Timing of Entry

Once attractive markets have been identified, it is important to consider the timing of entry. We say that entry is early when an international business enters a foreign market before other foreign firms and late when it enters after other international businesses have already established themselves. The advantages frequently associated with entering a market early are commonly known as first-mover advantages.² One first-mover advantage is the ability to preempt rivals and capture demand by establishing a strong brand name. A second advantage is the ability to build sales volume in that country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants. This cost advantage may enable the early entrant to cut prices below the higher cost structure of later entrants, thereby driving them out of the market. A third advantage is the ability of early entrants to create switching costs that tie customers into their products or services. Such switching costs make it difficult for later entrants to win business.

By entering the private client market in Japan early, Merrill Lynch hopes to establish a brand name that later entrants will find difficult to match. And, by entering early with a valuable product offering, Merrill Lynch hopes to build its sales volume rapidly. This will enable the company to spread the fixed costs associated with setting up operations in Japan over a large volume, thereby realizing scale economies. These fixed costs include the costs of establishing a network of branches in Japan. In addition, as Merrill Lynch trains its Japanese employees, their productivity should rise due to learning economies, which again translates into lower costs. Thus, the company should be able to ride down the experience curve, giving it a lower cost structure than later entrants. Finally, Merrill Lynch's business philosophy is to establish close relationships between its financial advisors (i.e., stockbrokers) and private clients. The financial advisors are taught to get to know the needs of their clients and help manage their finances more effectively. Once established, people rarely change these relationships. In other words, due to switching costs, they are unlikely to shift their business to later entrants. This effect is likely to be particularly strong in a country like Japan, where long-term relationships have traditionally been very important in business and social settings. For all these reasons, Merrill Lynch may be able to capture first-mover advantages that will enable it to enjoy a strong competitive position in Japan for years.

There can also be disadvantages associated with entering a foreign market before other international businesses. These are often referred to as first-mover disadvantages.³ These disadvantages may give rise to pioneering costs. Pioneering costs are costs that an early entrant has to bear that a later entrant can avoid. Pioneering costs arise when the business system in a foreign country is so different from that in a firm's home market that the enterprise has to devote considerable effort, time, and expense to learning the rules of the game. Pioneering costs include the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes. A certain liability is associated with being a foreigner, and this liability is greater for foreign firms that enter a national market early.⁴ Recent research seems to confirm that the probability of survival increases if an international business enters a national market after several other foreign firms have already done so.⁵ The late entrant may benefit by observing and learning from the mistakes made by early entrants.

Pioneering costs also include the costs of promoting and establishing a product offering, including the costs of educating customers. These costs can be particularly significant when the product being promoted is one that local consumers are not familiar with. In many ways, Merrill Lynch will have to bear such pioneering costs in Japan. Most Japanese are not familiar with the type of investment products and services that Merrill Lynch is selling, so the company will have to invest significant resources in customer education. In contrast, later entrants may be able to ride on an early entrant's investments in learning and customer education by watching how the early entrant proceeded in the market, by avoiding costly mistakes made by the early entrant, and by exploiting the market potential created by the early entrant's investments in customer education. For example, KFC introduced the Chinese to American-style fast food, but it has been a later entrant, McDonald's, that capitalized on the market in China.  An early entrant may be put at a severe disadvantage, relative to a later entrant, if regulations change in a way that diminishes the value of an early entrant's investments. This is a serious risk in many developing nations where the rules that govern business practices are still evolving. Early entrants can find themselves at a disadvantage if a subsequent change in regulations invalidates prior assumptions about the best business model for operating in that country. For an illustration of the potential difficulties and hazards, consider the experience of the Amway Corporation in China, which is described in the accompanying Management Focus.