Deciding Which Market to Enter
A case study of Taco Bells
Introduction
A company with objectives of entering into new markets must implement strategic decisions on the type of market and the entry mode. Typically, global business enterprises enter new markets through exportation, obtaining market licenses, the formation of joint ventures, or sole venture entry (Keegan, 1989). Any of these entry modes require a firm to commit some resources to succeed in the market entry. Thus, initial strategic decisions as to the category of the market and appropriate entry mode are essential. High competition, industrial organization, and international market imperfections tend to impede the capability of a firm to join a new market. Additionally, firms must consider other essential factors such as social, economic, and political structures of the countries where they intend to establish new markets (Anderson and Coughlan, 1987, p. 79). Different companies will succeed in entering some markets while others will fail depending on the type and the characteristics of the market the company chose to enter. The entry mode also determines the success of a business organization in going into a new market.
Some markets entail high risks and therefore the expected returns from entering such markets are low. Additionally, the managerial capacity of a firm is instrumental in determining the resource capability in joining new markets (Keegan, 1989). A company with efficient management tends to have a significant competitive advantage and a great capacity to penetrate new markets. Thus, the decisions to enter new markets must be based on several factors that will affect the success of a firm in operating in the new markets. This paper will present the theme of market entry decision, a case study of Taco Bells. A teaching note will also be provided to analyze the case.
Factors that Taco Bells considers when making new market entry decisions
Market expansion is one of the primary objectives of most international companies. As such, various firms implement different marketing strategies to facilitate their entry into new markets. Some of the approaches used include the formation of international joint business operations, consolidation of the local markets, and international acquisitions (Nadkarni et al., 2007). However, various factors must be considered when making the entry decision to minimize chances of failure.
The competition level in a given market is an important consideration when making the entry decisions. According to Anderson and Coughlan (1987), the company’s success in joining new markets depends significantly on its competitive power. Companies with high production costs tend to be less competitive in some markets particularly when the advanced technology is used in production. The relationship between price and product quality is fundamental to setting a firm at a higher competitive position. Companies with high-quality products and relatively low prices tend to make entry decision with ease since they don’t need to consider the level of competition (Pieray, 1982 p. 31). Taco Bells performs market research in different countries through its marketing agents to determine the level of market competition before making the decision to enter into those markets (Lutz, 2014). This promotes its success in joining new markets and expanding its business operations.
The market size, as well as performance, is a fundamental determinant in the decisions to enter into new markets. Markets that are characterized by high imperfections tend to perform poorly. Additionally, small markets in terms of the number of consumers significantly affect the decisions of a firm in entering into new markets (Belu and Caragin, 2008). However, some commodities have good returns in markets that are perceived to be poor. For example, Coca- Cola Company has penetrated nearly every market, and its performance is good despite the varying market sizes (Nadkarni et al., 2007). Focusing only on the developed markets does not make a company better off since most global suppliers tend to concentrate on these developed markets resulting high competition.
The ability to communicate in different languages promotes the marketing efficiency of a firm. Cultural factors have considerable impacts on the market entry decisions. A company must consider its capacity to interpret products description in different languages to convince buyers from various cultural backgrounds (Belu and Caragin, 2008). Also, the study of consumer habits helps in making the entry decisions. Different customers have varying tastes for the same product. Toba Bells deploys personnel with the ability to communicate in different languages in its entire supply chain. This strategy enables the company to improve its marketing capacity and expansion (Lutz, 2014).
Multinational companies consider the attractiveness of markets by evaluating their potential to improve their revenue generation. Also, the ease of accessing the markets influences the decision of a firm in entering such market (Perks et al., 2008). Taco Bells performs market evaluations to determine their potential to increase its profits by considering the required level of initial investment, the structure of the industry, and the expected obstacles in the new market when making the entry decision (Lutz, 2014). Markets with high growth rate tend to be very attractive to most companies and the decision to enter into these markets does not involve many risks.
Different companies have varying capabilities in terms of management and finance. The consideration of firm’s resource capacity is of central importance when it comes to making decisions to expand the market. Taco Bells analyzes its competitive advantage critically by evaluating its knowledge of the market, the level of technology, and the reliability of its international partners before making the decision to penetrate new markets. Additionally, the company has different people who are experienced in international markets in its various distribution points to facilitate the marketing of its products and services (Lutz, 2014). This helps to minimize operational risks when entering the new markets.
The analysis of tariffs and the potential for currency exchange are fundamental when making decisions regarding market expansion. The failure to evaluate the risk involved in currency exchange results in significant loss to most exporters. Additionally, the amount tariff involved in the product exportation must be given due considerations because it determines the benefits of participating in international trade with different countries (Sisodia and Sheth, 2009). The evaluation of the exchange rates of different countries and the tariffs charged help Taco Bells to make strategic entry decisions. However, the company has failed in various markets such as China due to lack of effective strategies to withstand competition and other market conditions (Mercurio, 2012).
The social status of individuals who constitute the market that a firm intends to enter is an important consideration. The structure of the social class determines the market share of a company depending on its consumption capacity and behavior (Pieray, 1982). The establishment of supply chains in markets dominated by people who consume luxuries results in significant market risk for the company, if its products do not match the consumer needs in such market (Piercy, 1982). The performance of market research by Taco Bells supports its efficiency in making the new market entry decisions. The company engages in extensive market research to determine the suitability of its services to various markets before entering into such markets (Lutz, 2014).
Fundamental changes that Taco Bells has made to improve its market entry strategies
Different companies implement various strategies to aid their ability to penetrate the global market. Most of these strategies are based on the level of competition in the market and resources available for implementation. Product differentiation is most commonly used strategy to attract the customers by companies with similar products. Also, diversification of services and quality improvements helps to enhance the efficiency of a firm in entering the new market. “Innovativeness is instrumental in promoting the competitive advantage of a firm,” said Brandt, who is the marketing manager in Taco Bells. According to his information, innovation has great benefits for the company (Lutz, 2014).
The release of new brands such as Doritos Locos has improved the performance of the company in various markets (Lutz, 2014). The sales volume increased in 2012 following the release of the new brand where over one billion units were sold. Also, the company has improved its breakfast menu to improve its customer services. According to the information that Brandt gave, Taco Bells has made significant improvements in the quality of its services, which resulted in a 5% increase in sales in 2013 (Lutz, 2014). The expected sales increase is major consideration when making market entry decisions. If the sales of the company will rise significantly as a result of entering into a new market, then the entry is justified.
The reputation of a firm has considerable impacts on the ease of entry into new markets (Canabal and White, 2008). Companies with great global reputation tend to have easy market penetration compared to small companies whose reputation is not worldwide. For example, a company like Coca- Cola penetrates into new markets easily due to its high reputation (Nadkarni et al., 2007). Taco Bells has put considerable efforts in building its image by improving its services to meet the changing market needs. Brandt revealed in a conversation that the alignment of the company’s services with the market demands helps to improve the market size significantly. The adjustment of the brands to the changing customer tastes has done a lot in building the reputation of Taco Bells. For example, the improvement from the traditional serving methods to what Brandt referred as Happier Hour improved the company image as well as the customer loyalty to the company’s services (Lutz, 2014).
Challenges of new market entry decisions
The entry into new markets is fundamental to the expansion of a company. Most business organizations seek to internationalize their operations to promote their growth and expansion. However, the decision to go international by entering into new markets is crippled by various challenges which organizations must overcome to succeed in market expansion.
Availability of limited resources in some companies tends to reduce their capacities to implement expansion decisions. Companies must consider the resources required to be committed to the implementation of expansion decisions. If managerial and financial resources are limited in a company, its growth is limited (Anderson and Coughlan, 1987).
Barriers to the entry prevent some companies from adopting market growth strategies. High tariffs in some countries tend to make exportation complicated by making exports expensive. As such, multinational companies refrain from exporting to such markets, resulting in reduced capacity to expand. Physical ban to the exportation of some products in different countries, as well as the introduction of strict bottlenecks to control international trade also hamper the decisions concerning new market entry by most companies (Pieray, 1982).
Production in different countries takes place at different costs depending on the resource endowment and the level of technology. Multinational firms in developed countries offer their products and services at relatively low prices due to high production efficiency than companies from the developing countries. As a result, the competition in the global market between the products from the two categories of companies is unfavorable, and it results in high-cost industries withdrawing from the markets due to low demand for their products (Yin, 1994). However, Taco Bells has overcome this challenge by diversification of its products through innovation and new brands development.
In the formulation of decision regarding the type of market to enter, time becomes a critical consideration (Canabal and White, 2008, p. 273). The formation of a business intelligence system, as well as the building of company's reputation through promotions, consumes a lot of time and other resources (Canabal and White, 2008, p. 274). The costs of entering a new market constitute a fundamental barrier to the implementation of the entry decisions. The issue of language barrier influences the marketing in the global market. Additionally, the enforcement of legal trade agreements affects the internationalization of business since the integration of the international market is complicated (Keegan, 1989).
The establishment of international organizations and agreements to regulate international trade affects the company’s decision about market expansion. Some trade agreements tend to prevent the entry of companies outside the regional boundaries in which they are established. Such regulations affect the size of markets for firms that operate outside specific trading blocks. For example, NAFTA (North American Free Trade Agreement) regulates the trade among Canada, Mexico and USA (Anderson and Coughlan, 1987). Therefore, a multinational firm that operates from other countries may face significant barriers in this region. Additionally, the production line of a firm constitutes a fundamental limiting factor to the new market entry decisions. For example, companies like Taco Bells, which concentrate on restaurant services face significant challenges when entering into markets with cultural restrictions to consumption of some food products (Lutz, 2014). Therefore, the line of company’s products constitutes an essential barrier to the implementation of the market entry decisions.
Teaching Notes
The case contains three major questions that relate to the new market entry decisions. One of the questions is about the factors to consider when making decisions regarding new market entry. Several factors have been considered when studying the case of Taco Bells. These factors apply to nearly all companies seeking to internationalize their businesses. The consideration of economic factors such as the tax system, tariffs, and feasibility of carrying out business in some markets does not only affect Taco Bells but any other business organization with objectives of expanding its business to international markets. Some countries tend to impose heavy taxation on foreign products to promote local consumption. Such strategy affects the capacity of firms to penetrate into various markets. Also, the unfavorable tax system in some countries affects the decision to establish business ventures by reducing the returns to the company’s investment.
The exchange rates entail the rate at which one currency exchanges for another. Inflexible exchange rates systems affect the decisions of multinational firms to establish franchises in some countries, thereby reducing their capacities to expand their markets. Besides, unfavorable exchange rates increase the business risk, resulting in reduced market penetrating capacity of companies. Therefore, companies should critically analyze the impacts of all factors that affect their decisions concerning market expansion. Also, the significance of the factors should be considered since all factors do not have the same weight. Some factors do not have significant impacts on firm’s decision to enter into new markets while others are inevitable, and companies can only develop coping mechanisms.
The adoption of strategies to improve the performance of a company in the market has significant contributions to the growth of an organization. Some these strategies include products differentiation, innovation, and diversification. Differentiation entails making similar products appear different through various techniques such as the use of different packaging to attract more customers. Innovation involves developing of new brands as well as the improvements of the existing products to align them with changing market needs. Product diversification contributes to market expansion by ensuring that the diverse needs of the customer are met. If you look at the strategies that Taco Bells used to expand its market, it is clear that innovation plays a critical role in promoting a company’s market size and performance.
The entry into new markets cannot happen overnight. Also, despite the implementation of various approaches, a firm may fail to enter effectively into a new market. Making decisions as to which market to enter requires careful analysis of the strategies to use and the impacts of each strategy on the performance of an organization. The capacity of the firm in terms of management and resources is essential in determining the type of market the company can enter. For example, a company with a limited supply of skilled labor cannot contemplate entering into a market for sophisticated products. Time has also been found to be a significant consideration when making market entry decisions. It is apparent from the case of Taco Bells that building of worldwide reputation of a company is not a one-day business. Thus, patience is required to realize business expansion. Looking at how Taco Bells has dealt with challenges of new market entry, we can deduce that strategic approaches to entering into new markets are necessary for success.
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