Low costs in production by the low costs for materials and labour can encourage a company to build a production plant in the target country. High costs favour entry modes that involve only marketing operation in the target country.

Target country environmental factors

The political, social and economical conditions in the target country are dimensions with great influence on the entry mode. The most important of these conditions is probably the government

policies. The restrictions by the government, like the quotas and high tariffs can discourage a certain entry mode and favour others.

Geographical distance is another dimension in this classification. A great distance brings along high transport costs, which disables goods to compete with local goods when export is the selected entry mode. In this case investment entry modes are preferred.

The economy of the target country can affect the choice of an entry mode. The most important characteristic in the economy dimension is the presence of a market economy or a centrally planned

economy. Centrally planned economies are usually present in socialist countries. These countries don’t

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Market entry strategy for the Paspomaat

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