We continue our investigation of the methods we can employ to expanding businesses into new markets.
Inside today’s video we will focus on equity investment options. If the initiating entity can stand the potential short-term valuation hit they can be positioned to reap the benefit of full participation in a market. It takes a strong mindset to follow this path for ownership requires the greatest commitment of capital and managerial effort.
My goal with this video blog series is to have you take something away from each part, whether it’s a reminder about an old friend or new perspective.
How to Craft a Winning Market Entry Strategy – Part 4: Transcript
In the last video we talked about Joint Ventures and how it’s hedged ownership profile is very appealing to many businesses that might have a level of capital restrictions that prohibits full ownership.
In this video we take a look at the other side of the coin, equity investments.
Establishing a new footprint of operations via a full-scale direct expansion is typically expensive and requires a major commitment of managerial time and energy. However, political or other environmental factors sometimes dictate this approach.
There are three basic investment forms – although they are more levels of investment than forms. The first is:
- Greenfield Investment: This a market entry strategy that entails direct investment in a factory, retail outlet, or some other form of new operations in a target market. The benefit of this method is that it is not encumbered by any constraints of prior work. Read reputation.
- Pursuing a merger is an alternative. We don’t have to look far to find well known examples. One of the largest in the media space is currently in the late stages of unfolding. Comcast's agreement with General Electric for a 51 percent stake in NBC Universal will create one of the world's most dominant mediacompanies.
- Acquiring an existing entity is often the most used path of the three. This approach is taken for several different reasons; to eliminate an up-start threats, pull mission critical resources in house, secure a substantial foothold in a new market. Despite the reasoning this is an instantaneous—and sometimes, less expensive—approach to market entry or expansion. Although full ownership can yield the additional advantage of avoiding communication and conflict of interest problems that may arise with a joint venture or coproduction partner, acquisitions still present the demanding and challenging task of integrating the acquired company into the organization.
Deutsche Bank raise of £8.1bn to complete the Postbank takeover is a great example. Germany's biggest bank to issue 308m common shares to buy the 70% of Postbank it does not already own. The business rationale, to expand their strong position within the home market, take a leading position in the European retail banking business and significantly enhance the bank's revenue mix.
If you have any doubt check out the finds of a PwC study of the 2008 marketplace. Despite being a year in which most equity and credit markets were frozen Merger & acquisition (M&A) activity was only down 22% to some $1.1 trillion US dollars.
The alternatives discussed in this series – exporting, licensing, joint ventures, ownership stakes – are all point along a continuum of alternative strategies. The wise strategist understands that a combination of these methods might yield the best long-term results. Combinations that are put together both based on concurrent situations and time. It is not uncommon for mid-course adjustment to radically shift strategies as the market players become wiser.
In the next installment we will explore how political, economic, and technological environments have conspired to change the relative importance of market entry strategies.
Inside the next video we’ll explore strategic partnership.
Thank you for watching.
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