Internationalization strategies for financial
6.7 Strategy selection and implementation
keep costs low through global integration, and also a need for a high degree of local responsiveness. This approach requires a high degree of global co-ordination and careful management of operations to fully exploit opportunities for increased efficiency, while retaining the flexibility to tailor the service to a given market.
In principle, a transnational strategy creates a strong competitive position, being more locally responsive than a global strategy and of a lower cost than a multi- domestic strategy. There are probably relatively few examples of genuinely transna- tional strategies in services, not least because of the difficulty of delivering both integration and responsiveness. In the service sector more generally, MacDonald’s is sometimes cited as an example of a service-based company moving towards a transnational strategy. It uses supply-chain management systems and global brand- ing to ensure a high degree of integration whilst, within this framework, adjusting the products offered in each country to accommodate the tastes and expectations of domestic consumers. In financial services, given that IT enables a greater degree of remote delivery and facilitates the separation of front- and back-office activities, there may be the potential for some of the providers who are moving towards global strategies to become increasingly transnational.
However, broader macro-influences must also be considered and factored into the market selection decision. Factors such as size of population, levels of income and rate of growth will have important implications for the attractiveness of a market.
One of the reasons why both India and China are attractive to many financial services organizations is that they are large markets and, although income levels are relatively low, economic growth rates are high, suggesting considerable long-term potential.
Economic variables are imperative in determining the attractiveness of a market, but it is equally important to consider the feasibility of operating in a particular market. Infrastructure is one important consideration, encompassing the quality and capacity of communications networks, access to essential supporting services (e.g. market research) and the ability to access suitable premises. Given the impor- tance of people in a service business the availability of appropriate quality staff must be considered, and this may be of particular significance in cases where there is a significant cultural difference between home and target market (a high psychic distance). In financial services, understanding the nature of domestic market regu- lation and its implications for the conduct of business is essential. Finally, of course, it is important to remember that some international markets may be strategically significant and that, irrespective of the other factors, firms need to have a presence in those markets. For banks operating internationally, a presence in the key markets of London, Tokyo and New York will probably be essential quite simply because customers and competitors expect to see them there.
6.7.2 Method of market entry
Methods of market entry are normally divided into three categories: export, contrac- tual and investment. In very simple terms we can think about these forms of market entry as being distinctive in terms of cost and control, with exporting at one extreme seen as offering low cost but low control, and investment being high cost but high control. The choice of entry mode can then be thought of in terms of the extent to which the firm needs to control the marketing and delivery of its products and services to customers, and the extent to which it wishes to control costs. Exporting is often presented as being the first stage in internationalization, because it involves a rela- tively low resource commitment. As firms build up experience they are thought to move on to more complex and high commitment method of market entry, such as a contractual arrangement or direct investment in overseas markets. In practice, of course, the choices are rarely that straightforward, and the nature of financial services does tend to constrain the choice of mode of market entry. A helpful overview that highlights some of the complexities associated with internationalization and methods of market entry is provided by Whitelock (2002).
The methods of market entry are described below:
1. Export. Exporting involves supplying goods from the home country to customers located in international markets. Provider and customer essentially remain at arm’s length. Different regulatory systems and customer preferences for a physi- cal presence make this form of market entry difficult for providers of financial services, although deregulation within the European Union has sought to encour- age increased trade in financial services through a system of mutual recognition.
Moreover, it has been suggested that high levels of information intensity in some financial services, combined with the ability to digitize, have increased the poten- tial for service exports (McLaughlin and Fitzsimmons, 1996). Certainly the global securities business, which relies heavily on digitized information relies on grow- ing volumes of export-style activities with, for example, an investment house in New York dealing with a securities house in Hong Kong who will then provide a service remotely, based around information.
2. Contractual: A contractual entry mode involves some form of partnership arrangement with a domestic provider which typically does not involve any shared ownership. Contractual entry modes are rather more costly than export- ing, but also provide rather more control. The most immediately recognizable forms of contractual entry are franchising and licensing. Both these arrangements grant an overseas firm the right to use some of the knowledge and expertise associated with the firm wishing to internationalize, and, because they draw on local managerial expertise, can be of particular value when there is a need to be sensitive to and adapt to local culture. Licensing arrangements are common in the physical goods sector – a variety of different types of soft drinks and food stuffs available worldwide are manufactured ‘under licence’, i.e. using licensed recipes, manufacturing processes etc. Franchising extends the licensing concept to cover not just the product but also a broader business format. Service businesses such as Hertz, Hilton Hotels and MacDonald’s rely heavily on franchising as a method of market entry, but it is relatively less popular in the financial services sector for internationalization, although it is used in domestic markets for activities such as financial advice and broking.
3. Investment: Investment-based entry describes any type of operation in which a control is established over physical assets in an international market. It is the highest-cost mode of entry and requires considerable commitment, but it also offers the highest level of control over the conduct of business. Investment-based entry may involve wholly new developments (sometimes referred to as green- field developments) or some form of joint venture, strategic alliance or merger/acquisition. Greenfield developments are costly, but allow the organiza- tion to do exactly what it wants. Citibank’s entry to the Japanese market in the 1980s was managed as a wholly new development. Joint ventures and strategic alliances are less flexible, because they entail working with local partners, but they do ensure access to organizations with local knowledge (which can be very important in some markets). In many countries, government regulations require that foreign entrants operate in a joint venture (see Case study 6.1 regarding China), so new market entrants may simply not have a choice. Mergers and acquisitions can be attractive as routes to market, because they provide speedy access to an existing customer base and save the new entrant the difficulty of building up the business from nothing. The acquisition of the British-based Abbey plc by the Spanish Banco Santander is a good example of such an approach. However, there are clear challenges associated with integrating the staff and systems of two or more businesses, and this can make mergers and acquisitions difficult to manage. In general, investment entry modes have been widely used in financial services; there are numerous examples of joint ventures where required by regulations and market conditions, but many of the larger international financial services organizations have reached their position through
a series of mergers and acquisitions. For example, Deutsche Bank became a global bank through the acquisition of Banca d’America e d’Italia in 1986 (Italy), Morgan Grenfell in 1989 (UK), Bankers Trust in 1999 (USA), Scudder Investments in 2002 (USA), Rued Blass & Cie in 2003 (Switzerland) and United Financial Group in 2006 (Russia).
The choice of method of market entry is subject to a variety of influences, includ- ing the nature of the service, the internal resources and capabilities of the firm, the regulatory environment and the host-country environment. This means that it can be difficult to generalize about the best mode of market entry for any given service, but investment modes do appear to be the preferred route to market for most finan- cial services providers – reflecting, perhaps, the importance of a physical presence in the market, regulatory considerations, the value of local knowledge and the need for control over the service itself and the way in which it is delivered.
6.7.3 How to market in international markets
Once a method of market entry has been selected and implemented, the issue of marketing needs to be addressed. Discussions of international marketing have tradi- tionally revolved around the debate between standardization and customization – should an organization operate with the same marketing strategies and tactics across all markets, or should strategy and tactics be tailored to the local market? In basic terms, this can be thought of as directly analogous to the choice between a global strategy (low levels of local responsiveness) and a multi-domestic strategy (high levels of local responsiveness). Although this debate has attracted much atten- tion in academic literature and international marketing textbooks, most academics and practitioners would recognize that some degree of customization is unavoidable and that sensible approaches to international markets will involve standardizing where possible (the brand, advertising messages, logos, use of colour, methods of distribution) and being prepared to customize where necessary (product features, creative presentations, use of language, price). The leading global financial services providers such as Standard Chartered Bank, American Express, HSBC and Citibank all provide examples of how this is done. Some marketing activities are adapted to the specific context, but there remains considerable standardization in terms of the marketing communications, thus ensuring that the brand is recognizable worldwide.