Foreign Market Entry and Diversification



Foreign Market Entry and Diversification

Introduction

American economy needs to retain its relative position, must continually strive for change and growth. In order to maintain this position it is necessary that the economy maintains its pace. In the recent years the methods of traditional trade and production procedures have enhanced. Companies have to develop twice fast on their paces, if they stay abreast with the competition and innovation. There are four main factors to consider when analyzing the opportunities of alternatives related to growth; it can be through development of market, product development, through diversification or by the increased penetration of the market.

Companies that accept diversification as the option of growth have to continuously weight the options and compare the advantages among the four factors. In case of weak position in competition, the growth is slow relatively; the organization should reformulate the current strategy of competition to change the game plan and create a strategy that enhances their position among the existing competition. It suggested by Cole G.A. (1988) that the organization strategies should be based on the basis of diversity with expectations from the future. The corporate creators of strategies should make assessments related to a specific diversification and ensure that it is capable of increasing the value of the shareholder through the following test it can be determined:

Attractiveness test

The chosen industry of diversification should be attractive to consistently provide investment return, that is representation of true industry attractiveness which is usually defined by the existing competition in a favourable condition and the environment of the market is conducive to the profitability on long term basis.

Cost of entry test

The cost of entering the targeted business should not erode the anticipate profit. There is a parallel relationship between the attractiveness of the industry and the expenses. Higher the attractiveness, higher will be the expenses to get in to it, there are several barriers as in case of low rate of barriers the rate of profitability will reduce because of continuous emerging markets. Buying a company or starting a company already increases the cost; a high cost of entry will reduce the value of shareholder.

Better-off test

A company willing to adopt diversity should look for potential advantage from the competition in the prevailing business. The opportunity creates competitive sustainability advantage where no one has reached before, which means there is possibility of achieving higher profitability (Quinn J.B. 1980).

Challenges of Diversity:

According to Bright (1969), companies should concentrate on a single business as this can assist them in achieving height of success over time and it would also assist them in maintaining growth. When organization concentrate on single business either entirely or through assistance of minor diversification has shown some important managerial and organizational impacts:

In organization operating under a single business operation reduces ambiguity as to what is the aim of the business and what should be done to achieve it, in diversification there are multiple businesses.

The entire efforts of the organization are not directed towards a single business ...