Piggy Backing as International Entry Mode
We would also like to thank Staffan Livbom, Chief Executive Officer of BossIT Communications, for taking the time to answer our questions and explaining in detail BossIT’s international expansion. Lulea, May 2005 Tobias Simolin Olov Renberg I ABSTRACT There is a process ongoing where domestic markets are merging into a large global market, and this clash creates a larger supply of products on the international marketplace. Firms have to be able to adapt to these new settings to stay competitive.
Previous research has focused on how manufacturing firms and foremost large firms go international. Since more firms are outsourcing their services and employing small service firms to do a specific part of their work abroad, our research is focusing on small firms. For a small firm, it is important to choose the right mode of entry when entering a foreign market.
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There exists a large array of different modes to choose from when entering a foreign market. The decision of what method to implement can be critical since they may differ in how successful the international entry becomes.
One of these international entry modes that has not been received sufficient attention in previous research and thus we have chosen to address is piggybacking, which is when a company indirectly exports through a larger firms distribution channels. To add into the research of piggybacking we have focused on a small firm that is working with telecom in the service sector. This research has provided an understanding that small service firms can use piggybacking as an international entry mode.
The concept of globalisation and internationalisation is referred to as the trend toward greater interdependence among national institutions and economies. It is a trend that is characterised by “denationalisation” in which national boundaries are becoming less relevant. It also refers to the cooperation between national actors (Wild et al, 2003). Internationalisation is necessary because, from a national view, economic isolation has become impossible. Failure to participate in the global marketplace assures declining economic capability of a nation (Czinkota and Ronkainen, 2004).
According to Root (1994) the new global economy has created business environments that require firms to look past the traditional thinking of the domestic market, and to start looking at business from an international and global perspective instead. The term international business refers to a wide range of activities involved in conducting business transactions across national boundaries (Jain, 1996). According to Jeannet and Hennesey (1995) a company goes beyond exporting and become directly involved in the local market environment within a given country or market when they practice international marketing.
Jain (1996) discusses that the internationalisation of marketing activities has become irreversible for relatively small companies. According to Czinkota and Ronkainen (2004), a successful international marketing enables improved quality of life, a better society, more efficient business transactions and even a more peaceful world. Process of internationalisation According to Czinkota and Ronkainen (2004), internationalisation is a gradual process for companies. For most companies, export operations are the first step in internationalisation.
There is evidence that many firms develop their export business gradually (Albaum et al, 1994). Many companies appear to grow into international activities through a series of phased developments. They gradually change strategy and tactics as they become more involved. Others enter international markets after much research, with long-range plans fully developed (Cateora, 1996). Firms go international because increased global business activities create increased opportunities. International activities can also be crucial to a firm’s survival and growth.
By expanding the international business around the globe, an international firm can strengthen its competitive position. Going international with your product and in this way lengthening or renewing the product life cycle in other countries, can also avoid early market saturation. (Czinkota and Ronkainen, 2004). According to Hollensen (1998), the major motives for a firm to start with international activity is divided into proactive and reactive motives. Proactive motives are focusing primarily on opportunities whereas reactive motives are necessary for the firm’s survival. 1
Introduction According to Czinkota and Ronkainen (2004), the proactive motivation can be about making the best use of profit, technological or unique product advantages. It can also consist of identifying and utilizing tax benefits or exclusive information to the firms benefit. Reactive motivations can be about national competitive pressure, or declining domestic sales that forces a firm to expand abroad to avoid making an economic loss (ibid). Jain (1996), discusses the importance of considering the internal and external factors extensively when preparing international expansion.
The internal factors refer to corporate objectives, organization and resource availability. The external factors refer to competition, technological change, and economic, political or social changes. The monitoring of external and internal factors helps in the decision of whether to adapt a proactive or reactive strategy when going international. International market entry An international market entry mode is an arrangement that creates the possibility for a company’s products, technology, human skills, management, or other resources to enter into a foreign country Root (1994).
According to De Burca et al (2004), there are various approaches, when selecting entry modes for foreign markets, and these have different implications for small and medium-sized as oppose to large sized firms. Most small and medium sized enterprises that enter foreign markets do it in a country-by-country basis. In this way the small actors can expand to new markets in a suitable pace with good control over the development (ibid). Once a firm has decided to enter or expand into a foreign market, it must determine the structural nature of its operations in that nation (Osland et al, 2001).
The importance of choosing method of entry into foreign markets cannot be overemphasized. It is one of the most critical decisions because the entry decision is a macro decision. That is, when the firm chooses a level of involvement in foreign markets, it is also making choices about its marketing program there (Terpstra and Sarathy, 2000). Root (1994) describes the strategy for international entry as a comprehensive plan that will set forth the objectives, goals, resources, and policies that will guide the company’s international operations.
The range of entry mode alternatives is wide enough that almost any company in any product area can find some appropriate way to reach foreign markets (Terpstra and Sarathy, 2000). There are a variety of foreign market entry strategies from which to choose. Each has particular advantages and shortcomings, depending on company strengths and weaknesses, the degree of commitment the company is willing or able to make, and market characteristics (Cateora, 1996). Depending on the type of entry strategy selected, market success may differ substantially (Jeannet and Hennessey, 1995).
Managers therefore need to understand the nature of each of their modal choices. Modes vary in terms of the level of control, the quantity of required resources, and the amount of technological risk (Osland et al, 2001). According to Jeannet and Hennessey (1995) the three major entry mode strategy alternatives are foreign production, ownership and exporting strategies as described below. Several factors may encourage, or force, the firm to produce in foreign markets.
If not producing in the country in which the sales occur, transportation costs can result in noncompetitiveness and tariffs or quotas can prevent entry of an exporter’s products. (Terpstra and Sarathy, 2000). 2 Introduction According to Czinkota and Ronkainen (2004) when companies making foreign direct investment they can choose from large ownership to a minority interest. The ownership choices are full ownership, joint venture and government consortia. The different levels of ownerships will result in a varying flexibility, a changing ability to control strategy, and differences in the level of risk assumed.
De Burca et al (2004), describe alliances as an ownership strategy that improves international competitiveness by; faster product development, introducing products to foreign markets more quickly, lowering costs by focusing on core competences and reducing promotion costs by marketing under one brand. With export entry modes, a firms’ product are manufactured in a domestic market or a third country, and then transferred either directly or indirectly to the host market. Export is the most common mode to entry into international markets. (Hollensen, 1998).
Small service firms go international De Burca et al (2004) give four reasons to why the service economy has stimulated international marketing of services. The decreases in government regulations are freeing up trade in services. This factor combined with social changes and business trends have also facilitated internationalisation of services. The advances in technology have lessened the constraints on provision of services imposed by national boundaries and influenced international service providers to globalise, which can be observed as evidence in the telecom sector (ibid).
One quarter of all international trade consists of services. The different characteristics between manufactured goods and the service goods, affect how they are marketed internationally (Cateora, 1996). Erramilli and Rao (1993), talks about Swedish technical consultancy service firms that have bypassed the incremental establishment chain that is used by manufacturing firms. This is possible since the resource commitments are of minor significance for the service firm. Researchers have questioned how service firms enter into foreign markets and how they differ from manufacturers in their efforts.
When internationalising, service firms have a tendency to require lower levels of financial investment than manufacturing firms (ibid). Since services are produced and consumed at the same time they have more restrictions in deciding the entry mode to bee used. Services can be divided into two categories, hard- and soft services. The first being more industrial services such as engineering and computing services, and the latter consisting more of consulting and consumer based services. Exporting is a common mode of entry for firm’s delivering hard service.
Soft services are mainly nonexported. Erramilli, 1989). Karagianni and Labrianidis (2001), talks about large firms having considerable experience in acting on global markets, when on the other hand the majority of small firms have only recently adopted international perspectives in their strategies. Studies suggest that these small firms are confronted with greater difficulties in accessing international markets than the largescale actors. The uncertainty resulting from the inability to control prices, the limited access to policy makers, and the limited financial resources, acts as a constraint when developing a plan of international orientation.
Therefore small firms face a higher risk when extending their business abroad (ibid). These factors force the small firms expanding international to use entry modes that provide security. This security can in the best way be gained through partnership operations with larger firms. 3 Introduction The above-mentioned characteristics for service- and small firms, shows that special entry modes need to be adapted to succeed internationally. 1. 2 Problem Discussion Export decisions A company can decide to enter the international arena by exporting from the home country.
This type of foreign market development is the easiest and most common approach employed by companies taking their first international step because of the risk of financial loss can be minimized (Cateora, 1996). While exporting has the advantage of the least cost and risk of any entry method, it allows the firm little control over how, when, where and by whom the products are sold (Hollensen, 1998). Due to the benefits of low risk with the exporting entry mode, this method is a common way of getting international experience (Root, 1994).
According to Terpstra and Sarathy (2000) a firm has two basic options for carrying out its export operations, direct and indirect exporting. According to Osland et al (2001), indirect exporting is the use of intermediaries located in the company’s home country and that takes responsibility to market and deliver the products. With indirect exporting the firm is not engaging in international marketing in any real sense. Its products are carried abroad by others. In direct exporting the manufacturer performs the export tasks rather than delegating it to others (Terpstra and Sarathy, 2000).
A firm with minimal resources to devote to international expansion, which wants to enter international markets gradually, may also adopt this method, for testing out markets before committing major resources and effort to developing an export organisation (Hollensen, 1998). By using an indirect channel, a firm can start exporting with no investment in fixed capital and with low start up costs, in this way the risks are few (Root, 1994). There are five main entry modes of indirect exporting: Export buying agent, broker, export management company, trading company and piggyback (Hollensen, 1998).
From these five modes of indirect exporting, piggybacking suits the small service firm going international. Piggybacking In piggyback exporting, one manufacturer uses its overseas distribution to sell another company’s product along with its own (Terpstra and Sarathy, 2000). Piggybacking is considered as an early form of strategic alliance where firms join together voluntarily, usually with no equity ties, to reach some objectives together that they cannot reach efficiently by themselves (Terpstra and Yu, 1990).
The terms carrier and rider is described by Terpstra and Yu (1990); the carrier is usually a large firm with considerable international business and experience, and may have widespread production- and distribution facilities in several countries. In general the rider is the supplier of the basic products while the carrier performs the marketing and distribution strategy (ibid). According to Jeannet and Hennessey (1995), the rider is piggybacking its products on the shoulders of the established company.
When a firm has a gap in its product line they have an option to acquire the necessary products outside by piggybacking. This option can be attractive because the firm obtains the new product faster. It is also a low cost solution to get the product because the carrier does not have to invest in R&D, production facilities or market testing for the new product. (Hollensen, 1999). 4 Introduction For the rider using an export company to carry its product to foreign markets, piggybacking is one alternative route. It offers established export and distribution facilities and shared expenses (Terpstra and Sarathy, 2000).
The fact that another producer is distributing the rider’s products may bring important benefits to the rider as compared with using a regular distributor (Terpstra and Yu (1990). All types of products can be exported by this technique, including textiles, industrial and electrical machinery and equipment, chemicals, consumer soft goods, and books. (Albaum et al, 1994). Service firms Most of the literature on internationalisation, international marketing and export strategies is adjusted to the need of the manufacturing sector.
“For international services, theory lags practice by a onsiderable degree” (Gronroos, 1999, p. 291). Erramilli (1989, p. 50) emphasises the importance of research in service firms and entry modes and states two questions: “How do service firms enter individual foreign markets? ” and “How does the entry behaviour vary across different industries in the service sector? ” Chryssochoidis (1997) argues that since a service firm is characterized by high degrees of simultaneity, intangibility and perishability in the production process, they do not face the same investment alternatives in their internationalisation process as manufacturing firms.
Due to the perishability, the service firm is always pressed to schedule tasks as efficiently as possible (ibid). The service offering is more intangible, personalized and custom-made than goods and it is the fastest growing sector of world trade. Traditionally, services have been thought of as offerings on a local solution and service firms have been considered local establishments. However the service businesses have now become more international (Czinkota and Ronkainen, 2004). A rapid globalisation of the world economy during the 1990’s has increased the opportunities for marketing services abroad.
It is a fact that international marketing is a vital part of the service marketing (Gronroos, 1999). Foreign market entry behaviour in the service sector is characterised by considerable diversity, especially compared to the manufacturing sector (Erramilli, 1989). According to Terpstra and Yu (1990), the benefits for small firms when using piggyback operations are extensive. It is one of the most obvious ways for small firms without large capacity, to sell their products abroad. Even though the tendency to piggyback is large, and especially among smaller firms, there has not been any extensive research done in the area.
The gap between practice and theory mentioned by Gronroos (1999), shows that the area of small service firms internationalising is not sufficiently researched. This fact provides us with the opportunity to contribute through the present study, in connecting the question of piggybacking as a method of market entry to the experiences of small service firms. 1. 3 Purpose In view of the above discussion the purpose of our study is: To provide a better understanding of piggybacking as an international entry mode for small service firms. 5 Introduction 1. 4 Research Questions
To be able to answer the purpose of the study we shall address the following three research questions; 1. How can the process of piggybacking as an international entry mode be described? 2. How can the benefits gained by small service firms as piggyback riders be described? 3. How can the relationship between the piggyback rider and piggyback carrier be described? 1. 5 Delimitations The focus of this study is the piggybacking entry mode, used by small service firms when going international. The research is focusing on the rider firm, and the use of piggybacking.
The relationship and the benefits are also analysed from the rider’s perspective. The carrier firm is not further considered since data is going to be collected only from the rider firm. 6 Literature Review 2 Literature Review In this chapter the literature in the research area of small service firms going international, and the use of piggybacking is reviewed and presented. We will analyse the theories connected to the research area and present a conceptual framework that will clarify the main topic to be studied.
To add into the research of piggybacking as an entry mode for small service firms, the piggybacking arrangement combined with general entry mode decision for service firms will develop a framework from the literature. The entry mode choice, for small service firms differ from each other in the degree to which they involve the firm in the foreign market (Erramilli and Rao, 1990). Typically the amount of control increases, as a firm’s resource and involvement commitment increase. This generally means that firms preferring to maintain control over their foreign operations, may have to choose entry modes with higher involvement levels.
Firms with lower market knowledge can be expected to be more willing to employ entry modes that involve entities outside the firm. (ibid). According to Darling and Kash (1998), the small firm needs to understand the dynamics of doing business in foreign markets. To just identify an opportunity is not enough. Contrasting opportunity with preparation and timing entry is essential to succeed. Small firms will do well in foreign markets if they proceed carefully and scientifically. International success will come to those who identify and meet a customer demand solidly and efficiently.
Small firms can enjoy steady growth if they build on previous successes and do not compromise their strategic foundations with fast decisions made from incomplete competitive information (ibid). Small firms seldom have specialist executives to manage their international operations and therefore decision-making is much more likely to be personalized. This can lead the small firm to take shortcuts without proper evaluation of the alternatives.
The small firm, however enjoy the advantage of greater flexibility and responsiveness to changes in the marketplace. Karagianni and Labrianidis, 2001). Small firms can choose between different ways to expand internationally, however limited resource bases can reduce the ability to expand from the domestic market. (Westhead et al, 2001). The choice of entry mode for service firms when going abroad is either to follow existing clients when they expand internationally or to actively look for new markets (Erramilli and Rao, 1993). For many service firms going abroad is not a matter of choice. Customers acquire international offers and require the service firm to deliver internationally as well.
According to Gronroos (1999), there exist two different general entry modes for service firms entering foreign markets: 1. Client-following mode 2. Market-seeking mode A large number of service firms enter a foreign market primarily to serve the foreign subsidiaries of their domestic clients. This phenomenon “client following”, not heard of in the manufacturing sector, is a unique characteristic of service firms. The market seeking entry 7 Literature Review refers to service firms entering foreign markets primarily to serve foreign customers (Erramilli and Rao, 1990).
A firm can generally be expected to be more knowledgeable when going abroad to serve its current domestic clients in a client-following entry, than when entering a market to serve foreign customers in a market-seeking mode. This means that the market-seeking firm can expect to perceive higher levels of uncertainty and risk (ibid). When high tech manufacturers internationalise, their service suppliers often are forced to follow them abroad. This factor has partly been the key factor of the growth in service trade internationally.