- Email: [email protected]
International market entry strategies and performance of United States catalog firms
~~~
~
FERNANDO AOBLES
International Market Entry Strategies and Performance of United States Catalog Firms FERNANDO ROBLES teaches international marketing in the School of Business and Public Management at the George Washington University He received his PhD from the Pennsylvania State University His research interests are in rnternational direct marketing and marketing strategies for Latin American markets His articles have appeared in the Journal of International Business Studies. lnrernationa! Marketing Review, Industrial Marketing Management, Journal of Euromarkefing, and The InternationalExecutive He has also made several contributions to chapters in books in the areas of international marketing and industrial marketing Dr Robles is a member of the Board of Trustees of the Business Association of Latin American Studies. and served as president of this organization from 1989- I990
ABSTRACT This article analyzes the international market entry strategies of US. catalog firms. Market entry strategy was conceptualized in terms of market selection (English- or non-English-speaking country) and mode (exporting. licensing, joint ventures, subsidiaries, and retail stores). The results of a sample of 5 7 firms active in international markets found that firms entering a culturally close market (English: speaking) were more likely t o report greater revenues per catalog and overall performance than those that entered non-English-speaking countries. A cluster analysis of several modes reported by the sample of firms revealed four generic modes. These four generic modes ranged from simpfe direct exporting to more complex ones that used subsidiaries and retail stores in international markets. Mode of entry was not related to performance. U.S. catalog firms are using a conservative approach t o international markets by exporting to countries where the level ofuncertaintyis low. Firms using this strategy may benefit from lower costs and greater revenues per catalog.
0 1994 John Wiley ((r Sons, Inc. and Direct Marketing Educational Foundation, Inc CCC 0892-0591/94/01059-l2
JOURNAL OF DIRECT MARKETING
VOLUME 8 NUMBER I WINTER 1994
59
INTRODUCTION
Direct marketing has become a viable and accepted marketing alternative to many firms. According to a recent independent study commissioned by the Direct Marketing Association, this industry generates about $350 billion in revenues (12). Although direct marketing represents a fraction of retail sales, about 10 percent, its rate of growth in recent years has been outstanding. In the 1980s, consumer direct mail sales grew at the annual average rate of 11 percent, and business-to-businessdirect mail at an even higher rate of 16.5 percent. In contrast, the rate of growth for retail sales in the same period was 6.85 percent (21). Industry reports estimate that approximately 8,000 companies market their products and services through catalogs. This group alone has more than doubled their number of catalogs mailed from 5.8 billion in 1980 to 13.4 billion in 1989 (21). With the slowdown of the U.S. economy in the first part of the 1990s and the increasing costs of mailing, the rate of industry growth has tapered off. As a result, response rates and sales per order are diminishing and competition for a mature US.market is increasing. To maintain healthy sales and profit goals, U.S. catalog marketers are looking at international markets. I n comparison to the U.S., international markets are underdeveloped. For instance, Japan, with half of the U.S. population and slightly greater income per family, has one-tenth of the mail order sales, which represents 1 percent of total Japanese retail sales (13). A survey of U.S. catalogers found that 30 percent of the respondents were testing or actively pursuing international markets (5). Several U.S. firms are taking a more proactive approach to international markets. A few examples of recent international ventures by U.S. catalog firms provide evidence of this increasing international activity. Recreational Equipment (REI) and Austad tested the Japanese market with impressive results; 25 percent response rates and average orders three times those of the U.S. ( 3 ) .These results convinced both firms to enter the Japanese market. The Sharper Image and Williams-Sonoma have also entered Europe and Japan through a combined strategyof retail and catalog sales (6). Many companies prefer a direct export strategy,
60 JOURNAL OF DIRECT MARKETING
marketing directly to international customers. Other firms use foreign distributors to prospect, sell, and perform local arrangements including delivery, service, and collections. Others invest in marketing subsidiaries and fulfillment centers in the countries where they sell, such as Eddie Bauer and Day Timers in Canada, Lands’ End in the U.K., and Inmac worldwide (10). Some large firms use joint ventures or acquire local direct market firms. For example, the U.S. Reliable Corporation bought a 50 percent interest in Universal Direct, a British direct marketer of computer supplies ( 1 4 ) . In Japan, joint ventures are prevalent, such as the Otto-Sumisho, a joint venture between Germany’s mail order giant Otto Versand with the Sumitomo Corporation of Japan. Recent entries to the Japanese market have used other alternatives. The L.L. Bean company has signed an agreement with the Japanese joint venture of Matsushita and Seiyu to establish Bean retail outlets in Japan. The Bean company retains the exclusive right to sell by mail in Japan. Another outdoor clothing firm, Patagonia, has opened one retail store in Japan for the purpose of developing a customer database. All of these alternatives seem to have been successful (1). The selection of an international marketing strategy by a U.S. direct marketer encompasses a series of decisions that include the initial market to enter, the mode of entry, the merchandise selection, and fulfillment operations. What is the most appropriate entry strategy for a particular country? What strategy has the highest likelihood of success?These are key questions that need to be answered by those U.S. firms seeking to expand internationally in the future. The purpose of this article is to identify the market selection and entry strategies used by U.S. catalog firms in international markets and to explore their relationship to international performance. The article is organized in four sections. The first section presents a conceptual framework and discussion of market selection and market entry literature. The second section reports the methodology used. The third section discusses the general findings of the market selection and entry modes of a sample of U S . catalog firms, and the association of these two strategic factors o n international performance. The final section provides a general discussion of the research findings and limitations.
VOLUME 8 NUMBER I WINTER 1994
CONCEPTUAL FRAMEWORK
In developing an international framework for market entry strategies for the catalog industry, we borrowed fundamental concepts from the fields of international marketing, with emphasis on the export marketing literature, and from the field of international business theory with emphasis o n international market entry. In reviewing these large bodies of literature we focused on those factors relevant to the case of the catalog industry. Market Selectlon Strategy The first strategic decision that a firm faces is the selection of the first international market. Catalog marketers must select countries that offer the best opportunities for them in terms of market size and growth. Countries with great market opportunities are not necessarily the least risky, or the least competitive, or even the least difficult to penetrate. Japan, for instance, is a very attractive country in terms of market demand, but is a difficult market to penetrate. Strict regulatory restrictions in many countries of Europe make international direct marketing approaches difficult or costly to implement. The literature o n market selection is abundant and productive. Several empirical studies have found that exporters begin with psychologically close countries and extend to psychologically distant ones as they gain experience (16,17,23). Multinational manufacturing firms have also followed the same approach ( 8 ) , as have service firms in the financial sectors (18), and advertising (22). On the other hand, Robert G. Cooper and Elk0 J. Kleinnschmidt ( 8 ) , in their study of Canadian exporters, concluded that exporters with a global orientation, as opposed to reliance on a nearest neighbor (in this case the U.S.), have a strong positive association with export growth rate but a weak positive association with export sales. The impact of market selection o n performance was analyzed by Tage K. Madsen (19). Madsen, in a review of 17 studies of export performance, concluded that it is initially advisable to choose physically and psychologically culturally close markets. Madsen argued that contradictory results may be caused by the presence of interaction effects with other variables. Based o n the literature reviewed, one would ex-
JOURNAL OF DIRECT MARKETING
pect that U.S. catalogers should have a strong preference to enter English-speaking countries first. Within the catalog industry, the theory is conceptually appropriate for several reasons. First, merchandise selection in catalogs is essential to their success. With the high level of uncertainty about international markets at the entry stage, the assumption that similar countries have a similar preference for a given merchandise mix is reasonably acceptable. Also, there are cost savings in using the same language in domestic and international catalogs as well as in the promotion and fulfillment activities. For cost and risk reasons, there is a c!ear preference of U.S. catalog marketers to concentrate in English-speaking countries such as Canada, Australia, New Zealand, and England. However, some industry experts argue that smaller countries, such as the Scandinavian countries, the Netherlands, Hong Kong, and Singapore, offer the best opportunities because of the ease of maintaining and building accurate databases (2). Others argue that smaller countries seem to yield better response rates than larger ones (7). In summary, there is a lack of consensus in the trade literature on the effectiveness of the strategy to select culturally similar countries. O n e area where consensus does exist, however, is in the criteria used for market selection. Factors such as responsiveness to direct marketing media, good mail and telecommunications systems, local distributors, or partners with knowledge of direct marketing approaches, and sizable segments of customers with cosmopolitan attitudes and substantial buying power, seem to explain the success of international direct marketing. Countries with good direct market potential are those where people are used to buying by mail: countries with strong postal services and countries whose currency is linked to the U.S. dollar. Applying the criteria with no consideration for the uncertainty factor may yield a country selection based purely o n opportunity. Given the lack of international experience in this industry, catalog firms will tend to opt for a conservative approach. Based o n the arguments explained previously, o n e can conclude that U.S. catalogers are more likely to enter English-speaking countries first, and those firms that follow such an approach may exhibit better performance than those that choose other markets. The last part of the argument is based on
VOLUME 8 NUMBER I WfNTER 1994 61
cost efficiencies and affinity of similar markets to the catalog offering. PROPOSITION 1
There will be more firms with better performance among those that enter culturally similarly countries (English-speakingcountries for U.S. catalogers), than of those that enter culturally dissimilar ones (nonEnglish-speaking).
Mode of Entry Strategy The choice of market entry has a long-lasting impact on a firm’s international performance. The market entry decision is extremely critical to international operations because it determines the many contractual relations with suppliers and customers. In the international business literature, the many options are typically classified as exporting (directly or indirectly), contractual (licensing and franchising), and direct investments (joint ventures, wholly owned subsidiaries, and acquisitions) (20). In the catalog industry, experts identify the following alternatives as the most important ways to serve international markets through catalogs (4).
5.
6.
1. Passive Approach: Fill unsolicited interna-
tional orders from domestic fulfillment centers. The communication program is essentially domestic, but there is a spillover effect into international markets that generates demand. The direct marketer is responsible for shipping, collection, and customer services. 2. Active Direct Approach: Direct marketer initiates international communication program to prospect and solicits orders from selected target countries. The direct marketer fills orders from a domestic fulfillment center that ships, collects, and provides customer services. 3. Active Indirect Approach: Direct marketer has an international communication program but fills orders through a third-party fulfillment center. The third-party fulfillment center can also take part in mailing, order taking, and follow-up telemarketing operations. 4. Licensing: Traditional contractual approach in which the direct marketer provides advice and support to a local company in target countries to replicate the system in the domestic market. The franchisee takes the investment and
62
JOURNAL OF DIRECT MARKETING
7.
8.
commercial risks; the franchise carries all the promotion and fulfillment activities. Many U.S. companies, including The Sharper Image, Day Timers, and others use this low-risk entry approach. Joint Venture: An investment in a newly formed or established direct marketing operation in target market countries. Joint venture partners sometimes complement each other’s activities. Some U.S. companies have found access to the Japanese market by joint ventures with Japanese retailers that provide the distribution and customer bases. For example, William-Sonoma has a joint venture with Tokyo Stores and West German Quelle withMatsuzakaya (9). In Europe, German cataloger Otto Versand has a joint venture with Austrian retailer Modenmuller. Cooperative Ventures:Joint effort to share the costs of marketing and distribution to international markets. Catalog Retail Corporation transports and distributes catalogs from participating U.S. companies in 226 Stars and Stripes bookstores in Europe patronized mostly by 750,000 U.S. expatriates. This approach will be extended to the Far East in the future (11). Direct Investment in Fully Controlled Marketing and Distribution Operations Abroad: Direct marketer develops branches and fully controlled subsidiaries abroad. U.S. cataloger Inmac corporation has subsidiaries in about seven countries. The local subsidiaries produce and distribute Inmac’s catalogs. Acquisitions: A direct marketer takes full or majority control of a company based in any of the targeted countries. The direct marketer intends to use the same name and operations of the acquired company. For example, U.S. office supplies cataloger, The Reliable Corporation, bought a 50 percent interest in a U.K. wholesale and distribution group, Universal Direct. With the financial and marketing support of the U S . company, Universal Direct planned in 1990 to expand from its operation limited to England and Wales to the rest of Europe by 1992 (14).
The choice of a given strategy is said to be based on careful consideration of control and cost of re-
VOLUME 8 NUMBER I WINTER 1994
source commitments. As firms strive to improve their international competitive position, they will attempt to increase their presence and control. Greater control may lead to higher returns but risks will also increase in proportion to resource commitment. A firm's optimum choice depends on a careful assessment of control, commitment, risk, and return. Modes of entry vary for each of these factors. Thus, indirect exporting is a low-commitment, low-risk, low-return, and low-control approach, whereas investment in retail stores to complement catalog sales provides more control and may lead to greater returns, but increases the risk (15). Firms may also select different entry methods for different countries as they evaluate the conditions of each market independently. Most of the literature on this subject is based on discussions of the large multinational corporation. Except for a few casual reports in trade journals, there are no empirical studies focusing o n modes of entry for catalog firms. Given the limited experience of catalogers in international markets, options such as joint ventures, acquisitions, or even strategic alliances, may b e limited as well. With few firms outside the U.S. possessing the levels of advanced mail order technology practiced by U.S. firms, the primary motivations to use shared-control alternatives are based mainly on market access and market 'penetration. Greater control of international marketing operations is essential to reduce costs and effectively manage customer contact activities. For instance, catalog companies that enter international markets with retail stores have a great advantage in testing merchandise and gathering customer information from local store traffic. Control is also important in developing and maintaining international customer databases. In the catalog industry, control of the customer database is essential to analyze the response behavior of current customers and determine the effectiveness of future promotions. Thus, o n e could hypothesize that those firms with modes of entry that provide greater presence in international markets may exhibit better performance.
Proposition 2
There will be a greater number of firms with better performance among those that use modes of entry
JOURNAL OF DIRECT MARKETING
that provide greater presence in international markets than among those with less presence. International Catalog Performance
Previous studies of export performance more often than not have analyzed export performance in o n e of three areas of performance: export profitability, export sales, and export growth (19). The concept of performance in the catalog industry is much broader than the sales and profitability dimensions. Madsen (19) quite correctly pointed out that the problem of misspecification of a multidimensional concept may lead to contradictory results. In the catalog industry, firms compare several indicators of catalog performance to track their progress and to adjust their strategy. Performance in catalog operations is measured in terms of operational results and profitability. Typical indicators of performance include: response rates, the number of active customers in the preceding 12 months, sales per order, sales per catalog, profit per catalog, and others. Catalogers track these results to make decisions regarding lists, merchandise, promotions, and other critical factors. In the short term, firms may expect excellent results if the offering is well received. The key aspect in international markets is the ability to sustain good results. Thus, firms with more commitment and resources to build a strong international organization may succeed in the long term, whereas others that d o not invest in customer retention activities may fail. In conclusion, catalog performance, whether domestic or international, is multidimensional. These dimensions include economic, market, and operational criteria. METHOD
The method used in this study was a mail survey of U.S. catalog firms active in international markets.
The Instrument The survey instrument consisted of a cover letter and a questionnaire. The questionnaire consisted of nine sections. The first section obtained information on the type of catalog business. The second section asked the respondent about the international marketing operations and its market entry decisions. Other sections inquired about the char-
VOLUME 8 NUMBER I WINTER 1994 63
acteristics of the firm’s international marketing mix and about catalog performance. The last section asked about the respondent’s profile. The instrument was field-tested with five firms. The independent variables were market selection strategy and mode of entry. Market selection strategy was measured by asking respondents to provide the first three countries initially entered. Their answers were grouped later in a dichotomous scale: Englishspeaking (Canada, U.K., and Australia), and nonEnglish-speaking countries. Additionally, respondents were asked for their top-sales international country markets today. Their top-sale countries were also grouped in the English/non-English dichotomy. Mode of entry was measured by asking respondents to check whether they used one or more of the several market entry alternatives. The dependent variable in this study was the firm’s international market performance. As noted, several dimensions of performance were measured. These were: sales growth, order size, response rates, retention rates, number of 12-month buyers, revenue per catalog, cost per catalog, profit per catalog, project conversion (inquiries that are turned into customers), and an overall measure of performance. We asked for objective and subjective measurements of performance. Given the confidential nature of the information requested, we obtained poor results regarding objective performance measures. Consequently, objective measures of performance were not used in this study. Subjective measures of performance were gathered by a three-point scale ranging from worse (1) to better ( 3 ) where the respondent assessed international performance relative to the domestic (US) catalog on nine dimensions. An advantage of this approach is that it permits the comparison across all firms, independent of their nature of business or type of catalog. The Sample
The universe for the study was defined as U.S. catalog firms that were or have been selling in international markets. I t is difficult to estimate the number of firms in this universe; I developed a sample frame from a variety of sources. The process involved a systematic review of periodicals and mail order directories to identify reports of catalog firms in international markets or the presence of an international marketing department.
64 JOURNAL OF DIRECT MARKETING
The analysis of the sources resulted in a list of 1,070 entries. This became the sample framework. Each firm received a mail questionnaire that included a cover letter, the questionnaires, and a prepaid self-addressed envelope to facilitate the return of completed questionnaires. The incentive to respond was the summary report of the study results. We received a total of 135 responses for an overall response rate of 12.6 percent: of these, 68 were in international markets; the others said that they were considering entering or would do so in the long term. Of the 68 respondents to the long questionnaire, 57 said that they were active in international markets and 11 were not. This report is based on the analysis of the information provided by the 57 active firms. Tables A1 and A2 in the Appendix provide a profile of international catalog firms in the sample. It should be noted that most of the respondents were presidents, vice-presidents or CEOs. The firms in the sample operate in either consumer markets or in both the consumer and business markets in the US. Relatively few (six) operate exclusively in business-to-business markets. The fundamental approach to U.S. markets by most respondents is through joint catalog and retail operations. Half of the firms in the sample operate with a combination or retail/wholesale and catalog operations, but only 17 percent do so in international markets. The types of consumer merchandise included apparel, gifts, sporting goods, and food products. With the exception of financial products and magazines, the sample is similar to the US. industry profile. A report of U S . catalog sales by merchandise shows that the top categories were insurance and financial products, gifts, apparel, magazines, and sporting goods (21). Finally, the sample profile reveals that most respondents have more than 10 years of experience in the catalog business. The mean level of experience in catalog selling was 28.1 years and the median was 19 years. The level of mean international experience was 13.42 years and the median was 10 years. The distribution reveals that 64.9 percent of the firms have 10 or fewer of sales experience in international markets, and 15.8 percent said that they have between 10 and 20 years; 7.4percent have between 20 and 30 years; and 1.8 percent reported more than 40 years of experience.
VOLUME 8 NUMBER I WINTER 1994
RESULTS International Market Selection
Cultural similarity and proximity explain the choice of most respondents. As is reported in Table 1, Canada and the U.K. were mentioned by most firms as the first countries selected for entry; 11.3 percent mentioned Japan as the first country market entered. Other European countries including Germany, Switzerland, Austria, France, and even broad regions such as the European Community and Scandinavia were also mentioned. In the Americas, only one firm mentioned Mexico as its first initial market. Of the total sample, 35 firms selected an Englishspeaking country initially, whereas 18 entered a non-English-speaking country. Four of the firms did not provide information on this variable. In a later section, these groups are used to test Proposition 1. Table 1 also reports on the difference between the percentage of firms indicating a country being the first to enter and the country being the top country today. Canada was a good choice for most
TABLE 1
Country Market Selection Strategy 96 Change (top-first]
First Country to Enter /%)
Top Sales Country Today (96)
Canada
39.6
41.8
+2.2
U.K.
22.6
9.1
-13.5
Japan
11.3
21.8
+ 10.5
Germany
7.5
3.6
-3.9
Switzerland
3.8
18
-2.0
Australia
3.8
7.3
+3.5
EC
3.8
-3.8
Mexico
1.9
-
-1.9
Austria
1.9
1.8
-0. I
France
1.9
3.6
+1.7
Scandinavia South America
1.9
-
-1.9
Country
-
1.8 3.6
Holland
-
Singapore
-
1.8
Italy
Note. N = 57
JOURNAL OF DIRECT MARKETING
1.8
+1.8
+3.6
+ 1.8 + 1.8
catalogers as this country gained a modest percentage relative to the initial country percentage. Japan moved to a second position with an impressive gain in the percentage of firms selecting this country as a top performer. The U.K. did not live u p to the expectations of many catalogers. Other countries that also lost ground in their sales performance were Germany, Switzerland, Mexico, Austria, and the Scandinavian region. On the other hand, Australia and France gained status in importance in terms of sales. Countries and regions that were not initially perceived as good prospects but that performed very well in later sales were Italy, Holland, and the South American region. Mode of Entry
With respect to the mode of entry, Table 2 reports o n the choices made by the firms in our sample. The data reported in Table 2 are multiple responses to the question of entry alternatives used by the firm to date. Given the recent international experience in this industry, it is not surprising that most firms use exports. Of the total sample of 57 firms, 52 (91.2%) said they export directly. Exporting through distributors was mentioned by 18 firms, and exporting with agents by 13 firms. Both direct and indirect exporting was mentioned about two-thirds of the time. Other market entry alternatives are also found in the sample. Subsidiaries, joint ventures with U.S. and non-U.S. firms, licensing, and retail stores were mentioned by respondents. A cluster analysis of the m i d e s of entry used by firms was performed to investigate common strategies in the sample of respondents. A hierarchical cluster analysis procedure using the Ward method was performed using SPSSX. After analyzing the results. a four-cluster solution was selected. The four clusters are identified in Table 3. The first cluster groups 28 firms that use strictly a direct export strategy and no other entry mode. The second cluster includes nine firms that use a combination of direct exports and indirect channels (agents and distributors). Five firms in this group have joint ventures with other catalog firms. The third cluster identifies eight firms that, in addition to the direct and indirect exporting modes, have used licensing agreements and established subsidiaries in international markets. The final cluster groups 12 firms that use a variety of modes. The distinctive characteristic of
VOLUME 8 NUMBER I WINTER 1994 65
TABLE 2 Mode of Entry
International Catalog Performance Table 4 provides the sample’s assessment of the performance of the international catalog relative to the U.S. catalog. The majority of the respondents reported that the international catalog performs worse than the U S . catalog. I t is interesting to note that a group of seven firms reported a better performance. Respondents expressed better international catalog performance on sales growth, order size, and revenue per catalog. In response rates, there appears to be a bimodal distribution. Fifteen respondents indicated that international response rates were worse, and 14 firms said that they were better. The areas where respondents clearly found the international catalog performing worse than the U.S. catalog were the number of preceding 12month buyers, cost per catalog, and profit per catalog. The international catalog was found to perform at a par with the U.S. catalog on retention rates and project conversion. The sample of catalog firms in this study confirms the main reason for the increased interest in international markets among U.S. catalog firms. Revenue per catalog and order size are very attractive in international markets. In addition, international revenue is growing at a faster rate than the domestic market. However, the increased revenue potential does not translate into a better profit potential. Respondents experienced increased international catalog costs due to the increased costs of catalog modification, greater international mailing costs, increased fulfillment costs, and a greater effort to convert international customer inquiries into actual purchases. With respect to the file of 12-month buyers, the domestic customer file was obviously larger than
to International Markets No. of Firms
90Of Firms
% of Responses
52
91.2
46.8
Through distributors
18
31.6
16.2
With agents
13
22.8
11.7
8. I
Mode Direct exports
9
15.8
Joint venture w i t h non-U.S. firms
With subsidiaries
7
12.3
6.3
Licensing
4
7.0
3.6
Joint venture with U.S firms
3
5.3
2.7
W i t h retail stores
3
5.3
2.7
Other
2
3.5
1 .a
this cluster is the use of retail stores. Three firms in this group had retail stores in international markets. The cluster solution reveals strategies that reflect increased levels of presence and commitment to international markets. As firms move from Cluster 1 to Cluster 4 , the use of modes of entry increases. Also, firms in higher clusters exhibit greater degrees of investment in international markets as indicated by the presence of subsidiaries and retail stores. The issue of control is not clearly determined by the cluster solution. Cluster 1 is the only group where the control is not shared with other firms. In the other clusters, catalog firms use modes that shared control (joint ventures, licensing, and distributors), as well as full-controlled alternatives (subsidiaries and retail stores).
TABLE 3
Mode of Entry
Clusters _____
~
28
I 2
9
9
9
4
3
8
8
3
5
2
4
12
8
9
2
Note. N
66
_____
N o of Firms Direct Exports Through Agents Through Distributors Licensing Joint Ventures Subsidiaries Retail Stores
Cluster
=
5
3
8 1
3
57
JOURNAL OF DIRECT MARKETING
VOLUME 8 NUMBER I WINTER 1994
TABLE 4
International Catalog Performance (Percent Distribution of Responses] Dimension
n
Worse Ill
Same
Better
(21
(3)
Mode
Sales growth
34
265
23 5
50
30
Order size
42
143
35 7
50
30
Response rates
40
375
275
35
10
Retention rates
32
375
228
123
20
12month buyers
30
53 3
36 7
10
10
Revenue/catalog
31
32 3
290
38 7
3 0 10
Cost/catalog
35
629
257
114
Profit/catalog
32
406
344
250
10
Project conversion
18
27 8
38 9
33 3
20
Overall
34
44 I
353
206
10
the internationai one, mainly because of many more years working the domestic market. In the long term, however, if firms remain in international markets, this may not b e the case. With billions of customers outside the U.S., assuming that firms are persistent in their international efforts, they should be able to increase the size of recently active customers. The internal reliability of the construct was quite acceptable; Cronbach’s alpha of internal reliability was .80 and .79, adjusted for the 10 items in the scale.
better categories were collapsed into one. Table 5 presents the results. Proposition 1 was supported in 2 of the 10 cases. The calculated chi-square was larger than would be expected by chance alone for revenue per catalog ( p < .lo) and overall performance ( p < . 0 l > .Analysis of these two cases revealed that of firms that selected an English-speaking country first, 16 reported an equal or better performance, whereas only 4 said it was worse. In contrast, 4 of the firms that entered a non-English-speaking country first reported an equal or better performance, and 5 indicated performance was worse. For the overall catalog performance, 16 of the catalog firms in the first group (English-speaking countries) rated performance as equal or better and 7 rated it worse. Among the second group, only 2 rated performance equal or better, whereas 8 rated it worse. The finding that market selection was not associated with any of the other catalog performance dimensions suggests that firms that selected either English-speaking or non-English-speaking countries experienced the same level of response and retention rates and faced the same level of costs and poor profit results.
TABLE 5
Association Between Market $,election and Mode-OF-Entry Clusters with International Catalog Performance: Chi-square Statistics (x’] and Level of Significance (p]
Market Entry Strategies and International Catafog Performance
A bivariate analysis was used first to examine the
association of market selection strategy and the mode of entry strategy o n the relative performance of the international catalog. Given that all of the variables in the analysis were nominal and the sample size small, nonparametric statistics were used to determine whether either market selection or mode of entry was significantly related to catalog performance. Chi-square contingency coefficients were calculated for two-way cross-tabulations of market selection (English-non-English) and for mode of entry (four clusters) with each of the 10 dimensions of relative catalog performance (worse, equal, better). To solve the problem of empty cells in some of the contingency tables, the equal and
JOURNAL OF DIRECT MARKETING
Catalog Performance Dimension
Market Selection {English Speaking vs. Other]
Entry Mode Clusters
x2
P
x2
P
Sales growth
1 .I 2
.28
0.14
.98
Order size
0.03
.84
2.69
.44
Response rates
0.28
.59
1.10
.77
Retention rates
0.32
.56
2.10
.55
12-month buyers
0.02
.88
5.46
.I4 .69
Revenue/ca talog
3.54
.05
1.46
Cost/catalog
0.13
.7 1
6.08
.I0
Profit/ca talog
0.08
.76
2.45
.48
Project conversion
1.63
.20
1.68
-63
Overall
7.19
.a37
9.08
.38
VOLUME 8 NUMBER I WINTER 1994 67
Proposition 2 could not be supported in any of the cases. Results of the bivariate analysis presented in Table 5 show that firms in any of the entry strategy clusters exhibit all levels (worse or better) of international catalog performance. These results suggest that an increased presence or variety o n modes used (as moving from Cluster 1 to Cluster 4 ) does not result in better performance. All levels of international presence are equally successful or unsuccessful. Mode of entry strategy is not a good predictor of relative success on any of the performance dimensions.
Conclusions and Suggestions for Further Research
International activity is a new area for many U.S. catalogers. The potential to enlist firms to venture into international markets depends o n whether the experience of the successful firms can be transferred to others. This study is an attempt to explore which international marketing strategies seem to work better than others. Although many aspects of the international marketing strategy are important, such as the degree of adaptation of the catalog to international markets, this study focused on the impact of market entry strategies on performance. Other important aspects should be the focus of future research. The sample of firms in the study provides a benchmark on the degree of success of U.S. catalog firms in international markets. In terms of performance, most catalogers were very optimistic with respect to sales growth, order size, and revenue per catalog of international catalogs. The majority of respondents reported worse response rates, costs, and profits. Overall, the sample of respondents indicated that the performance of the international catalog was worse than the domestic catalog. The poorer performance could be explained by the high costs of the international catalog despite greater revenues and order size. But success based purely o n shortterm profitability may be shortsighted. Profitability i n the catalog business is built over the long term as firms gain and retain customers over time. With increased international experience, o n e would expect costs to decrease and profitability to improve. However, for those respondents who indicated
68 J O U R N A L OF D I R E C T M A R K E T I N G
a better international catalog performance, their strategies seem to be working successfully. In this study, the focus was on whether market selection and mode of entry explained the relatively greater success of this group. Market selection was found to be significantly related to revenue per catalog and overall performance. Those firms that selected English-speaking countries Canada and the U.K. reported equal or better performance on those dimensions than those that entered non-English speaking countries. The analysis of top country markets showed that Canada and Australia were good choices. With respect to market entry, we found a variety of strategies used concurrently. Cluster analysis identified four generic strategies. The majority of respondents belong to a group that exported directly to the final customer. Direct and personal contact with the final client, which is intrinsic to the catalog industry, provides many benefits. Catalogers can decide quite rapidly which items are selling best in given countries. Quick changes in merchandise and price adjustments to reflect fluctuating currencies are the cataloger’s best competitive factor. Other generic strategies combine many alternatives, such as the use of agents and distributors, licensing agreements, joint ventures, subsidiaries, and retail stores. These generic strategies provide a greater presence in international markets, but they require a higher level of resource commitment. The results of this study suggest that the mode of entry was not associated with either worse or greater performance. Under any mode, US.catalog firms are confronted with high costs of operation and lower profits than the domestic catalog. There are some limitations to the study. Other factors may affect performance such as the type of product, the degree of international experience, or the size of the catalog firm. Given the small sample size, controlling for these variables was not performed. A greater sample size would allow for control of these variables. Also, a greater sample size would have more fully discriminated the results of the contingency tests. In this respect, the results reported here are exploratory. To my knowledge, no previous study has empirically gathered information on international catal-
V O L U M E 8 N U M B E R I W I N T E R 1994
ogers. Although there are case studies reported in the trade literature o n the international experience of U.S. catalog firms, academics have largely neglected to study this industry. This study is a modest contribution to the investigation of this subject o n I an important and fast-growing industry.
APPENDIX TABLE A1
Sample Profile: Type of Business in t h e
US
Type of Cataiog
TABLE A2 Sample Profile: Respondents’ Titles and Experience
Title ~~~
n
%
27
51 9
~~
President, Owner, CEO Vice-President
4
77
VP or Director International
10
I9 3
VP Marketing or Advertising
7
I3 4
Director Sales
2
38
Manager Circulation
1
19
Manager Consumer products
1
missing
5
1.9
-
Degree of Experience in Catalog Buslnets’
No. of Firms
%
Years of Experience
Domestic
International
~~
consumer business to business both missing
30
53 6
6
10.7
20
35.7
1
Type of Merchandise
Type of Catalog
YO
17
16.8
gifts
14
11.9
sporting goods
11
10.9
food
10
0.9
books
8
7.9
housewares
7
6.9
home furnishing
6
5.9
hardware
5
5 .O
gardening
3
3 .O
electronics other
3
3 .O
19
18.8
Business Catalog? industrial goods
17.9
computer supplies
7.1
office supplies
7.1
education
7.1
subscription other a
I01 responses by 49 firms 28 responses by 23 firms.
JOURNAL OF DIRECT MARKETING
21.8
64.9
34.5
15.8
20-30
20
30-40
7.2
>40
16.4
Domestic. n = 5 5 .
No. of Responses
Consumer Catalogs” apparel
3.6
57.1
7
1.8
-
international, n = 53
REFERENCES 1. Business International (1992), “Direct Marketers in Japan Find Receptive Consumers but Practical Problems,” International Report (September 141, 291. 2. RusinessMarketing (1988), “ S a y Mailers Tap Foreign Markets,” (September), 55-65. 3. Catalog Age (1989), “RE1 Pulls 25% Response in Japanese Mailing,” (September), 9. 4. CatalogAge (1989), “Breaking into the World of International Cataloging,” (May), 105-107. 5. CatalogAge (19901, “The Catalog Age Report,” (December), 69-101. 6. Catalog Business (1989), “Inmac Develops a Truly Global Business,” (April 11, 20. 7. Circulation Management (1989), “International Lists: Where to Find the Good Ones,” (September), 25-28. 8. Cooper, R. G., and Kleinnschmidt, E. J . (1985), “The Impact of Export Strategy on Export for Sales Performance,”Journal of International Business Studies,(Spring), 37-55. 9. Dateline (19891, “Global View,” (April), 4. 10. Davidson, William H. (1983), “Market Similarityand Market
VOLUME 8 NUMBER I WINTER 1994 69
Selection: Implications for International Marketing Strategy," Jourtial of Business Research, 11, 439-456. 11. Direct (1989), "Catalog Test Targets U.S. Citizens Abroad," (September 20), 1 . 12 Direct Marketing Association (1993), "News and Information," (May 12). 13. DMNews (1989), ''Japan's MO Market to Hit $62-Billion by 1998," (April 151, 50-51. 14. DM News (1990), "Reliable/U.K. Firm Joint Venture Seeks Eventual European Operation," (February 19), 8. 15. DM News (1992), "Land's End to Expand U.K. Presence," (October 5), 1 . 16. J o h n s o n , Jan and Wiedersheim-Paul, Finn (1975), "The Internationalization of the Firm: Four Swedish Case Studies," Journal of Management Studies, 12 (October), 305-322. 17. ___ and Vahlne, Jan-Erik (1977), "The Internationalization Process of the Firm: A Model of Knowledge Development and Increasing Foreign Commitments," Journal of International f3usiness Studies, 8 (Spring/Summer), 23-32.
7 0 JOURNAL OF DIRECT MARKETING
18. Khoury, Sarkis J. (19791, "International Banking: A Special Look at Foreign Banks in the U.S.," journal of International Business Studies, 10 (Winter), 36-52. 19. Madsen, Tage K. (1987), "Empirical Export Performance Studies: A Review of Conceptualizations and Findings," in S . T. Cawsgil, ed., Advances in International Marketing, Greenwich, CT: JAI Press.
20. Root, Franklin R. (1989), Foreign Market Entry Strategies, New York: AMACOM.
21. Sroge, Maxwell (1991), The United Staies Mail Order Industry, Homewood, 1L. Business O n e Irwin. 22. Weinstein, Arnold K. (1977), "Foreign Investments By Service Firms: The case of Multinational Advertising Agencies," journal of lntemational Business Studies, (Spring/Summer), 8391. 23. Wiedersheim-Paul, Finn, Olson, H. C., and Welch, L. S. (1978), "Pre-Export Activity: The First Step in Internationalization," Journal of International Business Studies, 19 (Spring/ Summer), 47-58.
VOLUME 8 NUMBER I WINTER 1994
~
FERNANDO AOBLES
International Market Entry Strategies and Performance of United States Catalog Firms FERNANDO ROBLES teaches international marketing in the School of Business and Public Management at the George Washington University He received his PhD from the Pennsylvania State University His research interests are in rnternational direct marketing and marketing strategies for Latin American markets His articles have appeared in the Journal of International Business Studies. lnrernationa! Marketing Review, Industrial Marketing Management, Journal of Euromarkefing, and The InternationalExecutive He has also made several contributions to chapters in books in the areas of international marketing and industrial marketing Dr Robles is a member of the Board of Trustees of the Business Association of Latin American Studies. and served as president of this organization from 1989- I990
ABSTRACT This article analyzes the international market entry strategies of US. catalog firms. Market entry strategy was conceptualized in terms of market selection (English- or non-English-speaking country) and mode (exporting. licensing, joint ventures, subsidiaries, and retail stores). The results of a sample of 5 7 firms active in international markets found that firms entering a culturally close market (English: speaking) were more likely t o report greater revenues per catalog and overall performance than those that entered non-English-speaking countries. A cluster analysis of several modes reported by the sample of firms revealed four generic modes. These four generic modes ranged from simpfe direct exporting to more complex ones that used subsidiaries and retail stores in international markets. Mode of entry was not related to performance. U.S. catalog firms are using a conservative approach t o international markets by exporting to countries where the level ofuncertaintyis low. Firms using this strategy may benefit from lower costs and greater revenues per catalog.
0 1994 John Wiley ((r Sons, Inc. and Direct Marketing Educational Foundation, Inc CCC 0892-0591/94/01059-l2
JOURNAL OF DIRECT MARKETING
VOLUME 8 NUMBER I WINTER 1994
59
INTRODUCTION
Direct marketing has become a viable and accepted marketing alternative to many firms. According to a recent independent study commissioned by the Direct Marketing Association, this industry generates about $350 billion in revenues (12). Although direct marketing represents a fraction of retail sales, about 10 percent, its rate of growth in recent years has been outstanding. In the 1980s, consumer direct mail sales grew at the annual average rate of 11 percent, and business-to-businessdirect mail at an even higher rate of 16.5 percent. In contrast, the rate of growth for retail sales in the same period was 6.85 percent (21). Industry reports estimate that approximately 8,000 companies market their products and services through catalogs. This group alone has more than doubled their number of catalogs mailed from 5.8 billion in 1980 to 13.4 billion in 1989 (21). With the slowdown of the U.S. economy in the first part of the 1990s and the increasing costs of mailing, the rate of industry growth has tapered off. As a result, response rates and sales per order are diminishing and competition for a mature US.market is increasing. To maintain healthy sales and profit goals, U.S. catalog marketers are looking at international markets. I n comparison to the U.S., international markets are underdeveloped. For instance, Japan, with half of the U.S. population and slightly greater income per family, has one-tenth of the mail order sales, which represents 1 percent of total Japanese retail sales (13). A survey of U.S. catalogers found that 30 percent of the respondents were testing or actively pursuing international markets (5). Several U.S. firms are taking a more proactive approach to international markets. A few examples of recent international ventures by U.S. catalog firms provide evidence of this increasing international activity. Recreational Equipment (REI) and Austad tested the Japanese market with impressive results; 25 percent response rates and average orders three times those of the U.S. ( 3 ) .These results convinced both firms to enter the Japanese market. The Sharper Image and Williams-Sonoma have also entered Europe and Japan through a combined strategyof retail and catalog sales (6). Many companies prefer a direct export strategy,
60 JOURNAL OF DIRECT MARKETING
marketing directly to international customers. Other firms use foreign distributors to prospect, sell, and perform local arrangements including delivery, service, and collections. Others invest in marketing subsidiaries and fulfillment centers in the countries where they sell, such as Eddie Bauer and Day Timers in Canada, Lands’ End in the U.K., and Inmac worldwide (10). Some large firms use joint ventures or acquire local direct market firms. For example, the U.S. Reliable Corporation bought a 50 percent interest in Universal Direct, a British direct marketer of computer supplies ( 1 4 ) . In Japan, joint ventures are prevalent, such as the Otto-Sumisho, a joint venture between Germany’s mail order giant Otto Versand with the Sumitomo Corporation of Japan. Recent entries to the Japanese market have used other alternatives. The L.L. Bean company has signed an agreement with the Japanese joint venture of Matsushita and Seiyu to establish Bean retail outlets in Japan. The Bean company retains the exclusive right to sell by mail in Japan. Another outdoor clothing firm, Patagonia, has opened one retail store in Japan for the purpose of developing a customer database. All of these alternatives seem to have been successful (1). The selection of an international marketing strategy by a U.S. direct marketer encompasses a series of decisions that include the initial market to enter, the mode of entry, the merchandise selection, and fulfillment operations. What is the most appropriate entry strategy for a particular country? What strategy has the highest likelihood of success?These are key questions that need to be answered by those U.S. firms seeking to expand internationally in the future. The purpose of this article is to identify the market selection and entry strategies used by U.S. catalog firms in international markets and to explore their relationship to international performance. The article is organized in four sections. The first section presents a conceptual framework and discussion of market selection and market entry literature. The second section reports the methodology used. The third section discusses the general findings of the market selection and entry modes of a sample of U S . catalog firms, and the association of these two strategic factors o n international performance. The final section provides a general discussion of the research findings and limitations.
VOLUME 8 NUMBER I WINTER 1994
CONCEPTUAL FRAMEWORK
In developing an international framework for market entry strategies for the catalog industry, we borrowed fundamental concepts from the fields of international marketing, with emphasis on the export marketing literature, and from the field of international business theory with emphasis o n international market entry. In reviewing these large bodies of literature we focused on those factors relevant to the case of the catalog industry. Market Selectlon Strategy The first strategic decision that a firm faces is the selection of the first international market. Catalog marketers must select countries that offer the best opportunities for them in terms of market size and growth. Countries with great market opportunities are not necessarily the least risky, or the least competitive, or even the least difficult to penetrate. Japan, for instance, is a very attractive country in terms of market demand, but is a difficult market to penetrate. Strict regulatory restrictions in many countries of Europe make international direct marketing approaches difficult or costly to implement. The literature o n market selection is abundant and productive. Several empirical studies have found that exporters begin with psychologically close countries and extend to psychologically distant ones as they gain experience (16,17,23). Multinational manufacturing firms have also followed the same approach ( 8 ) , as have service firms in the financial sectors (18), and advertising (22). On the other hand, Robert G. Cooper and Elk0 J. Kleinnschmidt ( 8 ) , in their study of Canadian exporters, concluded that exporters with a global orientation, as opposed to reliance on a nearest neighbor (in this case the U.S.), have a strong positive association with export growth rate but a weak positive association with export sales. The impact of market selection o n performance was analyzed by Tage K. Madsen (19). Madsen, in a review of 17 studies of export performance, concluded that it is initially advisable to choose physically and psychologically culturally close markets. Madsen argued that contradictory results may be caused by the presence of interaction effects with other variables. Based o n the literature reviewed, one would ex-
JOURNAL OF DIRECT MARKETING
pect that U.S. catalogers should have a strong preference to enter English-speaking countries first. Within the catalog industry, the theory is conceptually appropriate for several reasons. First, merchandise selection in catalogs is essential to their success. With the high level of uncertainty about international markets at the entry stage, the assumption that similar countries have a similar preference for a given merchandise mix is reasonably acceptable. Also, there are cost savings in using the same language in domestic and international catalogs as well as in the promotion and fulfillment activities. For cost and risk reasons, there is a c!ear preference of U.S. catalog marketers to concentrate in English-speaking countries such as Canada, Australia, New Zealand, and England. However, some industry experts argue that smaller countries, such as the Scandinavian countries, the Netherlands, Hong Kong, and Singapore, offer the best opportunities because of the ease of maintaining and building accurate databases (2). Others argue that smaller countries seem to yield better response rates than larger ones (7). In summary, there is a lack of consensus in the trade literature on the effectiveness of the strategy to select culturally similar countries. O n e area where consensus does exist, however, is in the criteria used for market selection. Factors such as responsiveness to direct marketing media, good mail and telecommunications systems, local distributors, or partners with knowledge of direct marketing approaches, and sizable segments of customers with cosmopolitan attitudes and substantial buying power, seem to explain the success of international direct marketing. Countries with good direct market potential are those where people are used to buying by mail: countries with strong postal services and countries whose currency is linked to the U.S. dollar. Applying the criteria with no consideration for the uncertainty factor may yield a country selection based purely o n opportunity. Given the lack of international experience in this industry, catalog firms will tend to opt for a conservative approach. Based o n the arguments explained previously, o n e can conclude that U.S. catalogers are more likely to enter English-speaking countries first, and those firms that follow such an approach may exhibit better performance than those that choose other markets. The last part of the argument is based on
VOLUME 8 NUMBER I WfNTER 1994 61
cost efficiencies and affinity of similar markets to the catalog offering. PROPOSITION 1
There will be more firms with better performance among those that enter culturally similarly countries (English-speakingcountries for U.S. catalogers), than of those that enter culturally dissimilar ones (nonEnglish-speaking).
Mode of Entry Strategy The choice of market entry has a long-lasting impact on a firm’s international performance. The market entry decision is extremely critical to international operations because it determines the many contractual relations with suppliers and customers. In the international business literature, the many options are typically classified as exporting (directly or indirectly), contractual (licensing and franchising), and direct investments (joint ventures, wholly owned subsidiaries, and acquisitions) (20). In the catalog industry, experts identify the following alternatives as the most important ways to serve international markets through catalogs (4).
5.
6.
1. Passive Approach: Fill unsolicited interna-
tional orders from domestic fulfillment centers. The communication program is essentially domestic, but there is a spillover effect into international markets that generates demand. The direct marketer is responsible for shipping, collection, and customer services. 2. Active Direct Approach: Direct marketer initiates international communication program to prospect and solicits orders from selected target countries. The direct marketer fills orders from a domestic fulfillment center that ships, collects, and provides customer services. 3. Active Indirect Approach: Direct marketer has an international communication program but fills orders through a third-party fulfillment center. The third-party fulfillment center can also take part in mailing, order taking, and follow-up telemarketing operations. 4. Licensing: Traditional contractual approach in which the direct marketer provides advice and support to a local company in target countries to replicate the system in the domestic market. The franchisee takes the investment and
62
JOURNAL OF DIRECT MARKETING
7.
8.
commercial risks; the franchise carries all the promotion and fulfillment activities. Many U.S. companies, including The Sharper Image, Day Timers, and others use this low-risk entry approach. Joint Venture: An investment in a newly formed or established direct marketing operation in target market countries. Joint venture partners sometimes complement each other’s activities. Some U.S. companies have found access to the Japanese market by joint ventures with Japanese retailers that provide the distribution and customer bases. For example, William-Sonoma has a joint venture with Tokyo Stores and West German Quelle withMatsuzakaya (9). In Europe, German cataloger Otto Versand has a joint venture with Austrian retailer Modenmuller. Cooperative Ventures:Joint effort to share the costs of marketing and distribution to international markets. Catalog Retail Corporation transports and distributes catalogs from participating U.S. companies in 226 Stars and Stripes bookstores in Europe patronized mostly by 750,000 U.S. expatriates. This approach will be extended to the Far East in the future (11). Direct Investment in Fully Controlled Marketing and Distribution Operations Abroad: Direct marketer develops branches and fully controlled subsidiaries abroad. U.S. cataloger Inmac corporation has subsidiaries in about seven countries. The local subsidiaries produce and distribute Inmac’s catalogs. Acquisitions: A direct marketer takes full or majority control of a company based in any of the targeted countries. The direct marketer intends to use the same name and operations of the acquired company. For example, U.S. office supplies cataloger, The Reliable Corporation, bought a 50 percent interest in a U.K. wholesale and distribution group, Universal Direct. With the financial and marketing support of the U S . company, Universal Direct planned in 1990 to expand from its operation limited to England and Wales to the rest of Europe by 1992 (14).
The choice of a given strategy is said to be based on careful consideration of control and cost of re-
VOLUME 8 NUMBER I WINTER 1994
source commitments. As firms strive to improve their international competitive position, they will attempt to increase their presence and control. Greater control may lead to higher returns but risks will also increase in proportion to resource commitment. A firm's optimum choice depends on a careful assessment of control, commitment, risk, and return. Modes of entry vary for each of these factors. Thus, indirect exporting is a low-commitment, low-risk, low-return, and low-control approach, whereas investment in retail stores to complement catalog sales provides more control and may lead to greater returns, but increases the risk (15). Firms may also select different entry methods for different countries as they evaluate the conditions of each market independently. Most of the literature on this subject is based on discussions of the large multinational corporation. Except for a few casual reports in trade journals, there are no empirical studies focusing o n modes of entry for catalog firms. Given the limited experience of catalogers in international markets, options such as joint ventures, acquisitions, or even strategic alliances, may b e limited as well. With few firms outside the U.S. possessing the levels of advanced mail order technology practiced by U.S. firms, the primary motivations to use shared-control alternatives are based mainly on market access and market 'penetration. Greater control of international marketing operations is essential to reduce costs and effectively manage customer contact activities. For instance, catalog companies that enter international markets with retail stores have a great advantage in testing merchandise and gathering customer information from local store traffic. Control is also important in developing and maintaining international customer databases. In the catalog industry, control of the customer database is essential to analyze the response behavior of current customers and determine the effectiveness of future promotions. Thus, o n e could hypothesize that those firms with modes of entry that provide greater presence in international markets may exhibit better performance.
Proposition 2
There will be a greater number of firms with better performance among those that use modes of entry
JOURNAL OF DIRECT MARKETING
that provide greater presence in international markets than among those with less presence. International Catalog Performance
Previous studies of export performance more often than not have analyzed export performance in o n e of three areas of performance: export profitability, export sales, and export growth (19). The concept of performance in the catalog industry is much broader than the sales and profitability dimensions. Madsen (19) quite correctly pointed out that the problem of misspecification of a multidimensional concept may lead to contradictory results. In the catalog industry, firms compare several indicators of catalog performance to track their progress and to adjust their strategy. Performance in catalog operations is measured in terms of operational results and profitability. Typical indicators of performance include: response rates, the number of active customers in the preceding 12 months, sales per order, sales per catalog, profit per catalog, and others. Catalogers track these results to make decisions regarding lists, merchandise, promotions, and other critical factors. In the short term, firms may expect excellent results if the offering is well received. The key aspect in international markets is the ability to sustain good results. Thus, firms with more commitment and resources to build a strong international organization may succeed in the long term, whereas others that d o not invest in customer retention activities may fail. In conclusion, catalog performance, whether domestic or international, is multidimensional. These dimensions include economic, market, and operational criteria. METHOD
The method used in this study was a mail survey of U.S. catalog firms active in international markets.
The Instrument The survey instrument consisted of a cover letter and a questionnaire. The questionnaire consisted of nine sections. The first section obtained information on the type of catalog business. The second section asked the respondent about the international marketing operations and its market entry decisions. Other sections inquired about the char-
VOLUME 8 NUMBER I WINTER 1994 63
acteristics of the firm’s international marketing mix and about catalog performance. The last section asked about the respondent’s profile. The instrument was field-tested with five firms. The independent variables were market selection strategy and mode of entry. Market selection strategy was measured by asking respondents to provide the first three countries initially entered. Their answers were grouped later in a dichotomous scale: Englishspeaking (Canada, U.K., and Australia), and nonEnglish-speaking countries. Additionally, respondents were asked for their top-sales international country markets today. Their top-sale countries were also grouped in the English/non-English dichotomy. Mode of entry was measured by asking respondents to check whether they used one or more of the several market entry alternatives. The dependent variable in this study was the firm’s international market performance. As noted, several dimensions of performance were measured. These were: sales growth, order size, response rates, retention rates, number of 12-month buyers, revenue per catalog, cost per catalog, profit per catalog, project conversion (inquiries that are turned into customers), and an overall measure of performance. We asked for objective and subjective measurements of performance. Given the confidential nature of the information requested, we obtained poor results regarding objective performance measures. Consequently, objective measures of performance were not used in this study. Subjective measures of performance were gathered by a three-point scale ranging from worse (1) to better ( 3 ) where the respondent assessed international performance relative to the domestic (US) catalog on nine dimensions. An advantage of this approach is that it permits the comparison across all firms, independent of their nature of business or type of catalog. The Sample
The universe for the study was defined as U.S. catalog firms that were or have been selling in international markets. I t is difficult to estimate the number of firms in this universe; I developed a sample frame from a variety of sources. The process involved a systematic review of periodicals and mail order directories to identify reports of catalog firms in international markets or the presence of an international marketing department.
64 JOURNAL OF DIRECT MARKETING
The analysis of the sources resulted in a list of 1,070 entries. This became the sample framework. Each firm received a mail questionnaire that included a cover letter, the questionnaires, and a prepaid self-addressed envelope to facilitate the return of completed questionnaires. The incentive to respond was the summary report of the study results. We received a total of 135 responses for an overall response rate of 12.6 percent: of these, 68 were in international markets; the others said that they were considering entering or would do so in the long term. Of the 68 respondents to the long questionnaire, 57 said that they were active in international markets and 11 were not. This report is based on the analysis of the information provided by the 57 active firms. Tables A1 and A2 in the Appendix provide a profile of international catalog firms in the sample. It should be noted that most of the respondents were presidents, vice-presidents or CEOs. The firms in the sample operate in either consumer markets or in both the consumer and business markets in the US. Relatively few (six) operate exclusively in business-to-business markets. The fundamental approach to U.S. markets by most respondents is through joint catalog and retail operations. Half of the firms in the sample operate with a combination or retail/wholesale and catalog operations, but only 17 percent do so in international markets. The types of consumer merchandise included apparel, gifts, sporting goods, and food products. With the exception of financial products and magazines, the sample is similar to the US. industry profile. A report of U S . catalog sales by merchandise shows that the top categories were insurance and financial products, gifts, apparel, magazines, and sporting goods (21). Finally, the sample profile reveals that most respondents have more than 10 years of experience in the catalog business. The mean level of experience in catalog selling was 28.1 years and the median was 19 years. The level of mean international experience was 13.42 years and the median was 10 years. The distribution reveals that 64.9 percent of the firms have 10 or fewer of sales experience in international markets, and 15.8 percent said that they have between 10 and 20 years; 7.4percent have between 20 and 30 years; and 1.8 percent reported more than 40 years of experience.
VOLUME 8 NUMBER I WINTER 1994
RESULTS International Market Selection
Cultural similarity and proximity explain the choice of most respondents. As is reported in Table 1, Canada and the U.K. were mentioned by most firms as the first countries selected for entry; 11.3 percent mentioned Japan as the first country market entered. Other European countries including Germany, Switzerland, Austria, France, and even broad regions such as the European Community and Scandinavia were also mentioned. In the Americas, only one firm mentioned Mexico as its first initial market. Of the total sample, 35 firms selected an Englishspeaking country initially, whereas 18 entered a non-English-speaking country. Four of the firms did not provide information on this variable. In a later section, these groups are used to test Proposition 1. Table 1 also reports on the difference between the percentage of firms indicating a country being the first to enter and the country being the top country today. Canada was a good choice for most
TABLE 1
Country Market Selection Strategy 96 Change (top-first]
First Country to Enter /%)
Top Sales Country Today (96)
Canada
39.6
41.8
+2.2
U.K.
22.6
9.1
-13.5
Japan
11.3
21.8
+ 10.5
Germany
7.5
3.6
-3.9
Switzerland
3.8
18
-2.0
Australia
3.8
7.3
+3.5
EC
3.8
-3.8
Mexico
1.9
-
-1.9
Austria
1.9
1.8
-0. I
France
1.9
3.6
+1.7
Scandinavia South America
1.9
-
-1.9
Country
-
1.8 3.6
Holland
-
Singapore
-
1.8
Italy
Note. N = 57
JOURNAL OF DIRECT MARKETING
1.8
+1.8
+3.6
+ 1.8 + 1.8
catalogers as this country gained a modest percentage relative to the initial country percentage. Japan moved to a second position with an impressive gain in the percentage of firms selecting this country as a top performer. The U.K. did not live u p to the expectations of many catalogers. Other countries that also lost ground in their sales performance were Germany, Switzerland, Mexico, Austria, and the Scandinavian region. On the other hand, Australia and France gained status in importance in terms of sales. Countries and regions that were not initially perceived as good prospects but that performed very well in later sales were Italy, Holland, and the South American region. Mode of Entry
With respect to the mode of entry, Table 2 reports o n the choices made by the firms in our sample. The data reported in Table 2 are multiple responses to the question of entry alternatives used by the firm to date. Given the recent international experience in this industry, it is not surprising that most firms use exports. Of the total sample of 57 firms, 52 (91.2%) said they export directly. Exporting through distributors was mentioned by 18 firms, and exporting with agents by 13 firms. Both direct and indirect exporting was mentioned about two-thirds of the time. Other market entry alternatives are also found in the sample. Subsidiaries, joint ventures with U.S. and non-U.S. firms, licensing, and retail stores were mentioned by respondents. A cluster analysis of the m i d e s of entry used by firms was performed to investigate common strategies in the sample of respondents. A hierarchical cluster analysis procedure using the Ward method was performed using SPSSX. After analyzing the results. a four-cluster solution was selected. The four clusters are identified in Table 3. The first cluster groups 28 firms that use strictly a direct export strategy and no other entry mode. The second cluster includes nine firms that use a combination of direct exports and indirect channels (agents and distributors). Five firms in this group have joint ventures with other catalog firms. The third cluster identifies eight firms that, in addition to the direct and indirect exporting modes, have used licensing agreements and established subsidiaries in international markets. The final cluster groups 12 firms that use a variety of modes. The distinctive characteristic of
VOLUME 8 NUMBER I WINTER 1994 65
TABLE 2 Mode of Entry
International Catalog Performance Table 4 provides the sample’s assessment of the performance of the international catalog relative to the U.S. catalog. The majority of the respondents reported that the international catalog performs worse than the U S . catalog. I t is interesting to note that a group of seven firms reported a better performance. Respondents expressed better international catalog performance on sales growth, order size, and revenue per catalog. In response rates, there appears to be a bimodal distribution. Fifteen respondents indicated that international response rates were worse, and 14 firms said that they were better. The areas where respondents clearly found the international catalog performing worse than the U.S. catalog were the number of preceding 12month buyers, cost per catalog, and profit per catalog. The international catalog was found to perform at a par with the U.S. catalog on retention rates and project conversion. The sample of catalog firms in this study confirms the main reason for the increased interest in international markets among U.S. catalog firms. Revenue per catalog and order size are very attractive in international markets. In addition, international revenue is growing at a faster rate than the domestic market. However, the increased revenue potential does not translate into a better profit potential. Respondents experienced increased international catalog costs due to the increased costs of catalog modification, greater international mailing costs, increased fulfillment costs, and a greater effort to convert international customer inquiries into actual purchases. With respect to the file of 12-month buyers, the domestic customer file was obviously larger than
to International Markets No. of Firms
90Of Firms
% of Responses
52
91.2
46.8
Through distributors
18
31.6
16.2
With agents
13
22.8
11.7
8. I
Mode Direct exports
9
15.8
Joint venture w i t h non-U.S. firms
With subsidiaries
7
12.3
6.3
Licensing
4
7.0
3.6
Joint venture with U.S firms
3
5.3
2.7
W i t h retail stores
3
5.3
2.7
Other
2
3.5
1 .a
this cluster is the use of retail stores. Three firms in this group had retail stores in international markets. The cluster solution reveals strategies that reflect increased levels of presence and commitment to international markets. As firms move from Cluster 1 to Cluster 4 , the use of modes of entry increases. Also, firms in higher clusters exhibit greater degrees of investment in international markets as indicated by the presence of subsidiaries and retail stores. The issue of control is not clearly determined by the cluster solution. Cluster 1 is the only group where the control is not shared with other firms. In the other clusters, catalog firms use modes that shared control (joint ventures, licensing, and distributors), as well as full-controlled alternatives (subsidiaries and retail stores).
TABLE 3
Mode of Entry
Clusters _____
~
28
I 2
9
9
9
4
3
8
8
3
5
2
4
12
8
9
2
Note. N
66
_____
N o of Firms Direct Exports Through Agents Through Distributors Licensing Joint Ventures Subsidiaries Retail Stores
Cluster
=
5
3
8 1
3
57
JOURNAL OF DIRECT MARKETING
VOLUME 8 NUMBER I WINTER 1994
TABLE 4
International Catalog Performance (Percent Distribution of Responses] Dimension
n
Worse Ill
Same
Better
(21
(3)
Mode
Sales growth
34
265
23 5
50
30
Order size
42
143
35 7
50
30
Response rates
40
375
275
35
10
Retention rates
32
375
228
123
20
12month buyers
30
53 3
36 7
10
10
Revenue/catalog
31
32 3
290
38 7
3 0 10
Cost/catalog
35
629
257
114
Profit/catalog
32
406
344
250
10
Project conversion
18
27 8
38 9
33 3
20
Overall
34
44 I
353
206
10
the internationai one, mainly because of many more years working the domestic market. In the long term, however, if firms remain in international markets, this may not b e the case. With billions of customers outside the U.S., assuming that firms are persistent in their international efforts, they should be able to increase the size of recently active customers. The internal reliability of the construct was quite acceptable; Cronbach’s alpha of internal reliability was .80 and .79, adjusted for the 10 items in the scale.
better categories were collapsed into one. Table 5 presents the results. Proposition 1 was supported in 2 of the 10 cases. The calculated chi-square was larger than would be expected by chance alone for revenue per catalog ( p < .lo) and overall performance ( p < . 0 l > .Analysis of these two cases revealed that of firms that selected an English-speaking country first, 16 reported an equal or better performance, whereas only 4 said it was worse. In contrast, 4 of the firms that entered a non-English-speaking country first reported an equal or better performance, and 5 indicated performance was worse. For the overall catalog performance, 16 of the catalog firms in the first group (English-speaking countries) rated performance as equal or better and 7 rated it worse. Among the second group, only 2 rated performance equal or better, whereas 8 rated it worse. The finding that market selection was not associated with any of the other catalog performance dimensions suggests that firms that selected either English-speaking or non-English-speaking countries experienced the same level of response and retention rates and faced the same level of costs and poor profit results.
TABLE 5
Association Between Market $,election and Mode-OF-Entry Clusters with International Catalog Performance: Chi-square Statistics (x’] and Level of Significance (p]
Market Entry Strategies and International Catafog Performance
A bivariate analysis was used first to examine the
association of market selection strategy and the mode of entry strategy o n the relative performance of the international catalog. Given that all of the variables in the analysis were nominal and the sample size small, nonparametric statistics were used to determine whether either market selection or mode of entry was significantly related to catalog performance. Chi-square contingency coefficients were calculated for two-way cross-tabulations of market selection (English-non-English) and for mode of entry (four clusters) with each of the 10 dimensions of relative catalog performance (worse, equal, better). To solve the problem of empty cells in some of the contingency tables, the equal and
JOURNAL OF DIRECT MARKETING
Catalog Performance Dimension
Market Selection {English Speaking vs. Other]
Entry Mode Clusters
x2
P
x2
P
Sales growth
1 .I 2
.28
0.14
.98
Order size
0.03
.84
2.69
.44
Response rates
0.28
.59
1.10
.77
Retention rates
0.32
.56
2.10
.55
12-month buyers
0.02
.88
5.46
.I4 .69
Revenue/ca talog
3.54
.05
1.46
Cost/catalog
0.13
.7 1
6.08
.I0
Profit/ca talog
0.08
.76
2.45
.48
Project conversion
1.63
.20
1.68
-63
Overall
7.19
.a37
9.08
.38
VOLUME 8 NUMBER I WINTER 1994 67
Proposition 2 could not be supported in any of the cases. Results of the bivariate analysis presented in Table 5 show that firms in any of the entry strategy clusters exhibit all levels (worse or better) of international catalog performance. These results suggest that an increased presence or variety o n modes used (as moving from Cluster 1 to Cluster 4 ) does not result in better performance. All levels of international presence are equally successful or unsuccessful. Mode of entry strategy is not a good predictor of relative success on any of the performance dimensions.
Conclusions and Suggestions for Further Research
International activity is a new area for many U.S. catalogers. The potential to enlist firms to venture into international markets depends o n whether the experience of the successful firms can be transferred to others. This study is an attempt to explore which international marketing strategies seem to work better than others. Although many aspects of the international marketing strategy are important, such as the degree of adaptation of the catalog to international markets, this study focused on the impact of market entry strategies on performance. Other important aspects should be the focus of future research. The sample of firms in the study provides a benchmark on the degree of success of U.S. catalog firms in international markets. In terms of performance, most catalogers were very optimistic with respect to sales growth, order size, and revenue per catalog of international catalogs. The majority of respondents reported worse response rates, costs, and profits. Overall, the sample of respondents indicated that the performance of the international catalog was worse than the domestic catalog. The poorer performance could be explained by the high costs of the international catalog despite greater revenues and order size. But success based purely o n shortterm profitability may be shortsighted. Profitability i n the catalog business is built over the long term as firms gain and retain customers over time. With increased international experience, o n e would expect costs to decrease and profitability to improve. However, for those respondents who indicated
68 J O U R N A L OF D I R E C T M A R K E T I N G
a better international catalog performance, their strategies seem to be working successfully. In this study, the focus was on whether market selection and mode of entry explained the relatively greater success of this group. Market selection was found to be significantly related to revenue per catalog and overall performance. Those firms that selected English-speaking countries Canada and the U.K. reported equal or better performance on those dimensions than those that entered non-English speaking countries. The analysis of top country markets showed that Canada and Australia were good choices. With respect to market entry, we found a variety of strategies used concurrently. Cluster analysis identified four generic strategies. The majority of respondents belong to a group that exported directly to the final customer. Direct and personal contact with the final client, which is intrinsic to the catalog industry, provides many benefits. Catalogers can decide quite rapidly which items are selling best in given countries. Quick changes in merchandise and price adjustments to reflect fluctuating currencies are the cataloger’s best competitive factor. Other generic strategies combine many alternatives, such as the use of agents and distributors, licensing agreements, joint ventures, subsidiaries, and retail stores. These generic strategies provide a greater presence in international markets, but they require a higher level of resource commitment. The results of this study suggest that the mode of entry was not associated with either worse or greater performance. Under any mode, US.catalog firms are confronted with high costs of operation and lower profits than the domestic catalog. There are some limitations to the study. Other factors may affect performance such as the type of product, the degree of international experience, or the size of the catalog firm. Given the small sample size, controlling for these variables was not performed. A greater sample size would allow for control of these variables. Also, a greater sample size would have more fully discriminated the results of the contingency tests. In this respect, the results reported here are exploratory. To my knowledge, no previous study has empirically gathered information on international catal-
V O L U M E 8 N U M B E R I W I N T E R 1994
ogers. Although there are case studies reported in the trade literature o n the international experience of U.S. catalog firms, academics have largely neglected to study this industry. This study is a modest contribution to the investigation of this subject o n I an important and fast-growing industry.
APPENDIX TABLE A1
Sample Profile: Type of Business in t h e
US
Type of Cataiog
TABLE A2 Sample Profile: Respondents’ Titles and Experience
Title ~~~
n
%
27
51 9
~~
President, Owner, CEO Vice-President
4
77
VP or Director International
10
I9 3
VP Marketing or Advertising
7
I3 4
Director Sales
2
38
Manager Circulation
1
19
Manager Consumer products
1
missing
5
1.9
-
Degree of Experience in Catalog Buslnets’
No. of Firms
%
Years of Experience
Domestic
International
~~
consumer business to business both missing
30
53 6
6
10.7
20
35.7
1
Type of Merchandise
Type of Catalog
YO
17
16.8
gifts
14
11.9
sporting goods
11
10.9
food
10
0.9
books
8
7.9
housewares
7
6.9
home furnishing
6
5.9
hardware
5
5 .O
gardening
3
3 .O
electronics other
3
3 .O
19
18.8
Business Catalog? industrial goods
17.9
computer supplies
7.1
office supplies
7.1
education
7.1
subscription other a
I01 responses by 49 firms 28 responses by 23 firms.
JOURNAL OF DIRECT MARKETING
21.8
64.9
34.5
15.8
20-30
20
30-40
7.2
>40
16.4
Domestic. n = 5 5 .
No. of Responses
Consumer Catalogs” apparel
3.6
57.1
7
1.8
-
international, n = 53
REFERENCES 1. Business International (1992), “Direct Marketers in Japan Find Receptive Consumers but Practical Problems,” International Report (September 141, 291. 2. RusinessMarketing (1988), “ S a y Mailers Tap Foreign Markets,” (September), 55-65. 3. Catalog Age (1989), “RE1 Pulls 25% Response in Japanese Mailing,” (September), 9. 4. CatalogAge (1989), “Breaking into the World of International Cataloging,” (May), 105-107. 5. CatalogAge (19901, “The Catalog Age Report,” (December), 69-101. 6. Catalog Business (1989), “Inmac Develops a Truly Global Business,” (April 11, 20. 7. Circulation Management (1989), “International Lists: Where to Find the Good Ones,” (September), 25-28. 8. Cooper, R. G., and Kleinnschmidt, E. J . (1985), “The Impact of Export Strategy on Export for Sales Performance,”Journal of International Business Studies,(Spring), 37-55. 9. Dateline (19891, “Global View,” (April), 4. 10. Davidson, William H. (1983), “Market Similarityand Market
VOLUME 8 NUMBER I WINTER 1994 69
Selection: Implications for International Marketing Strategy," Jourtial of Business Research, 11, 439-456. 11. Direct (1989), "Catalog Test Targets U.S. Citizens Abroad," (September 20), 1 . 12 Direct Marketing Association (1993), "News and Information," (May 12). 13. DMNews (1989), ''Japan's MO Market to Hit $62-Billion by 1998," (April 151, 50-51. 14. DM News (1990), "Reliable/U.K. Firm Joint Venture Seeks Eventual European Operation," (February 19), 8. 15. DM News (1992), "Land's End to Expand U.K. Presence," (October 5), 1 . 16. J o h n s o n , Jan and Wiedersheim-Paul, Finn (1975), "The Internationalization of the Firm: Four Swedish Case Studies," Journal of Management Studies, 12 (October), 305-322. 17. ___ and Vahlne, Jan-Erik (1977), "The Internationalization Process of the Firm: A Model of Knowledge Development and Increasing Foreign Commitments," Journal of International f3usiness Studies, 8 (Spring/Summer), 23-32.
7 0 JOURNAL OF DIRECT MARKETING
18. Khoury, Sarkis J. (19791, "International Banking: A Special Look at Foreign Banks in the U.S.," journal of International Business Studies, 10 (Winter), 36-52. 19. Madsen, Tage K. (1987), "Empirical Export Performance Studies: A Review of Conceptualizations and Findings," in S . T. Cawsgil, ed., Advances in International Marketing, Greenwich, CT: JAI Press.
20. Root, Franklin R. (1989), Foreign Market Entry Strategies, New York: AMACOM.
21. Sroge, Maxwell (1991), The United Staies Mail Order Industry, Homewood, 1L. Business O n e Irwin. 22. Weinstein, Arnold K. (1977), "Foreign Investments By Service Firms: The case of Multinational Advertising Agencies," journal of lntemational Business Studies, (Spring/Summer), 8391. 23. Wiedersheim-Paul, Finn, Olson, H. C., and Welch, L. S. (1978), "Pre-Export Activity: The First Step in Internationalization," Journal of International Business Studies, 19 (Spring/ Summer), 47-58.
VOLUME 8 NUMBER I WINTER 1994