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Bachelor Thesis
A study of 2008 financial crises effect on internationalization of firms
with luxury Products
Department of Economics and Business Administration Aarhus University Hand in: 07th April
Spring 2015 BScB Final Semester
Supervisor: Ingo Kleindienst Associate Professor of Strategy Dep. Of Business Administration, Aarhus University Authors: Sameer Yaqoubi, Id: SY94683 Abdul Qader Sayedi, Id: AS94308
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Table of Contents
Introduction ....................................................................................................................................... 4
Problem statement .................................................................................................................................... 6 Research questions .................................................................................................................................... 6
Theoretical considerations ........................................................................................................... 6
The External Shock .................................................................................................................................... 6 Emery and Trist environmental turbulence model ........................................................................ 8 Ansoff 5 stage model of environmental turbulence ..................................................................... 10 Internationalization motives ............................................................................................................... 14 The Uppsala model ................................................................................................................................................. 19
Internationalization Barriers .............................................................................................................. 22 International market selection ............................................................................................................ 23 International Market expansions strategy ................................................................................................... 27 Concentration versus diversification ............................................................................................................. 28
Entry mode ................................................................................................................................................. 32 Transaction cost theory ........................................................................................................................................ 32 Real Option Theory ................................................................................................................................................ 42 The Ansoff matrix .................................................................................................................................................... 47
Methodology ................................................................................................................................... 48
The Analysis .................................................................................................................................... 50
Company history ....................................................................................................................................... 51 The effect of 2008 external shock on B&O ....................................................................................... 52 Pre-‐financial crisis ................................................................................................................................... 52 The effect of the crisis on B&O ............................................................................................................. 55 Pole Position strategy and the external shock of 2008 ............................................................... 56 Pole position strategy (response and aggression) ........................................................................ 59 Internationalization of B&O ................................................................................................................. 61 B&O Uppsala model ............................................................................................................................................... 63
B&O market selection and expansion strategy .............................................................................. 65 B&O Entry modes ..................................................................................................................................... 73 Transaction Cost Theory ...................................................................................................................................... 73 Real Option Theory ................................................................................................................................................ 79 B&O Ansoff matrix .................................................................................................................................................. 82
Limitation ........................................................................................................................................ 84
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Conclusion ....................................................................................................................................... 84
Bibliography ................................................................................................................................... 88
Appendix .......................................................................................................................................... 93
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Introduction Globalization of firms is no longer a choice but a need for most firms in order to continue
their business in any kind of industry they are operating. In recent decades the
internationalization of firms turns out to be a necessity aspect of running business due to
intensive competition and achieving higher growth, which is not possible in staying
domestic markets. On the other hand internationalization is not a straight forward
process it involves lot of risks challenges, threats, opportunities, research and knowledge
about the foreigner markets. Due to high level of rivalry among the firms and
exploitation of new market opportunities around the globe the internationalization of
the firms has increased significantly in recent decades. Which in other words mean firms
needs to pursue a cross border strategy and engage with different external
environmental aspects such as cultural, economical, social and institutional (Hollensen,
2012).
One of the most challenging periods of all times for multinational cooperation was the
world financial crisis of 2008. Many international companies went bankrupt or have
been hit so hard economically worldwide, only those firms who came up with substantial
changes in their strategy and over all operation of their business could manage to
survive. These substantial changes in strategy could be elaborated in many ways based
on Firms size, resources, capabilities, competitive advantages, brand values and finally
the industry they are operating in. Bang and Olufsen (B&O) is a Danish multinational
company producing wide range of luxuries products within Video and audio high-‐end
industry, which is in combination of quality and design. As the global rescission spread
out in more mature markets starting in 2008 the demand for luxuries products deceased
with high speed due to lower consumer’s purchasing power (Annual Report, 2007/08).
This turns out be a catastrophic year for most companies including B&O which was the
worst period of time in their history. The company’s net turn over, net profit and revenue
drops almost to half. They were forced to close down many show rooms and sale shops
around the globe and lay off a large proportion of employees. The chairman of B&O
Jørgen Worning explained the situation of the company for the shareholders as follows:
‘‘The 2008/09 financial year was extremely tough for Bang & Olufsen, not only for the
company and its employees, but also for you, our shareholders. The global financial crisis
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has turned into a global recession which has resulted in a significant slowdown in private
consumption. This has impacted strongly on almost all product categories, especially
sales of luxury goods” (B&O AR, 2009/10, s. 6).
As B&O solely focused on luxuries products for many decades and enjoyed high level of
growth in most markets, the recession brought two big challenges for the company to
cope with, first of all the price of B&O product is considered, as one of the most expensive
products in the market among the other competitor. B&O spend years of experience to
create a high brand image of their product`s reputation in terms of quality and design in
their consumer’s mind. Although B&O largely targeted high-‐end segments, consumers
with high income, no matter who the real consumers were, in time of the recession the
consumer purchasing powers decrease significantly. The second challenge was related to
the technological evolution of their brand as B&O is in an industry where the level of
competition is very tough in terms of fast innovation and design other competitors are
now offering same values with considerable lower price which will motivate most of
B&O consumer to look for alternative substitutes. (B&O AR, 2009/10)
In order to cope with the above mentioned challenges they needed to bring strategic
changes right after the crisis. The company came up with strategic changes in their
internationalization strategy the first step of the plan was defensive respond toward the
crisis, where they close down their shops in declining markets around the globe and also
part of the plan were to reduce the production costs and administration cost. To fulfill
this plan they targeted new markets, where they can open their production facilities with
the lowest cost and lowest wages of workers. The second step of the plan was aggressive
strategy where they targeted new potential markets manly China, India and Brazil. By
entering new markets and decreasing the number of shop in declining market the
company used all their resource and capabilities to respond the external shock of 2008
financial crisis. The purpose of this project is to assess and analyses the effect of the crisis
on the company’s decision of internationalization. To what extend the choice of new
markets and their expansion strategy helped the company to cope with the crisis and
bring back the company to pre-‐crisis stages. (B&O AR, 2011/12)
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In order to target the challenges brought by 2008 financial crisis on firms with high-‐end
and luxuries products, and the effect of the crisis over the decision of firm’s
internationalization, we have designed the below problem statement for the project;
Problem statement How does the external shock of 2008 financial crisis effect the internationalization
of the company in luxuries industry?
In order to address the main problem statement more specific and precise, we have
create different sub parts in form of three research questions. Each research question
looks into deferent perspective of the main problem statement.
Research questions 1. How does internationalization can help firms during the crisis (2008 financial crisis)?
2. What strategies firms need to peruse in relation to international market selection and
entry modes?
3. What are the potential markets, during 2008 financial crises for firms with luxurious
products?
Theoretical considerations
The External Shock The first decade of 21th century brought the world dramatic changes in the outside
environment that collapses the perception of firm’s activity and prediction for future.
One of the most recent events which have brought significant influence in the outside
business environment was the external shock of 2008 financial crisis. As a result of this
external shock many firms around the globe went bankrupt or were pushed at edge to
fight for their survival. To assess and analysis the problem from a theoretical approach,
this part of the project focuses on theories and arguments from the scholars in relation to
external environmental shock and their influence on firms, beside that the last section in
this part (theoretical framework) the focus would be on, what strategy firms need to
pursue in order to avoid or respond to such environmental change.
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As a starting point it would be best to know what we really mean when we talk about the
external environment of firms, and why it is very important for firms to pay close
attention in their surrounding environments.
According Andrews (1998) the environment of organizations in business are “the
patterns of all the external conditions and influences that affect its life and development
(Andrews, 1998, p. 14)”. Whereas seen from Eisenhadt, (1998) point of view the firms
outside environment is defined as “a situation that is subject to continuous and
substantial changes which are uncertain and unpredictable (Eisenhadt, 1998, p. 13)”.
Igor Ansoff (1957) placed the environment, primarily into two large categories: historic
and discontinuous. In historic environments, decisions about the future are based on
past and present events that can be exploited into the future. In historical environments
Change is incremental, predictable, and visible. In discontinuous environments, the
future is partially visible and predictable; therefore, change is possible by using weak
signals from the environment. Lastly, the future could be completely unpredictable and
invisible; hence, changes are based on building scenarios utilizing weak environmental
signals. (Ansoff, 1957)
On the other hand Moussetis (2011) came up with another approach to define the term
external environment of firms “it is meant to examine economic, political, sociological,
technological, geopolitical, psychological, etc. forces in the area(s) that an organization
chooses to operate” (Moussetis, 2011, p. 6). The external environment plays a significant
role in how firms choose to operate and design their future strategy. One of the critical
situations that mangers had difficulties for years to coping with is the environmental
uncertainty and dramatic changes during the past few decades. To defined the situation
Emery and Trist in (1965) introduced the term turbulence which is a function of Change
ability and predictability, and it consist of several factors such as changeability of the
market environment, speed of change, intensity of competition, abundance of technology,
discrimination by customers, pressure from government and influents groups (Glaister,
1992; Trist & Emery, 1965).
By definition the environmental turbulence refers to the amount of complexity and
change in the in environment of an industry, the higher the amount of change and
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complexity in the environment would lead to greater level of environmental turbulence
(Kipley, lewis, & Jewe, 2009).
PN (1977) categorized the environmental turbulence as a dynamic, unpredictable,
expanding, fluctuation, an environment where the components are marked by change.
(PN, 1977). Emery and Trist in (1965) who originated the term environmental
turbulence classified it as “an environment that has a high degree of interconnectedness
with the organization together with a high degree of change in the environment itself”
(Trist & Emery, 1965, p. 8). Furthermore, as a common definitional approach
environmental turbulence is shaped by three complexes aggregate dimensions related to
change predictability, complexity and dynamism. Based on the specific situation of the
industry some dimensions are dominant than others (Kipley, lewis, & Jewe, 2009)
predictability dimension in terms of defining turbulence refers to the uncertainty and
unfamiliarly related to the extension of cause and effect in an unpredictable
environment. Complexity refers to greatness, relatedness and concentration of the
elements and their interdependencies in relation to the environment (Thompson, 1967).
Dynamism dimension asses the stable (static) to dynamic and based on two range
describes the elements of environmental components of firms which remain the same
(stayed stable) or has been influence by the environmental change over the time
(Duncan, 1972).
Emery and Trist environmental turbulence model Emery and Trist (1965) identified the environmental turbulence into four distinguish
dimension based on the situation changes brought by the turbulence, the classification of
four dimensions of turbulence are shown in the (figure1)
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Figure 1: stable and dynamic situation during turbulence Source: (Kipley, lewis, & Jewe, 2009)
According the figure 1 Type one (Placid/Random) and type two (Placid/Clustered) are
both indicates stable environment where the participant in the field experience low level
of uncertainty and complexity. Type three (Disturbed/Reactive) in this condition the
participant is very Interconnection as the level of competition is intense the environment
gets more dynamic. Type four is a turbulent condition with the most uncertain of
environmental textures (Kipley, lewis, & Jewe, 2009). Turbulent field is placed in the
highest level of complexity and dynamism, which creates variances in the components of
organization external environment. The high level of uncertainty comes from these
variances that lead to turbulence situation (Benning, 1999).
Igor Ansoff in his book Ansoff (1990) Implanting Strategic Management approaches the
environmental turbulences in two dimensions: changeability, and predictability. Ansoff
defines the environmental turbulence as “a combine measure of the changeability and
predictability of the firm’s environment” (H. Igor Ansoff, 1990, p. 35). Ansoff (1990)
describe his approach of definition to environmental turbulence by four characteristics:
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Changeability: First complexity of the firm’s environment and in the second
characteristics is the Relative novelty of the successive challenges that the firm
encounters in the environment (H. Igor Ansoff, 1990).
Predictability: The third is rapidity of the change; this refers to the speed in challenges
that involve the environment of the firms and the speed in which the firms are able to
respond to it. (H. Igor Ansoff, 1990)
And fourth is the visibility of the future in which the firms can assess and analysis about
future activates (H. Igor Ansoff, 1990). Taking into account the two dimension of his
approach (changeability and predictability)
Ansoff 5 stage model of environmental turbulence Ansoff (1990) designed a scale in five distinguish stages which provides us a
visualization of environmental turbulence in five levels. Which can help us to categorized
and assess in which stage of the turbulence firms placed them self.
Figure 2 provides a full visualization of five levels of turbulence. Ansoff named each of
the these levels based on their environmental situation, the first level is called the
“repetitive ”stage according Ansoff in this level, the environment repeats itself , no
substantial changes occurs over time . In this level firms can confine its attention based
on their historical market place, any successive challenges which occurs in this level is
just repetition of the past, even if there is any changes in this level the change is slower
than the firm’s ability to respond, and finality the future is a replication of the past and
hence it is predictable (H. Igor Ansoff, 1990).
Level 2 is the “expanding” stage according Ansoff in this level the change is incremental.
It occurs slowly, it is visible and predictable, since the level of change is not dramatic the
firms can adapt to these changes easily.
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Figure 2: Ansoff 5 level turbulence model Source: (H. Igor Ansoff, 1990)
Level 3 is the “changing” stage the rate of environment changes is much faster than the
earlier stages, but it is still incremental and still visible. In order to respond these
changes firms need to progressively improve and adapt to the speed of the changes.
Level 4 is the “discontinuous” stage in this stage the changes are not based on historical
background, the rate of change is strong it is much more complex with poor
predictability. In respond to overcome, the level four environmental turbulence Ansoff
suggested that firms needs to continuously scan their environment for identifying the
future economic, technological, social political and competitive discontinuities (H. Igor
Ansoff, 1990).
Level 5 is the “Surprising” stage. This level is the most complex and strongest stage of
environmental turbulence, the rate of change is quite enormous and rapid that no firms
has the capability to respond to it in short period of time. The evens are invisible and it is
hard to predict, according to Ansoff this high level of environment turbulence occurs as a
result of economic, political, and social disorder , therefore firms dealing with level 4 and
level 5 of environmental turbulence would continually seeks and enters other markets in
which they can success and find their future brighter. As they entered new attractive and
potential markets they would in the longer run increase their resources to the new
markets where they found it attractive (H. Igor Ansoff, 1990). What we can take as a
conclusion based on Ansoff argument regarding the level 4 and level 5 of environmental
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turbulence is that when firms found them self in such stage they would seek new
attractive markets in which they can see a brighter future, on the other hand he also
insist that resource seeking into new potential market is another step for firms once they
found them themselves into new attractive markets (H. Igor Ansoff, 1990).
From a theoretical point of view Ansoff came up with a very innovative management tool
called “strategic diagnosis” which allows firms to essentially diagnose their future profit
potentiality during environmental turbulences. As Ansoff himself defined the strategic
diagnosis as “a systematic approach to determining the changes that have to be made to
a firms strategy and its internal capability in order to assure the firm`s success in its
future environment” (H. Igor Ansoff, 1990, p. 36). In order to fully get use of this strategic
management tool, he suggest two basic requirement for firms to develop.
1. Firms need to establish the capability to be able to diagnose the future challenges, as
well as opportunities, strengths, weakness, and threats.
2. Firms must develop an in-‐house response mechanism in order to fit strategically with
their needs (H. Igor Ansoff, 1990).
The performance would reach to an optimal level if the strategy and the capability of the
firms match the environmental turbulence (Moussetis, 2011). The strategic diagnostic
procedure is derived from the strategic success hypothesis and has been validated by
empirical researches (H. Igor Ansoff, 1990) . The hypothesis stated that three condition
must be met for and optimal organization`s performance potential
1. Aggressiveness of the firm`s strategic behavior matches the turbulence of its
environment.
2. Responsive of the organization`s capabilities matches the aggressiveness of its
strategy.
3. The component of the organization`s capability must be supportive of each other (H.
Igor Ansoff, 1990).
The two key terms “strategic aggressiveness, and responsiveness” are insisted by Ansoff
as how firms should respond and adapt to a highly turbulence environment.
According Moussetis( 2011) the strategic aggressive refers to the strategic orientation of
the general management of the firms, whereas the responsiveness refers to the
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functional orientation of firms management that involves production, marketing and
entrepreneurial (Moussetis, 2011).
Strategic aggressiveness is shaped by tow characteristics:
1. The degree of discontinuity: according the Ansoff five level of environmental
turbulence the level of change and discontinuity intensifies as we go from lower level of
the upper level.
2. Timeliness: the intensity and speed of strategic aggressiveness in regards to change.
Timeliness ranges in different modes from a reactive to anticipatory and from innovative
to creative (H. Igor Ansoff, 1990). On the other hand in comparing the strategic
aggressiveness, the responsiveness of the firms mainly focuses on the capabilities in
relation to the level of turbulence. (Figure 3) indicates how firms should consider their
strategic aggressiveness and responsiveness of capability in relation to different
environmental turbulence level.
Figure 3: Ansoff 5 level of turbulence and respond model Source: (H. Igor Ansoff, 1990)
As the level of change from level 1 up to level 3 of the environmental turbulence starts
from slow and incremental to discontinues and unpredictable in level 4 to level 5. Firms
adapt different strategic aggressiveness and responsiveness based on each level. In level
one, two and three the strategic aggressiveness and responsiveness is based on past
historical data since it is predictable and the level of change is incremental, where as in
level four and five firms the level of change is very high most firms are not able to
respond to it , in other words they don’t have the capability to respond to it in the short
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run, therefore most firms seeks strategic changes in overall strategy of the company
which includes, focusing on internal efficiency and capabilities, minimization of costs,
entering new attractive markets , gradually removing resources from unattractive
market to attractive ones (H. Igor Ansoff, 1990).
To sum up the theoretical approach based on the above theories and arguments in
relation to external shock or according Emery and Trist(1965) who introduced the term
environmental turbulence, two propositions has been designed to bring us to a final
conclusion of the theoretical approach:
1. If the level of environmental turbulence is discontinuous and unpredictable firms need
to strategically diagnose the environment, and realize in what stage of the turbulence
they position themselves.
2. As they found the turbulence stage they need to establish strategic aggressiveness, as
well as responsiveness of capabilities, which can match the turbulence of the
environment that includes, focusing on internal efficient and internal capabilities, market
seeking, resource seeking, and minimization of costs.
Internationalization motives One of the other ways to cope with the external shock is to move the R&D, production,
selling and supplementary business activities to the international markets. The
Internationalization process takes place in different ways in small and big firms; some
big firms take various internationalization steps on numerous external expansion
projects. Nevertheless, the internationalization process takes at discrete order, which
means the management is concerned with one project a time in small firms (Hollensen,
2012).
The general reason behind the internationalization motives is to generate more money,
but one influence alone seldom accounts for any given action. Hollensen (2012) has
divided the internationalization motives into proactive and reactive. Firms pursue
proactive motives when they try to change the strategy, based on exploiting possibilities
or firm’s attentiveness in developing an inimitable competence. But pursue reactive
motives, when a firm has to response to a pressure or threat arising in the foreign or
15
home market and adjust accordingly to them by gradually changing the main activities
(Hollensen, 2012, s. 35).
Proactive internationalization motives: Small multi-‐national enterprises, seek the short-‐
term interest at the early stage of initiation of exporting. Meanwhile, they have the
intention of expansion as a motivation that may also be an essential importance from the
start of exporting business. Over time, the firm’s magnitude toward expansion will be
influenced by the efficiency of the promising market, according to the generating
revenue and profitability. Normally, the gap between the firm’s perception toward
profitability is large then the reality, following that if the firm has not been engaged in
the international market activities previously. Even though, the firm has planning, but
sudden changes in economic condition or volatility in currency exchange affects the
profit forecast. The greater the motivation to expand, the higher is the effort in firm’s
activities including finding new possibilities to maintain the growth and profitability
(Hollensen, 2012, s. 36).
Technological competence or unique products are defined as the products that are not
widely available in the international competitor market or may the firm have developed
a specialized technology in a lea. Yet, the perception of the firm around it is unique
product or services should be differentiated from the reality in the foreign market. If the
perceived unique products or technology of the firms is decent, however, it is assured
that the company will have competitive edge in the external market. Firms with such
competitive edge should consider, that for how long this technology or product will last
in the market, historically, the chance for being sole supplier in the international market
has shrunk due to competitor technology catch up and lack of international patent
protection. Firm with unique products often get inquiries from the international market
for the alleged competence it has. Moreover, companies that possess unique competence
in the domestic market, the possibility to be competitive in the overseas markets are
high, due to very low committed opportunity cost of these assets (Hollensen, 2012, s. 37).
As firms tend to expand and internationalize, they often seek the foreign market
opportunity only if they are capable to put the resources in hand to respond to these
opportunities. These expansions decisions are due to the internationalization planning of
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the firm aiming the limited number of underlying opportunities in foreign market; often
decision makers in firms determine the opportunities in external markets which are
similar or alike to the opportunities in the home market.
Hollensen (2012) argues gradually different international markets grow dramatically, as
markets grow they pave different opportunities for internationalized-‐minded firms.
Likewise, the attraction of Southeast Asian market is grounded on the economic success,
however, the temptation of eastern European markets is the conception of political
freedom and free trade area and the willingness to develop the trade and economic
bonds with eastern European countries, North America and Japan. Other countries focus
on economic and inter-‐relationships and wish to increase the market attractiveness
include China, India and Brazil (Hollensen, 2012).
Similarly, Dunning (2000) reasons that internationalization motives for firms with
unique resources and competences are designed to satisfy a particular external market.
In that sense, firms wish to do market seeking fdi, in markets where tariff barriers are
low, the domestic law of international investing is lose, the market size is promising,
there is macro-‐economic stability, promotional incentives and proximity to users. Firms
gain access to natural resources like; minerals, agriculture products, unskilled cheap
labor forces, quality of infrastructure to transport resources and governmental
restrictions or incentives to exploit these resources are resource seeking fdi. The
reduction of transportation cost, production cost and artificial tariffs are leading firm to
efficiency fdi, meaning that if there is restriction on trade in the intermediate goods in
some markets, there are quality for labor force, and presence of local capabilities
particularly relevant for knowledge intensive activities, companies incline to be more
efficiency seeking. Lastly, firms make strategic seeking fdi in foreign markets to gain
access to the availability of assets, to the pool of specialized and relevant knowledge in
the domestic host market and perform strategy seeking investment in countries where
the culture difference is not significantly high (Dunning, 2000).
To be a part of global marketing activities firms may consider increasing their
productivity and therefore have to perform well in the learning curve as part of
economics of scale. According to Boston Consulting Group, firms doubling the
productivity can reduce the production cost up to 30 percent. International production of
17
the firm can help to moderate the production cost at home, and make the firm
domestically competitive against competitors, this is in the result of setting market share
as primary objective. Yet again, at the initial stage of internationalization firms start
expansion by means of export markets, as company grows and if the market is profit
promising they open own subsidiary, besides, growth even increase may the firm move
it’s own production facilities overseas. Low tax burden and tax benefits in the
international context can be a key motivating factor for internationalization like; in the
US tax rules called the Foreign Sales Corporations (FSC) has been established to asses
exports. This is a fundamental aspect giving firms extra benefit or allows firm to produce
products with lows cost in the international market, this could be an indicator of firms
internationalization motivation. However, there are certain other regulations e.g. the
antidumping laws enforced by World Trade Organization (WTO) basically abandons the
domestic producers, which offers very low price products at local markets (Hollensen,
2012, s. 39).
Reactive Internationalization motives: The main reactive motive the competitive
pressure, firms bear the fear that they may lose the market share to the competing firms
that may have the benefit of economies of scale obtained via different international
marketing activities. (Johanson, Jan; Vahlne, Jan-‐Erik, 2009), Argues that firms make
quick entry in a market, do a quick withdraw too, once they have realized that the
preparation for going beyond the domestic boundary was not sufficient. In the same
manner, firms may lose market share permanently to domestic firms that emphasis on
increasing penetration in these markets. Furthermore, releasing that other firms mainly
competitors in internationalizing, postulates a strong incentive toward
internationalization. Basically, in a perfect market firms flow each other’s activities,
internationalization context competitors are external factor for encouraging
internationalization (Johanson, Jan; Vahlne, Jan-‐Erik, 2009).
Essentially, firms expand to international markets because of small home market
potentials, even for some firms the home market is not sufficient to withstand the
economies of scale and scope, and therefore firms consider export markets as part of
their entry strategy. These marketing activities are encountered in the industries with
specialized products which produces only for few identified customers or a small
18
national segment of many countries. The domestic markets, whether it is measured in
sales volume or market share, has alike motivating effects. Often, products traded in the
domestic markets by companies may be in declining stage of product life cycle. Instead of
trying to push-‐back of the life cycle process, firms choose to lengthen the product life
cycle by inflating the market. These behaviors were mostly offered with success in
developing countries, where customer gradually reaches the level of desire and
sophistication already reached in the industrialized countries. There are still some
developing countries, where the customer need of products that are in declining stage in
the industrialized nations. This is one of the main reasons, that firms prolong the
products life cycle to serve these international markets (Johanson, Jan; Vahlne, Jan-‐Erik,
2009).
Ultimately, if firms sale less products than expected, then the inventory is higher than
desired level. Likewise, in this condition firms initiate to start exporting the excess
amount of inventory to international market in a cheaper price. As the demand in
domestic market return to desired levels, the international marketing activities of the
firm are declined or eliminated. Firms that pursue this strategy usually confront
problems when attempt to deliver it again as foreign customers are not interested in
unknown temporary and periodic products. This reaction from the international market
may decrease the value of this motivation gradually. However, in some circumstances the
excess production may lead to a strong motivation, if the equipment in the production
facility is not completely exploited, companies may see the opportunity to expand into
international markets for wide distribution of fixed costs. Otherwise, if all the fixed cost
is designated to firm activities in the domestic market, the company may penetrate in the
international market for cover most of the variable costs. This strategy is possible in the
short run that may result in offering low cost products in abroad markets than home
market, but in the long run the fixed cost has to be distributed to cover the replacement
of equipment in the production facilities (Johanson, Jan; Vahlne, Jan-‐Erik, 2009).
Lastly, the reactive motive for internationalization is the proximity for international
customer. Often physical proximity and psychological closeness paves huge roles in
export activities and reduction in transportation costs. E.g. if German firms, establishes
subsidiary or expands to Austrian boarders, they may not even observe the new
19
establishment as global activity. But rather perceived it, as expansion of domestic market
without any special treatment of the products, as for regular international market. Due
to, the fact of proximity of physic distance and similarity in both countries (Johanson, Jan;
Vahlne, Jan-‐Erik, 2009, s. 37).
The Uppsala model During the environmental tumult firms consider alternatives to expand across the
borders. Johanson and Vahlne (2009), in their empirical research on the
internationalization of the firm has developed a model which focuses on the gradual
acquisition, integration of knowledge and use of the resources on increasing
commitment of foreign markets. Mainly, the model is concentrated to increase the
engrossment in a discrete foreign country (Jan and Vahlne, 1977).
The University of Uppsala did an empirical observation and developed a literature in mid
1970s, according to the literature firms favor the optical way of entering by scrutinizing
the economics cost and risk involved in the market typed based on the available
resources at firms disposal. According to Johanson and Vahlne (2009) empirical
research in internationalization on Swedish firms, which included Swedish-‐owned
subsidiary abroad and number of Swedish industries in the international market,
showed that Swedish firms began the internationalization process with ad hoc exporting
(Johanson & Vahlne, 2009)
These importing were in the form of deals with intermediaries, often agents who
represented the company in the international market, as sales grow companies hired
their own agents and equally sales continues to grow firms tend to move their wholly-‐
owned production facility in the foreign country’s market. This was one of the Uppsala
model’s pattern and the other pattern is physic-‐distance (cultural distance, consumer
preferences and economic distance), stated as phenomena that make the external market
difficult to operate in. The strategy for targeting was to gradually aim the markets, which
were foster away in terms of physic distance. Hymer, (1976) and Zaheer (1995) in the
paper argues that this course had its originality in the liability of foreignness, which
explains why investors have to have firm specific advantage to more than offset this
20
liability (Hymer, 1976). The notion, which the models explain is that the larger the
psychic distance, the greater is the liability of foreignness
Figure 4: Essence of Uppsala mode Source: (Johanson, Jan; Vahlne, Jan-‐Erik, 2009)
The fundamental essences of original Uppsala model are uncertainty and bounded
rationality. The model has also two change mechanisms, the firm’s change by learning
from its international experience or current activities in the foreign market and the
change via commitment of the firms in foreign markets, the choice strengthening it is
position in the foreign market through increasing the product offerings and level of
investment. As you can see in Figure 4, the model is dynamic it does not suggest any
increment or cease of the commitment in the foreign market if the market is not
promising. However, the model assumes that the processes are by no mean
deterministic, the internationalization process continues as long as the performances
and the standpoints are favorable. The state aspects are resource committed to foreign
markets-‐ market commitment and market knowledge, the main motive for considering
the market commitment is the underline risk and opportunities in the market (Jan and
Vahlne, 1977). Furthermore, the market learning and the market commitment are time
consuming, which clarifies why investors tend to move into risky but potentially
21
rewarding modes changes in markets which are more detached in terms of psychic
distance (Johanson, Jan; Vahlne, Jan-‐Erik, 2009).
The revised Uppsala model suggests that the network relationship notion have an effect
on the choice of market and the type of entry mode in the internationalization process.
The finding in Swaminathan and Mitchell (1998) is that the inter-‐organizational
relationship with buyers and suppliers affect the expansion pattern of a firm. Networks
relationships in the outsider markets are recognized as source of knowledge. The
knowledge that the local partners possess cannot be gained through own international
experience, but through the flow of relevant information from one network to the other,
like the prior experience of managers (Swaminathan & Mitchel, 1998). Building relations
with the local in a foreign country is both resource and time demanding, which mostly
encountered in the psychic distance context (Johanson, Jan; Vahlne, Jan-‐Erik, 2009).
Nevertheless, relationships develop over time once firms learnt about the resources and
capabilities of the network actors, they gradually increase the commitment toward the
network relationship. Findings in Covielo (2006) when the psychic distance between the
home country and the new market is tremendous then the impression of the insidership
in network is developed, before the entry when firms tend to internationalize or start the
foundation of the firm. When firms want to enter a new market that it has no connection,
it is hard to establish relationships, when the distant is greater it becomes even more
important aspect (Coviello, 2006). Often knowledge creation is the result of argument
between the producer knowledge and the user knowledge. The types of knowledge
available in the foreign market is distinct, institutional market knowledge is the
difference in terms of language, the domestic laws of foreign investors, rules and
regulations which are all associated with liability of foreignness. Business market
knowledge, are the unwritten rules and business practices. Lastly, relationship-‐specific
knowledge is the network partners resources and capabilities in a market that leads to
both market-‐specific learning and general knowledge development (Johanson, Jan;
Vahlne, Jan-‐Erik, 2009).
22
Internationalization Barriers Like motivation factor of internationalization there exists dynamics of
Internationalization that could be identified for successful export and during the process
of internationalization. Johanson and Vahlne (2009) cluster some main internal
internationalization barriers such as insufficient finances meaning lack of capital finance
to support expansion in the global market, insufficient of human resources and
knowledge, lack of foreign market connections, export commitment, productivity of
capacity to supply the foreign market, the management prominence of the domestic
market and the cost boost due to high transportation, distribution and financing
expenditure. Moreover, having not enough information or information asymmetry about
the external market and potential customers, foreign market diversity and complexity
and the competition in the foreign market are essential barriers for firms. Importantly,
requiring sufficient penetration for oversea distribution, import tariffs makes the
process even hard to communicate with foreign distributor and costumers. The cost
increase of international production and the product interruption, du to non-‐standards
export of products and requirements for the products. Firms often, encounter barriers in
the process of internationalization, Johanson (2009) clusters the further
internationalization process dynamics into three groups: general market dynamics,
Commercial dynamics and political dynamics.
General market risks include the culture and language difference in the foreign market,
dissimilarities of product usage, not alike production specifications, high competition
from firms with similar product portfolio and geographic market distance. As well as,
according to KPMG (2009), Basel II market risk framework, commercial risks in the
foreign markets is define as movements of market prices, foreign exchange rate, the
currency fluctuation when the contract between the enterprises are made in foreign
currencies, equity and commodity prices. Classically, most financial institutions develop
a healthy strategy to include these types of risks, determine the risks and set a side
limited resources (KPMG, 2009).
Lastly, the political risk gathers both the domestic country and host country political
risks. Some countries continuously change the national export policy to increase the
domestic products demand, foreign government restrictions, the host country limits the
23
opportunity for foreign customer to make payments by the currency exchange policy,
lack of government assistance in incapacitating the export barriers, execution of national
legal codes regulation foreign exports and confusing foreign country’s import regulations
and procedures. In order to manage these risk in the international context, firms usually
avoid their international activities in high-‐risk markets, instead they focus on diversify
markets and try not to depend on single county’s market. Likewise, firms structure the
business in a way, that the buyer bears most of the risk and insures the business if
possible (Johanson, Jan; Vahlne, Jan-‐Erik, 2009).
International market selection The choice of which country to enter is one of the most critical decision that need to be
made with very deep understanding and considerable deliberation (Susan, Douglas, &
Samuel, 2011) by definition according Hollensen (2012) international market selection
(IMS) is the choice of the markets, which best fits firms internal capabilities and external
environment. One of the basic concerns which involve the IMS is the focus on market
segmentation based on countries or in other words it refers to homogenous
transnational customer group (B & S, 2007).
The second aspect which concerns managers in relation to market selection is the
decision process which is involves narrowing down among a large set of markets to a
limited numbers of market which best fits the firms strategy. According Hollensen
(2012) firms need to pay close attention to the following aspect when deciding which
market to enter. The economic social, political and legal environment of the host country
(Hollensen, 2012).
Taking all the aspect into account the economic environment of host country is one of the
most important factor that need to be consider while deciding to internationalize, the
economic aspect looks the economic development, total buyer power, and the level of
income in terms of GDP, and also the level of infrastructure and development in a
country which has significant influence on firms decisions to enter a country. The last
but not the least aspect that Hollensen insisted is the social culture environment of the
host countries which involve the cultural difference, psychological difference, religious
and language difference (Hollensen, 2012).
24
According to Andersen and Buvik (2000) there are two different approaches to the IMS
systematic approach and the non-‐systematic approach.
The systematic approach “refers to both the nature and content of the decision making
process in connection to the international market selection. The decision making process
is supposed to be structure and formalized” (Andersen & Buvik, 2000). The decision
makers need to be able to adjust their performance and their activities based on the
following steps:
Problem definition which involves that the decision makers should be able to define
structure and isolate the problem from other IMS problem. Identify the choice criteria
the decision maker should be able to identify the relevant criteria in relation to the
specific country that the firms decided to select which, involves country specific indicator
such as cultural, administrative geographical, social, economic, technological
characteristics. Other relevant criteria is market specific indicators such as the size of the
market, the level of completion, access to the distribution channels, as well as the cost of
operation in the market. (Andersen & Buvik, 2000)
Weight the criteria that involve assessing the different vales or weights that best reflects
the objective of the firm. Generate the alternatives refers to identification of possible
alternatives of countries and portfolios which are equivalent to prior choice of the firms.
Rate each alternative on criterion refers to the assessment of each potential alternatives
therefore the decision makers need to be aware of future event and have information
about second best choice while, making decision about market selection. last but not the
least Compute the optimal decision this step deals with analyzing all the criteria
between the different countries and alternatives, for example comparing countries with
lower political stability against high demand for product , or lower level of trade barriers
against high level of market competition based on the these evaluation and assessment
firms need to pursue the best choice that best fits to their strategy and their competitive
advantages (Andersen & Buvik, 2000).
While the systematic approach consist of many critical approaches that firms need to
follow up one by one most firms find it difficult to deal with it ,one of the reason that
25
firms takes the non-‐systematic approach in their internationalization process is the
limited information processing capacity (N , 1982).
In a non-‐systematic approach firms enter new markets with lower psychic distance. By
definition psychic distance concept has been defined as “factors preventing or disturbing
the flow of information between firms and market, including factors such as difference in
language, culture, political system, level of education and level of industrial
development” (Andersen & Buvik, 2000, p. 22). Most often firms starts in countries that
are easy to understand with lower market uncertainty. They start operations in countries
with large markets or they would consider smaller markets that are more similar to their
domestic market. On the other hand, a different approach has been established by Susan
Douglas and Samuel (2011), who believe more in the role and influence of contextual
factors while deciding on IMS criteria. “Consumption takes place within a context and the
context along with other factors help shape values and attitude as well as influencing
both broad and specific consumption choices. It is important to develop a deeper
understanding not only of the role of the context in shaping consumption and purchase
behavior, but also to understand the variation in contextual factor across and within the
countries” (Susan, Douglas, & Samuel, 2011, p. 22). Susan Douglas and Samuel (2011)
have categorized the contextual factors into four distinct levels. Figure 5 shows each
level in relation to host country.
26
Figure 5: Levels of contextual comparison across countries Source: (Susan, Douglas, &
Samuel, 2011)
The four level in this model (Figure 5) concentrate on how each of the factors influences
the consumption and purchasing behavior when entering a new market. On top of the
model the Macro level factor is placed, it has been widely used when dealing the cross
cultural issues that can be used when assessing consumer behaviors which involves
economic factors such as level of GDP and GNP per capital income distribution specially
firms who are in the high end product industry the economical factor is one of the
fundamental issue for them in order to target the high income segments .
The demographic factor plays a very important role for firms who are looking for
potential market with higher rate of growth and higher segmentation, at the second level
(Figure 5) the Meso level factor is placed which involves regional ,economic and cultural
variation in the country level , most often these variation occurs in larger countries that
has market differences in ethnic groupings ,topography and climate which causes major
differences in purchasing behavior and consumption patterns (Susan, Douglas, & Samuel,
2011).
One of the other factors related to Meso level which is a major concern for firm who are
considering entering developing countries or more specifically emerging markets is the
institutional voids. The institution voids refers to the lack of a strong institution and
regulatory systems in a country, which negatively affect the contracting enforcing
mechanisms (Susan, Douglas, & Samuel, 2011).
The biggest challenge the institutional voids create is the high level of uncertainty in a
market, which prevent competition among the firms, market disorientation and lack of
trust between the contractor and consumers create greater gap. In most cases it turns
out to be very costly for firms who are entering markets without adequate knowledge,
which has higher institutional void. The next level is the Micro level factor (figure 5),
which deals more specifically with factors such as local population density, the
infrastructure, the education level and the social institution within a specific region or
area. The fourth level in the model deals with the situational factors, which influence the
consumption behavior to a great extent. Which involves the differences in common
27
behavior of a particular social, religious or ethical groups in a community on a given
occasions. (Joy, 2001) (Susan, Douglas, & Samuel, 2011)
To sum up the argument in relation to the four level factors in the model (figure 5) each
layer in the model has significantly influence consumer behavior and their perception. It
is very important for firms to get a deep understanding of each of these contextual
factors when they are choosing a specific market. The key elements that firms need to
pay attention in most cases are the two countries (home and host country) they may
have highly similar Macro environmental contexts, but in other contextual level they
would have differences, which create significant variation that limits opportunities for
fully market exploitation and segmentation strategies (Susan, Douglas, & Samuel, 2011).
One of the other important issues in relation to international market selection is market
expansion strategy. Once firms decided which markets they wanted to enter based on the
market selection criteria and their assessment of their favorite market that best fit their
strategy the next critical and decisive step is what sort of expansion strategy they need to
pursue in order succeed.
International Market expansions strategy One of the key decisions in export marketing is the choice of a market expansion
strategy. Based on market expansion strategy firms can choose whether to focus on short
term profitability or gaining stronger competitive position and higher market share “a
fast rate of growth into new markets characterized by short product life cycles can create
entry barriers towards competitors and give rise to higher profitability. on the other
hand , a purposeful selection of relatively few markets for more intensive development
can create higher market shares ,implying stronger competitive position” (Hollensen,
2012)there is two main fundamental question according Hollensen that firms needs
answer before they design their expansion strategy . The first question is whether they
28
want to enter the markets incrementally or simultaneously and the second question is
whether they want to concentrate or diversify across international markets. (Hollensen,
2012) Figure 6 below shows two different approaches, the waterfall approach
(incremental) and the shower approach (simultaneous)
Figure 6: incremental and simultaneous market expansion model Source: (Hollensen, 2012)
The water fall approach is very useful for firms when they are planning to introduce a
new line of high end products or technology which is expensive. The basic assumption is
that only advanced (wealthy) countries would be the best choice to expand to it, and then
over time the price would fall down as the firms would be able to get experience on
international operation and resource allocate more efficiently. They would then choose
to enter developing countries one after others. On the other hand a shower approach
(simultaneousness) is taken by firms when they wanted to leverage their core
competence and resources rapidly into international markets, this approach is preferable
for firms having standardize product line, where it is affordable in more markets in
terms of price and in terms of competition among competitor in the market (Hollensen,
2012). As firms decided which sort of approach best fits their strategy, the next
fundamental and critical step in market expansion strategy is whether they want to
concentrate their resources on few similar markets or they want to diversify into a large
number of different market (Hollensen, 2012).
Concentration versus diversification The two different strategies are used in two different situations depending on firm’s
resources and capabilities, and also their overall internationalization process. Ayal & Ziff
29
(1979) defined the two strategies as followed “a strategy of market concentration is
characterized by a slow and gradual rate of growth in the number of markets served. On
the other hand a strategy of market diversification is characterized by a fast rate of
growth in the number of markets served at the early stage of expansion, it is therefore,
expected that a strategy of concentration will result in a smaller number of markets
served at each point in time relative to a strategy of diversification” (Ziff & Ayal, 1979).
Figure 7 shows the two different approach of market diversification on the top and the
market concentration at the bottom, the relatively changes in the number of markets
served by two strategies, by a diversification approach firms expands into large number
of different markets in order to diversify risk, comparing to concentration approach
which involve few similar markets, but in the longer run the strategy of market
diversification would
Experiences less profitable market situation as a result of consolidation and
abandonment, which would lead to a reduction in the number of markets (Ziff & Ayal,
1979). On the other hand the number of markets that has been expanded by a
concentration approach would eventually increase as the result of efficient allocation of
resources and gain experiences, Therefore the optimal number of markets served by
both strategies would eventually end up being close to equal to each other in the longer
run as shown in figure 7 (Ziff & Ayal, 1979).
Figure 7: Diversification and concentration of market expansion Source: (Hollensen, 2012)
30
According Hollensen (2012) and Ayal, Ziff (1979) there are four major factors (the
company factors, market factors, product factors and marketing factors) that influence
firm’s decisions in deciding which expansion strategy they should choose. Taking in to
account the company factors, firms would prefer diversification expansion strategy if
there is a high management risk consciousness associated, their objectives are to growth
through market development and they have little market knowledge. In relation to
market factor a diversification approach would be preferable if there is a small, unstable,
similar, or low growth rate market, where there is low customer loyalty and high synergy
between countries. Furthermore product factors which favors diversification approach is
when the product is a non-‐repeat purchase, low volume, limited specialist uses, and
when they are in the very early or late stage of life cycle. Lastly the marketing factors in
favor of diversification is when there is low communication costs, low order handling
costs, low physical distribution costs, and standardized communication (Hollensen,
2012) (Ziff & Ayal, 1979).
On the other hand the taking into account the concentration strategy the company
factors which favors this strategy is when, there is low management risk consciousness
the objective of the firm is growth through penetration, and they have the ability to
allocated their recourses in the best markets.
The market factors which favors concentration approach is when there is large, stable,
and high growth rate markets. The customer loyalty is high, lower synergy affect. In
relation to product factors which favors concentration approach is when it used in high
volume, it is purchased repeatedly, the products are at the middle stage of their life cycle
and it has incremental innovation. Lastly the marking factors that favor concentration
approach is when there is high communication, high order –handling, and high physical
distribution cost (Ziff & Ayal, 1979).
One of the most important issues relating to these two approaches is customer
segmentation. Most firms focus on potentiality of consumers first rather than on any
other facts which make a market more attractive. (Figure 8) is a two by tow matrix
designed by Ayal, Ziff (1979) shows a combination of the two approaches concentration
and diversification on customer (segment) level (Hollensen, 2012).
31
Figure 8: concentration and diversification of segments Source: (Hollensen, 2012)
The first situation on the top left of the matrix (figure 8) shows a concentration strategy
where firms focus on few customers –segments in few countries where they want to
target their real consumers with full resource allocation. It is a narrow focus by
concentration. The second situation on the top right of the matrix is a concentration
approach by focusing on many customer-‐segments in few countries comparing to the
first situation, in this situation the firms focus is not narrow it is more broader in the
country level. The third situation at the bottom left of the matrix is a diversification
approach by focusing on few customers –segments in many countries. In this situation
firms wanted to diversify the risk by targeting few segments in many countries. The last
situation on the right bottom of the matrix is a diversification approach by focusing on
many customer-‐segments in many countries. In this situation firms enter as many
markets as they can by targeting the highest amount of potential consumers in order to
diversify and get a fast and constantly growth rate in short period of time (Hollensen,
2012).
To sum up the above theories and argument in relation to international market selection
and international market expansion strategy the following propositions are created:
While dealing with market selections, firms consider the Macro, Meso, Micro and
situational factors in the host countries, based on their capabilities and competitive
32
advantages they would choose the best markets that fits in accordance their
internationalization strategy.
Once firms decided which markets to enter, they are going to approach these markets by
either a concentration or diversification market expansion strategy, if firms want to focus
on few attractive markets and gradually expand they are going use a concentration
approach where as if they want to diversify in many small and unstable markets to get a
higher growth rate they are going to use a diversification approach.
Entry mode This section of the report will account for entry modes in international markets. The
entry mode will start with Transaction Cost Thoery, then Real Option Theory, to see the
possibility of variety of options firms have with each entry mode. Finally, Ansoff matrix
will spotlight the different firm activities in each market.
Transaction cost theory The third main parts of this paper focus on essential mode of entry at firm’s disposal to
take advantage of the international market opportunities. The market selection and
entry mode depends on company’s resources capability and the strength of operation at
the domestic market. Anderson and Gatignon (1986) in Transaction Cost theory (TCT)
argues when firms seek to operate across the domestic markets must focus best
institutional arrangements in the global markets. The primary stage of entrant includes:
wholly owned subsidiary or a joint venture depending on resources in hand and the
external market conditions. Cognitively, all entry modes are associated with risks, firms
normally focus on choosing the right option proposing the highest risk-‐adjusted return
on investment. Nevertheless, the empirical evidence on the entry mode makes it a bit
direct on risk and return, rather the concern is designed in terms of control on each entry
mode (Anderson & Gatignon, 1986).
According to Davidson (1982) in the paper, firms finds it difficult to coordinate actions,
develop strategies without Control1 and determine all the sudden issues arise when two
firm’s contract pursue their own interest. Hence, control stays the most determinant
1 Control (the ability to influence other, decisions, methods and systems)
33
focus of entry mode literature, as it is the single cause of risk and return. In order to
obtain control the entrant must assure responsibility, as control entails the obligation of
assets including high overhead. It could be standpoint the international market entry
decisions are perceived as tradeoff between control and the cost of resources
involvement, normally under reflection of risk and uncertainty. There are certain
consequences for control in entry mode, which is compromised between risk, return and
resources allocations. The cost of control is resource demanding capital investment,
specifically transaction specific assets, high capital investment will cause high switching
cost and the mode will lose the flexibility2 notion. On the other hand, control has
potential benefits, firms pursue control would have coordination advantage, it will be
easier to implement changes (new policies and new strategies), conflict will be less costly
to manage and there will be a correlation between control and return (Anderson &
Gatignon, 1986).
Though there is no specific tested theory for the level of control on each entry mode,
nevertheless, Adnerson & Gatignon (1986) in figure 9 summarize and cluster the entry
modes in 17 groups in terms of control (high, medium and low). Figure 9, the high equity
interest (Majority shareholder or Wholly Owned Subsidiary) are anticipated to require
high level of control at the time of entry, due to high level of capital investment
(transaction specific assets).
2 Flexibility (the ability to change systems and methods quickly and at a low cost)
34
Figure 9: Entry mode classification of control Source: (Anderson & Gatignon, 1986, s. 5)
The other entry modes, balance interest (plurality shareholders, equal partnership and
balanced contracts) are considered to be medium control modes based on the contract
and notion of involvement with partner in foreign market. Often firms, enter an equal
partnership with a high likelihood of trouble have hard time to allocate an apt partner. In
Order to obtain a potential partner the entrant has to give up some good faith or credible
commitment. E.g. marginally in unbalanced venture the 50% partnership might grant the
veto power. This could be in a case that in a 49% share may have higher control than
51% shares. Some other non-‐equity modes follow a moderate level of control base on the
daily operations involvement and expertise (Anderson & Gatignon, 1986).
35
Lastly the low control modes are clustered as entrants having circulated interest on the
entry mode. These low control modes include nonexclusive, constructive contracts,
minority shares, limited equity positions and intensive distributions. (Anderson &
Gatignon, 1986)
Transaction Cost Theory framework’s concern is the existence of multinational firms,
and theories developed in this framework are for the purpose of choice of entry mode.
Yet again, control and integration are strictly connected, as the integration provides a
firm the power to direct operations. Thus, the theory of vertical integration is attempted
to evaluate the aptness of different entry modes following the level of control. The TCT
framework also, merges the features of industrial organization, organization theory, and
contract law to influence the trade off to be prepared vertical integration and degree of
control. The basic assumption in TCT is that the market in which entry is taken place has
enough potential to cover the overhead of the high control entry modes, if this couldn’t
be the situation then high control entries are not worth of considering. Nonetheless, the
entrants have choice to make when the international market has the potential to break
even the fixed cost of high control mode entries. In such situations, the effectiveness of
an entry mode fluctuates on four constructs, which specifies the degree of control as you
can see in figure 10 (Anderson & Gatignon, 1986).
36
Figure 10: Transaction Cost theory efficiency analysis of entry mode
Sources: (Anderson & Gatignon, 1986, s. 7)
1. Asset Specificity: investment (human and physical)
2. External uncertainty: the unexpected external environmental at the time of entry
3. Internal uncertainty: the internal inability of firm to analyze agent’s performance.
4. Free-‐riding: utilizing the firm’s resources without bearing any associated costs.
Figure 10 is a view of the TCT framework emphasis that these four features are
positively related with the entrant’s degree of control.
Asset specificity According to Anderson & Gatignon (1986) the preferable entry mode is defined to be the
low level ownerships. However, firms by not direct investment prevent the drawbacks of
the resources, we will elaborate on this topic further in Real Option theory ROT. Yet,
integration is codified when the external market no longer persuade performance,
37
essentially when the completion is low (Anderson & Gatignon, 1986). Williamson (1979)
in the paper argues when the external market competition is high some debase into
bargaining, often when the contracting partner become irreplaceable and the partner
may require new contract terms, begins the opportunistic behavior 3, become inflexible
and violet the contract terms (Williamson O. E., 1979).
Transaction specific assets normally expand as time passes, firms expect a bigger role the
longer the transaction has continued. Eventually, these transaction specific assets lose
the value, yet, they can contribute significance in performance for the partner who
acquire them becomes challenge to replace. Once the transaction specific assets become
valuable, then TCT suggest the firms should increase the level of control or redesign the
process where the main purpose of the defining asset suffice. As the control increases,
firms can prevent the opportunistic behaviors by practicing the authorities and monitor
the manners. There is an associated risk combined with the redesigning of the process,
that may the focused asset will lose the value. Yet, there is a chance of elimination of
overhead and bargaining, while thrashing of specialized assets. TCT suggest, that firms
with unstructured, poorly understood products and process should increase the level of
control (Anderson & Gatignon, 1986).
The model suggests that it is hard to implement low-‐control approach mode of entry in
companies with unstructured, poorly understood process and knowledge. Thus, the
transaction cost is estimated to be higher which means that development employee must
be in close collaboration production to solve some unforeseen problems. The transaction
cost in this situation happens to be higher, as the first transaction of the process is ill
understood. Firms normally, move the learning curve down and come up with a solution
that is helping in transferring these technology, high control modes are preferable to
facilitate these knowledge across that specific part of the firm. Teece (1993) argues in the
paper that complexity of process leads the organization to ill understanding of the
process (Teece, 1983). Thus, Wilson (1980) suggests the low control (licensing) is more
common and flexible mode of entry rather than high control (direct investment) (Wilson,
1980). Furthermore, the more mature the product class, low control demand is expected
from the external entity. Products with immature class have higher property content 3 Self interest seeking guile
38
than the products or technology that has been recently introduced and only the
innovator have the knowledge about the product and know its market. In order to
prevent the locked in issues of outsider, more control is suggested. Once the new
innovated products are diffused, outsider could expect the specialized knowledge to be
accessible in the market. As the diffusion happens, less integration is needed respectively
less administrative control is expected too (Anderson, Erin; Gatignon, Hubert, 1986).
Teece (1976) argues that the transaction cost of technology for transferor and transferee
declines for the mature product classes, terms of technology lifetime and the number of
competitors using the same products (Teece, David J., 1976). Often companies with
immature products are in the position of bargaining power with the domestic
authorities. As the products are hard to replicate, they can force the host government to
possess them more ownerships and the expertise does not necessarily have to be from
the partner (Anderson & Gatignon, 1986).
Direct investments (high control entry modes) are more efficient for products adapted to
the customers. Some customized products required the local knowledge, this doesn’t
necessarily represent any challenge, as the entrant gain access to this specific knowledge
via the partner. Yet, this spot is critical for entrant to use the effectively the knowledge of
local entity to customize the products for users. This knowledge transmission depends
on the relationship of both company (the licensee and the mother company) the ties
must worked out to communicate the underlying knowledge and these relationships
builds the asset specific transactions. Now that the relationship is created, with only one
partner the entrant is locked in, it will affect each individual therefore high control is
required (Anderson & Gatignon, 1986).
External Uncertainty The second element of TCT framework is External uncertainty, which cover the main
changes in the firm’s external environment. Anderson & Gatignon (1986) argues, when
there is high volatility in the external environment firms should prevent the insidership,
as it is not certain when the next environmental shifts happens. Moderately, let the
external entity ownership along with the risks, which means that the entrant should
retain its flexibility. Thus, the nonappearance of transacts specific assets the default
39
option and market contracting are not changed by volatility. Hence, firm should not
expect the high control entry mode to be optimal than the low control entry mode in the
volatile context (Anderson & Gatignon, 1986).
The higher the country risk (political instability and economics variations) the more
need for appropriate level of control is required. TCT suggest, that in the rapid changing
environment, firms may consider the low control entry mode, which has the abandon
options and the flexibility notion in the future rather than high control entry modes. The
external uncertainty property is an interface between asset specificity and level of
control that basically implies to each source of uncertainty may relate to extend
(magnify) the individual impact of each source of transaction specific asset (Anderson &
Gatignon, 1986).
The external uncertainty plays a main role when firms enter a market with high control
entry mode, it increase the need for control the asset specificity creates. When assets
specificity is low, the uncertainty doesn’t really matter, there is notion of flexibility and
default option, low control is suggested, at the time of unpredictability firms can consider
to change the agents, leave the market instead of increasing the commitment
(Mascranhas, 1982).
Internal Uncertainty Internal uncertainty happens when firms cannot assess their agents’ performance, with
the underline output measures. This is possible when there is no existence of output
measure or when the result process approach is ill-‐understood, and then it is challenging
to put performance measures. Internal uncertainty in terms of control is more favorable
regardless the level of asset specificity involved. Relevantly, when firms cannot measure
the performance it is important to observe the input rather than evaluating the output.
TCT suggests, when the internal uncertainty is high more control is required to enforce
judgment and observe the inputs. This is in circumstances that management know how
people should act and to achieve the results. The management perception of managing
employees in domestic setting is manageable over time, however it is different in the
international context, the new entrants are implausible know how to succeed the
internal uncertainty (Anderson & Gatignon, 1986).
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TCT also suggest that firm’s level of control of a foreign partner should be link to the
firm’s overall international experience. Thus, according to Anderson & Gatignon (1986)
the key perception in international management literature review if a firm gains more
international experience in global market, the new establishers fear the unidentified,
accordingly will overestimate the market risk and underestimate the return of the
international market. Carefully, the firm avoids establishing entity outside and want to
be merely engaged in exports, with the little exporting experience the firm advantages
certainty and becomes the main competitor and aggressive in the international markets
and tends to do direct investments rather than exporting. As we highlighted in the
Uppsala framework, classically firms are interested to invest in countries with similar
culture background. This is enhanced with experience of understanding, competence and
confidence with a truer picture of foreign market risk and return. Eventually the firm
enters the more distant markets with the acquired international experience it try the
sense of control for the management. The relationship between international experience
and the level of control is negative, which means the inexperience firms vital higher
control than more experienced firms. But as time passes firms gain knowledge and
become more relax wit the local difference smooth the relationships between the
employees, and become confident that it can work with local pool of knowledge to their
benefit. Hence, firms are willing to envoy control, and favor in lower level of ownership
(Anderson & Gatignon, 1986).
One of the other forms of internal uncertainty is shaped with the interaction of social
culture distance (the culture difference between home and host country). It is argued
that the greater the host country and home country cultures, the lower control mode is
optimal. This is in connection to the uncertainties executed perceives in cultures that are
really external to them. The entrants act to be comfortable, and agree with the operating
procedures of the host country, but executives should not forget that it supplements a
sense of ownership. Furthermore, managers due to uncertainty cased by social culture
difference undervalue the investment and they attempt to transfer the domestic
management knowledge and techniques to the host country, which is difficult because of
dissimilar operating context. TCT argues that, as the environment is unfamiliar, social
culture difference case huge internal uncertainties. If an entrant tries to transfer its local
41
knowledge and management skill, it has to train its agents heavily in the foreign market,
in order to facilitate the underline skills. The model also suggests that once local firms
learn the entrant’s ways of doing business, the local entities require more knowledge and
relationships that possibly would be applicable to other new firms in that country. Now
that, the management problem created by social culture difference is provoked via
specificity, the entrant may demand more control. On the other hand, firms can avoid the
benefits of transferring the local management knowledge and skills, rather design an
operating method, which is feasible at local general purpose and demand low control
(Anderson & Gatignon, 1986).
Free-‐ Riding Potential The last element of Transaction Cost Theory is Free-‐Riding potential, which is a problem
of control occurs when one party gets benefits without bearing any associated costs.
Transaction Cost Analyzes suggests that when the potential for free riding is high, a high
control entry mode is favorable. Firms wit high value brand, should consider high control
entry modes. It is in a sense that short-‐term gains are consumed as expense of long term,
firms are conscious in protecting their name and brand value from free riders or avoid
the local business operator for inconsistent manner usage of brand name, which causes
mitigating or confusing the international position of the brand. Classily, firms that their
entry strategy includes standardize product design, style and quality demand high level
of ownership by the entry (Anderson & Gatignon, 1986).
Hence, the entry strategy is connected with assurance of all the dependent name
indicating (good will or reputation effect), on quality control is fundamental and free
riding is harmful. Some scholars argue, that firms with high or enormous level of
advertising require more control, but on contradictory some other ague, that firms with
high level of advertising and promotions require low level of control. As the high level of
advertising is correlated with low intra-‐firm trading, the level of integration and control,
which means these firms have unsophisticated products, which is not a challenge for
many agent, hence low control is suitable. However, highly advertised firms focus on
free-‐riding aspects of agents and prefer high control modes. According TCT, This
circumstance demonstrates the value of abandon option (low control). Starting with a
low control entry modes, firms may consider the more control mode for highly brand
42
value names, so firms with high-‐advertised brands may consider franchising rather than
non-‐exclusive contracting (Anderson & Gatignon, 1986).
Real Option Theory Fundamentally, the impression of real option theory stems from financial options.
Financial options give the option holders the right but not the obligation to sell (exercise)
or buy the option, at a future data (exercise date). Normally financial options give the
option holders the practice of upside potential and downside risk. The Real Option
Theory (ROT) is different from the financial options, ROT is based on physical assets and
is normally non-‐tradable, they have value, which influences the management decisions.
Real Options are not mention in the contract at the time of entry, however they are
exclusively for apart of strategic investment. The model has to regulate the two
characteristic that if the strategic investment delivers real option: first, there exists
uncertainty about the future generating revenue of the project; second, there exist the
notion of flexibility in increasing the commitment or limit the control according to the
attractiveness of the foreign operating environment (Li, 2007).
In different studies scholars have found that the combination of Transaction Cost
analysis and Real Option Theory might have significant improvement on decision-‐
making process (D. Brouthers, Brouthers, & Werner, 2008).
The main reason to compare the two international strategy framework from the
literature of entry mode and internationalization is that TCT, mostly focuses on cost
minimization rather than value creation at the time of entry, which is critical for three
reasons; first, the transaction cost theory has no accountability for opportunity costs
associated by the time of entry, it is ignoring the causes or actions of the competitors;
second, TCT does not suggest any further growth or default when the there is high
uncertainty in the foreign market; thirdly, important of all, it ignores the notion of
strategic flexibility. On the other hand, ROT could identify both the cost minimization
(minimum resources commitment leas to minimize the downside risk exposure) and
value creation the notion of flexibility (maximize flexibility), suggest option to acquire
the upside potential of the foreign market (D. Brouthers, Brouthers, & Werner, 2008).
43
Li (2007) Emphasis on ROT in international strategy and introduces the types of real
options such as: (option to defer, Option to grow, option to switch, option to abandon
and option to learn).
As you can see in figure 11, option to defer, gives the firms the option to delay the desire
strategic investment for at some time in the future, if the market demand is volatile in the
foreign market environment. The growth option gives the firms the opportunity to grow
in the future, some strategic investment have a negative NPV, but due the fact of future
possibility they can provide benefit because of the option value and the market
opportunities. The value creation of the option depends on the type of entry mode, firm
with Wholly owned subsidiary (WOS) has the option to grow the ownership (increase
the volume of asset and information), Joint Venture (JV), firms entered via JV has the
option to acquire it’s partner equity if the market is promising. Lastly, the contract and
export mode of entries provide low option to grow. Likewise, option to switch, gives the
firm an option to switch its supplier of raw material in a market, if there exist uncertainty
or opportunistic behavior (Li, 2007).
The option to abandon, this option provides the firm the possibility of withdraw or divest
if the foreign market is not favorable. This option creates high value to the firms
investing in high-‐risk countries, favorably, firms should ensure that they are not baffled
with an entry type which continues producing negative cash flow. Firms with WOS
option has lower abandon option due to high and irreversible investment, there might
not be similar market for invested assets. Yet, JV entry modes have higher abandon
option-‐ for instance, the associated partners in foreign environment provides a likely
market for divested assets, or may firm come to an agreement with the partner if the
market is not promising, I leave out the market and you may buy my equity share. The
higher abandon option modes are considered to be exporting and contracting because of
not involving any transaction specific assets (Li, 2007).
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Figure 11: Real Option Theory Source: (Li, 2007, s. 73)
Lastly, the option to learn, gives the firms opportunity to learn from its associated
partner. Which means, that through alliance with the domestic firms, the entrant has the
option to learn, the firm can obtain knowledge on how to the business in the local market
of host country. Eventually, this will have an impact on option holder doing business in
the host country and essential in other countries too. WOS entry mode has the lower
option to learn, due to little or no collaboration with local partner at all. However, JV
entry mode firms have the higher learning option, apparently, because of day-‐to-‐day
interaction with the local partner. Contracting and Exporting entry modes have the low
option to learn, as a result of little or not collaboration of with local partner (Li, 2007).
According to Williamson (1991) the key variable in TCT is asset specificity, which often
involves proprietary knowledge and this specific knowledge needs to be protected from
potential competitors. Often market based entry modes offer weak control over asset,
therefore partners act opportunistically and the entrants have little resources. Thus TCT
suggest a contractual agreement for controlling the transaction specific assets. In
addition, control and investment uncertainties also influence the structure and
transaction specific assets. Control Uncertainty (CU) originate two different sources;
45
first, the activity of organization; second, the inability of covering all the aspects in a
contracts. The assumption here is that, local partner may act opportunistic if not
monitored and controlled. It is due to high contracting cost and bounded rationality. In
order to prevent the opportunistic behavior, one solution is to write complete contracts.
In the same manner, Investment Uncertainty (IU) stems from volatility in the foreign
market environment, principally political and legal uncertainties. Political uncertainties
are defined at the instable political situations, actions of government which influences
the economical environmental, legal uncertainties increase the cost of making contract.
TCT concludes, if the investment uncertainty is high, firms need to enlarge control on
highly asset specific transactions (D. Brouthers, Brouthers, & Werner, 2008).
Meanwhile, ROT also emphasis on decision-‐making process in uncertain conditions,
options gives firm the flexibility to modify their strategy according to changing level of
uncertainty. Basically ROT, allows firms to stage the strategic investment, it shrinks the
downside risk (created by demand uncertainty (DU)), whereas lead firms to the upside
potential benefits. The primary suggestion of ROT is that firms should limit the current
activities in market and keeps the option to invest a future time (D. Brouthers, Brouthers,
& Werner, 2008).
Previous scholars suggested that JV haven an option value that gives the option holder
the right but not the obligation for future investment. Meanwhile, the option provides to
minimize the current investment commitment, if the market is not promising.
Furthermore, scholars suggest that when the uncertainty is abolished from a market, the
entrant may decide to acquire the partner’s equity. JV also gives value as they reduce the
option holder’s uncertainty via giving the entrant a possibility to get into a new market
and obtain partner knowledge. Lastly, JV gives advantage of entering into a partnership
with a local entity that enables the entrant to access the technology and resources of the
associated partner, declines the accessibility of competitors and increases the
competitors upcoming entry cost (D. Brouthers, Brouthers, & Werner, 2008).
Demand Uncertainty As we discussed earlier, firms cannot estimate the accurate product or services demand
uncertainty before they make actual investment. The view of demand uncertainty is that
46
it influences the present value result for strategic alternative, generates uncertainty over
the best sequence of firm’s activities. ROT suggest when the demand uncertainty is high
in the foreign environment, firms will have advantage by delaying and minimizing the
current investment activities, whereas the firm will benefit the upside potential if the
market is promising and the demand uncertainty is low. There exist different ways that
an option-‐based mode (JV) gains advantage when the demand uncertainty is high (D.
Brouthers, Brouthers, & Werner, 2008).
Primary advantage is having an option to the upside potential, while at the same time
minimizing the downside risks ordinarily companions the WOS, secondary options give
firms to invest in grander diversity of opportunities and exporting mode and JV mode
provides the firm with a drive for a quick knowledge acquisitions. Lastly, JVs are given
greater preference over direct exporting due to the reason of first mover advantage that
gives close distribution channel over competitors, restrict competitors to limited
resources and involve potential partner entity. Brouthers & Werner (2008) concludes
the demand uncertainty with a hypothesis, that companies want to invest in external
markets characterized with high demand uncertainty favor the option modes entries (JV)
and companies entering low demand uncertainty external markets favor non-‐option
entry modes (WOS) (D. Brouthers, Brouthers, & Werner, 2008).
Strategic Flexibility ROT abstracts that firms are package of strategic options that are combined over time
and these strategic options add value to the current option mode (JV) decisions as they
offer strategic flexibility. Brouthers & Werner (2008) Suggest that combined
international experience can give a firm strategic flexibility when enters international
markets. This view is supported by two reasons; first, firms with international
experience grows an option to consider operating from less productive markets to more
productive markets. On the condition that demand is not according to the expectation,
then output is moved to other markets. Second, experience delivers firms with flexibility
in reshaping the product portfolio to a better fit in new markets demand, however if the
core product doesn’t meet the expectation of international market, firm has gain enough
know-‐how knowledge to transfer the possibilities at hand into more acceptable products
(D. Brouthers, Brouthers, & Werner, 2008).
47
An argument of ROT is that firms with higher strategic flexibility observe lower ‘risk of
loss’ and so favor non-‐option entry modes (WOS or independent contracting) over JV.
Which means, if the demand is lower than forecasted firms with WOS modes may send
out the output to other market, firms in JV entry modes continues operating and tries to
be efficient on the same market, losses the possibility market utilization. Furthermore,
firms with WOS entry have the control to modify the shifting output quicker than JV
entry modes. Hence, there is lower inducement of continuing production efficient due to
cost/benefits dot not happen from a single firm but are via all associated partners (D.
Brouthers, Brouthers, & Werner, 2008).
The Ansoff matrix One of the useful managerial tools in relation to strategic direction for entry mode in a
new market is the Ansoff matrix. It provides four distinguish situation in which firms can
analysis and assess which type of these situation can best fit their modes of entry in a
new or existing market. The Ansoff matrix is described in the figure 12.
Figure 12: the Ansoff growth matrix source: (Johnson, 2011)
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The matrix consist of four zones: market penetration (zone A) new product
development (zone B) Market development (zone C) and diversification (zone D). as
Ansoff argued that firms can either choose to staying in the existing market that they
have already been by penetrating in to it (zone A)market penetration ,this strategy is
used when firms wants to increase the level of sales rate and productivities , it only
applies when the firms want to focus on the existing market they have already been with
no new product range. Market penetration leads to more competition among the
competitor within the same markets. Firms with higher competitive advantage than
others would be able to penetrate. On the other hand the situation in (zone B) is about
when firms introduce a new product or services to the existing market they are
operating. Ansoff insisted that product development has higher risk due to the reason
that new product involves building new capabilities that firms need to go through
processes that are new for them. Most often it will also create lot of costs. On the other
the biggest advantages related to new product is being the first mover, where firms
would be able to target a large segment and achieve abnormal profit without competing
in the short run (Ansoff, 1957).
(Zone C) which involves markets development, is basically entering new markets with
the same product line. One of the reasons that most firms would like to enter new
markets with the existing product is that they want to avoid the risk and cost of
developing new products, beside that firms want to enter new market with products that
they have already build capabilities and achieved competitive advantages. (Zone D),
which is diversification a situation where firms choose to enter a new market with a new
product or services. Firms with stronger financial resources and capabilities would
choose the diversification strategy in order to achieve higher market power and
economies of scope and gaining presence in more optional markets around the globe to
increase financial benefits (Ansoff, 1957).
Methodology This section of the report will provide a brief exposure on internationalization of an
electric, audio video firm with luxury products. As well as, this section accounts for
which theories we have chosen to be relevant in analyzing the case company’s
internationalization process. We have introduced all the relevant theories in the
49
theoretical approach section, but here a short reasoning will be provided. Finally we will
conclude this section with information on the data collection process. The next section
include the introduction of case company, which we will apply respectively, all the
introduced theories in theoretical approach.
The purpose of this report is to see how firms modify their presence in the international
markets during the financial crises and after the financial crises. It is also of interest to
see what strategic approach firms with luxury products pursue to cope with financial
crises.
The analyzing and Theoretical approach sections of this report is consist of three main
areas and one pre-‐financial crises exposure; 1. External shock 2. The Internationalization
motives, 3. The market selection and 4. The entry modes.
The first part will start with a brief introduction of external shock, which examines what
happen at the compnay external environment. Ansoff’s environmental turbulences
capture all the dynamics in international market and provide a solution. The second part
Internationalization motives, start with intentions firm want to expand to external
markets. This section summarizes the motives into proactive internationalization
motives and reactive internationalization motives, which synopsizes all the existing
potentials in foreign market and the entrant’s resources and competences. The next
model used to analyze the internationalization process of the case company is Uppsala
model, this model help firms to start expansion into international markets in small step
gradually.
The third part of analyses is international market selection, where the expansion process
to external markets start. One of the theories, which help us analyze the international
market selection, is Systematic and Non-‐systematic approach. In systematic approach
firms have a discipline approach, where the firm evaluates and analysis each step into
new markets, firms that apply the systematic approach in market selection are normally
selective. Non-‐systematic approach is where firms randomly choose a market and make
an entry. The next model is international market expansion strategy that firms at the
time of entry chose to focus on short-‐term profitability or on gaining higher market
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position. Concentration and Diversification, these strategies depend on firm’s resource,
competences and business scope. Concentration is classified as slow and gradual growth
in different market and Diversification is classified as fast growing strategy in serving
number of markets.
The fourth and final part in analyzing section is the entry mode; this section starts with
Transaction cost theory that help in analyzing the cost minimization of the firm and
shows the level of assets specific in a market with a specific entry mode and degree of
control. The next model used here is the Real Option Theory, this model capture the
notions that TCT does not contain. It provides variety of options in foreign market, if the
market is not promising or if there are upside potentials in the market. It also provides
the notion of strategic flexibility that firms could move business from less attractive
markets to more attractive markets. The last model used in this section is Ansoff matrix,
it helps to investigate the movement of company in external markets, and according the
metrix (market expansion, market penetration, product development and
diversification) which approach did the firm use in these markets.
The initial focus was to base the analysis on primary data, thus an email has been sent
“Bang & Olufsen support” in order to interview the line managers and get data on M&A
activities. Hence, due to high number alike request and confidentiality perspective the
company rejected our request. However, we base our report on secondary data available
in public. Different sources have been used to gather industrial data such as; industry
reports, annual reports, interim reports, journal articles, and different databases
available in AU library.
Finally, all the raised points and issues in the theoretical approach will be summarize in a
conclusion, and most possibly we will answer the developed problems statement and
research questions.
The Analysis This section of the report will start by an introduction of the case company (Bang and
Olufsen), from her on we will start to analyze and link all the theories introduced in
theoretical approach in same order respectively.
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Company history Bang and Olufsen, from here on (B&O), was invented by two Danish engineers, Peter
Bang and Svend Olufsen in 1925 in Struer Denmark. The first commercially product was
developed to curry the name of B&O was the Eliminator in 1927. The Eliminator
facilitated a radio to be joined directly to the mains relatively than being battery-‐
operated, the introduction of Eliminator was a success with the right timing, when it
arrived to the Danish market the electricity suit the conventional in the Danish
households. In 1929, the company introduced 5 tubes radio that give B&O reputation
among the other radio manufacturers (BeoWorld, 2007).
At the end of the World War II, the company was destroyed by the Danish Nazi
sympathizers as a vengeance of not being a part of German forces and because of the
cause that many of the company’s employee being involved in the Danish Resistance. In
the following years, B&O did not struggle to survive in the market position, but struggle
to rebuild the company. Throughout the 1950s and 1960s, B&O lucratively initiated a
recognized name in the Danish market as “The Danish Quality Brand”. By the end of
1960s, the competition from the Asian producer increased, the Danish and European
radio and TV producers had to close the productions but B&O allied itself with designers
and architect groups and set focus ideas and design behind the products and the quality
the same time. The company started it sales from abroad, at present it counts for almost
80% of its revenue (Bang and Olufsen Homepage, 2008).
Once again in 1980s and 1990s B&O suffer the low income, where the earnings did not
match the turnover. The company had to abandon a large scale of non-‐core activities and
had to come with new distribution strategy that no longer B&O products have to be sold
throughout multi brand radio/ TV stores. But rather through dedicated channels which
only allotted with B&O products. Since then the focus was to create (B1) shops, which in
principle accounted for total increasing sales. As matter of fact, the company emphasis
on emerging the shop in shop concept, where a specific area of big super markets or
store were dedicated for B&O products that are designed and established according to
B&O’s requirement and demand. The new distribution strategy has proven a high
success and since the launch in 1990s, has subsidized in high growth in turnover and
revenue up until 2008 financial crises. As early as 2000s the company continues its
52
expansion strategy and set-‐ups new shops across the globe especially in the emerging
markets such as Russia, India and China, with new products launces, which meets the
high quality and standards of B&O. (Annual Report, 2007/08)
Bang and Olufsen is the leader in providing electronic audio-‐video solutions in the
industry. The company produces a compete line of technologically high-‐level, designed
hi-‐fi, speakers, Television and Telecommunication tools (BeoPhile.com, 2000). At the
moment B&O is well-‐known producer of high-‐end quality televisions, music systems and
high performance loudspeakers, the company syndicates technology-‐excellence with
passionate appeal and a historic design. The company operates through extensive
independent retailer network in almost 100 countries of the world. A high number of
these retailers are concept stores, which mainly sells B&O’s products (B&O, 2012).
The effect of 2008 external shock on B&O In order to assess and analyses the effect of the external shock 2008 financial crisis on
B&O this part of the assignment would focused on two critical period of time, which
involves two different situation for the company. The first period focuses on pre-‐financial
crisis where the company enjoyed high level of growth rate in domestic and foreign
markets, each year the percentage of net turn over net income, and revenue was greater
than the year before. The second period focuses on actual time of financial crisis in which
the company was hit hard, the overall net profit and level of sales were dropped to
almost 50 percent comparing to year before. Soon after the begging of the crisis the
company came up with new strategy and approaches to cope with the crisis (B&O AR,
2009/10). The assessment of these two critical period would give us a deep
understanding of to what extend the company was effected by the external shock and
what approaches did they company pursued in order to deal the crisis.
Pre-‐financial crisis Looking back at the history of company overall, it gives an impression of development,
innovation expansion and profitability, although the company faces some challenges
during the 80s and 90 but never the less they have been able to continue being profitable
and innovative. The most important events in the history of the company was the last
decade mainly from the begging of the new millennium, the company established close
53
relation with strategic partners around the globe one of their biggest achievements that
takes the company into new dimension was B&O entered into B2B. In their new business
area the company focused on developing luxuries sound systems for cars, which enable
them to build up strategic collaboration with world famous auto manufactures
companies such as Mercedes Benz, Audi, BMW, and Aston Marin. (B&O AR, 2000/01)
Today almost 30 percent of the annual net profit comes from B2B area of the company.
Beside that the combination products both in B2C and B2B gives the company a very
high brand value, and a good impression for the consumers in terms of design and
quality that made the company to be named two times one of the coolest brand in the
world (B&O AR, 2008/9).
Following the begging of new millennium in 2003 the general world economy was
characterized a slowdown in consumer purchasing power, but B&O could manage to
maintain their sales level as they targeted the market by pursuing the strategy of
consolidation, efforts and caution to increase their overall margin ( B&O,AR, 2003/04).
They also brought one of the most fundamentally transformation to the electronic
industry by transforming the transitional tube TVs To flat screen TVs, the development
of new flat TVs by B&O has effected to a great extend medium and large size
manufactures, which gives them a greater capabilities and competitive advantages (
B&O,AR, 2003/04). One of the other biggest achievements that B&O had continuously
moved on developing before the crisis was the increase in number of B1 shops. By mid-‐
January 2001 B&O had opened 46 new B1 shops in strategic positions around the globe,
which in total reached to 490 B1 shops. The total number of B1 shops was accounted for
48 percent of the total turnover in 2001 ( B&O,AR, 2003/04).
A year later in 2002 B&O reaches the total number of B1 shops to 602 worldwide, which
were accounted for 56 percent of total turnover. Beside that during this year B&O has
reported successful progress in most potential European markets, which included UK,
France, Spain and Holland. As B&O improved into these European markets the number of
total B1 shop has reached to 780 worldwide by 2007 that was accountable to over 60
percent of total turnover (Annual Report, 2007/08).
One of the other important factors, which can point out strongly on B&O high growth
and profitability before the years of crisis, is their technological and product
54
development. B&O allocated most of its resource and capacities to stay competitive and
innovative, therefore they have introduced each year large number of product line to the
market, during 2001 B&O introduced their brand new products Beo player, digital player
for PC, and Beo sound 2. The product launches for the 2002/03 included Beo vision 5,
new updated TV with classical Beo vision as well as, hard disk technology along with
other upgrading the existing products ( B&O,AR, 2003/04).
The product launches in financial year of 2003/04 included Beo Vision 6, Beolab 5 and
Beo center 3 and new brand TVs with recent technology. (B&O annual report 2003/04)
following the years after B&O continued to launch and introduced new products with
unique designed both in their B2C and B2B area which opens new opportunities for B&O
to expand into new markets. Just few years before the crisis B&O had experienced a
period of growth, market development and market expansion, as well as building up
strategic celebration networks with suppliers and B2B partners. In order to get a deep
understanding of the overall key results of the pre-‐crisis situation and the actually effect
of the external shock of 2008 financial crisis on B&O (figure 13) provides the summary of
five years key figures ( B&O,AR, 2003/04).
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Figure 13: Five year summery, Main key figures Source: (B&O AR, 2009/10)
By looking at the main key figure (figure 13) in years before the crises the net turn over
in 2005/06 financial years was about 4,225 Million DKK moving on to the year after the
net turnover increase by 151 million DKK which reach to 4,376 in 2006/07 financial
year. moving on to the last year before the crisis the net turn over slightly decrease but
the net turn over from foreign market has increase comparing to the previous years.
Never the less the effect of the crisis already can be seen in 2007/08 financial year the
figure such as operating profit, result before tax and result of the year are the main
indicator of the financial crisis effects (Annual Report, 2007/08).
The effect of the crisis on B&O Like many other firms who suffered during the external shock of 2008 financial crisis
B&O was one of those firms who was hit hard. Due to globe economic downturn which
lead to slowdown in private consumptions which had significantly affected on almost all
product lines, but most important of all the luxuries goods. B&O which is one of the
companies with high-‐end luxuries good faced dramatic decreased in sales in most
potential markets starting from US, central European markets east Europe , new markets
such as Russia was hit to a lower extent. The share price drops to almost half and
number of employees were laid off to a considerable number, it was not only a
challenging year for the company but also a the shareholders and employees (B&O,AR,
2008/09).
One of the other factors beside the economic crisis that had also effected according to
the Chairman of the company was the delayed for the development of new products at
the same year due to the failure to meet the sales expectation and requirements for new
product. Although this argument does not look valid and strong enough to accept as one
of the major factors beside the losses that the company suffered to a great extent, but it
could be added as one of the minor factor in terms of market competition and consumer
demand for new products that they failed to fulfill at the time of crisis. Looking at the five
years key summary (figure 13) we could see that significant changes has been brought
to almost every key figures during the crisis period. (B&O AR, 2009/10).
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The net turnover from 4,092 Million DKK in 2007/08 financial year dropped to 2,790
Million DKK in 2008/09 to operation profit/loss went down from 195 Million DKK to
negative (496) Million DKK the result of year and the result before tax, as well as the cash
flows and the balance sheets all has been negatively affected to a great extent. In order to
cope with the financial crisis and the future challengers and to bring back the company
into a pre-‐crisis stage the company needed to take crucial steps. Therefore a new CEO
(Kale Hvidt Nielsen) took office at the begging of 2007/8 financial year. He came up with
a new strategy called “The Pole Position strategy” and with a strong slogan “we began a
race towards a healthier, more focused and more profitable Bang and Olufsen, with a
strong product line and simplified sales organization” (B&O, Pole Postion strategy, 2008,
p. 3).
Pole Position strategy and the external shock of 2008 As the new CEO took place he started to implement the pole position strategy in October
2008. The strategy was designed to cope with the financial crisis. And to meet the future
challenges, it was most likely was a defensive strategy based on the characteristic of
overall strategy. The strategy consisted of four high priority steps:
1. profitability –action now: in order to secure the profitability immediately during the
crisis the company decided to cut cost in down markets, as well as in production and
administration. (B&O, Pole Postion strategy, 2008)
2. sales – re organizes and boost: by establishing one single global sales organization in
order to bring more efficient support for B&O dealer networks. Merging from 7 regional
originations to one globally sales operation (B&O,AR, 2008/09)
3. products –one technology platform: by introducing one digital platform for new
product launch at the right time and the right quality for the right segments. By
implementing the new strategy B&O insisted on product development as one of
important factor for further success.
4. Increase the number of B1 shops: to focus in most promising and potential emerging
markets by opening B1 shops. Although B&O had reduced the number of B1 shops in
mature markets but by implementing the new strategy the company focused on opening
new B1 shops in emerging markets such as China, India and Russia (B&O, Pole Postion
strategy, 2008, p. 5).
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The overall structure of the pole position strategy was design as a defensive respond to
the financial crisis ,the main focus were mainly laid on cost saving , product development
growth and profitability (B&O AR, 2009/10). In order to assess and analysis B&O
situation during the crisis and their responds towards the crisis by implementing the
pole position strategy. This part of the assignment discusses the theoretical approaches
which was discuses in the earlier part, namely the theoretical considerations in relation
to the implemented strategy of B&O.
Emery and Trist in (1965) who introduced the term environmental turbulence insisted
that as a result of environmental turbulence the outside environment changes, therefore
it causes uncertainty, which makes it hard for firms to deal with these changes. In their
models (figure 1) they classified the environmental turbulence in to four categories; the
first two categories discussed a stable environment where, the level of uncertainty and
complexity is lower, the third category discussed about the intensity of the competition
in the market.But the fourth category in their model discuses about the turbulence
environment, where the level of uncertainty and complexity is very high (Trist & Emery,
1965).
Considering B&O situation during the external shock of 2008 financial crisis the fourth
category of the model which is the turbulent situation best matches due to the fact that
the level of uncertainty complexity and predictability is very high. When the world
financial crisis started from US and gradually spread around the globe the company
found them self in a situation of completely uncertainty and complexity. They did not had
any idea to what extend does this crisis could push the company to the verge of anxiety
and instability. (Annual Report, 2007/08).
As discussed in theoretical part, Igor Ansoff and Mc Donnell in (1990) developed a
broader and more sufficient model of Emery and Trist where they introduced the
environmental turbulence into five stages along with the level of complexity that each
stage can bring on firms depending on which stage of environmental turbulence the
firms place them self, as well as the speed of changes by the external shock over the
firms. In addition they also proposed solutions by developing the model deeper by which
firms can assess the environmental turbulence level and adjust their strategic
aggressiveness and responsiveness of capability (H. Igor Ansoff, 1990). In order to
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evaluate B&O situation during the crisis based on Ansoff environmental turbulence the
model is recalled her for more clearance.
Figure 14: Ansoff 5 level of turbulence and respond model. Source: (H. Igor Ansoff, 1990)
Based on Ansoff turbulence model (figure 15) B&O situation best match is the fifth stage
of the model, according the definition by Ansoff the fifth model of the model is a
surprising and unpredictable situation. This is the highest stage in environmental
turbulence, which involves the high rate of change in outside environment of the
company with high level of complexity as well as with high level of uncertainty (H. Igor
Ansoff, 1990).
As external shock of 2008 financial crisis started from US and gradually hit European
markets. In a very short period of time B&O felt the effects of the crisis already back
home. The level of complexity and speed of the environmental change were so rapid that
during the first two years of the crisis B&O find it very difficult to measure the speed of
change that has been brought by the crisis in different markets. Although it has been a
very challenging period for B&O to deal with, but never the less they have designed their
new strategy of pole position to cope with it. One of the innovative management tool that
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Ansoff introduced is “strategic diagnosis” it is used when firms find them self in a very
highly turbulence environment mainly in fourth and fifth stage of the model. By this tool
firms evaluate the extent of the change and complexity of the outside environment.
Based on the evaluation they made and the available internal capabilities they need to
structure and organize a responsive mechanism in order to assure their future success
(H. Igor Ansoff, 1990).
The pole position strategy of B&O was a strategy in response to the finical crisis. The
following part of the assignment look over the assessment of the pole position strategy of
B&O based on Ansoff management tool “strategic diagnosis” this approach would lead us
to realize, to what extent does the pole position strategy of B&O matches with the Ansoff
management tool along with the five stage model.
Pole position strategy (response and aggression) One of the best methods that Ansoff (1990) suggested for firms during the high level of
environmental turbulence was to use the strategic diagnosis, to evaluate further
challenges as well as, future opportunities. After the diagnosis process they need to
adjust the firm’s strategy to respond to the degree of the changes that has been brought
by turbulence. According to Ansoff (1990) this can be done by fulfilling two basic
requirements. First firms need to establish the capability to be able to diagnose the
future challenges and opportunities. Second they need to be able to build up internal
capabilities and an in-‐house response mechanism in order to match to the level of
changes. In addition to that the aggressiveness of firms needs to match to turbulence
environment and it needs be adjusted through the strategy of the firms. Considering B&O
new strategy “the pole position strategy” during the financial crisis. Based on its
characteristics it was designed as a defensive strategy. It focused more on cost savings
such as reducing the number of B1 shops in markets, where it was affected by the
financial crisis and reducing the number of employees. Beside that they also created one
global sales organization instead of many individual sales offices in many regions to save
costs (Annual Report, 2007/08).
Taking into consideration the first propositions proposed in the theoretical approaches,
the first proposition were suggested as follow: P1: If the level of environmental
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turbulence is discontinuous and unpredictable firms need to strategically diagnose the
environment, and realize in what stage of the turbulence they position themselves.
Considering the first proposition in relation to B&O during the crisis, we could argue that
B&O realized that the level of environmental turbulence were discontinuous and
unpredictable, they also realize that the speed of environmental change is enormous that
they are not able to respond to it in short period of time. But based on their evolution of
the situation “strategic diagnosis” they designed the pole position strategy as a solution
to the crisis (Ansoff, 1957).
The second suggested proposition were: P2: As they found the turbulence stage they
need to establish strategic aggressiveness, as well as responsiveness of capabilities
which can match the turbulence of the environment which includes, focusing on internal
efficiency and internal capabilities, market seeking, resource seeking, and minimization
of costs.
The second proposition focuses more on firm’s aggression and responsiveness towards
the environmental turbulence. Although the pole position strategy was not an aggressive
strategy but rater offensive, it consisted of two major parts the first part were cost
savings and other major part were to focused on potential markets such as China and
Russia. As proposed by Ansoff firms need to develop their internal capabilities and look
for opportunities to cope with challenges, to get fully advantages of potential markets
and consumers. B&O also increase their focused on product development through
innovation and design. During the financial crisis they have introduced new product lines
which include different flat screen TVs and sound systems not only in B2C area, but also
in B2B. There are some weakness related to the pole position strategy if we evaluate it
from Ansoff theories and arguments, first of all the strategic diagnosis were suggested by
the assumption that firms needs to develop the capabilities to realize the extent of the
change that has been brought by the environmental turbulence, since the financial crisis
of 2008 were so rapid and enormous and at the same time it was an ongoing crisis that it
was very difficult to measure exactly the extent of the changes. Therefore it does not
match what it was argued by Ansoff. Secondly Ansoff proposed a strategy of aggression
that can strongly respond to what it is called environmental turbulence (Ansoff, 1957).
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By aggression and responds he meant to consider market seeking and resource seeking
in new regions where it is more attractive, although B&O consider focusing in Chines and
Russian markets by opening new B1 shop in most promising area, but does not fulfill the
requirements that were suggested by Ansoff. Overall the pole position strategy had some
strength in terms of cost savings to improve financial resources, and product
developments, to reach new consumers and increase the core competence and
competitive advantages. And lastly not the less concentration of the Chines and Russian
markets (B&O AR, 2009/10).
Internationalization of B&O As we spotlighted earlier in the internationalization motives that at the light of economic
disorder firms tend to seek ways for business continuity. As Hollensen (2012) argued
that one of the optimal solutions is to bring significant strategic changes and to stay
operative in the industry is to move the R&D and production into new external markets.
Likewise, highlighted the case company (B&O) in order to cope with the 2008 financial
crises developed a defensive strategy (Pole Position Strategy) and the main focus was on
cost minimization, new market concentration and market penetration.
In the same manner, Hollensen (2012) suggested in proactive international motives, that
firms tend to expand and internationalize base on the resources and competences in
hand and the host market will influence the efficiency of the firm. In order to benefit the
underlying opportunities in the foreign market, firms have to be innovative and have
technological competence, introduce unique products, specialized technology, the
technology competence in domestic markets makes firms competent in foreign markets
and decreases the committed opportunity cost (Hollensen, 2012).
Following its defensive strategy, B&O introduces it is new aggressive five-‐year strategy
the so-‐called ‘Leaner Faster Stronger’ in August 2011. The overall purpose of the new
strategy was to develop innovative products and introduce these products into the
existing and new global markets. ‘Leaner Faster Stronger’ strategy is proposed for a
period of five years, wit an estimation of 8-‐10 billion DKK in turnover with an EBIT
margin increase of 12 percent. The implementation of the new strategy is obviously in
the scope of company’s available financial resources. After the announcement, the
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primary focus of the new strategy was on the two first years in obtaining the leading
position in the industry within the company’s capacity range of building a more
operational, globalized and costumer oriented organization. In order to be more
competitive and expand to new and existing markets with new products, the company
concentrates on the following as apart of its new strategy ‘Learner Faster Stronger’ (B&O
AR, 2010/11).
The first emphasis is on core product development, the sound, acoustics and audio-‐video
development and sourcing. The company increases the intention on sound and acoustic
enlargement and so leverage and extra focusing on company’s world-‐class skills and
market potion in the industry. This has happened in consideration of vertical integration
of the ICE power engineering teams and stronger knowledge sharing of automotive
acoustic crews. The aim is to boost firm’s progress to expand the new product portfolio
in this specific area of the business. Consequently, the audio-‐video expansion and
sourcing, the company will leverage to a bigger level than is at the moment. There will be
a continues focus on strengthening the internal competences, where the company have
world-‐class skills, which means the primary focus will be concept development, user
experience mapping, design and system integration. B&O will emphasis on producing the
products, which add long-‐term value to the customers, and keeping in mind the emphasis
in the digital age by adding value to the products with the possibility of upgrading with
new software versions. Example of these products are; audio system BeoSound 5, where
the company add two free ways for remote control functionality and smart phone
connectivity (B&O AR, 2010/11).
The new strategy also included, consideration on new products category and increasing
the distribution. Thus, B&O introduced new series of products at end of 2011 for the
purpose of attracting new customers to the brand. These new product category
contained stand-‐alone products, which combines B&O’s competences and quality
approach of design, connectivity, sound and friendliness. These products will be sold out
through dedicated B&O shops, and via paired retail channels. The company has sign a
contract with Apple Co. for wider distribution of European markets through apple shops,
this is in further expanding the existing agreement of selling B&O products visa apple
stores in the USA. As well as, these new product categories will be sold, through new-‐
63
branded digital online shops. The company expects the new product category to be an
essential part of the business and the deliver a higher turnover and make new customer
leads to the existing distribution via a complete product portfolio (B&O AR, 2010/11).
One of the other aspects of the new strategy was to expand the business into BRIC
countries, we will discuss this subject further in choice of markets section of the report.
Similarly, the automotive business strengthening, B&O is providing automotive high-‐end
sound system for cars. The upcoming emphasis of the firm is on sound and acoustics.
Likewise, the company will focus on creating value to the existing partners (Aston
Martin, Audi, BMW, and Mercedes) via continuous product development, innovation of
new sound systems, which will add value to the partners’ brand image. The last and main
characteristic of the new strategy is to create a stronger and learner organization with
global outlook. The company in order to make sure the continuously deliver of high value
to the customers, will create more internalized customer approach. So, the company
needs to be at proximity of the customers, the associated technology partners and
market crescendos, in a result of these considerations and to attract most potential
marketing and sales employees, the company has moved its marketing and sales to
Copenhagen from its main office in Struer (B&O AR, 2010/11).
B&O Uppsala model According to Johanson and Vahlne (2009), and in their empirical research on
internationalization for the firm. Most firms tend to engage in the primary exporting
mode in foreign markets, and gradually increase resources and commitment according to
their business scope.
Bang and Olufsen started trading it’s products across domestic markets, as early as 1940.
It was in the form of authorized dealers, who sold B&O products via retail networks
(BeoWorld, 2007).
Bang and Olufsen, experienced some difficulties staying profitable in the foreign markets,
in 1980s and 1990s. The company pursued, its new distribution strategy and reformed
the partnership, in those markets. The new strategy contained new distribution policy,
which no longer B&O’s products should be sold through multi-‐brand retailers, but rather
64
the company would establish dedicated B1 and shop in shop outlet that deals only with
B&O products (B&O AR, 2009/10).
The 2000 distribution strategy focuses on increasing the B1 shops and shop in shop
concepts will continue across the globe. This has happened in providing the best possible
tools to the associated agents, achieving higher sales. Simultaneously, along with strong
product portfolio and supporting the retailer network, the strategy includes targeted
marketing. Bang and Olufsen, is operating in the most of European, the US, Japan and
other Asian markets. In most of the markets a national sales office represent the
company and in some other markets a soles agent represents the group in the oversea
markets (B&O AR, 2000/01).
One of the major steps in the history of internationalization process of the company was
the establishment of Greenfield Production facility in Czech Republic. B&O planned to
build the only production facility in Koprivnice, Czech. The establishment cost company
and investment of approximately DKK 124 million, and the facility will provide job
opportunity for around 200 employees. It is in connection to the company’s continues
sales growth in external markets and the availability of products in all over the world,
made it necessarily to expand the production facilities. One of the main reason behind
this wholly owned subsidiary (WOS) was the strategic seeking fdi, where the company
wanted to get access to the underlying highly educated professionals, from the academic
intuitions at the vicinity (Johansen, 2004).
As spotlighted in the theoretical approach, the main notions of Uppsala model were
uncertainty and the bounded rationality. And the chanted mechanism, suggested that
firms should increase commitment, as sales grow. Bang and Olufsen, in order to increase
its commitments in foreign markets, it has introduce it is new sub-‐product line ‘B&O
play’, we will discuss this topic further in the Anosff’s Matrix section further.
This new sub-‐product line has been distributed through leading retailers, via a strategic
contracting with Apple stores, independent premium shops and shop in shop outlets. At
the same time, the focus of new strategy was to reduce the number of retailers in the
mature markets. Instead increase the business in BRIC countries, therefore a national
sales office has been established in Shanghai, and the company presumes the control of
65
activities and distribution in Hong Kong and other southern Chines regions. As well as, an
agreement has been established with a master dealer in India (B&O AR, 2011/12). As
grow continued in that region, the company gained knowledge of the market, in year
2012; it went to yet another strategic partnership with ‘Sparkle Roll’ and ‘A Capital’. Both
companies have subscribed new shares of 6.63% and 1.72% at the market price
respectively. This strategic partnership preceded a transaction of approximately DKK
177 million, have been invested to boost the sales in china (Euroinvestor, 2012).
B&O market selection and expansion strategy As it has been discussed in the theoretical part related to the international market
selection the choice of markets plays a very significant role during the
internationalization process of firms. Based on their internationalization strategy and
their internal capabilities and resources they need to choose the market that fits those
best. The two approaches of the international market selection (IMS) which was
introduced in the earlier part are, the systematic approach where firms follow a
structured and formulized steps whereas in the non-‐systematic approach firms seeks the
market with lower psychic distance. Also the four contextual factors which were insisted
that firms needs to be taken into account during the choice of markets were the Macro,
Meso, Micro, and Situational factors. The macro level looks at the economic, social culture
and the demographic factors. The Meso level looks at regional, economical, and cultural
variation and institution voids in the country level. The Micro level looks at
infrastructures, education and social institution with a specific area. And lastly the
situational factors look at the differences in common behavior of particular social and
ethical groups in a community (Susan, Douglas, & Samuel, 2011).
To evaluate and asses B&O choice of markets after the external shock of 2008 financial
crisis this part of the assignment pays a close attention to the two main strategies that
B&O implemented after the crisis. The first strategy was implemented in October 2008
“The pole position strategy” and the second strategy were implemented in august 2011
“the leaner-‐faster-‐stronger ”the first strategy was designed as a defensive strategy to
respond the financial crisis, by defensive we mean that the company focus more on their
internalization rather than on focusing too much on externalization. Most of their
focuses were to save costs, and to increase their product development. In order to create
66
and build up the road for future market entry they included part of their future
internationalizing in the pole position strategy. That was to increase the number of B1
shops in most promising and potential emerging markets such as China, and Russia
(B&O, Pole Postion strategy, 2008). Therefore during the implementation of the pole
position strategy beside the other factors the company started to drop out their B1 shops
from mature markets (markets that was hit hard by financial crisis and the level of
demand went down dramatically) during the 2008/09 financial year the company
reduced about 104 B1 shops, the reductions took places in European markets, while at
the same time the company had a net addition of four B1 shops in Russia and Ukraine
and one addition in China. The number of all B1 shop was 758 across the world in May
2009 compared to 822 shops at the end of 2007/08 financial year (B&O,AR, 2008/09).
The year after the company continue to reduce B1 one shops in mature markets and
instead increase it in more potential markets. (B&O AR, 2010/11)
In 2009/10 financial year the company reduced about 55 B1 shops in US and European
markets and about 33 B1 shops were opened or upgraded. By the end of May 2010 the
total number of B1 shops was about 703 across the world compare to 758 B1 shops at
the end of 2008/09 financial year (B&O,AR, 2009/10).during the two years of pole
position strategy implementation the company gradually prepared themselves towards
their new strategy to be implemented which was planned to be started in (2010/11)
financial year. Although the pole position strategy was not a strategy that involves
entering new markets. but it never the less helped that company to reduce a great
number of B1 shops in mature markets that gives the company the capacity and
resources to invest it in potential markets under the new strategy in 2011.The leaner
faster and stronger strategy which was discussed in the earlier part of the assignment
consisted of six winning battle that the company targeted to wind in the five coming
years. (B&O AR, 2011/12) The six winning battle are shown in the figure below.
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Figure 15: B&O six winning battle streategy Source: (B&O AR, 2010/11)
Out of the six battles that they announced to win, one of them was growth in BRIC
markets. The leaner faster and stronger strategy was designed as an aggressive strategy
to boost up the growth and profitability. “A substantial part of the future sales growth
will be driven by a geographic focus on growth markets. As a consequence of this B&O
intends to increase the number of dedicated shops in developing markets which includes
an aggressive growth strategy in China (B&O Press release, 17.08.2011)”. The new
strategy targeted the BRICs markets more specifically they saw China a very promising
market for their future growth and profitability, therefore they established a national
sales offices in shanghai to accelerate the growth and provide full scale support for all
newly opened B1 shops in China. Beside that the company also signed an agreement in
January 2012 to fully control the operation including six retail shops in Hong Kong and
South China (B&O AR, 2011/12).
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The European markets had a total of 443 B1 stores compared to 467 which equals to a
total of (-‐24) B1 shops in one year. The BRIC markets had a total of 78 B1 stores compare
to 71 a net increase of (+7) B1 stores in one year (B&O AR, 2011/12). Following the year
after at the begging of the new Year in January 2013 the company signed an agreement
with Sparkle Roll an experienced luxury retailer in China, with this agreement B&O
started a joined venture where Sparkle Roll agreed to open and operate 51 dedicated B1
stores in three major Cities of China within 2013 financial years. In addition to that, to
further strengthen control over Chines market the company also took over 20 stores
from the previous master dealer which were located in major cities such as Beijing and
shanghai (B&O AR, 2011/12). Beside China, the other BRIC markets that B&O
concentrate their focused for their future growth were India, and Brazil. (B&O AR,
2011/12).
After China B&O realized India one of the other potential market to expand and opened
their dedicated B1 shops in major cities of India. “We had a great pull from the Indian
consumers. Hence in 2013 we decided to launch our first store in India. Said Gaganmeet
Singh, managing director, Beo world (Economic Times India, 2015)”. During the 2013
financial year the company launches their first store in the capital, and they announced
that as part of their leaner faster and stronger strategy the company would target the
major cities in India. According the estimated figure by economics time India so far the
company has reached to 8,000 customers in India through online shopping sites and
apple premium resellers (Economic Times India, 2015).
lastly but not the least B&O had focused on Brazil by taking over the master dealer
responsibility in order to strengthen the position of the company for further market
penetration in Brazilian markets. Beside that a national sales office were created in order
to assure further supports of partners and consumers (Bang and Olufsen AR, 2012/13).
Although B&O announced that under their new strategy of leaner faster and stronger
they would target aggressively the BRIC markets, according the data published by the
company it has indicated that they have mainly target China as their core market for
future growth and profitability (B&O AR, 13/14).
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India which has the second largest population after China in the world, is a developing
country which can be a very potential market for B&O due to the fact that the demand for
luxuries products is high and also the fact that India is famous for their music and culture
of movie productions in Asia and specially in Middle east. Since most of B&O products
are related to sound and accusations India would be very potential markets in the longer
run. Therefore starting from their first entry B&O had planned to gradually expand into
other major cities of India in the coming four years (B&O AR, 2011/12).
As pointed out in the earlier part above out of all BRIC countries China was mainly the
target market for B&O, therefore each year they increase their control over B1 shops by
taking over from retailers. In 2013/14 financial year the company once again continued
to reduces the number of B1 shops in mature markets at the end of May 2014 the
number of B1 shops were 549 worldwide compare to 611 at the end of May 2013. The
net reduction was about 62 stores (B&O AR, 13/14). Most of these reductions took place
due to the fact that the company wanted to increase the number of B1 shops in BRIC
countries mainly in China. The figure below shows the level of revenue growth by region
in the first quarter of 2013/14 financial year.
Figure 16: B&O revenue growth during 2013/14. Source: (B&O Interim Report, 2013/14)
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According the interim report of the company the first quarter of 2013/14 financial year
the revenue in European markets decreased by 21 percent due to the challenging market
conditions and the reduction of most B1 shops in these mature markets. North America
markets also decreased in revenue compare to the previous year due to market
challenges and promotional activities of the company. The BRIC markets had
significantly growth by 28 percent. According the company that growth was due to the
expansions and increasing of B1 shops in Hong Kong and south China, as well as the
newly opened dedicated B&O play shop in shops in china. (B&O Interim Report,
2013/14).
The evaluation of B&O new strategy the leaner, faster and stronger which was
implemented in august 2011 indicated that under this strategy B&O mainly focused on
BRIC countries and more specifically they invest most of their resources and capabilities
in China they started to reduce the number of B1 one shops in other mature markets, so
that they can increase their attention more in China for more expansion, The
introduction B&O play a new sub brand by B&O was one of the crucial steps that paved
the road for more expansion specially in China . B&O play was launched in October 2012
the main target were the younger generation with more youthful feel, and one of the
characteristics of this new sub brand which best fits in Chines market were its lower
price compares to other B&O product (B&O Press release, 10.01.2012) .
According the theoretical approach of the systematic and non-‐systematic, B&O took a
non-‐systematic approach in BRIC countries and here our point is mainly in China. Since
the systemic approach is consist of structure and formalized steps that firms need to take
each of these steps into consideration while deciding which market to choose. On the
other hand in the non-‐systematic approach firms seek markets that are easy to
understand with lower uncertainty and most importantly, markets that are more
attractive in terms of growth and profitably. B&O realized the potentially of Chines
market long before the financial crisis of 2008, as a result of the crisis the company’s
intention become more stronger towards china, on the other hand to evaluate China
from the four contextual factors (Macro-‐Meso-‐Micro-‐situational) perspectives would
give us another dimension of market selection (Susan, Douglas, & Samuel, 2011).
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To recap shortly each of the four factors for more clearance the macro factor looks into
economic and social culture factor, the Meso factor into cultural and economic variation
as well as institution voids, the micro factor looks deeper into infrastructure, population
density and social institutions and the situational factor look to the common behavior of
a particular targeted segment.
Although China is socially and culturally different from Danish and European markets
but what made China an attractive country for most international firms and especially
for B&O, is the fast growing economy of China and size of the market in the past decades.
the economic growth of China has increase the standard of living and increase the
purchasing power among the Chines consumers. The main driver of economic growth is
the exportation of Chines products to rest of the world. (Research and Markets, 2013).
The expectation of the Chines consumers towards the luxuries product has risen
significantly compare to a decade ago which makes it a very suitable place for firms like
B&O. The social culture aspect in China is a very important aspect for firms to look over
for example the demographics are changing constantly, for firm who are targeting a very
specific segments this aspect plays important role, age distribution and the population
growth fluctuate significantly. Cultural values and family size as well as social behaviors
impacts to a great extend how the decisions should be taken in regards to consumption.
According Hofsted`s cultural dimensions China is categorized as a collectivistic culture
(Pest analysis of China, 2015). B&O`s most targeted segments of B&O play are the
younger generation and other B&O `s consumers are mainly high income consumers,
based on the data, it indicates that the level of consumers with higher purchasing power
are increasing ,therefore the future for B&O looks bright both for their high end products
and as well as for products with lower prices. The institutional aspect is one of the other
important aspects that need to be considered, the institution voids which refers to lack of
a strong institution together with an ineffective regulatory system that could not support
firms regarding the contracting enforcing mechanisms (Susan, Douglas, & Samuel, 2011).
Although China is govern by single party, the communist party over the last sixty years,
but in the last decades the party brought significant economic reforms to open door for
foreign investors, one of the important steps towards embracing foreign investor were
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the Chinese agreement of CISG convention, which is a standardized terms of trading
goods between counties (Research and Markets, 2013).
The agreement of CISG opened the door for all the investors especially all the western
countries that are members of CISG convention that has abolished the strictly legal
institutions which was imposed on foreign firms in China, now international firms can
trade and make legal contracts with Chines traders base on standard terms of CISC
conviction which is applicable in all the group members around the globe (Research and
Markets, 2013). Although intuition voids is still a problem for firms who are dealing with
local retailers or for firms who are establishing subsidiaries, but institution voids are
most often costly for those firms who are entering a market for the first time and does
not have the experience how the market mechanism works .For B&O the intuition voids
in China is not a big challenge ,due to the fact that B&O has been in China for a
considerable period of time which gives them enough experience of the Chinese market
to deal with the mechanism and market uncertainty (Bang and Olufsen AR, 2012/13).
The next important factor related to international market selection is the expansion
strategy. Once the firms selected the markets they need an expansion strategy. According
Hollensen (2012) there is two type of approach to market expansion strategy, the
incremental (the water fall approach) and the simultaneous (the shower approach). The
incremental approach is used for firms introducing a new line of high-‐end products with
higher price for developed countries and gradually moves to developing and less
developing countries. On the other hand the simultaneous approach is use for
standardized product line with affordable price for all type of countries (Hollensen,
2012).
As B&O`s products are categorized high end products with high prices out of the two
approaches the incremental approach best fit B&O products, but since B&O selected
markets after the crisis are mainly the BRIC countries, hence these markets are
categories as a developing countries the argument can be based on ,that B&O introduced
the B&O play mainly for younger generation of emerging markets to attract more
consumers, Whereas other products of B&O with higher price is classified for higher
income consumers of the emerging market (Hollensen, 2012).
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Ayal & Ziff, (1979) introduced the two famous strategies of concentration and
diversification. As they defined the concentration strategy is used when firms want to
concentrate on few specific big markets with slow and gradual rate of growth. Whereas,
the diversification strategy is used when to achieve a fast rate of growth in many smaller
markets (Ziff & Ayal, 1979). Along with the two expansion strategy they also develop a
two by two matrix of concentration and diversification, which involve each expansion
strategy on consumers. B&O expansion strategy in BRIC countries, more specifically in
China was a concentration strategy on many segments. Although they came up with
specific and cheaper products it younger generation, but most of B&O`s other products
were targeted to high-‐income consumers in China, therefore they allocate lots of
resources and concentration not only on one specific segment but to many segments in
China (Ziff & Ayal, 1979).
To sum it up the financial crises of 2008 hit hard the potential markets that B&O were
there for many decades such as the European markets and the US market. Under their
new strategy of leaner faster and stronger the company increases their focus on new
markets where it suffered less from the financial crises, and also one of the other major
reasons was to increase the companies profitably for a better future, therefor they found
China an optimal market to allocate resources and increase their involvement. A
concentration strategy was used because China is big in market size and population
therefore a gradual and slow expansion strategy was needed (B&O, 2012).
B&O Entry modes
Transaction Cost Theory As we spotlighted earlier in Uppsala model and internationalization process section of
the report, that B&O has started it activities across the Danish borders as early as 1940.
In this part of the report, we will elaborate on B&O entry modes in the emerging markets,
more precisely in BRIC markets. And the other entry modes in different part of the world
as part of the internationalization process will stay out if the analysis in this section.
As Anderson and Gatignon argued (1986) that firms seek to move it is activities to the
external markets, therefore firms should prepare the best institutional arrangements in
the external markets.
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Correspondingly, as B&O is operating in an industry with rapid technological changes,
there will be time-‐to-‐time strategic changes. The distribution of products takes place
through partner-‐owned retailer channel. But, at specific time and market, the company
acquire the retailer network and open new shops (B&O Interim Report, 2012/13).
The Company’s sales of products take place via different segments. Most of B2C business
is combined of Audio Video and the Sub-‐brand B&O Play, which has been created in a
slighted different view, targeting mostly the young generation. The main focus was to
generate more revenue and magnetize more customers in the existing business. B&O
Play products are being sold through company’s B1 shops, shop-‐in-‐shop outlets and via
retail channels. As well as, the B&O Play products are sold through dedicated brand
online web-‐shops. The B2B business is composed of ICEpower, which board produced
for electronics industry including the rest of B&O core products independently of the
B&O brand, the automotive brand is consist of cooperation with Auto industry in
exclusive contracting (B&O Interim Report, 2012/13). According TCT, the associated
cost is the pre-‐ante and post-‐ante cost. Basically, when firms decide to move the business
to external markets, they have to find a potential market, and an associated partner,
which include transaction specific cost. The post-‐ante cost is the contracting with
associated partners, in order to prevent any opportunistic behavior of the external
partner. And to find an associated retailer and make a contract with the external partner,
they are the pre transaction costs for B&O.
Bang and Olufsen, order to boost the sales and increase the expansion after the
announcement of its 2011 strategy ‘Leaner Faster Stronger’ focused on the restructuring
of the entire retailer chain. This was in connection of gaining more control on
distribution strategy; yet, the company acquired the main master dealers in Brazil, India
and China. The retailer expansion and optimization is a part of ‘The six must-‐wining
battles’ in the new suggested strategy. Likewise, to speed up the current network the
company will continue opening B1 shops in key market locations and proceed with
closing of un-‐profited stores in mature markets, the closing number of stores are
expected to exceed the number of opening stores, this will have an adverse impact of
DKK 100 million on company’s revenue in 2012/13 (Bang and Olufsen AR, 2012/13).
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Bang and Olufsen in 2013 performed analysis on the performance of the individual
retailers and the result showed that the individual retailers under-‐performed compared
to the owned-‐retailer network and other group retailers. The company also set a target
for individual retailer turnover to be DKK 1 million annually, if the individual retailer’s
performance was below, the agreement should be terminated. In that respect, B&O
terminated 125 low-‐performing stores in the Europe. In the process of optimization of
retailer network and for future stability, more than 80 shops have been terminated
Austria, Switzerland, Finland, Germany, the United Kingdom, Italy, the Netherlands,
Norway and Sweden. Henceforth, in order to stay focus on the designed strategy the
company continues the reduction of shops and instead increases the number of shop-‐
shop outlets (B&O Interim Report, 2012/13).
The number of shops increase in the BRIC markets and the net movement at the end of
2012, is a termination one shop, with two new establishments and two more closings.
This followed B&O to step into a joint venture agreement with an existing partner
‘Sparkle Roll Group Ltd.’ and Mr. Qi Jianhong from here on (Sparkle Roll), which means
that Sparkle Roll, will invest in opening three new B1 shops in three different Chinese
cities, with the possibility of further extensions to many outlets. In the same manner,
Sparkle Roll will open and operate around 50 dedicated B&O Play shops across Chines
markets.
Asset Specificity
Transaction cost theory suggest, that the optimal entry mode in a foreign market is the
low control mode. One of the main arguments here is the possibility of rapid business
changes in the future. And when the foreign market competition is high, foreign partners
become opportunistic and go into dialog for a larger stake in the business (Anderson,
Erin; Gatignon, Hubert, 1986). B&O business scope requires small or medium size
investment in foreign market entries for establishment of a retailer store, as the level of
transaction specific asset is low, when the company contracts a new store. B&O, have
been operating in Chinese market since the beginning of the new millennium, via
contract retailing (B&O Interim Report, 2012/13). Thus, TCT suggest low control mode is
the optimal entry mode.
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The model also suggest that the low control mode should be implemented, if companies
have unstructured, or poorly understood process and knowledge. Organizations with
complex process lead to ill-‐understanding of the process in the firm, therefore more
flexible mode of entries are suggest than high control entry mode (WOS) (Anderson &
Gatignon, 1986).
As most of B&O transactions in the foreign market are sales activities and retailing. In
order to keep alignment through the entire organization and the retailer network. B&O
provides an exclusive training for all new partners and a full induction is provided prior
to the store opening. All the employees including the owner of the retail store and the
installation team benefits this comprehensive pre-‐opening course, which will help them
run the floor smoothly and be successful in the market. Besides the opening training,
there is also an extensive ongoing training program for sales and technical employees
within the global retail network. The personnel are provided with the required skill and
knowledge via e-‐learning platform and regular physical sessions. Furthermore, B&O
products require regular technology innovation, the company on regular basis
introduces, new innovated products across the segments, which are build on company’s
unique competences within acoustic, design and craftsmanship (Bange and Olufsen,
2005).
As pointed earlier, all the product innovation and design takes place at the head office,
Struer Denmark. The company has also build relation with local universities in Denmark
and has a R&D office in Aarhus (Bang and Olufsen Homepage, 2008). There is no high
risk in leaking any technological information by associated partner in the foreign market.
The main concern here is the partner way of doing business, though the company
provides exclusive training for all new partners. Thus, according to TCT a low control
mode is an optimal mode of entry.
External Uncertainty
As the main focus of entry modes analysis is on BRIC countries, this part of the report
will provide a highlight the Chines market political environments.
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Transaction cost theory suggested that firms operating in volatile external environment
should avoid insidership, as it is not certain when the next change will happen. One the
measurement for external uncertainties that TCT suggest is the external environment
political stability. When there is high political un-‐stability and the environment is
changing rapidly, then the low control modes are favorable (Anderson & Gatignon,
1986).
China is a fast moving economy, and the state is responsible for guidance and business
transitions. Thus, most of the new entrants find chines market much confusing and
disarray. Most of the states impose taxes, regulations and require consultation on the
project statues. This is a part of economic decision-‐making process in Chinese
governmental system, the centralized approach where decisions are taken central. The
government is working to devolve executive powers and grant the local authorities even-‐
greater power (Chinese Marketing & Communication, 1986). The political system in
China seems predominant, an anti-‐corruption restriction and discord have given the
government the strength to bring reforms, however, these diplomacies have associated
costs. The economic downturn in some parts of the economy (construction business) and
the pressure of inflation, cause to cut the interest rates which will support an economic
growth of 7.2% in 2015 (The Economist, 2015).
Bang and Olufsen is operating via retailer network in Chines Markets. In Jan 2013 the
company has decided to terminate the low-‐performing stores, rather take control of the
distribution channel. Thus, the company went to a partnership with Sparkle Roll, a
company which in business of luxury retailer for 15 years. B&O expect this JV will
provide a platform for future company growth. This will activities of the company will
have a short term adverse effect on top line, yet will have a long term fortune (Anderson
& Gatignon, 1986).
According to TCT framework, the external uncertainty property is an interface of asset
specificity and degree of control that principally implies to each source of uncertainty.
Hence, the model also suggests that a low control mode of entry will possibly provide the
company the future flexibility.
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Internal Uncertainty
Transaction Cost Theory (TCT) argues that internal uncertainty happens when firms are
not able to measure the performance of external partner. The model also suggests, that
the firm’s level of control should be connected to the firm’s overall international
experience (Anderson & Gatignon, 1986).
B&O’s revenue in the second quarter of the year 2012/13 declined by 22% in BRIC
countries, company reasons it for the ongoing negotiation of acquisition of activities from
the maser dealers in Brazil and China. This has been officially been finalized with the
master dealers, that as of Jan 2013 the company will take the direct control of
distribution activities (B&O Interim Report (2nd Q), 2013).
B&O as part of its new strategy (Faster Leaner Stronger) to double the growth in BRIC
countries, initiated to accelerate the opening of new stores and proactively close the
store in mature markets. Closing of stores in mature markets, took place in a target
setting approach, where the below DKK 1 million revenue per-‐year stores were
terminated. The overall aim of this strategic action is to develop the health of retail
network. The company in 2013 also reported the distribution and marketing activities
cost to be DKK 568 million in the first three quarter of the year, compared to DKK 486
million in the same period year before. The costs among other things are due to
establishment of a national sales office in Shanghai, and the acquisition of activities. The
master dealer in China had ownership of 21 B1 shops, as of Jan 2013 the B&O will take
the direct control of 16 shops and the remaining shops will be closed. Furthermore, other
distribution contracting has been established regarding the B&O Play products with
third party retailer networks across Europe and Chines Markets. The company expected
to ensure the quick decision-‐making process in overall owned-‐retailer network, thus, to
restructure the retailer network a specialist group of executive management has been
assigned (B&O Intrim Reports, 2012/13).
As TCT suggested that when the internal uncertainty is high in an external market, a high
control is required to judge and observe the outputs. Thus, the primary focus of B&O was
exclusive contracting with retailers in Chines Market. At the beginning of 2012 company
issued licensing for new retailer in the market. As the performance of individual retailer
was not satisfactory, the company engaged directly in control of distributions.
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Free-‐Riding Potential
Lastly, Transaction Cost Theory suggests that firms should increase control, when the
potential of free riding is high in a market. And Firms with high brand value should
consider high control mode of entry (Anderson & Gatignon, 1986). Yet again, the
business scopes of B&O require small size investments, the company continued pursuing
its expansion strategy. The company has restructured its mode of entry in China and took
control of the distribution. The company changed some of its contract retailing to join
venture with Sparkle Roll in China (B&O Interim Report, 2012/13).
Hence, according TCT a control mode (JV) will assure B&O more quality control on
services and sales activities, the company will also protects is brand, heritage and
reputation in chines market.
Real Option Theory The Fundamental reason for implementing the Real Option theory is to spotlight on the
notions that Transaction Cost Theory doesn’t cover. As we mentioned earlier, TCT
focuses on cost minimization it does not focus on value creation process in foreign
market. However, ROT can identify both the cost minimization (minimum resource
commitment, to minimize the down side risk exposure) and value creation the notion of
strategic flexibility (maximize commitment) (Li, 2007).
According to Hewlett-‐Packard (HP) Press Release (2015), HP computer producer and
Bang & Olufsen announced a strategic agreement. B&O and B&O Play will integrate its
recognized sound to HP’s PCs, Tablets and other accessories. In today’s world, sound
plays an important role in everyday life when costumers want to watch movie, hear
music or talk with friends via social media platforms. HP expects through this strategic
agreement Bang and Olufsen will create exceptional sound experience for their
customers. As well as, the strategic agreement will integrate tune on each PC, desktop,
notebook, and tablet for accurate sound. Other HP devices that carry B&O Play brand will
have a dedicated audio spot on the sensitive audio circuits on the motherboard. The new
integrated sound experience in headphones also jack limits the extent of metal parts to
decreases ground noise to help even perfect the audio experience on HP devices. HP
costumer expect to have the facility to adjust their audio for movies, music and vice, HP
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products will have a control panel, which allow costumers to enhance the audio
experience based on the integrated tune by HP and B&O. The costumers will also have
the ability to preset or normally tune the sound to their whish. The first HP product with
integrated B&O sound will be available in the market as of spring 2015 and B&O core
brand integrated sound system will be available in HP product at the end of this year
(DierkesHP, 2015).
According to ROT B&O have the option to switch across subsidiaries within multinational
network if there is high exchange rate volatility. B&O is operating in B2B business, where
the company provides acoustic solutions to the automotive industry. B&O will also have
the option learn, the option to learn will increase the knowledge curve in the B2B
business.
In addition, Bang and Olufsen has established an agreement with 24 third party stores
across Europe and China. These stores will only be dealing with B&O Play brand. The
company also made an agreement with Hengzhunixun (Beijing) Co. Ltd. and a joint
venture with Sparkle Roll and Mr. Qi Jianhong (B&O Intrim Reports, 2012/13).
As Williamson (1991) argued in theoretical approach, that the key variable in TCT
framework is asset specificity, contains transaction specific knowledge that needs to be
protected in foreign market from competitors. Often market entry modes offer weak
control over assets (Williamson O. , 1991). B&O business scope does not require high
asset specific knowledge at time of entry, its distribution strategy takes place via retailer
at the foreign market. Nevertheless, due to sales decline in some market and in order to
aline distribution strategy according to ‘Leaner Faster Stronger’ the company established
new agreements with partner in China to maintain more control oversea (Bang and
Olufsen AR, 2012/13). ROT suggests, that firms in an option mode (JV) have the option to
grow in the future, if possibility and potential exists in the foreign market. That means
that B&O has the option to acquire its associated partners if the market is promising.
Likewise, has the option to abandon or withdraw if the chines market become not
favorable, this option also gives B&O high value in China if the country risk (Political risk,
huge market volatility) is high.
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Demand Uncertainty
Rearl Option Theory argues that if the foreign market environment demand uncertainty
is high, firms may need to minimize the commitment or have the option delay the
investment. However, they have the upside advantage if the demand uncertainty is low
(D. Brouthers, Brouthers, & Werner, 2008).
Until 2008 all B&O sales took place via two dedicated shops, B1 shops that only deals
with B&O products and Shop-‐in-‐shop concept, which primarily is a dedicated area for
exclusive B&O products in big stores. Distribution was through exclusive retailers and
owned retailer chains, in the same year number of B1 shops peaked to 822 stores and
Shop-‐in-‐shops to 421 stores across the globe (B&O,AR, 2008/09).
The main concept of B&O Shop-‐in-‐Shops was in areas where the demographic does not
meet the requirement. As part of Pole Position and optimization of retailer network, the
company started reducing number of B1 shops in regions where the demand uncertainty
is high, and sales do not meet expectations. As ROT suggested if the demand uncertainty
is high, firms should withdraw foreign market. B&O decided to withdraw from the
markets where demand does not meet expectations. Rather, will focus on emerging
markets. Despite reduction of B1 shops in not promising markets, the company increased
the number of B1 ships in Ukraine and BRIC countries (B&O,AR, 2008/09). As ROT
recommended, B&O with its current partnership with Sparkle Roll has option to grow if
the demand uncertainty is low or has the option divest if the demand uncertainty is high.
Strategic Flexibility
According to Real Option Theory firms are package of strategic flexibility, essential over
time these flexibility add value to the current entry mode of a firm. Brouthers &
Brouthers (2008) suggested that one of the strategic flexibility measurements could be
firm’s international experience. With high international experience firms have the ability
to move its business from less attractive markets to more attractive markets (D.
Brouthers, Brouthers, & Werner, 2008). Similarly, B&O as part of it is 2011 Strategy
‘Leaner Faster Stronger’ focused in withdrawing the B1 stores from European markets,
and established in most promising markets of the world. The company established and
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will continue establishing B1 shops in markets, which expected future market economic
growth is high. Thus, the emphasis was to expand in BRIC countries (B&O AR, 2009/10).
B&O Ansoff matrix As it has been pointed out in the earlier part of the assignment, the Ansoff growth matrix
is one the widely used management tool which provides a framework to analysis the
present and future growth opportunities to identify, by considering the existing or new
products to the existing or to a new market. The matrix provides four strategic ways of
action the firms needs to consider regarding their products and the markets they are
operation, it consist of market penetration (selling existing products to the existing
markets) market development (selling the existing products into new markets) product
development (developing new products into the existing markets) and diversification
(developing new products to new markets) (Johnson, 2011).
The Ansoff growth matrix is very much related to B&O new strategy (leaner-‐faster-‐
stronger) which was implemented in august 2011 and it consist of the six winning battles
that the company targeted to achieve it in the 5 coming years (B&O AR, 2011/12). If we
categorized the six battles of the B&O strategy based on Ansoff growth matrix, it covers
all t four dimension of the Ansoff matrix.
Market penetration: one of the battles out of the six in the new strategy of B&O in 2011
was that B&O would increase their focus on the existing potential markets in order to
increase their market share. The European and US markets were the biggest markets
that B&O had had their highest share before the crisis and most of the revenue came
from those markets. But after the crisis the company lost their share due to the lower
consumer’s purchasing power and existence of other competitors with lower prices.
Therefore as part of the new strategy they started to eliminated a number B1 shops in
mature European markets, the plan was to close up to 125 in the coming 5 years, during
2012/13 financial year the company terminated about 80 B1 shops in Europe, based on
the above argument, we could argue that B&O did not increase their penetration in the
existing market, although they came up with many new product lines but their main
attention were towards China (Bang and Olufsen AR, 2012/13).
Looking into other dimension of Ansoff matrix, product development (launching new
products in the existing market). B&O has a culture of innovation and design in their
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products development, each year B&O launches different type of their product lines, but
taking into consideration under the new strategy in 2011, B&O accelerate their product
development which was not only in the existing market, but also in new markets.
Therefore after the implementation of the new strategy they came up with the following
new product launches:
2011/2012 financial year B&O launch Beo Vision 10-‐32 offers superior sound and
picture quality. The next launch was Beo sound 8 which turn out to became the fastest
selling product of the year. The product functioned as a speaker dock for IPhones, IPods
and PCs y (B&O AR, 2011/12).
In January 2012 B&O launched their new sub brand B&O play (Beolit 12) that functions
as a portable wireless music system with all apple products. The product was accessible
in all B1 shops worldwide as well as in most apple shops in Europe and US. In February
2012 the company launched another new product the Beo Lab, functioned as wall
mounted loudspeaker adjustable for all type of flat screen TV (B&O AR, 2011/12). Later
at the same year the company launched Beo vision 12 and B&O play A8 which was
recorded as a fast selling product as well.
In 2013/14 financial year the company continued to launch new product, the main
launches were Beo Lab 15/Beo lab 16/amplifier1/Beo pay H3 and H6 (B&O AR,
13/14).it was not only B2C area but also in B2B area, the company continue to increase
their Research and product development, during the 2012/2013 financial year the
company launched new sound system for their B2B partners (Audi, BMW, Aston Martin,
Mercedes Benz). The new sound system had the ability to function as 14 active
loudspeaker generated by B&O ICE power amplifier technology. Which was a unique
designed in automotive industry (Bang and Olufsen AR, 2012/13). The products launch
under the strategy of leaner faster and stronger show a great number of product
innovation , product design and development has taken place , these products was not
designed of the existence consumers but also for the new segments that the company
targeted to reach in BRIC countries (B&O AR, 13/14).
The third dimension of Ansoff matrix is about market development, (selling the existing
product into new markets). One of the other battles out of the six was expansion into
BRIC countries. since B&O`s main target was China they expand into China to a great
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extent by opening new dedicated B1 shops during the five year plane of the new strategy.
The number of all dedicated B1 shop in India and more specifically all the number of
newly opened stores by B&O and Sparkle Roll has been discussed with details in B&O
market selection part. The basic argument here is that B&O has paid a lot of attention in
market development and market expansion in China .By closing many B1 shop in other
markets mainly the European markets (B&O Interim Report, 2012/13).
The last dimension of the Ansoff matrix is about diversification (selling new products
into new markets). as it has been pointed out earlier, the introduction of B&O`s new sub
brand the B&O play was an example of diversification, that the company introduced a
new product in new markets. The main reason behind introducing a new sub brand in
China was to reach more segments and increase their market share (B&O AR, 13/14).
Based on the above argument we can conclude that the six battle that B&O announced
under their new strategy in 2011, covers all the dimension of Ansoff growth matrix in
terms of market penetration, market development, product development and lastly
diversification.
Limitation As, our topic of interest is the internationalization of Bang & Olufsen. However, due to
project limitation constraints and lack of access to primary data, this paper will limit the
analysis of entry mode to BRIC countries more specifically in China, where the case
company increased its business activities after the 2008 financial crises.
Furthermore, we have introduced the internationalization barriers in theoretical
approach. Yet, due to project character constraints and the case company scope of
Business, this paper will limit the internationalization barriers in the analyzing section.
Conclusion The external shock of 2008 financial crisis was one of the catastrophic year for most
firms around the globe specially, firms with high-‐end and luxuries products. As a result
of crisis the consumer purchasing power and their desire to wards buying luxuries
products went down, which leads to lower demand in developed countries especially in
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US and European market. To cope with the crisis most firms chose to enter new potential
and attractive markets, where it was less affected by the crisis to evaluate and assess
effect of a situation like the external shock of 2008 on firms with high-‐end luxuries
products, different theoretical approach has been implemented. The most related
theoretical approach to the crisis of 2008 was the Ansoff 5 level of turbulence model
which encourages firms to internationalize into new attractive markets during high
turbulence environment as a responds towards the changes brought by the turbulence.
As internationalization is a prolong process which involves, the motives why do firms
need to internationalize, is it based on a proactive or reactive motives, creating internal
capabilities to be able to compete into new markets, the choice of markets, evaluating all
external and internal environment of the selected markets, the expansion strategy in the
selected markets, weather to approach it incrementally or simultaneously, to diversify
or concentrate. The entry modes of firms in high-‐Medium and low control modes were all
discussed from the valid theoretical approaches.
In order to examine and evaluate the main problem regarding the external shock of 2008
financial crisis on firm with high-‐end luxuries products the Danish company used as a
case company. B&O the Danish firm who has a history of more than 80 years in
producing high-‐end products in terms of quality and design is one of those firms that
were hit so hard during the financial crisis of 2008. The US and the European markets
were the two main markets of B&O that they had been enjoying for decades in terms of
market share and profitability. As the crisis started from US in early 2008 and gradually
spread to European markets, B&O felt the effect of the crisis already the same year back
home. The level of sales went down dramatically in these markets, which, in return
effects to a great extend to decrease the revenue, net income and share price. The
responds of the company towards the crisis were a defensive strategy which they called
it the pole position strategy. The main highlight of this strategy was to save costs in
products and administration, reduces the number of B1 shops in all mature markets, and
increases their focus on BRIC countries. Although they were not much successful in
increasing their expansion in BRIC countries, due to the intensity of market challenges
brought by the crisis, but they have manage to build up the road towards a new
aggressive strategy of internationalization into BRIC countries.
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The second strategy that they name it the leaner-‐faster –stronger was implementing in
august 2011 consisted of six winning battles that the company targets to achieve in five
coming years. The main highlight of this strategy were to increase focus in BRIC
countries more specifically, they found China a very potential and attractive market for
future growth and profitability. Therefore right after the implementation of the new
strategy in 2011 the company increases the number of dedicated B1 shops in major cities
of China, including Hong Kong, Shanghai and Beijing. In order to further strengthen their
expansion in China, the company signed strategy agreement with local experienced
retails, sparkle Roll was one the strategic partners of B&O who take the responsibility to
open B1 shops in strategic regions of China.
Product developments for the existing and new markets were one of the other important
highlights of the new strategy in 2011 each quarter of the year the company came up
with launching of new products to target new segments. The introduction of a cheaper
product, a new sub-‐brand line the B&O play in China was a major step towards reaching
a lower class younger generation which helped the company to increase not only their
brand awareness but also their market share. Optimization of the distribution, creating
one global platform sale office, increase focus on RD, and automotive partner were the
other main highlight of the strategy which helped the company to a great extend to
increase growth, profitability, and market share. It is worth mentioning that elimination
of dedicated B1 shops in mature markets especially in Europe and US markets help the
company to save cost and resources, which make them able to invest most of these
resources in China.
Based on the key figures of the financial report and yearly statistical data and graphs
(more details available in appendix) it has been proved that, the 2008 financial crisis
were a catastrophic year in history of B&O, the pole position and the leaner-‐faster-‐
stronger strategy was a clever approach to cope with the crisis, out of all other BRIC
counties their strategy of concentration in China was the right choice at the right time for
B&O , although there were and yet to come more challenges in terms of competition ,
since China still remains one of the attractive market for most firms like B&O , more firm
entry would take place , it looks like it would turn out to be a market with many players ,
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in order to survive in such a market B&O needs to focus more in their core competence ,
quality , and design , that is what they are known for and has a competitive advantages
over the other competitors .
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Appendix Figure 1: five years summer of key figures
Soruce : (B&O 2012/13 annual report )
94
Figure 2: number of shops per segment and turnover share per segment in (2008/09)
Source: (B&O 2008/09 annual report ) Figure 2: number of shops per segment and turnover share per segment in (2009/10)
95
Source: (B&O 2009/10 annual report) Figure 3: number of shops per segment and turnover share per segment in (2010/11)
96
Source: (B&O 2010/11 annual report) Figure 4: number of shops per segment and turnover share per segment in (2012/13)
97
Source: (B&O 2012/13 annual report) Figure 5: number of shops per segment and turnover share per segment in (2013/14)
Source: (B&O 2013/14 annual report) Figure 6 : key figures of balance sheet
98
Source: (B&O 2010/11 annual report) Figure 7: revenue margin of the 2011/2012 financial year
99
Source: (B&O 2011/12 annual report) Figure 8: revenue margin of the 2012/2013 financial year
100
Source: (B&O 2012/13 annual report) Figure 9: revenue margin of the 2013/2014 financial year
Source: (B&O 2013/14 annual report) Figure 10: revenue growth by region in B2C 2012/13
101
Source: (B&O 2012/13 annual report) Figure 11: the development in share price during 2011 until 2014
102
Figure 12 : INTERIM REPORT 1st quarter 2013/14 1 June 2013 – 31 August 2013
103
Source :( interim report 1st quarter 2013/2014) Figure 13 : revenue development by region 2013/14
Source :( interim report 2st quarter 2013/2014) Figure 14 : revenue development by region 2013/14
104
Source :( interim report 2st quarter 2013/2014)
![Ansoff Revisited [1]](https://img.dokumen.tips/doc/110x75/577d20e11a28ab4e1e93fbda/ansoff-revisited-1.jpg)
