“A quest to conquer Europe”

“A quest to conquer Europe”

Developing an instrument to measure the presence of

the desired market characteristics for Organization X

Author: S.B.Nijman Student Number: 1335901

University of Groningen Faculty of Economics and Business

Msc Business Administration Specialization Business Development

Preface

To perform this research has been a positive and rewarding experience in numerous ways. First of all, I have learned a lot about the topic of the research and how to conduct a scientific research. Secondly, I have had the opportunity to be part of an organization for a period of six months. I have experienced this period as very educational and enjoyable. The third reward is the resulting Master thesis, which was the final barrier of my MBA, and a product of which I am proud and satisfied.

However, the research in front of you would not have been possible without numerous people that I would like to thank. I would like to thank everybody at Organization X for his or her cooperation, help, assistance and support with this research. I especially would like to thank Nick Bortot for providing me with the opportunity to conduct this research. I would also like to thank Joost van der Ouderaa for the help and guidance during my period with Organization X

Also, I would like to thank my supervisors of the University of Groningen, dr. ir. N.R. Faber and drs J.C.L. Paul for their guidance and help in writing this thesis.

Last but definitely not least, I would like to thank my parents for their endless support, encouragement and sponsorship.

Thank you all, Sytze Nijman

Executive Summary

Key words: preferred market characteristics; Available market; Entered market;

Customer value; Potential customer group;

Used definitions

Table 1: table with used definitions

Account: An open account with holdings

Derivatives: Contracts whose value is based on the performance of an underlying financial asset, index or other investment, used to hedge or profit from future changes in the value of the underlying.

Independent investor:

Every individual with the ability to actively and autonomous trade in stock and/or derivates.

Market: When this thesis uses the term market, the entire geographical market of a country is meant.

Option: Contract giving the buyer the right (but not the obligation), to purchase or sell a security at a future date, at a price fixed when the option is written (exercise price), in exchange for a premium paid when the option is purchased. Options to purchase a security are known as calls and options to sell a security are known as puts.

Partially filled trade

This occurs when an order is divided in different batches of stock or derivates. This usually happens when the stock or derivate is illiquid or when a large amount is bought.

Portfolio In connection with securities, the term portfolio refers to the entirety of securities held by a company or individual.

Share/ Equity: A share is a transferable security representing a portion of the capital of a limited company or a partnership limited by shares. Ownership of shares is evidenced by an entry in the issuer's share register (registered shares) or in a securities account kept in the holder's name by a bank, stockbroker or other accredited intermediary (bearer shares). Shares quoted on the stock exchange are also referred to as "equities".

Security: General term comprising bearer shares, registered shares, instruments payable to order, participation certificates and bonds. The security evidences the investor’s right of ownership or claim.

Trade: A transfer from money in stock or derivates or vice versa. Every transfer in a different stock or derivate is considered as a separate trade.

Traditional bank:

A traditional bank is a bank that has his core business in off-line products and services. It could be possible that he adopted the Internet as an additional channel. However, the bank made use of a new technology. The technology did not provide the reason for existence.

Warrants: Certificate issued on a stand-alone basis or strippable from another security (share, bond) giving the holder the right to acquire securities (share, bond). Warrants issued by

financial institutions acting as market-maker give the holder the right to purchase (call warrant) or sell (put warrant) various underlying (interest rate, index, currency, equities) at a fixed exercise price during a fixed exercise period. Although these warrants

Table of Contents

Part one: The construction of the instrument

... 6

Chapter one: Introduction ...6

1.1 Organizational description ...6

Chapter two: Presenting the problem ...8

2.1 Problem description ...8 2.2 Problem definition ... 11 2.3 Problem statement ... 11 2.3.1 Research Goal ... 11 2.3.2 Research Question ... 11 2.3.3 Sub questions ... 11 2.3.4 Research restrictions ... 11

2.3.5 Visualization of the research ... 13

2.4 Product definition... 13

Chapter three: Defining the profile of the instrument ... 18

3.1 The goal of the instrument... 18

3.2 Capabilities of the instrument ... 18

3.3 Restrictions of the instrument ... 18

3.4 Different alternatives that fit the profile of the instrument ... 19

3.5 Motivation for chosen alternative ... 20

Chapter four: Construction of the new instrument ... 21

4.1 Removing several components of the existing instrument ... 22

4.2 Supporting and constructing the characteristics of the new instrument ... 23

4.2.1 Potential market ... 24

4.2.2 Available market ... 24

4.2.3 Already entered market ... 26

4.2.4 Competitors ... 27

4.2.5 Attended market... 29

4.3 Visualization of findings ... 29

4.4 Measurement of the findings from the literature ... 30

4.4.1 Measurement of macro economic characteristics of the market ... 30

4.4.2 Measurement of the already entered market ... 31

4.4.3 Measurement of the ability to create customer value ... 32

4.4.4 Measurement of potential customer group... 32

4.4.5 Measurement of market restrictions ... 33

4.5 Methodology of the research ... 33

4.5.1 Similarities and differences of both instruments ... 33

4.5.2 Similarities and differences in measurement between both instruments ... 35

Part two: The practical usage of the instrument

... 37

Chapter five: Results of the Research ... 37

5.1 Overview of all the markets that were part of the research ... 37

5.2 Discussion of the most attractive markets ... 40

Part Three: Evaluation of the constructed instrument

... 42

Chapter six: Evaluation of the instrument ... 42

6.1 Evaluation of the content and measurement of the newly developed instrument42 6.2 Difference in outcomes when the old instrument would be used ... 44

6.3 General usefulness of the newly developed instrument ... 45

6.4 Conclusions of the evaluation ... 46

6.5 Summary of the ... 50

6.6 Discussion ... 51

6.7 Recommendations for further research... 53

References: ... 55

List of figures:

Figure 1: visualization of different business units

Figure 2: visualization of the research

Figure 3: interaction of the four P’s

Figure 4: platform-based view on different websites

Figure 5: Gourville’s adaptive behaviour

Figure 6: Roger adoption/ innovation curve

Figure 7: visualization of the instrument

Figure 8: visualization of future research

Figure 9: the new developed instrument

Figure 10: instrument for the second step in the exploration process

List of tables:

Table 1: table with used definitions

Table 2: advantages / disadvantages of the different alternatives

Part one: The construction of the instrument

Chapter one: Introduction

This thesis is based on a research performed at Organization X. After a successful period on the domestic market, Organization X has the desire to expand their retail business to foreign European markets. The management does not know to which foreign market they should expand their business. The goal of this research was to identify attractive European markets for Organization X to expand their business to. To be able to measure the attractiveness of foreign markets, an instrument had to be developed that could measure the presence of the desired market characteristics for Organization X This thesis starts with a brief organizational description and the presentation of the organizational problem. After that, Organization X’s products will be described. To understand why some characteristics influence the attractiveness of a market and why some market characteristics are preferred, the reader should have some knowledge and understanding about Organization X’s products. After the product definition, this thesis continues by determining which market characteristics should be adopted in the instrument. This will be determined by making use of scientific literature. The methodology of this thesis will discuss how these characteristics can be measured. The second part of this thesis presents the results that where gathered by making use of the instrument in practice. Finally, this thesis discusses the general usefulness and evaluates the value of the developed instrument.

1.1 Organizational description

Organization X is an online bank for investors. The main goal of the company is to provide their customers with access to (inter)national stock markets and accurate administrative dispatching of all related money and stock transactions. Besides providing access, Organization X also offers their customers the ability to obtain extensive market information.

Organization X was founded in May 2000 and launched her website for private stockbrokers a few months later. The main thought behind the concept is: “ to provide the private stockbroker with the same tools as a professional broker, for very low rates.” Currently, Organization X offers her services to more then 200.000 retail stock investors on the Dutch market. The organization is growing and the results are getting better over the last years. Organization X is a young player on the Dutch financial market with establishments in The Netherlands, Belgium and recently France.

Figure 1: visualization of different business units

Retail:

The business unit retail offers services for independent stock investors by making use of two different labels. These labels are named: Y and Z. The services offered include access to an extensive brokers site with real-time streaming data, online financial advice and research and analysis of financial data. The last years Y and Z are numerous times rewarded with the highest scores in independent researches for the best product in the category online brokerage for retail1.

Retail Professional

Chapter two: Presenting the problem

Organization X has achieved a substantial growth over the last few years. After two vital takeovers of supplier S and competitor Y, Organization X’s position on the Dutch market is further amplified. The management of Organization X is convinced that the possibilities for further growth on the Dutch market are relative limited. This thought can be amplified with the following facts. On the Dutch market are approximately 750.000 private investors active (MillwardBrown, 2008). At the end of 2007, Organization X served 165.000 private investors and is market leader on the Dutch market. Even though these figures suggest that the Dutch market still offers a lot of potential, the amount of growth that can be achieved is relative limited. Not all of the 750.000 investors are potential customers for Organization X. To become a customer, an investor should have access to a personal computer with Internet. Some investors are not capable or willing to conduct their financial transactions by making use of the Internet. So the goal of achieving full market coverage is not a realistic goal.

Every trade that Organization X performs, results in a transfer from money in stock or derivates or vice versa. To be able to perform this transaction, a clearing and settlement process is needed. For every trade Organization X performs, clearing and settlement is needed from Euronext Amsterdam that performs these clearing and settlement processes. The costs for these two processes are a substantial part of the production price for Organization X The clearing and settlement price is for every transaction the same. It is independent of the size of the transaction. The online brokerage market is a transaction volume driven business. The more transactions Organization X performs, the lower the clearing and settlement costs are that are being charged by Euronext. This means that a higher achieved transaction volume results in a lower production price. Even if Organization X achieves creating full market coverage on the Dutch market, they would still not be able to create transaction volumes as high as other European online brokers. These other European brokers are active on European markets that are much bigger then the Dutch market. The other European online brokers could, because of their higher transaction volumes, lower their prices. This could have a negative influence on the competitive position of Organization X

market for Internet brokers. This development could be similar to the consolidation period that occurred several years ago on the European cell phone market. During this consolidation period, a transformation of the market took place. Lots of relative small local providers transformed into a few large international providers. Resulting in a change of a fragmentized market to an oligopoly (Whalley, 2004).

Before this thesis continues, the consolidation prediction of the management should be checked. Based on what information did the management of Organization X make the forecast about the consolidation trend? How likely is it that this consolidation period will occur? These questions will be answered by reviewing management literature that focuses on consolidation.

In the scientific literature there is consonance about the main causes of consolidation. Consolidation is caused by the following factors (Hawkins and Mihaljek, 2002; Bos and Kool, 2001; Berger, Demsetz, Strahan, 1999):

 Increased competition  Technology

 Deregulation and opening-up to foreign competition

Increased competition: The corporate results from Internet brokers in Europe are good.

The number of clients, transactions and the amount of equity under custody are rising over the last years. These growth rates are realized because of the switch of most investors from traditional banks to online brokers. Most investors switch because online brokers are able to create competitive advantages compared to traditional banks. How these competitive advantages are realized will be described later in this thesis. However, the amount of investors that are active on a market is limited. So the amount of investors that can switch from a traditional broker to an Internet broker is also limited. Once those investors that will eventually switch have made the switch, competition among Internet brokers will increase.

Technology: The online brokerage market is a relative young market. Many companies

are still exploring how the Internet’s capabilities can provide extra services for the customer. Client’s mobile phones are rapidly developing into personal computers. This kind of evolving technology makes the market very dynamic. The technology on the market is changing and rapidly developing.

Deregulation and opening-up to foreign competition: The European financial market

is deregulating and opening-up to foreign competition. The following citations will illustrate this:

“ In early April 2007, the New York Stock Exchange (NYSE) successfully completed its

merger with Euronext, a major European stock exchange. The merger resulted in the creation of NYSE Euronext. Many other alliances, agreements, and mergers are under way in the global financial markets, with participants from middle America to Japan and India and many places in between. The question of who will end up with whom is as unknown as the number of players that might become involved.” (Raiborn and McGinnis,

“The countries that together make up the euro area are undergoing a process of

far-reaching change, with established national financial markets merging into one new European market accompanied by deregulation, cross-border consolidation, and increased competition within the euro area.” (Tumpel-Gugerell, 2007)

All factors that cause market consolidation are present on the European online brokerage market. This results in the conclusion that the prediction of the management about the consolidation period seems to be justified.

2.2 Problem definition

In the previous paragraph the problem was described that the management of Organization X is facing. This organizational problem can be defined in the following problem definition: “The management of Organization X does not know to which European country their retail business should be expanded.”

2.3 Problem statement 2.3.1 Research Goal

To perform a market analysis that creates insight into which European market(s), has/ have the most preferred market characteristics for Organization X to expand their retail business to.

2.3.2 Research Question

On which European markets are the most preferred market characteristics for Organization X present and how could this be measured?

2.3.3 Sub questions

 Which market characteristics can be considered as preferred?  How could these characteristics be measured?

 What is the potential customer group of a market?

 Which market characteristics can be considered as “undesirable”?  How could these market characteristics be measured?

 How can the offerings of Organization X’s products be adapted to local preferences?

2.3.4 Research restrictions

1. This research only explores the potential of the markets of countries that are part of the European Union. This is because Organization X would be able to conduct business in these countries by making use of their European passport

2. The model that will be constructed in part three is especially developed for Organization X Specific characteristics and/or restrictions that are relevant for Organization X are applied. These characteristics and/or restrictions could influence the general applicable capabilities of the model. Part three of this research will discuss the general applicability of the model for online brokers and financial service organizations

restriction could be toned down. The higher the potential of the market, the more adjustments Organization X is willing to make

4. The management has a preferred formula to expand to a foreign market. This formula is making use of a penetration strategy. If an organization enters a market by using a penetration strategy (Leeflang, 2003), it charges substantial lower prices then its competitors. The goal of this strategy is to create a substantial market share in a short period of time. Before this restriction will be adopted in the research, it should be justified by making use of scientific literature. Could this strategy be used to enter a foreign market and in which situations is this strategy preferred?

Leeflang (2003) describes in his book under which conditions a penetration strategy is preferred. These conditions are:

1. The expected pricing elasticity on the market is high

2. The products are not exclusive. Competitors are able to imitate the product 3. The cost structure of the product makes it necessary to create economies of

scale

The first condition is that the pricing elasticity on the market should be high. This would mean that if Organization X charges a lower price for their products then the competitors, the investors on the market would switch from their current broker to Organization X Price is the primary motive for online trading (Teixeira, 1999). In contrast to banking customers, brokerage clients are aware of the fact that they pay for each transaction (Teixeira, 1999). The price awareness of the customers combined with the fact that the products of different brokers are the same, results in the conclusion that high price elasticity is expected. The only thing in which the products of different brokers can differ is the charged price and the amount of service that is provided.

The second condition is also applicable on the online brokerage market. The products that Organization X offers on the entered market are not exclusive. On a foreign market are other brokers already active. These other brokers offer the same services. The only things in which they can differ is the amount of customer service and the prices that are charged when a trade is made.

As stated earlier in this research, the online brokerage market is a transaction volume based driven market. The higher transaction volume a broker can achieve, the less commission costs will be charged by the stock exchange. This results in the conclusion that also the last characteristic is applicable on the online brokerage market. According to the literature of Leeflang (2003), we can assume that the pricing penetration strategy is applicable on the online brokerage market and could be an effective way to penetrate a foreign market.

must be able to give, at a certain point of time, insight into the current presence of the desired market characteristics on different markets

2.3.5 Visualization of the research

The following figure visualizes the order of how this research will be performed. Figure 2: visualization of the research

Fig.1

2.4 Product definition

This thesis described earlier the desire of the management of Organization X to expand their business to foreign markets. To successfully expand their business, numerous decisions have to be made about the most attractive way to expand the business. All these decisions combined are named the marketing mix (Neil, 1984). The marketing mix consists of the four P’s of marketing. The four P’s stand for:

1. Place (distribution) 2. Price

3. Promotion 4. Product

Before Organization X is able to enter a foreign market and conduct business, decisions should be made about the four P’s. When Organization X has made decisions about their four P’s, the marketing mix is completed. This marketing mix can be seen as a plan how the product should be introduced on the foreign market. How the four P’s interact and form combinations is visualized in the following figure. Not all P’s are in the scope of this thesis. The P’s will be discussed individually.

Figure 3: interaction of the four P’s

Chapter 3 & 4 Constructional Part:

The development of the instrument based on

literature

Chapter 5. Practical Part:

Making use of the instrument in the field

Chapter 6. Evaluation of the constructed model:

Criticize and evaluate the relevance of the

Place

This is the most important P in this thesis. The goal of this research is to determine which market has the presence of the most desired market characteristics for Organization X to conduct business. Based on this research, Organization X is able to make decisions about the P for Place.

Promotion

The decision that Organization X should make about the P for promotion is beyond the scope of this research. The goal of the research was to give insight which foreign markets have the most preferred market characteristics for Organization X to expand their business to. As soon as a market is chosen, promotion decisions should be made.

Price

In paragraph 2.3.4 of this research the restriction was mentioned concerning the penetration strategy. The literature review mentioned three conditions under which the penetration strategy could be applicable. To successfully make use of the penetration strategy, Organization X should charge a lower price for the provided services than the organizations that are active on the market.

This mean’s that the management of Organization X has a limited amount of freedom in their pricing choice. To successfully use the penetration strategy, Organization X should charge a substantial lower price then the competitors that are active on the foreign market. Product

The product that Organization X offers her customers is an account on her website. This account offers access to numerous financial markets, information and analyses. When this thesis discusses the product of Organization X, the individual account of the customer on the website is meant.

In the restrictions of this thesis was the desire of the management mentioned to offer products on the foreign markets as similar as possible as the ones on the domestic market. This similarity avoids operational difficulties and reduces the costs to enter the market. However, the product that Organization X offers her customers on the French market differs significantly from the product offered on the Dutch and Belgium market. The Dutch and Belgium website offer a lot of extra information and analyses that are available for every customer. The French website on the contrary offers no information or analyses at all. These features are available but are additionally charged. The absence of information and analyses on the standard account results in lower commission prices for trades. The products on the Dutch/Belgium market and the French are constructed with a different marketing mix. The previous example shows that there is some room for adaptation of the product to the needs of the market. However, the management prefers to make no adaptations at all.

Every market has its own limitations and different characteristics. These limitations and characteristics can influence the restrictions for the product and the needs of the potential customer group. Besides the differences in an international context, customers can also differ on a local market. As in almost every other company, the customer base of Organization X can be divided in different segments. Usually the customers are divided based on their transaction activity. Customers segments that are more or less active are in the possession of different needs (Annual report Organization X, 2007).

Numerous studies point out the importance to fulfil customer needs to compete as effective as possible (Dertouzos, 1989 and Kahn, 1998). So, to meet the needs of different customers, national as well as international, Organization X must offer different services that fulfil these needs. The more services offered, the more likely it will be that each customer finds exactly the option he or she desires and this will allow each individual customer to enjoy a diversity of options over time (Halman; Hofer and van Vuuren, 2003).

The more variety an organization offers, the more challenging it is to create this desired variety economically. More variety means more operational adjustments what results in more costs. The more the products differ, the more operational adjustments are needed. Because of all the operational adjustments, organizations would like to offer products that are as similar as possible. As stated above, this is not sufficient to meet the demands of the customer. To avoid as much operational adjustments as possible, it could be very rewarding to define the offerings in modules and platforms. Platform thinking, the process of identifying and exploiting commonalities among a firm’s offerings, target markets, and the processes for creating and delivering offerings, appears to be a successful strategy to create variety with an efficient use of resources (Halman; Hofer, and van Vuuren, 2003). So by making use of platform thinking, Organization X would be able to profit from the larger volumes in scale and still able to create different services with minimal adjustments. In the next part of this paragraph, the different products that can be offered on a foreign market will be defined by making use of the platform planning principle.

By making use of this platform planning principle, Organization X is able to offer different products to meet different needs without large operational adjustments. The website could consist of the following modules:

Modules:

1. Free custody account

2. Access package for different financial markets 3. Real-time streaming for market X

These first three modules are always part of the standard platform. The modules are available for every customer without any additionally costs being charged. The next modules could be part of the standard platform but could also be an additionally charged option. This is dependent on the choices that were made for the marketing mix.

4. Additional information packages 5. Advice from different analysts

6. Real-time streaming for different indices

Figure 3: platform-based view on different websites

Dutch Website:

Platform Additional packages Personalized Site Customer X

+ =

French website:

Platform Additional packages Personalized Site Customer Y

+ =

Now that the organization Organization X is introduced, the problem defined and the research goal set, it is time to construct an instrument to conduct this research. The instrument will be constructed by making use of scientific literature.

Additional services that can be bought

by customers

Personalized site for customer that is

adapted for her needs

1. 2. 3. 6. 7.

Standard Website offered by Organization X on the French market

Additional services that can be bought

by customers

Personalized site for customer that is

Chapter three: Defining the profile of the instrument

In this part of the research, the instrument will be constructed. Before the instrument can be constructed, the goals, capabilities and restrictions of the instrument should be defined. These defined goals, capabilities and restrictions will form a profile in which the instrument could be placed. Then, numerous alternatives that fit the profile for the instrument will be discussed. After one alternative is chosen, it will be constructed by making use of scientific literature. Finally, the findings of the literature review will be summarized and schematically visualized in a figure.

3.1 The goal of the instrument

The goal of this research is to perform a market analysis that should create insight into which European market(s), has/have the most preferred market characteristics for Organization X to expand their business. To be able to perform this analysis, an instrument should be developed. The goal of this instrument should contribute to the research goal.

The goal of the instrument is to create input on which the market analysis could be performed. This input consists of data concerning the market characteristics of different European markets.

3.2 Capabilities of the instrument

For the instrument to be able to reach its goal, it must be in the possession of numerous capabilities. The instrument should measure multiple influences on the attractiveness of foreign markets. The more preferred and undesired characteristics are measured, the more complete the data input for the analysis will be. So, the instrument should have the capability to measure multiple market characteristics that influence the attractiveness of markets. Information about these characteristics should result in a complete and reliable data input for the analysis.

Another capability of the instrument should be its ability to divide data in a systematic manner. This results in the ability to make it easier to compare different markets. By adding this capability of the instrument, it will be easier to perform the analysis

3.3 Restrictions of the instrument

future. The only thing needed is current data. It is also possible that in the future more or less characteristics should be measured. If, for instance the European Union decides that the legal restrictions in all European countries are the same, there is no need for the instrument to measure this anymore. The newly developed instrument can be adjusted to the current situation by removing this characteristic. It is also possible to add characteristics if this will be necessary in the future.

The final restriction that is obligated to the instrument is that the instrument should take all the restrictions of the research into account. These restrictions were described in paragraph 2.3.4.

3.4 Different alternatives that fit the profile of the instrument

The first alternative that fits the developed profile of the instrument is to make use of an instrument that is used earlier in the organization. This instrument was developed and used in 2006 to make a decision whether Organization X should expand their retail business to the German or the French market. Based on the analysis performed by this instrument the choice was made to expand to the French market. The instrument that was developed and used in 2006 consists of the following components:

1. Consumers: amount of consumers, how are they investing, in what are they investing, Internet penetration rate and what is their opinion against foreign providers

2. Exchanges: are there operational difficulties, how many transactions are conducted on the exchanges, how many exchanges are on the market and what kind of investment products are preferred

3. Product: what kind of trading systems are offered and what kind of information is offered for consumers

4. Competitors: how many competitors are active on the market and what is their pricing

5. Relevant laws: what are the relevant laws that are applicable on the online trading business

6. Marketing: how many resources are spent on marketing by the active organizations, how are the active organizations communicating and what kind of media is used for advertisement

The second alternative is to construct a new instrument. This instrument will be constructed by making use of scientific literature. The literature should give insight into which market characteristics influence the attractiveness of a potential market. These conditions, provided by the literature, are combined and adopted in the instrument. The characteristics should only be adopted if they are not alien with the given research restrictions

3.5 Motivation for chosen alternative

In the previous paragraph three alternatives were presented that fit the profile created for the instrument. The decision is made to make use of the third alternative. First, the advantages and disadvantages of each alternative will be discussed. After that, the motivation will be given why this research has chosen to make use of the third alternative. The biggest advantage of the first alternative is that an employee of Organization X developed the instrument. Because of this, the instrument is customized to the organization and is suited for the organizations characteristics. Another advantage is the ability to make use of something that does already exist. There are no resources needed to further develop an instrument. This is in alignment with the research restrictions that focuses on the control of the limited amount of resources that are available. The first alternative also has numerous disadvantages. The tool was developed in 2006. Based on the rapid developments on the market it is difficult to make an estimation if this tool is able to provide representative data if it is currently used. Another disadvantage of the instrument is that it was developed to make a comparison between just two markets. The instrument that will be used in this research should be able to compare twelve markets. The biggest disadvantage of this tool is that is not supported by scientific literature. There is no information available that explains why the instrument adapted these characteristics. The second alternative is to make a new instrument based on a literature review. The biggest advantage of this alternative is the scientific proof that is provided by the literature. The influence of the adopted characteristics is supported by the sources that were used in the literature review. This will improve the validity of the instrument. A disadvantage of the second alternative is that the used literature is not customized to the situation of Organization X It is possible that the results of the literature are also applicable for Organization X However, this assumption should be made with caution. The third alternative is a combination of the previous alternatives. The biggest advantage of this alternative is that it is able to combine the advantages of both previous alternatives. This alternative makes it able to combine the best of both worlds. It combines knowledge that is coming from Organization X’s own sources with scientific literature.

Table 2: table with advantages / disadvantages of the different alternatives

Advantages Disadvantages

1. Make use of the available

instrument from 2006

 Already customized tool  No resources needed to

develop

 Was used for much smaller comparison  Developed in 2006  Is not supported by scientific proof 2. Construct a new instrument based on scientific literature

 Based on scientific proof  The used literature is not customized for Organization X’s situation 3. Combine the available instrument with scientific literature

 Is able to combine the advantages of the previous alternatives

 Contradiction between scientific proof and the existing instrument

The decision is made to choose the third alternative. Because its ability to combine the advantages of the previous alternatives, it is suited best for the specific restrictions that are given for this research. This alternative makes it possible to combine specific knowledge from Organization X and support/complete it with scientific proof.

Chapter four: Construction of the new instrument

As described in the previous chapter of this thesis, the decision is made to construct a new instrument based on two sources. One source that will be used is the instrument that was developed several years ago by an employee of Organization X This instrument is customized for the organization but is not supported by scientific proof. This existing instrument is also constructed with different restrictions, resulting in the possibility that we need to remove or adapt some components that are in contradiction with the restrictions that are tied to this research.

4.1 Removing several components of the existing instrument

The existing instrument forms the basis for building the new instrument. However, some components of the instrument should be removed. The removal of components is due to one or more of the following reasons:

1. differences in the restrictions of both researches

2. differences in the amount of resources that can be spent on the research 3. the difference in the goals of both researches

For every removed component of the existing instrument, the applicable reason(s) will be discussed.

This research is the first step in the exploration process of foreign markets. The goal of this research is to create insight into which European market(s), has/have the most preferred market characteristics for Organization X to expand their business to. After this information is available, and a few markets with the most preferred characteristics are known, a new research should further investigate these markets. This new research is a much more in depth research that will adopt different characteristics. This instrument, because of the restrictions that were given, was not able to measure these different characteristics.

The instrument that already exists was used as a tool to make the final analysis for the presence of the preferred market characteristics on the French and German market. So the difference in the fact that the new developed tool will be used as a first exploration tool and the existing tool was used as the only tool, resulted in the removal of several characteristics of the existing instrument. The newly developed instrument will be used on twelve markets. If, for instance, a market does not offer potential because there are no investors on the market, it does not offer any value to commit resources to investigate the presence of other characteristics on that market. Because of this the following characteristics and components are removed from the existing instrument:

 Relevant laws that are applicable on the online trader business: This is beyond the scope of this research. There are not enough resources to investigate the legal restrictions of the twelve markets. And, in some cases, it will not even be necessary to commit resources to this characteristic because of the absence of other preferred characteristics.

 Marketing usage of the organizations that are active on the market: If a market is chosen to which Organization X will expand their business, it could be very relevant to investigate how the organizations that are active on the market are conducting their marketing activities. This research is not able to measure this characteristic. This is due to the limited amount of resources that could be spent to conduct this research. However, it will be a valuable characteristic for the more in depth research that will be performed after this first exploration research is performed.

 The kind of information and trading applications that are offered for the

consumers: To gather this kind of information from every active organization on

all the twelve markets, will take to many resources. The new instrument focuses on the information trend of a market.

Nipo. The new instrument is only able to use secondary data because of the limited amount of resources that are available. This characteristic should also be investigated in the more in depth research. This characteristic is not as important as for instance the size of the potential customer group and the prices that are charged by competitors. However, it is useful to gather this kind of information when a market is entered or when the decision between two or three markets should be made. To gather this kind of information does not have the same priority as the other characteristics in the instrument. Because of the limited amount of resources that is available, the decision is made that the newly developed instrument will not measure this characteristic.

After deleting the characteristics that were in conflict with the goal and restrictions of this research, the following characteristics are left:

1. Customers: amount of customers, Internet penetration, how are they investing and what are they investing in

2. Exchanges: How many transactions are conducted on the exchanges, how many exchanges are on the market and what kind of investment products are preferred 3. Competitors: how many competitors are active on the market and what is their

pricing

These characteristics should probably also be adopted in the newly developed instrument. However, their adoption should be supported with scientific proof. The next paragraph will perform a review on scientific literature to support the adoption of these characteristics in the newly developed instrument. Besides supporting the existing characteristics, literature will also be checked to find more characteristics to construct the new instrument.

4.2 Supporting and constructing the characteristics of the new instrument

Every instrument performs on one or several aggregation level(s). This new instrument should be developed to function on a macro market level. It is the first tool in the exploration process. The instrument will not adopt al factors that influence the attractiveness of the market. Because of two reasons this is not possible either. The first reason is the limited amount of resources spent on this research. The second reason is that the model should be easy to use and perform a first exploration. After the results are available the organization can decide which markets should be further analyzed. In this process, more resources should be spent on a smaller subject group. If all influences on the attractiveness of the market were included, the instrument would no longer be easy to use and be able to meet the restrictions of this research. To be able to compare the different European markets, a uniform measurement instrument has to be constructed. To explain the thought behind this instrument, a metaphor is used.

Potential market: “ the consumers who have at least the slightest interest for the offered

product.” For this research that would be: all the consumers on a market that have the slightest interest to conduct their investment transactions with an online broker.

Available market: “ consumers who, besides the interest, have the resources to gain

access to the market.” For this research that would be: all the consumers that are not just interested, but are also in the possession of the financial resources and have access to a computer with Internet to conduct their investment transactions with an online broker.

Already entered market: “ amount of customers that have, at least once, already bought

the product.” For this research that would be: all the consumers on the market that, at least once, have already conducted their investment transactions with an online broker.

Attended market: “ the part of the available market that the bidder of the services

focuses on”. For this research that would be: the consumers that belong to the specific target group that Organization X focuses on when the market is entered. This group could be different per market. It is also possible that the already entered market and the attended market are the same. This depends on the maturity of the online brokerage market How the maturity of the online brokerage market influences the attended market will be discussed later in this chapter.

4.2.1 Potential market

The potential market consists of all the customers who have the slightest interest for the offered product. Because of the limited resources spent on this research, choices had to be made on how the resources were spent. This research starts with identifying the available market. The thought behind this is that information about the potential market will be very general and does not offer as much insight as the available market. To measure all the individuals on a market that have the slightest interest in the product will be quite some work. How could the slightest interest be measured? For this research it will be more valuable to identify the size of the available market. These customers are not only interested but are also able to conduct business with an online broker. Because of this reason, the decision is made not to measure the potential market but start with identifying the available market.

4.2.2 Available market

To be able to make use of the services that an online broker offers, a customer needs to have access to a personal computer with Internet. Because the services of an Internet broker are tied to these restrictions, the instrument should measure for every market how many people are able to conduct business with an Internet broker despite these restrictions. These figures will provide insight into the size of the available market. Because of these restrictions, there is a relationship between the amount of Internet usage and the economic situation of the market and the available market. This relationship should be adopted in the instrument. The characteristics of the Internet usage and the economic situation will be part of the component “macro economic characteristics of the market” in the instrument.

the Internet? If the inhabitants of the local market are already used to make certain financial transactions by making use of a personal computer and the Internet, less adaptive behavioural change is needed to become a customer of an Internet broker. Gourville (2006) explored why less adaptive behaviour is preferred.

Gourville (2006) explains in his article why some new products/services are a success and why others aren’t. Despite the fact that both products/services have clear benefits, they are not all adopted in the market. Gourville (2006) explains this by the amount of behavioural change that is needed for the customer to make use of the product/ service. If the new product/service requires a lot of behavioural change, consumers will be reluctant. The more behavioural change is needed, the more benefits the product/service should offer. This means that it would be preferred for Organization X if customers are able to make use of their services without the need to change their behaviour. This would mean that the consumers on the market al already used to conduct financial transactions by making use of the Internet. How this could be measured will be discussed later in this research.

Besides the embeddedness of the Internet, the development of the market will also be included in the model. Cooper and de Bretani (1991) state that the attractiveness of a market is a key success factor that influences the success of a product/service on a market. This can be measured by the size of the market, the amount of needs on the market and by whether the market is growing. This results in the adoption of these three characteristics in the instrument.

For this research the size of the available market will be the amount of investors on the market. The amount of needs on the market would mean the amount of transactions these investors conduct but also in what kind and in which manner they do conduct these transactions. There should also be a factor that measures the growth rate of the market. How is the market economically developing? Now that these characteristics are adopted, the next chapter will be used to explore how these characteristics could be measured. Almost every research that investigated the amount of success of a product/ service on a market points out one key factor. This key factor is the amount of fit between the needs of a market and the offered products/ service (Thomke, 2003; Sawhney, Balasubramanian and Krishnan 2004, Terrill, 1992, Cooper and de Brentani 1991, Slater and Narver, 1994). It would be very relevant for this research to explore what the needs of the market could be. Based on that information, Organization X can decide if they can fulfil those needs. The more an organization will succeed to fulfil needs, the more value it will create for her customers. This has a positive influence on the organizational results. The more Organization X will be able to create value for her customers, the more attractive the market will be. This results in a positive relation between the ability of Organization X to create customer value on a market and the presence of the preferred market characteristics on that market.

4.2.3 Already entered market

The size of the entered market will be valuable information for this research. If these figures are known, it can be estimated how the market is divided among traditional brokers and Internet brokers. As described in the previous paragraph there is a positive relationship between the ability for Organization X to create customer value and the presence of the preferred market characteristics on the market. However, the ability for Organization X to create customer value is also dependent on the ability to create customer value by the already entered market. If active organizations on the market are not able to fulfil certain customer’s needs, there is a possibility for other organizations to create customer value. This results in a relationship between the already entered market and the ability to create customer value. The way in which the already entered market is served, influences the ability to create customer value.

The size of the already entered market will also provide other valuable information. It will reveal if the foreign market is or isn’t in the possession of an established online brokerage market. Foreign markets could be in the possession of a mature online brokerage market with several competitors. It is also possible that on a foreign market one online broker recently started. The maturity of a market has implications for the strategy that could be used when the market is entered. Based on this information an organization can decide what their attended market could be.

“ The role of on-line technology will differ in each retail financial line of business. Expensive, valuable, and important transactions enacted by niche market segments will be shifted into on-line technology first. We see this clearly today in on-line trading.”

(Anderson, 2000)

Figure 5: Roger adoption/ innovation curve

market on a potential market is still not evolved yet, this group should be the target group. The day investors will be the most willing to switch from their traditional broker to a new online broker. The benefits provided by the online broker are for them the most valuable. That’s why they will be more willing to switch. However, when a market has the attendance of one or several on-line brokers we can assume that these early investors are already their customers. On such a market Organization X could besides trying to compete versus the established brokers for these day investors, focus on the less-active investors. These people will be in the early and late majority groups.

“ The less-active investors have different motivations and may be more profitable. They trade less frequently, have longer-term investment horizons, buy funds instead of equities, or lack the ability to select their own securities. Because they pay higher commissions, they generate more than 90% of all brokerage revenue and will continue to be an attractive customer segment” (Anderson, 2000)

The more mature the market is, the more diverse the customer base of an online broker will be. (Anderson, 2000) As stated earlier, this information has great implications for the strategic marketing choices that have to be made when a market is entered.

Besides being able to determine the maturity of the market, investigating the organizations that are part of the already entered market could result in other interesting data. By reading the annual reports of all active organizations, it will be possible to estimate the size of the already entered customer group.

In the instrument is a positive relationship between the potential customer group and the attractiveness of the market. The more clients Organization X could create on a market, the more revenues will be gathered and the more attractive the market will be.

4.2.4 Competitors

One of the goals of an organization is to create value its shareholders (Chambers & Lacey, 2004). To increase the wealth of the shareholders, an organization will try to obtain profits. To obtain profits, an organization must create value for her customers. This value can be created by offering something no one else can offer or against a lower price. So the penetration of a foreign market will only be profitable for Organization X if the organization is able to create value for the customers on the market. This could be created by the amount of fit between the needs of the customers and the provided services by Organization X and/or by a lower price. These two dimensions are already adopted in the instrument based on the previous paragraph.

"Traditional banks have the products already, but they need to make them work together better than they have and need to package them better than they have. Our research indicates that a lot of people do both online brokerage and online banking, but for the most part only Internet banks have successfully melded the two” (Anderson, 2000)

For an online broker it is much easier to create a competitive advantage over a traditional bank than over other online brokers. When an online broker is competing against a traditional bank, it is competing against an organization that has the goal to provide services threw through Internet not in its core business. An online broker focusses on the Internet. In general, an organization that is specialized in the Internet will have more expertise and better abilities to exploit this sales channel than a traditional organization. For traditional organizations it is an enormous challenge to balance strategy and operations between electronic commerce and traditional business channels (Bahn and Fischer, 2003). Anderson (2000) confirms this thought: “Banks have a great brand, but they have to create a second online brand.”

This does not mean that a market only offers potential if there is not an online broker active. A market offers potential as long as the Organization X is able to create more value for customers then the competitors on the market are currently providing.Some traditional banks are capable of providing their customers with almost the same quality of services as Internet brokers. However, Internet brokers are able to provide these services for lower commissions. So a price advantage can be achieved here.

Price is the primary motive for online trading instead of convenience or better access (Teixeira, 1999). However, in contrast to banking customers, brokerage clients are aware of the fact that they pay for each transaction (Teixeira, 1999).

Customers also consider the extra services that are offered by Internet brokers as valuable, such as third party equity research and stock screening. Besides price the additional services that are offered should be considered. The offered services are less important than price. These characteristics will be more important in a more competitive environment where the spread in prices among competitors is small (Doyle, 2007). In that case additional services can create a competitive advantage (Teixeira, 1999). Especially when these services can create a lot of convenience for customers. Anderson (2000) says that many investors will prefer the convenience of linked accounts to features such as research.

4.2.5 Attended market

The decision on what the attended market of Organization X should be when the market is entered, is beyond the scope of this research. As stated earlier in this theoretic review, the attended market will be influenced by the maturity of the market.

One of the restrictions of this research was the desire of the management to enter a foreign market by making use of a penetration strategy. It was also investigated under which conditions this strategy is preferred. However, it cannot be expected that every market will fulfil these conditions. If a market is attractive but should not be entered by making use of a penetration strategy, the management is willing to make use of another strategy. Because of the expectation that the research will also reveal attractive markets that cannot be entered with the penetration strategy, there is a need to further investigate which different strategies could be used to enter foreign markets. A brief overview of different strategies that can be used will be given in the discussion of this thesis.

4.3 Visualization of findings

In the previous paragraph several characteristics where found that had to be adopted in the model. These findings are visualized in the following figure.

Figure 6: visualization of the instrument

Presence of the desired market characteristics

Market Macro economic characteristics

of the market:

 Economical development of the market

 Amount of online banking  Internet penetration

Ability to create customer value on foreign market based on:

 Price

 Fit between provided services and expressed needs of the market

Potential customer group

Already entered market:

 Traditional Bank  Internet Bank

4.4 Measurement of the findings from the literature

In the previous paragraph scientific literature was used to construct an instrument that will give insight in the presence of the preferred market characteristics for Organization X The literature gave insight into which characteristics should be measured and adopted in the instrument. The literature did not give us any insight as to how these characteristics should be measured in the most valid and reliable manner. In this part of the thesis will be discussed how these characteristics will be measured.

4.4.1 Measurement of macro economic characteristics of the market

The macro economic characteristics of a market are numerous. Because of the resources and restrictions that where obligated to this research, it is not possible to adopt them all. The choice was made for those economical characteristics that are connected to the restrictions of Organization X and those of the research. The decision is made for the following three: Internet usage, Internet embeddedness and the economical development of the market. This decision is based on the findings in the scientific literature review that was performed in the previous paragraph.

The Internet usage will be measured by the percentage of inhabitants that are making use of the Internet. The assumption is made that this data is easy to gather. There are probably numerous studies that investigated the usage of Internet in different European countries. However, if for every country a different research is used, it will be difficult to compare the different markets. It is expected that data about the Internet penetration rate for every market will be easy to gather. For this research it is expected that the Internet penetration rate is the best indicator for the Internet usage on the different European markets.

In the previous paragraph Gourville’s (2006) literature was used to conclude that the more behaviour change is needed, the more benefits the product/service should offer. The combination of limited required behaviour change and significant benefits of the new product maximizes the chances on a successful adoption of the product on a new market. This means that it would be preferred for Organization X if customers were able to make use of their services without the need to change their behaviour. Figure four shows Gourville’s (2006) adaptive behaviour matrix.

The less required behaviour change is needed, the more favourable this is for Organization X If the habitants of a market are already conducting most of their banking business online, their behaviour needs considerable less change to use the services of an Internet broker than if they don’t. So, if the Internet is so far embedded in the society that it is used to conduct financial transactions consumers need less behaviour change to make use of the services of an online broker. On these markets the services of the online broker will sooner be seen as a “ smash hit” instead of a “ long haul”. This will make the services easier to sell. So, the amount of people that are conducting their banking business online is a good indicator for how deep Internet on that market is embedded. The further the Internet is embedded, the less required behavioural change is needed for consumers and the easier it will be to sell the services. To measure the embeddedness of the Internet the percentage of inhabitants is used that conducts their banking business online.

There is also another reason why the usage of Internet for financial transactions is a good indicator of the attractiveness of the market. A recent research performed by van Tongeren (2007) why Europeans do not buy financial products online, revealed several factors that influence the decision to buy or conduct transactions on the Internet. These factors are: desire to speak to someone, lack of trust and/ or do not see the advantage, finding it too complicated. These factors are also relevant for online brokerage. So, if the percentage of customers that conducts financial transactions by making use of the Internet is high, the factors named earlier do not apply to them. That means that these factors most likely also would not apply to them in the decision to make use of an online broker.

Another indicator that will be used for the embedness of the Internet is the amount of broadband connections in percentage. A broadband connection is the most sophisticated Internet connection that is available. The more broadband connections in a country, the more embedded the Internet will be.

The economical development of a country can be measured in numerous ways. For this research is chosen to use the real growth in GDP as measurement tool. Upcoming markets are characterized by growing GDP’s. A higher real GDP growth rate has a positive influence on the presence of the desired market characteristics. So, by using the real GDP growth rate it is expected to get, on an easy and reliable manner, insight into the economical development of the market. This data is easy to gather and will make it possible to compare different markets.

4.4.2 Measurement of the already entered market

4.4.3 Measurement of the ability to create customer value

In the literature review it was concluded that the ability to create customer value on a foreign market strongly influences the attractiveness of a market. Organization X could create this customer value based on price or based on the provided services. The ability to create value based on price will be investigated by making a comparison between the prices that are charged by organizations that are active on the already entered market and the prices that Organization X used to enter the French market. The management expects that if a foreign market is entered, the prices that will be charged on the entered market will be based on the pricing model of Organization X France. The kind of fixed costs and annual depot fees charged by local brokers will also be investigated and compared. The ability to create value based on services will be measured by analyzing the services that are provided by organizations that are active on the already entered market. Are they offering foreign exchanges, complex trading applications and/or multiple sales channels? The ability to create value based on services is less important then the ability to create value based on price. This is because of the penetration strategy restriction.

The ability of Organization X to fulfil needs on the market is dependent of the needs of the market. This research is not able to investigate the needs of a market itself. To identify needs, this research is dependent on other available information. However, it is not expected that other parties are willing to make this valuable information public. The ability to identify needs on foreign markets is expected to be one of the shortcomings of this research.

4.4.4 Measurement of potential customer group

This is probably the most important characteristic for the attractiveness of a market that has to be investigated by this research. The potential customer group will be measured in numerous ways. Because of the lack of resources in this research we are dependent on secondary data. By gathering as much secondary data as possible from multiple sources it is expected to get as much insight as possible into the potential customer group. The usage of multiple sources should also increase the reliability of the research.

The first source of information is the annual report of the local stock exchange. In most annual reports figures are given about the amount of trades done per instrument and per exchange. Sometimes information is given about the percentage of trades performed by retail clients.

Another source of information is reading the annual reports of all organizations that are active on the market. In the annual reports information is given about the amount of clients that are served by the organization. By combining the figures of all the annual reports, estimations can be made about the potential customer group.