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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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IMS DEFINITIONS AND CLARIFICATIONS

The previous chapters highlighted the complexity of the subject area. Furthermore, methodological difficulties surfaced during the preliminary literature scanning process. Therefore, the following chapters are elaborate and define the basic disparity of a proactively structured approach and a unsystematic approach in international market selection. Also, the selection and segmentation dilemma are illustrated and clarified.

STRATEGIC VS. UNSTRATEGIC

The term strategic or systematic refers to a formal planning structure, which does include not only sophisticated market research but also a strategic analysis of several countries as well as different entry modes. This method often includes a risk assessment and sometimes the development of contingency plans in case of long term commitments such as the establishment of subsidiaries or joint ventures.  Vice versa, a “unsystematic or ad hoc means not doing these things and being generally opportunists“ . The effect of this is that some researchers advocate a proactive, systematic approach to international marketing  also, entry market  , while others represent an opportunistically emerging approach  . The latter is often referred to as advocates of the Uppsala school of internationalization with Johanson and Vahlne (1977) and Melin (1997) as representatives.

IMS - SELECTION VS. SEGMENTATION

According to Papadopoulos and Martín Martín (2011) both "selection and segmentation decisions are, by definition, segmentation judgments in the traditional marketing sense.“  However, the researcher also highlights that the underlying problem lies in the market definition. While market selection refers to a selection of mostly a specific national market , market segmentation either relates to a group of domestic markets or regional markets with particular characteristics being common between the markets.  Here, a group of customers with the same features can be situated in either a single market or also across national borders or regions in several markets. Furthermore, by the use of segmentation, markets can also be categorized based on particular characteristics. The BRICS states can be named as an example of segmentation.  Nevertheless, while some researchers discuss the definition question of IMS in more detail, this research does not participate in this discussion. Segmentation and selection mainly differ from the applied selection criteria, and both selection and segmentation have the same goal – to find a suitable market for market entry. In this regards, this paper uses the acronym IMS for practical reasons with both connotations applied even though focus clearly is on the market selection side.

IMS KEY CONCEPTS

The key concept of international market selection is that the company identifies a potential market based on the selection of relevant criteria or objectives which are evaluated and subsequently compared with alternatives.   The researcher identified macroeconomic, political and cultural characteristics as most prevailing country-specific factors.  Further research stresses market growth and size, sales potential competition, distribution channels and operating costs as most important market-specific factors.  Most evaluations are conducted through a awarding the single indicators a weighting degree and ordering them into a hierarchical order  to point out the most attractive market based on the overall point average.  

Hollensen (2009) states market choice as a key determinant in early stage internalisation with the large impact on the creation of marketing programs. The author also mentions the firms' ability to coordinate business operation in other geographic locations as an essential factor for market selection.  This argument is supported by several researchers, who have pointed out the strategic importance of international market selection within a firm's internationalization process.   Furthermore, a proactive and systematic procedure in market choice can have a positive impact on export performance and strategy , which often is the most influential factor in the market selection process.  This insight is making the export strategy "a critical success factor for both smaller exporters and mature multinational firms".  Research also highlighted the fact, that the amount of market alternatives within the selection process has a positive influence on export growth if alternatives are many and vice versa.  Thus, a systematic international market selection process supports export performance, but wrong export choices do impact export performance negatively.   A result of these poor export choice can be financial burdens, but also decreasing internationalisation willingness.  Furthermore, Kim and Hwang (1992) are mentioning the likelihood of agents, e.g. chamber of commerce, trade fairs, et cetera, and governmental initiatives, e.g. tax reductions, free trade zone, et cetera, to trigger market selection.   

CONCEPTS

Andersen and Buvik suggested 2002, besides the two traditional selection approaches - the systematic and non-systematic approach - a third approach based on relationship.

(1) According to the researcher, the systematic approach consists of six steps. (a) Problem definition (b) Identify the choice criteria (c) weighing the criteria (d) Generate the alternatives (analyse the markets/ countries (e) Rate each alternative on each criterion (f) Compute the optimal decision.  Moreover, the target market selection and related analysis are primary done firm internal based on secondary data such as country and market indicators with the help of statistical methods.  Furthermore, the problem is treated discrete and rational as an isolated problem.

(2) Nevertheless, Andersen and Buvik (2002) also highlight that firms often don't realize all steps and "studies have concluded that firms do not adopt a systematic approach".  The non-systematic approach, on the other hand, treats international market selection more functional and often involves the perceived psychic distance in a rather subjective manner. Therefore, most decisions are based on management feeling and management expertise.  However, it is also to mention, that some firms do not hold the necessary internal information processing capabilities  moreover,/ or only act reactive and opportunistic.

(3) On the contrary does Andersen and Buvik (2002) relationship approach put emphasis on the selection of the business partner – can also be the end customer – which ideally is involved in further business processes. Here, common goal perception, existing business networks and trust in the partner are essential for a good collaboration and high performance.  Bradley (1995) mentions in this context; that market entry can be a result of increasing business interactions with a buyer who has an interest in deepening the relationship. Farrell et al. (1998) state, that many market selections are reactive in a sense that the selecting company follows clients into another market to support their customers' business operation.  This perception is widely observed within the manufacturing industry, especially the car producing industry.   However, researchers also point out that some firms enter markets to observe the competition and to gain merely market share even if the operation hold no profitability.

SIZE

Early internationalization research by Aharoni (1966) proved an “ad hoc nature“ of small and medium-sized companies in the internationalization process.  Johanson and Vahlne (1977) also highlight the differences in market selection between small and medium enterprise in comparison to large-scale enterprises.  This research can be seen, as highly influential for the development of the Uppsala Internationalization Model.  However, other researchers also highlighted the need for resource capabilities and commitment in which especially small and medium enterprises sometimes lack in financial and management capabilities.  Hence, the selection tool and process must be consistent with the company's distinctive resource capabilities to achieve optimal results.  Respectively, some researcher argues that financial, marginal and resource limitations of smaller firms have an adverse impact on the overall performance in regards to challenges posed by international competition.  Moreover small and medium-sized companies tend to enter the market with a low psychic distance.  Concluding, a larger firm with fewer constraints has advantages as more resources can be employed. In addition to this are product and service modification more widely realized by multinationals organisations, but also increasingly by small and medium-sized enterprises.  Furthermore, intuition and pragmatism can also be pointed out as main drivers for entry market choice in small and medium-scale enterprises.   

GEOGRAPHIC AND PSYCHIC DISTANCE

Psychic distance is the most significant determinant in international market selection  moreover, the most relevant factor within the internationalisation process  , before the firm's individual resources and capabilities.  Cultural distance is even mentioned as a ‘‘rule of thumb'' method.  Thereby, psychic distance refers to differences between countries/ markets. These differences mainly rely on factors such as language, culture, political systems, education and level of industrialization.  These findings are in line with the Uppsala model of internationalization which states that firms enter new markets with successively greater psychic distance based on their international experience.  The researchers Johanson and Wiedersheim-Paul (1975) and Johanson and Vahlne (1977) from the University of Uppsala suggest sequential internationalisation steps from sporadic export towards more international commitment in the form of foreign production or manufacturing.  

Hence, the organisation would have the ability to learn and expand internationalization through increasing market commitment by growing market activities and more market knowledge.  Further research state, that business factors, chance and psychic distance are the most dominant market selection factors.  Papadopoulos and Jansen (1993) add to this, that even though past studies have often been based on small and medium-sized firms, recent research with a focus on larger corporation barred similar results.  Papadopolous and Denis (1988) state, that a negative connotation of psychic distance is the market choice based on geographic and cultural proximity due to easier information access and analysis. This argument is supported by Langhoff (1996) who implies that easier countries are targeted first.  However, this also can also lead to neglecting alternative markets.  More challenging countries with a higher psychic distance, cultural distance or geographical distance are taken into consideration at a later stage.   This awareness means the effects of psychic distance become less significant as firms become more international in their activities.  Besides, studies also show the importance of information and management proximity to a potential target market.  Brewer (2001) points out "overseas representatives, enquiries from potential buyers, visits to markets, following existing customers and knowledge provided by allies“ as most important information factors for market selection while mentioning quantitative models and government programs as least important factors.

However, even though the concept of physic distance is widely accepted, criticism of the theory does exist. Langhoff (1996) describes the concept as “poorly defined and measured”, considering that the study is based on Scandinavian corporations, one can assume, that “firms handle cultural differences in different ways”.   O'Grady and Lane (1996) claim that the concept of psychic distance is more complex as presented by Johanson and Wiedersheim-Paul (1975).  In addition to this, Ghemawat (2001) argues, that related risks and costs are often neglected. Furthermore, he stresses, that the term ‘distance' must not only be seen in a geographic way but more importantly also in a culturally.   Nevertheless, Andersen (1997) points out that most firms consolidate their market position by a stage model through business development and higher market commitment which supports the Uppsala school.

It becomes clear that market selection is dependent on a variety of other determinants, mainly based on the firm's characteristics and the environment it operates in. While researchers have been comparing and developing different approaches for market selection, a series of market selection tools have already been widely used and approved for practical usage. The following part provides an introduction to market selection criteria and describes the selection criteria for use.

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