2008:122

B A C H E L O R T H E S I S

The Relationship between ForeignMarket Expansion Strategies

and Foreign Market EntryStrategies for SMEs

Flora Bendt Malgorzata Skropska

Luleå University of Technology

Bachelor thesis Business Administration

Department of Business Administration and Social SciencesDivision of Industrial Organization

2008:122 - ISSN: 1402-1773 - ISRN: LTU-CUPP--08/122--SE

I

Abstract The increased developments of technology and falling barriers of trade have been encouraging companies all over the world to internationalize. Not only multinational companies but also small and medium-sized enterprises succeed in conducting business on foreign markets. When deciding to internationalize, small and medium-sized enterprises face the need to develop a foreign market expansion strategy as well as a foreign market entry strategy. Market expansion strategies treat of the amount of markets to enter and the temporal approach chosen. The main strategies are country diversification and country concentration. A market entry strategy contains the level of commitment of resources planned for each market. Typical entry modes are export and foreign direct investment. This research explains the interrelations within and between market expansion strategies and market entry strategies. Our aim was to gain deeper understanding about the possibilities for small and medium-sized enterprises to combine market expansion with market entry strategies. For that we conducted a case study of a Swedish firm that is active on international markets. As a result we found out that the combination of market expansion and market entry strategies can diverge from theory. An important factor affecting a firms choice of strategies is the financial background. Key words: market expansion strategy, market entry strategy, internationalization, small and medium-sized enterprises, export, foreign direct investment.

II

Sammanfattning Den ökade utvecklingen av teknik och avtagande handelshinder har uppmuntrat företag över hela världen att internationalisera sig. Inte bara multinationella företag utan även små och medelstora företag lyckas göra affärer på utländska marknader med framgång. Vid beslut att internationalisera sig står små och medelstora företag inför behovet att utveckla en marknads expansionsstrategi och en inträdesstrategi på marknaden. Marknads expansionsstrategier behandlar utsträckningen av marknader företaget väljer att gå in på samt den tidsmässiga metod som valts. De viktigaste strategierna är land diversifiering och land koncentration. Marknadsinträdesstrategin innehåller de engagemang av resurser som planeras för varje marknad. Typiska inträdesstrategier är export och utländska direktinvesteringar. Denna forskning förklarar samspelet inom och mellan marknadens expansion strategier och marknadsinträde strategier. Vårt mål var att få djupare förståelse om de möjligheterna för små och medelstora företag att kombinera marknadens expansion med marknadens inträdesstrategier. Vi har genomfört en fallstudie av ett svenskt företag som är verksamma på den internationella marknaden. Som ett resultat vi fick reda på att kombinationen av expansionsstrategin och inträdesstrategin i praktiken skiljer sig från teorin. En viktig faktor som påverkar ett företags val av strategier är dess finansiella bakgrund. Nyckelord: market expansion strategy, market entry strategy, internationalization, small and medium-sized enterprises, export, foreign direct investment.

III

Acknowledgements We would like to thank our Supervisor, TorBjörn Nilsson for his help during the process of writing this thesis. Mr. Nilsson has supported us with his professional view on our work. We would also like to thank our respondents who gave us valuable insights concerning the decisions a company has to face when choosing its market expansion and market entry strategies. Luleå, June 2008 ______________ ___________________ Flora Bendt Malgorzata Skropska

IV

TABLE OF CONTENTS

1. INTRODUCTION................................................................................. 1

1.1 BACKGROUND ..................................................................................................................................... 1 1.2 PROBLEM DISCUSSION ......................................................................................................................... 2 1.3 PURPOSE AND RESEARCH QUESTIONS ................................................................................................ 4 1.4 DEMARCATION .................................................................................................................................... 4

2. LITERATURE REVIEW ........................................................................ 5 2.1 GENERAL ASPECTS OF INTERNATIONALIZATION ................................................................................ 5 2.2 FOREIGN MARKET EXPANSION STRATEGY .......................................................................................... 6

2.2.1 Concentration ................................................................................................................................. 7 2.2.2 Diversification................................................................................................................................. 8 2.2.3 Foreign market expansion strategy development................................................................................... 9

2.3 FOREIGN MARKET ENTRY STRATEGY.................................................................................................10 2.3.1 Export ..........................................................................................................................................11 2.3.2 Foreign direct investment (FDI) .......................................................................................................12 2.3.3 Foreign market entry strategy development.........................................................................................13

2.4 COMBINING FOREIGN MARKET STRATEGIES ......................................................................................14 2.4.1 Export and diversification................................................................................................................15 2.4.2 FDI and concentration ....................................................................................................................16

2.5 CONCEPTUAL FRAMEWORK ...............................................................................................................18 3. METHODOLOGY............................................................................... 19

3.1 RESEARCH PURPOSE...........................................................................................................................19 3.2 RESEARCH APPROACH ........................................................................................................................19 3.3 RESEARCH STRATEGY.........................................................................................................................20 3.4 SAMPLE SELECTION .............................................................................................................................21 3.5 DATA COLLECTION METHOD ..............................................................................................................21 3.6 VALIDITY AND RELIABILITY.................................................................................................................23

4. EMPIRICAL DATA: A CASE STUDY OF COMPANY X....................... 25 4.1 COMPANY BACKGROUND ...................................................................................................................25 4.2 FOREIGN MARKET EXPANSION STRATEGY .........................................................................................26 4.3 FOREIGN MARKET ENTRY STRATEGY.................................................................................................27 4.4 COMBINING FOREIGN MARKET STRATEGIES. .....................................................................................28

5. DATA ANALYSIS ............................................................................... 29 5.1 MOTIVES OF INTERNATIONALIZATION...............................................................................................29 5.2 FOREIGN MARKET EXPANSION STRATEGY .........................................................................................29 5.3 FOREIGN MARKET ENTRY STRATEGY.................................................................................................30 5.4 COMBINING FOREIGN MARKET STRATEGIES ......................................................................................31

6. CONCLUSIONS AND FINDINGS........................................................ 32 6.1 CONCLUSIONS FROM THE STUDY .......................................................................................................32 6.2 SUGGESTIONS FOR FURTHER STUDY ..................................................................................................33

REFERENCES APPENDICES

V

List of Tables Table 2.1: A classification of motives for internationalization Table 3.1: Different research strategies Table 3.2: Different methods to collect data List of Figures Figure 2.1: Alternative market expansion strategies over time Figure 2.2: The Scandinavian stages model Figure 2.3: Conceptual Framework

1

1. Introduction This chapter will introduce the main topic that will be researched throughout the thesis. It starts with a background and is followed by a problem discussion. The purpose of this study as well as the three research questions will be presented.

1.1 Background The globalization increases in today’s business society. Internet and other communication systems, fast travel and low tariff barriers accelerate the global business (Czinkota 2001). Individual business needs to follow the development of new competitive advantages such as international relationships. The strategic choice of how to expand to new geographical markets has remarkable influence on a company’s performance (Hollensen 2003). Constant and easy access to information simplifies a firm’s opportunities to internationalize. Also, the fast technological improvements will create new opportunities for companies in the future (Gillespie, Jeannet &Hennessey 2004). Smaller companies have gained better access and opportunities to enter foreign markets through globalization (Knight 2001). SME is an abbreviation for small and medium sized companies. It refers to companies in all industries as long as a given size is not exceeded. The main criteria for a SME is to have less than 250 workers, a maximum of 40 million euros annual turn over and owning managers or their families as managers (Knight 2001; EC 2005). One question that comes up is how SMEs may enter foreign markets to reach new customers. There are great gaps between countries considering technology. Constant innovation and technological leadership can be a starting point for growing companies to obtain a niche and gain market shares (OECD 1997). Though, entering and establishing on foreign markets is a complicated process affected by factors such as the choice of multidimensional competitive strategies (Bradley 2005). To be successful in new markets, managers should formulate an appropriate market expansion and market entry strategy. Bradley (2005) and Hollensen (2003) point out the first decision to make is the type and number of markets to expand into before determining a concrete entry strategy. The definition of market is broad; therefore this thesis defines market as one foreign country throughout the whole paper. This research places emphasis on SMEs' process of internationalization. More specifically, the relationship of foreign market expansion strategies and foreign market entry strategies shall be analyzed by comparing their degree of flexibility, risk and control. Here, the ability to react on altering circumstances on the international market determines the level of flexibility. Risk is defined as the risk to loose financial investments a company undertakes when entering a foreign market. How high control a company has is determined by the level of influence to affect the foreign market but also physical presence.

2

1.2 Problem discussion Ayal and Zif (1979) define two major expansion strategies a firm can choose from: market diversification and market concentration. In a concentration strategy a firm directs all or most of its recourses to a single or a few markets. In this strategy, a SME chooses to pursue a large share of one or a few submarkets as it is based on a long-term view of opportunities in international markets. The SME is more devoted to constructing a close contact with customers, suppliers and distributors. Prices are determined with an objective of sales growth, therefore a company is more than willing to sacrifice their short-term profits (Bradley 2005). Advantages with a concentration strategy are gaining great market knowledge and a high level of control that is obtained through the physical presence on the market. However, to enter a foreign market, heavy investments are required which can be described as a high financial risk. Furthermore, concentration strategy implies a level of low flexibility concerning the ability to react on a sudden decrease of a markets demand (Hollensen 2003). Diversification strategy allows the SME to penetrate a large number of markets. Bradley (2005) portrays the strategy's intention to be generating a high profit at low costs. Advantages with diversification strategy are a high level of flexibility and rapid obtainment of competitive advantages. According to Hollensen (2003) the strategy is a risky option when expanding to a new market with a new product due to operating on unfamiliar territory. Moreover, the company does not operate physically on the foreign market which gives them low control. However diversification can be a positive move to enlarge the demand of existing capability within the company. Furthermore, a low level of investments reduces the financial risks when expanding internationally. According to Ayal and Zif (1979) the two expansion strategies converge towards each other in the long term. Still, it is only possible to conduct one expansion strategy at a time (Ibid). A SME's strategic choice whether to conduct market concentration or market diversification does not exclude the international expansion problems that can emerge. Both strategies have strengths and weaknesses which makes it very difficult for the company's decision maker to find the relationship between the SME's situation and a possible strategy (Bradley 2005). Another consideration must be done in terms of a fitting market entry strategy. Hereby, people in charge must decide about the desirability and potential of flexibility, risk and control on a foreign market (Bradley 2005; Hollensen 2001). Market entry strategies reach from export over franchising, licensing and joint ventures to foreign direct investment (FDI). According to Bradley (2005) there is a strong relationship between market expansion strategy and market entry strategy. The two most common market entry strategies for SMEs are export and FDI (Lu & Beamish 2006). Export includes the lowest level of risk and control, at the same time it is considered to be the easiest way for companies taking the first step to enter a new market (Lu & Beamish 2006). Small and medium sized firms have few resources to commit to the planning and implementation of internationalization processes. By not investing in foreign subsidiaries and markets the financial risk for the company is limited. Another advantage is the high

3

flexibility. In case of any political or legal changes adversarial to the firm’s business a fast withdrawal from the market is possible as well as focusing on other attractive markets. Exporting is a fast way of entering new markets, also because the SME supplies other markets by using existing production locations instead of building new ones abroad. With a low level of investments and fast access to foreign markets export is a likely entry strategy to achieve high sales volume (Lu & Beamish 2006). Foreign direct investment on the other hand is an entry strategy with a high level of control and risk and low flexibility. By establishing sales subsidiaries in target markets the firm is confronted with the need for major investments (Bradley 2005). Advantages with FDI are connected to the SME’s position within the foreign market. Business relations to local competitors, clients and distributors are usually closer and easier to develop. Therewith, the company can easier overcome the “liability of foreignness” (Zaheer 1995). Furthermore, FDI holds the potential for a SME to gain valuable knowledge about operating in foreign markets. This organizational learning can be useful for further internationalization intentions (Lu & Beamish 2006). Considering market entry strategies several authors determine a tendency of changing them dependent on developing factors such as market knowledge, experience and financial resources (Bradley 2005; Bilkey & Tesar 1977). After creating preconditions a company could benefit from more complex entry strategies than export. According to Bradley (2005) this would display the development of entry strategies starting with export and ending with FDI. The choice of a market expansion strategy is related to the choice of a certain market entry strategy. Based upon the review of literature, expansion strategies and entry strategies can be described with similar determinants: flexibility, risk and control. Thus, there seems to be an existing interdependence between the decision of market expansion and market entry strategies. Furthermore, literature mentions and carefully indicates the connection between the two strategies (Ayal & Zif 1979; Bradley 2005). Mainly, market diversification is associated with export, while market concentration is seen to be connected with foreign direct investment (Bradley 2005). However, most research within international marketing concentrates on analyzing either market expansion strategies or market entry strategies (Buckley & Casson 1998; Katsikeas & Leonidou 1996). The following research focuses on the relation between market diversification and export as well the relation between market concentration and FDI. As mentioned above, concentration and diversification converge towards each other (Ayal & Zif 1979). According to Bradley (2005) there is a relation between export and market diversification as well as between FDI and market concentration (Bradley 2005). Furthermore, literature illustrates tendencies of development from export to FDI. Consequentially, this should lead to the assumption that there may be situations, when a SME combines one expansion strategy with several entry strategies.

4

1.3 Purpose and research questions The purpose of this study is to gain deeper understanding of the relation between market expansion strategy and market entry strategy for a SME when expanding internationally.

1. Is the choice of diversification as foreign market expansion strategy a prerequisite for conducting export as market entry strategy for SMEs?

2. Is the choice of concentration as foreign market expansion strategy a prerequisite for conducting foreign direct investment as market entry strategy for SMEs?

3. Can a foreign market expansion strategy be combined with several foreign market entry strategies?

1.4 Demarcation When a firm faces international challenges and widens its influence beyond domestic markets management has to make important decisions. Both planning and resources need to be optimized in order to achieve a smooth and cost-effective transition. The process of internationalization consist of several stages, each of them deserves closer attention. This research paper focuses on the step of establishing foreign market strategies. Market expansion strategies and market entry strategies are closely connected to each other and shall take center stage. To be able to gain a deeper understanding about both strategy fields and ponder on particular aspects at the same time, we analyze the interrelations between concentration and foreign direct investment as well as diversification and export. The interrelation will be measured by risk, control and flexibility. A further containment is the investigation of the strategies’ implementation by SMEs in the medical technical business.

5

2. Literature Review This chapter will cover the main theories regarding SMEs that are going to operate internationally. First an overview of the internalized world is presented followed by possible reasons for companies to expand. Finally market expansion strategy and market entry is analyzed.

2.1 General aspects of internationalization To be called an international business a company needs to undertake transactions between two or more countries (Daniels & Radebaugh 2001). International business has long been seen to belong to the large and rich companies. That view has changed in the last few years when evidence indicates that small and medium-sized companies are emerging and playing a very important role in international business (Knight 2001). International business is a great part of the world’s total business and most companies and economies are affected by today’s global events (Daniels & Radebaugh 2001). SMEs are a huge part of the world’s internationalization (Daniels & Radebaugh 2001). Rapid increase in and expansion of technology, lower governmental barriers to the movement of goods and development of institutions to support international trade have allowed smaller companies to operate internationally (Bradley 2005). SMEs in particular have adapted quickly to the development and account for 95 % of business in general and roughly 50 percent of the total value worldwide. Depending on the country SMEs generate 60 percent up to 90 percent of all new work opportunities (OECD 1997). Further indications for growing international business are new products that quickly become known all over the world, companies that produce in different countries and competitors, suppliers and customers that have become international. SMEs are very quick to take action rapidly to many sales opportunities on the international markets. They can shift their production rapidly among countries and are efficient in terms of transporting goods all over the world (Daniels & Radebaugh 2001; Knight 2001; Gupta & Govindarajan 2000). Before a firm decides which market to enter and how to do so, there should have been particular stimuli for internationalizing business activities. Albaum, Strandskov and Duerr (1998) arranged common stimuli as shown in table 2.1. They categorize internal stimuli initiated from inside the firm and external influences generated by the business environment, which includes home and foreign markets. Furthermore, the export motives result either from a proactive approach, which indicates a firms interest in exploiting particular market benefits; or from a reactive approach as an answer to pressures the firm is exposed to.

6

•Unsolicited orders•Small home market•Stagnant or declining home market

•Risk diversification•Extend sales of seasonal products

•Excess capacity of products

Reactive

•Foreign market opportunities•Change agents

•Managerial urge•Growth and profit goals•Marketing advantages•Economies of scale•Unique product/technology competence

Proactive

ExternalInternal

Table 2.1: A classification of motives for internationalization Source: Albaum et al (1998) Motives for SMEs to initiate international activities often seem to be of external reactive nature (Bilkey & Tesar 1977). Internationalization is a stepwise process, which often begins by SMEs receiving unsolicited orders or exporting on an experimental basis (Ibid). Also, SMEs used to have a limited financial base and can not benefit from economies of scale, which can prevent them to be proactive in initiating business abroad (Lu & Beamish 2006; Baird, Lyles & Orris 1994). Independent from a firm’s reason to internationalize it has to plan the form of internationalization. As Hollensen (2003) presents the different steps of conquering new markets, he points out the logical order of firstly determining what expansion strategy to conduct before finding an adequate entry strategy that shows how to enter a market. Both market expansion and market entry strategies will be studied and compared in terms of flexibility, risk and control. The following are arranged according to chronological decisions beginning with market expansion strategies.

2.2 Foreign market expansion strategy Different factors influence the critical decision of choosing a market expansion strategy (Ayal & Zif 1979). The main question the firm needs to answer is if they are trying to obtain many markets at the same time or concentrate their expansion to one country. In other words, they need to determine if they enter markets simultaneously or incrementally (Hollensen 2003). It is more preferable for a company to enter one smaller market if it has no experience of foreign markets. A firm can effectively gain knowledge to gradually enter more countries

7

(Hollensen 2003). This strategy is especially advisable for companies that enter international markets late and already face hard competition concerning local competitors (Gupta & Govindarajan 2000). Also, smaller companies with limited resources, companies which need to expand in order to survive, prefer to enter a single or very few markets gradually. This choice is more preferable than committing them to expanding into too many markets at the same time. Though, there are companies that require a more rapid entry into the world’s markets to gain as much as possible from an emerging opportunity such as preventing competition (Ayal & Zif 1979). Another factor recommending companies to choose this strategy is that they obtain experience quickly on many markets; enabling them to achieve economies of scale in production and marketing (Bradley 2005). This is made by integrating and consolidating operations across the many foreign markets. Thus, it can be added that to forestall competitors the company has to be a form of an innovative or very significant technological advanced firm. To enter markets simultaneously, financial and managerial resources a required (Hollensen 2003). SMEs look at their own domestic market as an opportunity to build their resources that later can be used when expanding internationally. The companies' strategy should be focused on its core competence that can give the company competitive advantages abroad (Knight, 2001). The most natural choice for SMEs to expand is through an incremental strategy, entering one country after the other. Thereby, companies try to guarantee consolidation and profitability before they enter new markets. A typical lack of resources is one reason for SMEs’ preference of selecting this expansion strategy (Hollensen 2003). The following subsections outline the two forms of market expansion strategies: concentration and diversification. As earlier mentioned, market is a definition that can cover Western Europe or one single country. In this thesis markets are considered as countries. Thus, the term market and country have the same meaning.

2.2.1 Concentration This market expansion strategy is described as the determined selection of comparatively few markets to focus more on intensive development (Lee & Yang, 1990). Concentration strategy is characterized by a slow and gradual rate of growth in the number of markets selected and entered. The advantages with concentration strategy include specialization, scale of economies and growth by penetration (Katsikeas & Leonidou 1996). The company choosing this strategy generally selects easily accessible international market targets to decrease the risks but also investments. This strategy focuses on a longer time frame when looking at opportunities in international markets. However, the firm has to invest heavily into the market to obtain long-term profitability through market penetration (Bradley 2005). Commonly, companies with technically sophisticated products favor high control and therefore choose a market concentration strategy. For many companies not only the importance of long-term relationships but also the ability to achieve good reputation plays a considerable roll for the choice of this expansion mode (Lee & Yang 1990; Ayal & Zif 1979). Other significant markers describing concentration are close contact with customers, suppliers, distribution outlets and the government. This strategy implies direct competition with local and other international firms (Bradley 2005). Concentration focuses on entering one single market or very few through gradually

8

expanding their internalization in the long run; therefore short-term profits are usually sacrificed (Ayal & Zif 1979). Flexibility Concentrating on a few markets implies a rather low level of flexibility. Though small and medium-sized companies tend to adapt to market changes easily and rapidly, it is hard for companies committing high investments on a market to drop out quickly (Ayal & Zif 1979). The long-term focus implies a specialization in certain markets. Risk According to Bradley (2005), the financial risks are high due to the heavy financial and managerial commitment. Even though markets are carefully chosen and explored before entering, a failure on the market could have devastating consequences for the firm. Control A firm that is concentrating on one or few markets has high control because of its presence on the foreign market. Moreover, close contact to suppliers and customers enables the company to influence the market (Bradley 2005).

2.2.2 Diversification This strategy sets a comparatively equal spread of resources across many different markets. Market diversification strategy is characterized by a fast rate of growth in a number of markets selected and entered in early stages of the expansion of the company (Ayal & Zif 1979). The level of commitment of resources and management is very low. Advantages of this strategy are flexibility, a reduced concentration and a way to hastily capitalize noteworthy competitive advantages. The commodities associated with this strategy are standard products that meet the required general market preferences (Bradley 2005). A fast growth rate is obtained by entering many markets at the same time (Katsikeas & Leonidou 1996). More specifically, the company can enter parts of the markets with limited resources and time. Companies choosing diversification are generally searching for a market that gives them high financial dividends. Therefore it is very likely that some of the entered markets are not profitable and the company will drop out of these markets and focus on the ones that generate highest revenues (Bradley 2005). Flexibility Diversification strategy provides a company with flexibility due to diversified investments. SMEs are more flexible on different markets compared to large companies (Hollensen 2003). Closing down a business in one market to enter another is fairly easy (Bradley 2005). Risk The risks when choosing diversification strategy are fairly low. Risks are primarily a definition on the performance level of a company using the diversification strategy (Lee & Jang 2007). When a company operates in many markets at the same time, one downfall of one market can easily be compensated through by growth in another market (Ayal & Zif 1979). Another factor influencing the reduction of risk is that the overall revenue can be

9

stabilized through operating on several markets. To reduce risks even more studies show that choosing countries similar to the domestic markets ease the company's entrance on the foreign market as well as activity of business (Hirsch & Lev 1971). Control The ability to control markets is quite limited because of the lower influence and presence. Also, the lack of control can be described as little knowledge about the markets as well as the differential markets the company is operating in (Hoskisson & Johnson 1992). Further, Hoskisson and Johnson (1992) imply that the more markets a company operates in at the same time the less control over their business they encompass. Diversification strategy also indicates that the chosen countries have a more intense competitive market where the profits are more stable (Hollensen 2003). As analyzed above, the two expansion strategies are dissimilar from a short term perspective. However, the similarities start to emerge when looking at the strategies’ development from a long term perspective.

2.2.3 Foreign market expansion strategy development As a concentration focuses on entering one or a few markets at the same time, this strategy is more likely to be chosen by small and medium sized companies due to limited resources (Lee & Yang 1990). Furthermore, expanding SMEs usually enter markets close to their domestic market as they are assumed to be less risky and geographically close (Cooper and Kleinschmidt 1985). Thus, SMEs may gain international knowledge easier and enter further countries incrementally (Hollensen 2003). Diversification strategy aims to enter several markets simultaneously. For the short term the allocation of investments on many markets provides the firm with a higher flexibility to react to local business changes (Hollensen 2003). The strategy implies the likelihood of dropping out of unprofitable markets and focusing on the ones that generate high revenues (Bradley 2005). Figure 2.1 illustrates the chronological development of both expansion strategies. Ayal & Zif (1979) found that the number of markets entered through diversification and the number of markets entered through concentration converges over time. Although the model is more than 30 years old it is still a fundamental description of the expansion strategies' coherence and forms an important background of this research.

10

Number of markets served

Time

Market Diversification

Market Concentration

Optimal number of markets served in the long-run

Figure 2.1: Alternative market expansion strategies over time Source: Ayal & Zif (1979)

After outlining possible market expansion strategies, a closer look shall be taken into market entry strategies and their relation to each other.

2.3 Foreign market entry strategy After a firm has analyzed which markets to enter it has to decide how these should be entered (Bradley 2005). Depending on the character of the selected market expansion strategy a fitting market entry strategy must be picked in order to create a coherent set of marketing and organizational activities. There are two main approaches when deciding what entry strategy to use. Either the selection is based on experience or on analysis. Of course, a combination of both approaches is possible (Albaum 1998). Market entry strategies reach from export over franchising, licensing and joint ventures to sales subsidiaries and production subsidiaries on a foreign market. Regarding literature, market entry strategies strongly vary in their level of involved flexibility and the degree of risk and control (Hollensen 2001; Bradley 2005). The degree of risk and control increases while the intensity flexibility to react to altering circumstances in markets decrease as a firm improves its market entry strategy over time (Bradley 2005).

11

The following section concentrates on outlining the different market entry attributes. As this research paper focuses on the two most common avenues, export and foreign direct investment shall be analyzed.

2.3.1 Export Generally, any sales activity on international markets is described as export. Here, export as entry strategy shall be defined as sale of unchanged products and services to non domestic markets via foreign based agents or distributors (Albaum 1998). By using international agents or distributors, a firm gets affordable access to exclusive market knowledge without self analyzing the country, culture, national politics, laws and local customer (Ibid). Thus, the cooperation with foreign based agents or distributors is favorable for firms committed to direct export but inexperienced in doing business outside known markets (Albaum 1998). These considerations lead to the assumption that export including foreign based agents or distributors is a suitable entry strategy for SMEs. The easiest way for companies to enter international markets is to export services and products manufactured for the domestic market. Also, export can be the beginning of intensified activities in foreign countries (Bradley 2005; Lu & Beamish 2006). As Naidu and Prasad (1994) analyzed, the smaller the stock of competencies in global marketing activities, the greater the likelihood of the SME to be a sporadic exporter. In other words, using export strategies including limited resource commitment tends to refer to SMEs that are just about to start going international. Bradley (2005) describes several circumstances that are typical for firms using export as entry strategy. The company size is rather small as well as there is a lack of resources for more cost intensive entry strategies. Also, extensive commitments are inadvisable because potential markets are uncertain, unattractive or involve some kind of political risk. Finally there may not be pressure to produce abroad (Ibid). Flexibility Export as market entry strategy contains a crucial advantage for SMEs. The loose commitment to foreign markets enables the firm to react quickly to altering circumstances (Lu & Beamish 2006). A high degree of flexibility makes it possible to withdraw from a market undergoing political or legal changes critical to the firm. Also, this empowers the company to change the geographical focus by adjusting export volumes in different markets (Ibid). Risk Export includes the possibility to skim a new country while placing few resources for market conquests (Hollensen 2003). Thus, the level of financial risk is limited due to the absence of investments in market shares, advertisement, communication, foreign sales subsidiaries and customer- and distribution networks. Especially, the set up of foreign sales subsidiaries demands big investments. First, the necessary knowledge about a country, culture, national politics, laws and local customer preferences has to be gained. This process of information takes time and money. The hours for a manager to analyze potential markets represent valuable and costly working hours. In case external consultants

12

are entrusted with data collection the costs move from manager salaries to consultant fees. Second, the gained information about the potential market has to be used when establishing sales subsidiaries and investing in different areas like the local bureau and new employees. Most of these financial considerations do not appear when entering through exporting (Lu & Beamish 2006). Control However, there is limited control over international operations (Bradley 2005). As the firm is not present on the market the protection of proprietary assets is complicated (Lu & Beamish 2006). Not only patent infringement but also other standards and regulations on the foreign market can develop into non-tariff trade barriers, which are hard to control for exporters (Bradley 2005). Also, as Albaum et al (1998) state, when using distributors or agents to conduct export abroad the influence on the market and the firms’ success lies within the intermediaries’ hands (Lu & Beamish 2006).

2.3.2 Foreign direct investment (FDI) According to UNCTAD (2007) foreign direct investment is defined as an investment involving long term relationships and reflecting a lasting interest and control by a resident entity in one economy in an enterprise resident in an economy other than that of the foreign direct investor. This research paper focuses on foreign sale subsidiaries precluding foreign manufacturing subsidiaries. Establishing a subsidiary abroad comes along with high investments in new properties, marketing, and human resources (Bradley 2005). Differences in language, culture taste, logistics and laws need to be analyzed in order to start and conduct successful business on the foreign market (Verwaal & Donkers, 2002). This occurs especially when FDI is chosen as entry strategy. As Lu and Beamish (2006) state the potential for feedback learning is higher for FDI than for export. It is likely that a company first collects information about the potential market. By operating on the foreign market the firm gains knowledge about the country and gets an insight into local knowledge and preferences. The potential for organizational learning is seen as a major benefit of FDI (Lu & Beamish 2006). Flexibility The degree of flexibility for FDI is low compared to export (Lu & Beamish, 2006). According to UNCTAD (2007) investing in local subsidiaries is only advisable if there are plans to stay on a market for a long period. Establishing a subsidiary abroad implies a certain commitment to the particular country. This does not only slow down the process of withdrawal from a market but also bonds the firm to the country and hinders the ability to react on changes. Risk As the degree of flexibility decreases, the level of risk in doing direct investments abroad rises. Due to the financial commitment on a foreign market, a firm can not easily withdraw from an unstable business environment without loosing at least a part of

13

investments (Lu & Beamish 2006). FDI includes big investments and financial risks. That is why this entry strategy is not considered equally suitable for SMEs (Baird et al 1994; Lu & Beamish 2006). Control Establishing a subsidiary on a foreign market raises the firm’s influence enormously. Since the firm has direct access to a market and is not dependent on intermediaries, it can develop, conduct and control its marketing and business strategy to the highest degree possible (Bradley 2005). Thus, the firm has control over its reputation and performance on the foreign market. The initial decision how to enter a market does not mean that a company has to commit itself to a particular entry mode. Gaining market knowledge through international operations can lead to a redefinition of appropriate entry strategies (Johanson & Vahlne 1977). Usually the term entry is used for describing an initial entrance. However, considering the development of market entry strategies over time, the authors decided to use the term entry strategy independent from whether it is the initial or an evolved strategy. The next section outlines the thought of a fluent development of a firm’s market entry strategy.

2.3.3 Foreign market entry strategy development When studying former research about market entry strategies, it becomes obvious that behavioral models play an important role in interpreting firms’ export performance (Johanson & Vahlne 1977; Forsgren 2002). As Johansen & Vahlne (1977) stated, empirical observations on the export behavior of Swedish firms showed, that there has been a tendency to start gradually by exporting in a country via an agent and later on establish sales subsidiaries. They studied the relation between market knowledge and market commitment. The more a firm knows about a market, the lower the perceived risk will be and the higher the level of foreign direct investment (Forsgren 2002). Knowledge of opportunities or problems leads to decisions. Decisions are a sign for the level of commitment for a foreign market. By successively gaining experiential knowledge through international operations, market activity and commitment on a foreign market increase (Vahlne & Johanson 1977). As Bradley (2005) labels it, these conclusions indicate a continuum of export. Because of its low need of commitment, export is a common way to enter new markets. With increasing knowledge and commitment, it is likely a firm alters its entry strategy from export to a more complex mode like FDI. Naidu and Prasad (1994) studied predictors of export development strategy and performance of SMEs. They diversified internationally active SMEs into sporadic and regular exporters. Sporadic exporters are defined as firms that export on an “on and off” basis with a small export intensity (export sales to total sales). Regular exporters are firms exporting on a regular basis with significant export intensity. A stock of competencies can comprise different entry modes like direct export, licensing and FDI. One hypothesis proved by Naidu and Prasad (1994) claims the higher a firms stock of competencies in

14

global marketing activities, the greater the likelihood of the firm to be a regular exporter. In other words: the higher the commitment on foreign markets, the higher the export regularity and intensity. This statement could lead to the assumption, that firms using export as entry strategy and starting their international activities, belong to the group of sporadic exporters. At the same time firms applying FDI as entry strategy could be associated with regular exporters. Further, as Naidu and Prasad (1994) write about export development strategy they imply a firm’s possibility and likelihood to evolve its entry strategy over time. This insight is partly based on studies conducted by Bilkey and Tesar (1977), who introduced a stage model of export development processes for SMEs. Firms are assumed to follow these steps when evolving their international activities. The 6 stages of export development are:

• Stage one. Management is not interested in exporting; would not even fill an unsolicited export order.

• Stage two. Management would fill an unsolicited export order, but makes no effort to explore the feasibility of exporting.

• Stage three. (This can be skipped if unsolicited export orders are received). Management actively explores the feasibility of exporting.

• Stage four. The firm exports on an experimental basis to some psychologically close country.

• Stage five. The firm is an experienced exporter to that country and adjusts exports optimally to changing exchange rates, tariffs, etc.

• Stage six. Management explores the feasibility of exporting to additional countries that, psychologically, are further away.

The investigation of the link between different market entry strategies showed that there seems to be a fluent transition. The starting point is export; FDI is seen as the highest stage in development. The outcome of section 2.2.3 displays that the market expansion strategies are converging to each other over time. However, after analyzing the interrelations among market expansions strategies as well as among market entry strategies the next step is to connect market expansion and market entry strategies to understand what combinations are possible for SMEs.

2.4 Combining foreign market strategies As stated earlier, the relation between market knowledge and market commitment implies a stepwise movement from low to a high level of international commitment (Johanson and Vahlne 1977; Forsgren 2002). The Scandinavian stages model is another illustration of how firms gradually increase their market commitments by acquiring experimental knowledge. Moreover, it illustrates the relation between entry and expansion strategies. A basic assumption regarding SMEs is that those firms generally do small steps in internationalization (Hollensen 2003). Figure 2.2 shows the incremental approach to internationalization. Successively, a firm enters more markets and increases its geographic expansion. At the same time, the market entry strategy develops over time. Beginning with sporadic export, the firm gains international experience and alters its strategy to a

15

more professional level. That includes increasing market commitment, which is the other indicator for a firm’s level of internationalization. This model describes the simultaneous progress of market expansion and market entry strategies. However, it does not specify the relation between particular strategy modes. This model has been criticized and extended after several decades of intensive studies around organizational behavior (Forsgren 2002; Hollensen 2003). Despite the general explanation of strategy links, this model is seen as an important background for this research since there are few studies about possible combinations of market expansion and market entry strategies.

Market ....

Market N

Market B

Market A

Foreign direct investment

Independent representatives (export modes)

Sporadicexport

Entrymode

Market

Increasing market commitment

Increasing geographic diversificationIncreasing internationalization

Figure 2.2: The Scandinavian stages model Source: Hollensen (2003)

As literature states, firms are likely to evolve over time and apply mixes of different entry strategies on different markets. According to Bradley (2005), cohesion between market expansion strategy and market entry strategy can be found. Moreover, diversification strategy and export are related as concentration strategy is connected to foreign direct investment. Here, these cohesions shall be illustrated by means of their flexibility, risk and control.

2.4.1 Export and diversification According to literature, the market expansion strategy diversification is associated with the market entry strategy export. Several characteristics are similar, as shown in the following

16

subsection. Thus a combination of diversification and export seems to be a logical consequence. Flexibility As mentioned earlier, diversification is a highly flexible expansion strategy. After entering and being active on a couple of markets at the same time, a withdrawal from non-attractive markets is common and easy to arrange (Bradley 2005). When conducting export as market entry strategy, the possibility to change the geographical focus by switching markets is a recognized advantage for the reactivity of companies (Lu & Beamish 2006). By displaying a high degree of flexibility, export and diversification complement each other in interaction. (Bradley 2005) Risk The financial risk to lose investments placed on a market is quite low when it comes to diversification. Even though there is a risk due to possible withdrawals from certain markets, the level of wastage is not high. Spreading investments over several markets makes the particular financial input on a single market small (Ayal & Zif 1979). Thus, the loss in one market is not as high as within concentrated strategies. Export also implies a limited financial risk due to the low financial commitment and investment on a market (Lu & Beamish 2006). These common risks are one more base for literature to associate diversification with export. (Bradley 2005; Ayal & Zif 1979) Control Section 2.2 showed that diversification indicates a low level of control. Not focusing on particular markets but skimming many goes along with cursory relations and commitment to short-term profitability (Katsikeas & Leonidou 1996; Bradley 2005) Equally, the entry strategy export is associated with few influences on tariff and non-tariff barriers (Lu & Beamish, 2006). Another risk evolving from both diversification and export is the common lack of information about a market to enter (Hoskisson & Johnson, 1992).

2.4.2 FDI and concentration The favored combination of concentration and foreign direct investment develops through the comparison of the three attributes flexibility, risk and control. Flexibility Concentration is marked by low flexibility (Ayal & Zif 1979). Focusing on high commitment to a few selected markets makes it hard to withdraw or change the order of priority without loosing investments. When it comes to FDI, the level of flexibility is as restricted as for concentration. Due to the intense financial commitment, FDI is not an appropriate strategy when the chosen markets are predicted to be unstable (Lu & Beamish 2006). The investments long-term tendency is another factor against flexibility (UNCTAD 2007). Risk Market expansion strategies and market entry strategies show the same relations of risk and control. The higher the risk the higher is the control. Concentration and FDI contain

17

high risk levels. By displaying extended financial commitment on few markets, the amount of resources that could be lost increases (Lu & Beamish 2006; Bradley 2005). However, applying market knowledge should counteract financial risks. Control On the other hand, both concentration and FDI imply the possibility for high control. The expansion strategy’s focus on certain chosen markets indicates the aim to build up close contacts on the market as well long-term profitability (Ayal & Zif 1979). Foreign direct investment is related to the establishment of intense contacts by being present in the host country. By that, there is the opportunity to influence the industry abroad in the same way located companies can do (Lu & Beamish 2006). Furthermore, both approaches require a high degree of knowledge about a market in order to succeed (Bradley 2005). This contributes to the opportunity to control success and the business environment.

18

2.5 Conceptual framework We based this conceptual framework on the theories reviewed above. Figure 2.3 shall illustrate the three research questions and clarify the interrelations within and between the market strategies. The arrow between export and foreign direct investment show SMEs’ tendency to evolve their market entry strategy from starting by export to establishing foreign sales subsidiaries (Johanson & Vahlne 1977; Bradley 2005). The connection between the market expansion strategies is clarified by two arrows. As they are positioned towards each other the arrows outline the long-term convergence of the two market expansion strategies (Ayal & Zif, 1979). The interrupted lines between the two boxes demonstrate the connections between the market expansion and market entry strategies. Since export and diversification as well as foreign direct investment and concentration show alike levels of flexibility, risk and control, they are connected and positioned on the same height. Since the third research question targets the relation of several entry strategies to one expansion strategy, the lines are interrupted.

Foreign DirectInvestment

Concentration

Diversification

Foreign marketentry strategy

Foreign marketexpansion strategy

Export

Figure 2.3: Conceptual Framework Source: Authors construction based on literature from Ayal and Zif (1979), Bradley (2005), Johanson and Vahlne (1977)

19

3. Methodology This chapter will present the research's methodological approach. Furthermore, the researchers illustrate how the study has been conducted and also display the study's relevance and accuracy.

3.1 Research purpose The nature of a research study can be classified as exploratory, descriptive or explanatory. However, these divisions are likely to be connected to each other. (Saunders, Lewis & Thornhill 2007). Descriptive studies are undertaken when the interest is directed towards answering the questions of who, what, when, where and how (Cooper & Schindler, 1998). However, descriptive studies are not intended to provide conclusions or solutions. That is why there often is a strong relation to explanatory and exploratory studies (Saunders et al 2007). Exploratory studies aim to gain a better understanding about a problem and to seek new insights and to assess phenomena in a new light (Saunders et al 2007). Explanatory studies address the testing of causal relationships between variables (Saunders et al 2007). The purpose of this research paper is twofold. As it emerges from the research approach clarified in the following section, one intent is the description of existing theory in practice. Therewith, the purpose is to delineate the implementation and combination of market entry and market expansion strategies in an internationally acting company. Furthermore, this research paper looks at SMEs’ behavior in a global environment. Since former researches mostly have been focusing on companies’ internationalization in general, the conducted literature review and investigation of a particular firm aims to explore the use of different strategies by a SME. Having other prerequisites than consolidated companies, SMEs are likely to pursue market entry and expansion strategies in an own way in order to succeed. Closely related to the exploration of a SME's use of strategies is the investigation whether existing theory is conducted as intended.

3.2 Research approach Deduction is seen as the dominant research approach in natural sciences. By deducing a hypothesis from a theory in order to test it in reality, deduction aims to explain causal relationships between variables (Saunders et al 2007). It is a process by which known facts are examined and build the basis for drawn conclusions (Sekaran 2000). Induction can be described as formulating a theory based upon observation (Saunders et al 2007). It is often used to create an understanding about relations, especially when theoretical backgrounds are insufficient or missing. Induction is a more qualitative approach of research (Saunders et al 2007). Qualitative research is used for gaining an understanding about a situation as a whole and allows comprehending social processes and interrelations (Holme & Solvang 1997). The outcome of qualitative research is non-standardized and non-numerical data, which is based on meanings, expressed through words and is analyzed through the use of conceptualization (Saunders et al 2007). Quantitative research has the aim to explain

20

specific components of a situation (Holme & Solvang 1997). Therefore, such studies are based on techniques that provide numerical and standardized data (Saunders et al 2007). This study analyses existing theory about market entry and market expansion strategy and their interdependencies. Thus, the main approach chosen is deduction. However, the focus on SMEs when conducting the research shows a strong link to inductive studies. Since it is unknown how the chosen SME applies market strategies, the conclusion can be assessed as a hypothesis of SMEs use of market strategies. Also, there is little theory about how SMEs in general tend to implement strategy developed for consolidated companies. Therewith, the aim is to gain new insights into the mentioned strategies for SMEs. Furthermore, this research is characterized by qualitative data collection methods and analysis. The conducted interviews generate non-numerical data based on a field report and shall lead to a better understanding of the investigated situation. This qualitative approach supports the inductive character of this research.

3.3 Research strategy Writing a social science research as a case study is one of several ways (Yin 1994). Choosing a strategy is not always an obvious choice though the researcher has to take three conditions into consideration; what type of research question are being used in the research, the control the researcher has over results and the focus the study has on existing occurrence. There are several different research strategy studies that can be used for a social science research. Table 3.1 presents them as well as the relevance for each strategy.

Strategy

Form of research

Requires control over

behavioral events?

Focuses on

contemporary events?

Experiment

How, why

Yes

Yes

Survey

Who, what, where, how many, how much

No

Yes

Archival analysis

Who, what, where, how many, how much

No

Yes/no

History

How, why

No

No

Case study

How, why

No

Yes

Table 3.1: Different research strategies Source: Yin, 1994

21

This research aims to conduct a case study. According to Yin (1994) there are two different varieties of case studies, single and multiple. Single case studies are executed when investigating one single firm. Multiple case studies are done when two or more firms shall be investigated in order to compare them. This research is a single case study due to the fact that only one firm has been studied to gain deeper understanding of a SME's implementation of market expansion- and entry strategy.

3.4 Sample selection There are two ways of collecting data necessary for pursuing the research purpose and answering research questions. Either conclusions are drawn by investigating an entire population or a sample is chosen (Cooper & Schindler 1998). The two types of sample selection comprise probability and non-probability sampling. Probability sampling has a representative character and the chance of each case being chosen from the population is known and equal (Saunders et al 2007). Non-probability sampling on the other hand, is judgmental and does not include known and equal probabilities for each case to be selected (Ibid). This research executes non-probability sampling. Due to the limited amount of time and financial resources a subjective and not generalizable sample is chosen. Investigating one subjectively selected example of a SME active on international markets shall help to answer the research questions. Furthermore, the sample technique used here is snowball sampling. After conducting an interview with a selected individual in the company, this person helped to identify another interview partner with similar characteristics important for this investigation. As described by Saunders et al (2007), the search for other individuals was stopped after no more other cases could be found. The possibility of bias resulting from the first individual’s identification of further persons to interview can not be excluded. Since this research is based on a qualitative study the sample size can not be big (Sekaran 2000). As outlined by Saunders et al (2007), when focusing on a particular purpose the study of a single case is appropriate. Thus, the sample size for this research is 1.

3.5 Data collection method According to Yin (1994) there are six different sources on how to collect evidence for your case study. The six sources are documents, archival records, interviews, direct observation, participant-observation and physical artifacts. The sources have various strengths and weaknesses which are presented in table 3.2 below.

22

Source of Evidence Strengths Weaknesses Documentation • stable - can be reviewed

repeatedly • unobtrusive - not created as a

result of the case study • exact - contains exact names,

references, and details of an event

• broad coverage - long span of time, many events, and many settings

• retrievability - can be low • biased selectivity, if

collection is incomplete • reporting bias - reflects

(unknown) bias of author • access - may be deliberately

blocked

Archival Records • [Same as above for documentation]

• precise and quantitative

• [Same as above for documentation]

• accessibility due to privacy reasons

Interviews • targeted - focuses directly on case study topic

• insightful - provides perceived causal inferences

• bias due to poorly constructed questions

• response bias • inaccuracies due to poor

recall • reflexivity - interviewee

gives what interviewer wants to hear

Direct Observations • reality - covers events in real time

• time - consuming • selectivity - unless broad

Participant- Observation

• [Same as above for direct observations]

• insightful into interpersonal behavior and motives

• [Same as above for direct observations]

• bias due to investigator's manipulation of events

Physical Artifacts • insightful into cultural features • insightful into technical

operations

• selectivity • availability

Table 3.2 Different methods to collect data Source: Yin, 1994 For this research the data collection method has been restricted to two of the six sources, documentation and interviews. Documentation data has been collected from different articles and literature in the form of books. By using key words as mentioned in the abstract, but also by scanning articles' references, the literature review was conducted. According to Yin (1994) documentations are very important source that corroborate evidence from other sources. Therefore the use of documentation as a secondary data has been used for this research. The second data collection method used is interviews. The interviews are assessed to be a primary data collection for this study. When conducting an interview there are few stands that have to be considered. Interviews can be structured in different ways according to Berg (2001), standardized interview, semi structured interview and un-standardized interview. Standardized interviews contain preformed questions that are carefully followed and conducted in a specific way which makes them comparable. Researchers that use this kind of technique are very certain of data they want to uncover during the interview. Further

23

researchers believe those questions asked during the interview are very standardized which also makes them assume that the responded understand them clearly and no misunderstandings can occur (Saunders et al 2007). Un-standardized interviews have no or very little questions conducted before the interview. The researcher assumes that they don't know in advance what all necessary questions needed to be asked. Un-standardized interviews don't use a question schedule on the contrary the questions develop during the interview that is relevant for the purpose of the investigation (Yin 2007). Semi structured interviews consist of questions that are between standardized and un-standardized interviews. The questions are prepared before the interview in a systematic order very like the standardized interview. The difference is that the researcher has little more freedom to ask follow-up questions if relevant data is uncovered during the interview. The questions are conducted in the way for the respondent to understand and being able to answer them. It can be said that researchers using semi structured interviews as data collection method understand the world in varying ways and see the world from a subject's perspective. A strength with this kind of interviews is that the complexity of the question can be deeper (Saunders et al 2007). For this research a semi structured interview has been chosen. The interview guide was formulated in a language that the respondent understands. The researchers have visited the company for the interview and conducted two face-to-face interviews which are seen as the most qualitative method when conducting a case study. During the interviews different follow-up questions were asked to the respondent.

3.6 Validity and Reliability According to Cooper and Schindler (1998) validity refers to the degree of which an investigation measures what is actually wished to be measured. Reliability indicates that if researchers follow the exact same measures as earlier researchers and perform the same case study one more time they also should reach the same findings and conclusions (Yin 2007). A necessary condition enabling other researchers to repeat a previous case study is to document the procedure accurately. Berg (2001) means the most important point of reliability is to decrease the inaccuracies and partialities in the study. For this research an interview guide has been constructed prior to the meeting with the respondents to increase the validity of the data collection. The interview guide was based on the research literature and was reviewed by our supervisor. Furthermore, the interview guide was constructed in a language our respondents could identify without difficulty. The interviewees obtained the guide in advance. To increase the reliability the researchers chose to interview the two founders of the company. The respondents are still working in the company and are engaged in developing market strategies. That makes them very attractive as interviewees, though the validity it affected negatively. When interviewing owners in a company, there is a tendency of the respondents to embellish information about the company. During the interview notes were taken by the researchers. Though the respondents gave clear answers the researchers asked follow-up questions to avoid misunderstandings. Also, no leading questions were asked. The researchers gave the respondent much freedom in answering the questions without interruptions. The questions are based on theory tied to the research area. The time-frame was extended due

24

to the fact that the respondents needed more time answering the questions. The respondents offered further contact if the researchers needed more information.

25

4. Empirical Data: A case study of company X Formally the company’s background will be presented followed by a presentation of the empirical data gathered from the interviews. The interviews were performed with the SME’s CEO and market executive. The collected data will be divided and presented in four sections; company background, market expansion strategy, market entry strategy and combining market strategies.

4.1 Company background Company X develops, manufactures and markets health care products for safe patient handling. The Swedish business started back in 1970s with only one employee and has now over 200 around the world. The firm proudly declares that 25 years of continuous development has resulted in the markets safest, most effective and most complete system medical health care products. The company’s concept and specialization has not been changed in over 20 years, which is seen as a main factor of success. From the start, the company’s highest priority and most important guiding principle was the care for those whom the products are developed for. On the domestic market in Sweden, the firm has been associated with medical health care products for a long time. Internationally, the success continues. In the ‘90s the export rate increased dramatically and still continues to do so today. The company started its expansion in the ‘80s. The reason was to survive financially since it was a small firm at that time. Also, the domestic market was not profitable enough. The firm is market leader in the Nordic countries and has nearly 20% of the world market even though the production is outsourced. The firm does not produce the goods themselves; instead, suppliers are conducting the production while the company can focus on product development and sales. In the early stages of the firm’s existence the respondents realized that the company can not realize economies of scale. Therefore they decided to import from suppliers that can produce to lower costs. Approximately 80% of the suppliers are Swedish; the other 20% are from Turkey, China and Estonia. Currently, the firm is negotiating with additional European suppliers. Within their own production the firm has between 50-60 employees. These workers are assigned to conduct final assemblies of the products. Motives for internationalization The company started early to internationalize its business. The home market was too small for the firm’s niche products to realize profit and maximize production volume. It became clear that it was necessary to enter foreign markets in order to stay competitive. Two years after establishing on the market in 1979 the first international activities were started within Scandinavia. However, the company was no pioneer on the markets since competitors already entered these countries. In the 1980’s, barriers for firms to enter a new market were not high. Though, many companies tried their luck. Shortly most companies dropped out from international markets as the standard of quality increased rapidly. Also, the respondent mentioned that

26

a number of companies that dropped out re-entered the international markets after adapting higher quality products. The respondent states “Business is global” and therefore the company internationalized. By doing business abroad the aim has been to sell products abroad and gain market shares of 20% per year as well as to reach early maximization of profits by 10%. The market is growing with 10% each year and company X aim to grow with the same amount or more too continuously gain new market shares. Commonly, this industry is controlled by governmental institutions which regulate and assign orders to qualified companies. Usually the assigned orders are distributed to the three largest firms at the market. Therefore if a company has 20-30% of the market shares it is automatically one of the three largest companies and also handed many assigned orders.

4.2 Foreign market expansion strategy The company’s expansion has been adjusted to the markets’ requirements. When the company decided to internationalize there was little information about the foreign market. To gain some knowledge the firm were present on trade fairs as the owner introduces themselves at the same time. Almost none information, about the distribution channels was gained before expanding, only potential markets for conducting business were known. Mature markets have been preferable for the company. The respondent points out that his firm does not follow customers. Instead, governmental decisions are the decisive factor made on these markets. The markets of interest are known for their caring attitude towards health-care staff which is seen as highly valued personnel. Furthermore, there has to be a mature quality awareness combined with the will to pay for better products. An example to why the firm is not expanding to Brazil is due to the fact that Brazil’s labor is contemptible and the health care system at this market is not developed as it needs to be. Brazil is the contrary to the United States of America. If a health care personnel suffers from physical injury occurred during working hours the employer is responsible for paying enormously high damages. That is why hospitals and other employers in the health care branch invest in medical appliances. Such an evolved social system is advantageous for both the firm and the market demanding the company’s products. The respondent says “When there is a want, we are there and supply it”. The company is a trendsetter in its branch. Since they have a wide range of products, the company meets most of the demands. This attracts plenty of governments to hire the company. The product life cycle seems to be slow in its transformation. The firm develops and inserts technical improvements to already existing products. In that way only parts of the product get changed while the whole tool stays the same. The respondent points out that it takes years to develop a new product or a new technique. Potential and conquered markets are mature though continuously growing. The firm concentrates its expansion to enter one country at the time. The interviewee states the desire for stability on the markets to enter. Also, the firm observes each market separately to adapt its business behavior to the country. The main aim is not to realize fast profits.

27

The firm’s most important task is to establish themselves on the market and stay there in the long term. Depending on how attractive a market is assessed, the level of investments differs. It was no coincidence to choose the United States of America as the firm’s first international target. This huge country has had enormous potential and above all it influences the European market behavior through status, prestige and brand. The firm also conducts sporadic export with customers from countries which are not assessed as potential markets yet. These sales are a convenient and easy way for the company to higher its regular profit.

4.3 Foreign market entry strategy The firm started its international activities by using direct export through distributors. First countries to be entered were Denmark, Finland and Norway. The reason for starting with this entry mode was to avoid heavy financial resource commitment. At the early stage of internationalization, the company was lacking the required financial base but also wanted to minimize the risks of failure. Also, the company did not have sufficient market knowledge or experiences to cope with the challenges of international business. Through distributors in each country remarkable market knowledge has been gained. Still, the entry strategy preferred is direct export through distributors. The enormous reduction of costs in comparison to FDI is seen as a major advantage when initializing international activities on unknown foreign markets. Due to limited capacities and financial resources the firm still does not have many alternatives of how to enter foreign markets. Also, the short period of amortization is a reason why export has been favored. Currently the company defines three major markets of interest. The US market, the German market and the British market. In all these countries FDI is the current strategy conducted. When starting to enter the US and German market, direct export was applied. Due to failed collaboration, the firm felt the need to be present on the markets itself and developed sales subsidiaries in the USA and in Germany. However, while entering the American and German market via direct export, the firm conquered the British market by establishing foreign direct investment. At this early stage, FDI was chosen because the respondents estimated that a critical amount of distributors already had established. The respondents stated that they gained sufficient knowledge about the market by starting export and developing the firm’s international activities. This experience has been helping to perceive risks more clearly. As the respondents mentioned, for them it is usual to start with the help of distributors. To a certain point, export as entry strategy is more effective due to cost reduction and stepwise learning about a market. Regarding the firm’s specific situation, the respondents differed about the development of entry strategies. Respondent 1 mentions that the firm usually starts by conducting export and extends its influence by establishing foreign sales subsidiaries. Respondent 2 on the other hand says the company used to choose export and tries to continue with this entry strategy. When problems emerged from disagreements with distributors or the market

28

was assumed to be on a competitive level, the firm was forced to conduct foreign direct investment. An example of that was Norway, where the distributor copied the company’s products and started to operate on the domestic market. Thus, FDI is an alternative if the firm is forced to do so; otherwise export is the preferred strategy.

4.4 Combining foreign market strategies As the respondents stated, relationships with local governments, customers, distributors and competitors are the most important factors in order to succeed in the long term. Thus, profits on new markets sometimes have to be sacrificed within the first years. According to the respondents the firm concentrated its expansion on entering one market at the time due to costs. At the same time direct export via distributors is used as market entry strategy for most markets. Only one market was entered through FDI. Further, there are three markets FDI is conducted on. By now, the firm uses two market entry strategies while have been expanding gradually. For the nearest future the firm plans to establish foreign sales subsidiaries in Norway. On the French market the firm tends to continue with export. There, the collaboration between the company and its distributor has developed to an intense level as the foreign distributor adopted the company’s name and specialized on distributing the firm’s products. The USA is a market the company still needs to gain more knowledge about. Therefore the firm expands its export to more states. Generally, the company does not desire to enter more markets. Instead, the firm focuses on guarding and developing current markets.

29

5. Data analysis In this section the collected data from chapter four will be compared and analyzed to theoretical findings that were presented in chapter two. Furthermore, all will be compared to the conceptual framework. This is made to find similarities and differences compared to theory as well as answer the three research question.

5.1 Motives of internationalization The reasons for the company to start exporting were reactive and external (Albaum et al 1998). As shown in figure 2.1, the firm's initial circumstances place the firm in the lower right quadrant. The respondents understood early that the home market was too small for their niche product. Thus, the needed amount of production and profitability could only be realized by internationalizing the business. Finally, the respondents established contact to tradesmen on trade fairs. Unsolicited orders have been another reason to internationalize. This case displays what literature is assuming about SME’s motives to go abroad. SMEs get unsolicited orders and react in order to survive in the industry (Bilkey & Tesar 1977).

5.2 Foreign market expansion strategy Market expansion strategy theory suggests choosing country concentration strategy for firms that trade with advanced technology, focus on long term growth and close contact with suppliers, customer, distributors and governments (Bradley 2005; Lee & Yang 1990; Ayal & Zif 1979). Furthermore, concentration implies entering only one single or few markets at the same time (Bradley 2005). Diversification strategy theory suggests that a firm should spread resources across many different markets. The level of financial and managerial commitment is considered to be low. Another characteristic for diversification is that firms generally search for markets which give them high and fast financial dividends (Bradley 2005; Ayal & Zif 1979). Moreover, theory discusses the lack of financial and managerial resources SMEs tend to have when entering foreign markets. The studied company is conducting concentration as expansion strategy. The company is enters one market at the time due to the financial restriction. Medical technical industry requires close contact with governments on markets the company operates in. The respondents state they stay close to governments. Moreover, suppliers, distributors, customers are equally important. Their products are technologically advanced and long term relationships are crucial. Foreign market expansion strategy development According to Ayal and Zif (1979) the two expansion strategies in the long run move towards each other. As shown in figure 2.1, a firm choosing concentration enters markets one-by-one while diversification implies that the firm enters several markets initially and withdraws from unprofitable markets. The here studied company initially entered one single market and has continued to enter markets one-by-one. This indicates that the firm is developing business activities in many countries. Due to the fact that this thesis is a single case study, comparison to a diversified strategy oriented company in the long run

30

could not been explored. However, considering the conceptual framework in figure 2.3, the studied firm is placed along the arrow connected to the expansion strategy concentration.

5.3 Foreign market entry strategy Consistent with theory, the market entry strategy taken by the studied SME has been export. As Lu and Beamish (2006) analyzed, export is the easiest way for firms with a lack of resources to internationalize. Due to the company’s limited resources it started by using foreign distributors to enter a market. The firm could benefit from the distributors exclusive knowledge, access and relations on the foreign market and learn how to do business abroad. The respondents explained the choice for export by describing the same advantages Albaum et al (1998) mentioned: this method is cost effective and does not require intense analysis of the potential market. Also, the approach of starting with countries that are culturally close to the domestic market, is a typical behavior for sporadic exporters (Cooper & Kleinschmidt 1985). The firm has been focusing on keeping the financial risk at a low level in the beginning. Even more, the controllable risk supports the company’s flexibility to react on market changes. The level of control on the other hand is rather low due to the limited commitment to the markets. However, the firm’s position and products lowered the likelihood to fail on the first markets. Also, the firm uses foreign direct investment on three big markets. Even if they began with FDI in England, the respondents made clear that export was the only possible way to start internationalization. Foreign market entry strategy development The development of starting with export and –in some cases- continuing with FDI supports the theory about the evolutional link between market entry strategies. By being present on international markets, a company gains experiential knowledge that helps to estimate situations and other market more precisely (Vahlne & Johanson 1977). Like Forsgren (2002), the higher the market knowledge, the higher the level of foreign investment. The firm’s behavior also supports the empirical observation of Johanson and Vahlne (1977) about the tendency to start incrementally by exporting in countries via an agent before opening sales subsidiaries. Concluding from the interviews and additional documents, the company has been evolving over time. It started to internationalize when it came into contact with tradesmen on different trade fairs. From this reactive beginning the firm developed to an experienced international SME. Interpreting the firm’s situation with the six stages of development by Bilkey and Tesar (1977), it can be settled at least on stage 5. The company's future plans are to focus and develop business on current markets as well as to wait for markets that develop a demand of the products the SME provides. This indicates that stage six of Bilkey and Tesar’s model (1977) is not reached yet. As Lu and Beamish (2006) stated, SMEs could employ export and FDI at the same time. This is what the studied firm has been doing over years. By gaining appropriate knowledge and resources with direct export, the company was able to conduct FDI, even if not preferred in some cases. Lu and Beamish (2006) concluded that SMEs should combine different entry

31

strategies in order to realize further firm growth. Regarding the conceptual framework, the firm is located both close to FDI and export along the arrow.

5.4 Combining foreign market strategies Theory suggests that diversification as expansion strategy is associated with the market entry strategy export. Furthermore, theory also combines the expansion strategy concentration with the market entry strategy FDI (Bradley 2005). Measuring these constellations was conducted by looking at risk, control and flexibility. With these variables a theoretic connection could be acknowledged. Moreover, the variables were an additional tool to investigate the link between expansion strategy and entry strategy for the studied SME. The studied firm has always conducted concentration as market expansion strategy due to the lack or financial resources. Theory implies that concentration is related to FDI (Bradley 2005). This case study can not strengthen this particular connection. The firm’s market expansion strategy has been concentration, conquering one market after the other. The market entry strategy has been export when entering international markets. Considering the Scandinavian stage model (1979), the SME studied in this paper evolved its entry strategies over time. On some markets like England the company was forced to conduct FDI due to late entrance. In other markets like Norway the firm is obligated to conduct FDI because of failed collaborations with distributors. The respondents explained that they would not have conducted FDI on these two markets if there was another alternative. Concentration does not seem to need to lead to FDI. However, on important markets, FDI is conducted to stay close to both governmental institutes and customers. Even more important, the firm can keep an eye on the changes on the markets and can be seen by the customer. Using the frame of reference to clarify the firm's combination of strategies, the reality is not as homogeneous as the theory. The firm conducts two different market entry strategies linked to concentration as expansion strategy. In this case, there has been a development of market expansion and market entry strategies according to theory. However, the observed simultaneous conduction of different market entry strategies combined with a certain expansion strategy is assessed as a new insight.

32

6. Conclusions and findings In the final chapter the findings of the research will be presented. Conclusions will be drawn to answer the research questions. Moreover, recommendations for further research are displayed.

6.1 Conclusions from the study This research is based on one single case study Therefore; the findings can not be generalized. However, some results could be seen as a support for existing theory about SMEs, while other findings could be a significant complement.

Research question 1: Is the choice of diversification as foreign market expansion strategy a prerequisite for conducting export as market entry strategy for SMEs?

Since the studied company does not apply diversification as expansion strategy this research does not imply information about how SMEs conduct diversification Therefore, the connection between diversification and export can not be displayed with findings from this research. Theory suggests that there is a link between diversification and export. However, the studied company has been using direct export as market entry strategy. At the same time the firm chose a concentrated approach to foreign market activities and entered few markets incrementally. Concluding, SMEs do not need to conduct diversification in order to be able to pursue export successfully.

The choice of diversification as foreign market expansion strategy is not a prerequisite

for conducting export as market entry strategy for SMEs. Research question 2: Is the choice of concentration as foreign market expansion strategy a prerequisite for conducting foreign direct investment as market entry strategy for SMEs?

Foreign direct investment is an entry mode which requires high commitments to a market. As most SMEs, the studied company has possessed a restricted financial basis. Thus, foreign direct investment is conducted in just a few highly attractive markets that have the potential to return a long-term profit. By concentrating on particular markets the company can divide its resources on a few countries and commit to each market in an intensive way. When conducting diversification, many markets are targeted at the same time. This requires (a) a high amount of resources or (b) allocation of low commitments to each market. The firm does not have the financial background for diversification though it chose export as entry strategy to lower the financial risks. Concluding, concentration is highly suitable for conducting export. With time the firm develops foreign direct investments on profitable markets.

33

The choice of concentration as foreign market expansion strategy is not a prerequisite for conducting foreign direct investment as market entry strategy for SMEs.

Research question 3: Can a foreign market expansion strategy be combined with several foreign market entry strategies?

The case study revealed a constellation of one market expansion strategy with two market entry strategies. As the studied SME was lacking experience and resources to start internationalizing with a diversification strategy, it chose concentration. Since the approach of entering new markets did not change, company X still focuses on concentration. At the same time, direct export was the favored entry strategy to conquer the first markets. The company developed the entry mode in some of the foreign markets and is now conducting direct export and foreign direct investment simultaneously. Thus, following the process of development of entry strategies facilitates the studied SME to serve different markets with different entry modes. The authors tried to show a clear connection between market entry and market expansion strategies. One insight gained is that a market expansion strategy can be combined with different market entry strategies. In this case study, the company combined concentration with export and FDI.

A foreign market expansion strategy can be combined with several foreign market entry strategies.

6.2 Suggestions for further study Our research shows that there are divergences between exciting theory and the data collected. Concerning possible combinations of a particular market expansion strategy and several market entry strategies more research needs to be done. Especially, possible relations between diversification and several market entry strategies could not be illustrated by this case study. Furthermore, quantitative research about the relationship of the variables flexibility, risk and control to market expansion and market entry strategies may help to enlighten strategy combinations. Another interesting object of further studies could be the exploration of alternative variables to measure which coherences exist between the strategies. Furthermore, studies about SMEs' decision process which market expansion and market entry strategy to conduct may provide valuable insights into SMEs' behavior and needs.

34

References Albaum, G., Strandskov, J. & Duerr, E., 1998. International marketing and export management. 3rd ed. Harlow: Addison Wesley. Ayal, I. & Zif, J., 1979. Market Expansion Strategies in Multinational Marketing. Journal of Marketing, Vol. 43(2), p. 84-94. Baird, I. S., Lyles, M. A., Orris, J. B., 1994. The choice of international strategies by small businesses. Journal of Small Business Management Vol. 32(1) p. 48-59 Berg B. L., 2001. Qualitative research methods for the social sciences. 4th ed. Boston: Allyn and Bacon. Bilkey, W. J. & Tesar, G., 1977. The export behavior of smaller sized Wisconsin manufacturing firms. Journal of International Business Studies, Vol. 8(1), p. 93-98. Bradley, F., 2005. International Marketing Strategy. 5th ed. Harlow: Prentice Hall. Buckley, P. & Casson, M., 1998. Analyzing Foreign Market Entry Strategies: Extending the Internalization Approach. Journal of International Business Studies, Vol. 29(3), p. 539-561. Cooper D. R.& Schindler P.S., 1998. Business research methods. 6th ed. Irwin/McGraw-Hill. Cooper, R.G.& Kleinschmidt, E. J., 1985. The Impact of Export Strategy on Export Sales Performance. Journal of International Business Studies, Vol. 16(1), p. 37-55. Czinkota, M. R., 2007. International Marketing. 8th ed. Mason: Thomson/South Western. Daniels, J.D.& Radenbaugh, L.H., 2001. International Business. 9th ed. London: Prentice Hall. EC, 2005. The new SME definition: user guide and model declaration. Luxembourg: European Commission. Forsgren, M., 2002. The concept of learning in the Uppsala internationalization process model: a critical review. International Business Review, Vol. 11(3), p. 257-277. Gillespie, K., Jeannet, J.-P. & Hennessey, H. D., 2004. Global marketing: an interactive approach. Boston: Houghton Mifflin Co. Gupta, A. K. & Govindarajan, V., 2000. Managing Global Expansion: A Conceptual Framework. Business Horizons, Vol. 43(2), p. 45-54.

35

Hirsch, S. & Lev, B., 1971. Sales Stabilization Through Export Diversification. The Review of Economics and Statistics, Vol. 53(3), p. 270-277. Hollensen, S., 2001. Global Marketing- a market-responsive approach. 2nd ed. Harlow: Prentice Hall. Hollensen, S., 2003. Marketing Management- a relationship approach. Harlow: Prentice Hall. Holme, I. M. & Solvang B. K, 1997. Forskningsmetodik- om kvalitativa och kvantitativa metoder. 2nd ed. Lund: Studentlitteratur. Hoskisson, R. O. & Johnson, R. A., 1992. Corporate Restructuring and Strategic Change: The Effect on Diversification Strategy and R&D Intensity. Stratagic Management Journal, Vol. 13(8), p. 625-634. Johanson, J. & Vahlne, J.-E., 1997. The Internationalization Process of the Firm- A Model of Knowledge Development and Increasing Foreign Market Commitments. Journal of International Business Studies, Vol. 8(1), p. 23-32. Katsikeas, C. S. & Leonidou, L. C., 1996. Export Market Expansion Strategy: Differences Between Market Concentration and Market Spreading. Journal of Marketing Management, Vol. 12, p. 113-143. Knight, G.A., 2001. Entrepreneurship and strategy in the international SME. Journal of International Management. Vol. 7(3), p.155-171. Lee C. S. & Yang Y. S., 1990. Impact of Export Market Expansion Strategy on Export Performance. Asia Pacific Journal of Marketing and Logistics, Vol. 3(1), p. 29-39. Lee, J. M. & Jang, S. C., 2007. Market diversification and financial performance and stability: A study of hotel companies. International Journal of Hospitality Management. Vol. 26(2), p. 362-375. Lu, J. & Beamish P., 2006. SME internationalization and performance: Growth vs. profitability. Journal of International Entrepreneurship. Vol. 4(1), p. 27-48. Naidu, M. G. & Prasad, V. K., 1994. Predictors of Export strategy and performance of small- and medium-sized firms. Journal of Business Research, Vol. 31(2-3), p. 107-115. OECD, 1997. Globalization and Small and Medium Sized Enterprises (SMEs), Paris: Organization for Economic Cooperation and Development. Saunders, M., Lewis, P. & Thornhill A., 2007. Research Methods for Business Students. 4th ed. Harlow: Prentice Hall.

36

Sekaran, U., 2000. Research Methods for Business- A Skill-Building Approach. 3rd ed. John Wiley and Sons, Inc. UNCTAD, 2007. World investment report 2007- Transnational Corperations, Extractive Industries and Development. United Nations Conference on Trade and Development, New York and Geneva. Verwaal E. & Donkers, B., 2002. Firm Size and Export Intensity: Solving an Empirical Puzzle. Journal of International Business Studies, Vol. 33(3), p. 603-613. Yin, R. K., 1994. Case study research. 2nd ed. London: Sage Publications, Inc. Zaheer, S., 1995. Overcoming the Liability of Foreignness. The Academy of Management Journal, Vol. 38(2), p. 341-363.

37

Appendices Intervjuguide

1. Kan ni vara vänlig och berätta lite om ert företag.

2. Vad är företagets vision? Affärsidé? När grundades företaget?

3. Antal anställda?

4. Vilken är företagets årliga omsättning på export marknaderna och hur har siffrorna sett ut under de senaste åren? Hur ser den generella omsättningen ut?

5. I hur många länder agerar företaget?

6. Hur kom det sig att ni började expandera utomlands?

7. Vad hade ni för grundtanke med expansionen? Var det att exportera varor i

utlandet? Flytta produktionen för att producera till lägre kostnad?

8. Hade ni undersökt marknaden ni expanderade till? Vilka kriterier låg bakom expansionen? Hur kom X fram till dessa? Varför?

9. Hur ser konkurrensen ut på de olika marknaderna? Hur såg den ut när ni expanderade?

10. Vilken sorts marknad är attraktiv för X att operera i? På en marknad som är i mognadsfasen eller som befinner sig i introduktionsfasen? Ny ung marknad eller etablerad marknad? (PLC)

11. Hur länge tog det att förbereda expanderingen?

12. Placerade sig X på marknader där de såg potential att växa snabbt eller där ni ansåg

X kommer att växa lite långsammare men mer stabilt? Marknadstillväxt? Pengar vs. Relationer?

13. Hur stora investeringar har gjorts under åren då X expanderade till de tre olika

länderna? 14. Marknaderna X har valt att expandera till är de strategiskt utvalda för att influera

andra mindre marknader? (USA påverkar Europa) 15. På vilket sätt ska ni expandera i dessa länder?

38

16. Har ni någon strategi ni håller er till? Eller utvecklar ni en ny strategi för varje land?

17. Har ni fått hjälp av externa konsulter vid expansionsplanering och genomförandet?

18. Har den ursprungliga expansions strategi förändrats om man tittar idag? 19. B2B? B2C? Vilka typer av kunder har företaget?

20. Distribution? Vilka distributionskanaler använder sig företaget av på de utländska

marknaderna?

21. Standardiserad eller anpassad marknadsföring? Har de samma marknadsföring på de olika marknaderna de expanderat till?

22. Hur ser ni på framtida expansionen? Vilka länder står på tur? Hur ska det går till?