UNDERSTANDING INTERNATIONAL BUSINESS (APPLE INC.)

The paper uses the eclectic paradigm and OLI framework to examine the company Apple’s internationalization. The paper conducts in-depth market analysis and proposes appropriate entry modes for India and Iran. These two foreign markets have completely different markets. Using the OLI framework the paper estimates the potential of each market. In the case of India, where all three advantages of the OLI framework are present, Foreign Direct Investment is recommended as an entry mode. Iran, on the other hand, is recovering the economy therefore FDI is not a good choice for it. The paper recommends export-based entry mode for Iran instead. Examination of countries, the selected model and recommended entry modes are supported by research. The rationale behind each choice is properly explained in the context of the resources and capabilities of Apple and the potentials of both markets.

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2 Introduction

Globalization is one of the most important steps taken by humanity. It has changed the dynamics of the world at every level in almost every context. Beyond the social and political implications of globalization, the economic themes introduced by this step have changed the way businesses operate. Before globalization, businesses were geographically locked and mostly operated within one border. These borders dissolved in the wake of globalization. Every growing company reaches a point of saturation in the country of its origin and, to facilitate more growth, the company is expected to reach out to new markets and open up new possibilities for its business. But entering a new market is not as easy as it seems because there are several factors of internationalization involved in this. It would not be wrong to say that entering a foreign market is more difficult than starting a new business. When a new business is started, many of the factors involved in the working of the business are known including government policies, market situations and customer behaviors but all of these factors are unknown in foreign markets.

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Within a growing international business context, large organizations are formed which conduct their business in different countries and generate profits through their massive infrastructure. These Global Multinational Enterprises (MNEs) strategically approach each market to deploy a business model that can effectively penetrate the market and serve as MNEs’ hub for future business in that market. There is a diverse scholarship produced on the matter of entering foreign markets. Utilizing some shared and unique factors, each line of scholarship proposes a unique model that companies can use to evaluate target markets and to select appropriate entry mode. Each model approaches the matter of entering a foreign market from a unique angle and focuses on general and particular factors. The company chosen for this paper is Apple Inc. The paper aims to provide a strategic analysis of two foreign markets for this company. Furthermore, the paper will suggest one entry mode for each market supported by the analysis. The paper selects an eclectic model to approach these markets and utilize this model to appraise each country for its value to Apple and how Apple can best exploit this value.

2.1 Company Analysis

Apple Inc. is an American based multinational company that deals in information and communication technology. The company has brand recognition that surpasses any other company in the technology business. Its product portfolio not only represents one of the most technologically sound devices but they also come with software which are renowned for their creative potential and productivity. The company generated revenue of $233 billion in 2015 with net income of $53 billion (Apple Inc., 2015).Apple is the world’s largest information technology company and became the second-largest mobile phone manufacturer after it entered the mobile phone market. Its flagship products include the iPhone, iMac, iPad and iPod. The company also owns the iTunes and iOS App Store which serve as online stores for the company. Furthermore, iLife and iWork productivity suits are used by companies and artists around the globe (Apple Inc., 2015).

Apple Inc. originated in America and its major presence is centered in this country. In last few decades, the company reached out to international markets and now has retail stores in several countries (Kane and Rohwedder, 2010). Furthermore, the company’s products are sold, through mobile retailers, resellers and distributors in other countries too. Now, 58% of its revenue comes from the international market (Kane and Rohwedder, 2010). Its major competitors include Microsoft, Google, and Samsung. Each competitor competes with Apple in one or more than one product types. Microsoft competes with Apple in the operating system. Google competes with Apple in mobile platform technology and Samsung offers stiff competition in mobile phone technology. To balance the terms of this multi-dimensional competition, Apple is forced to expand into foreign markets to increase the customers it can directly sell its products to (Kane and Rohwedder, 2010). With every new product line-up, Apple Inc. is entering new markets but this entry is informal and indirect because the company has no presence in these countries and just exporting its products to local retailers.

2.2 Foreign Market Analysis

Recently, Apple entered India, China, and Monaco with its iPhone 6 product (Dulaney, 2014). Within these markets, Apple failed to penetrate India. Its entry into the Chinese market was a successful expansion and China is now its second-largest market (Dulaney, 2014). The failure in India is attributed to the pricing strategy of Apple (Gilbert, 2016). Apple’s manufacturing is largely based in China which enables the company to offer products in the country at a lower price thus making them affordable. Compared to that, Apple exports its product to India and has no Apple Store in the country which increases the price of the product. Because of this, Apple flagship products continue to generate disappointing sales in India. Because of this reason, Apple should reconsider its entry mode in India. Recently, rumors surfaced about Apple planning to open its first retail store in India but even if these rumors are true, Apple needs to do far more than this to enter the Indian market properly. Another thing that Apple should consider is the strong level of competition it will face in India (Mody, 2016). To counter this, Apple must deploy its business in full force.

Iran is also a possible market for Apple’s products. Previously, Iran was under trade sanctions due to its nuclear program but these sanctions are being lifted after Iran signed a deal with America. Now Iran is becoming another possible market where Apple can expand to (Faucon, 2014). Iran remained a closed market since the beginning of 21^st century and no international company could enter it because of the sanctions imposed by the international community. These sanctions, for the most part, are now gone and Iran is now an open market. As discussed before, Apple does not directly sell its product in most markets. Instead, the company exports and use distributors, retailers, and resellers to sell its product. It is simple business model to reach small markets. This entry mode makes natural sense for a market like Iran. Analysts are categorizing the Iranian market positively in terms of future growth (Clawson, 2015) but things are still bleak right now therefore a safe export/distribution model makes sense for this country. Currently, Apple is in the planning stage to develop networks of authorized resellers in the country for a limited product portfolio (Allen, 2014).

As seen from company and market analysis, the choice of entry mode is very important for Apple to not only reach a market like Iran but to also reconsider the approach taken in India. The following analysis of entry modes under the eclectic model would provide Apple with penetrative entry strategies. Each strategy would be based on the parameters of eclectic paradigm and the paper will justify the choice of entry mode in each case against the special context of Apple Inc. and the country chosen. The paper will use eclectic paradigm to evaluate markets with special reference to company and its product, and suggest entry strategies for successful penetration. Before moving on to entry modes for Apple Inc. in India and Iran, it would be better to develop an understanding of the eclectic paradigm to improve the theoretical context of further activities.

3 Eclectic Paradigm

After the major economies in the West reached a point of saturation in terms of traditional goods at the end of the 20^th century, the large businesses in these economies branched out to developing economies in the rest of the world (Stock and Watson, 2005, 968). This gave the international business a boost that took it to new heights. Amidst this developing globalization of business, markets around the world became accessible to international companies. Each country developed its market to improve the performance of domestic companies and to attract international companies (Christmann and Taylor, 2001). But the accessibility of each market remains a problem for international companies because each market is unique in terms of regulations, capabilities, market size, sociocultural factors, and infrastructure. Different models were developed to analyze markets and to recommend appropriate entry mode. The eclectic paradigm, proposed by John Dunning is one example of such models.

The transaction cost theory evolved into internationalization theory and from there, it evolved into an eclectic paradigm which is also known as OLI-Framework (Dunning, 2001, 174-5). The OLI paradigm uses O (ownership advantages), L (location advantages) and I (internalization advantages) to assess countries and recommend entry modes (Dunning, 2001, 176). The entry modes included in the theory are Export, Licensing, and Foreign Direct Investment. Each entry mode and advantage is actually a tool of analysis through which a company can estimate the business opportunity in the foreign markets against a company’s resources and capabilities. The potential of business opportunity and the advantages the company would enjoy is determined against each entry mode (Dunning, 1988, 11). The paper will use the OLI framework on both countries selected earlier and provide the most beneficial entry mode for each country concerning Apple’s international expansion into foreign markets.

4 First Entry Mode

The first entry mode recommended by the paper is FDI for Apple’s expansion in the Indian market. Foreign Direct Investment is the most comprehensive entry mode recommended by the eclectic paradigm to maximize the advantages. FDI is recommended as an entry mode when the target market has the potential to become a highly profitable market for the company and when the target market offers all three advantages of the OLI framework (Cantwell and Narula, 2001, 158-160). FDI is used to develop market, efficiency and strategic assets. To recommend FDI as an entry mode, these three developments must be justified and their benefits should be clearly outlined (Kang and Jiang, 2012, 46-7). Through FDI, the company owns operational control in the foreign market and develops physical presence in the country to oversee the business. MNCs develop regional headquarters or separate offices in their most important foreign markets because they want to give these markets separate and undivided attention. In the initial introduction of Apple’s previous entry failure in India, FDI makes sense. Furthermore, considering that India is one of the largest markets in the world and its growth rate is exceptionally fast, FDI is the best way to penetrate this market.

4.1 Advantages and Disadvantages of FDI

As discussed before, FDI maximizes the advantages detailed in the OLI framework. It is argued that the market size and labor cost of the host country are two factors that justify FDI as an entry mode (Janicki and Wunnava, 2004, 507-8). If both of these factors are present then companies can expect a quick return on their investment and get access to a huge customer base. Considering that FDI has been selected as an entry mode for the Indian market, both market size and labor cost is in favor of FDI. Apple can develop manufacturing and retail network in India through FDI. Such development can give the company a strong base in the country and it can use this local development to bring the prices of its products. Furthermore, if conditions of market size and labor costs are already met then it means that manufacturing cost would be lowered too. Lower manufacturing cost allows more strategic pricing options for international companies (Lipsey, 2001). This is the Internalization advantage that India can offer Apple if Apple chooses FDI entry mode for this market.

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In the context of Apple, FDI would also allow the development of the retail network in the country which would end Apple’s dependence on distributors. Combined with manufacturing, the retail network would offer Apple both ownership and location advantages. The reason why governments make their markets more investment-friendly and why MNEs choose FDI for important markets can be observed in terms of maximization of business activity, access to the fresh customer base and a strong possibility for generating huge profits. Taking another entry mode would mean compromising on many of the benefits that FDI offers and it would also mean limiting the overall potential of expansion into a foreign market. One of the most important advantages of FDI is also realized if the selected foreign market has a well-developed infrastructure. A well-developed infrastructure ensures a positive return for a company if the company has appropriate resources and capabilities.

There are several disadvantages associated with FDI too. First of all, the government of developing countries can change their market policies relatively faster which means that a company investing in the market cannot trust the future of that market. Secondly, the foreign market is not only an economic entity but also a socio-cultural entity. These sociocultural factors are one of the many additional things that companies entering in foreign market must deal with. Thirdly, political stability and absence of violence are factors that can also affect the outcome of FDI (Cuervo-Cazurra and Genc, 2008, 964). In developing countries, the political landscape is somewhat unpredictable and can result in a disturbance in the market which can, directly and indirectly, affect the outcome of FDI. Fourthly, corruption is also another problem that MNEs must deal with in foreign markets, especially in the markets of developing countries. Corruption can easily increase the initially estimated investment and reduce the initially expected profits (Cuervo-Cazurra and Genc, 2008, 966). Most of these factors are present in the Indian market which makes FDI an unsafe option for Apple.

4.2 Reason for Selecting FDI

Despite these disadvantages, FDI is selected because it is still the only way for Apple to maximize the profits from the Indian market. Currently, Apple is suffering in the Indian market because it is taking the export/distributor entry mode (Blodget, 2012). If Apple wants to turn this situation around and develop a strong presence in one of the largest economies of the world then it must take the FDI entry mode for this market. The analysis shows that in the Indian market, Apple can maximize the ownership, location and internalization advantages. Few markets offer these three advantages together therefore Apple would be wrong to take any other approach. The Indian government requires companies to manufacture their products locally and, to facilitate that, they offer extremely liberal markets with very low production and labor costs. This scenario is almost exactly the same as the one Apple encountered in China where it shifted its manufacturing. The same response can be given to the Indian market because, with low production and labor costs, Apple can easily develop another manufacturing base here to supply both local and international markets.

The eclectic model recommends FDI when the possibility of reaping the benefits from all three advantages is possible. Furthermore, the failure of Apple’s current approach also shows that without operational control of its business and assets, Apple cannot succeed in this market. Within the context of the market, failure of current entry mode and the maximization offered by the selected entry mode, Apple should seriously reconsider its strategy in India. The similarities between Indian and Chinese markets also support the selection of FDI. Apple is focusing too much on the Indian government’s policy for producing locally when it can be easily remedied through the installation of a manufacturing hub in India. Considering the size of the Indian market and the potential of this market, Apple should go with FDI entry mode. China is now Apple’s second-largest market and India has the same potential, therefore, wasting time with the wrong approach not only delays Apple’s right entry into this market but it is also strengthening the competitors who are already performing better than Apple in this market.

As discussed in country profiling, the competition in India is very strong in the mobile phone market. Furthermore, the majority of the population owns traditional mobile phones and is not using smartphones. The small smartphone market is already dominated by other companies therefore Apple needs to enter this market in full force to develop a strong presence. Manufacturing hubs, retail store networks, and aggressive marketing would not only help Apple to compete within this market but it would also increase the adoption rate of smartphone technology. Apple must understand that it cannot just enter the market and start a business from day one. Apple must consider India as a market that needs market-making strategies.

5 Second Entry Mode

For the Iranian market, the paper recommends the export entry mode. This is the same entry mode that Apple is currently using in most of the foreign markets it is selling its products in. In the export entry mode, the producer sends the goods to another country where they are sold to the local market by the importer (Anwar and Nguyen, 2011, 178). Exports are used when regulations make a market too difficult to access through FDI or when the product demand is low (Rasheed, 2005). Export is also a good choice when companies are looking to sell their finished products. It is easier to leave the distribution of the product to local players instead of developing a whole network from scratch. Developing manufacturing hubs in foreign markets is an investment intensive proposal and it is only considered when the returns on this investment are too high. When the returns on investment are too low then it is better to utilize manufacturing hubs already present and exporting the finished product to foreign markets (Brouthers and Brouthers, 2003, 1181-2). Export entry mode allows internalization and ownership advantages. Because the location advantages are missing from this therefore FDI is not chosen for this case.

5.1 Advantages and Disadvantages of Export

Export is a widely used entry mode. Due to the ease of networking, risk mitigation, lower demand of control, appropriate fit for small markets and utilization of distributors, export becomes a good entry model for Iran (Canabal and White, 2008, 271-2). Export entry mode allows companies to leave many of the responsibilities to local players and enjoy the profits from the market. Choosing export also relieve the company from properly understanding the foreign market. The company does not bother with logistics and infrastructure when choosing export. Furthermore, if there is a low demand of product then this entry mode mitigates the risk of investment failure (Davis, Desai and Francis, 2000, 252-3). Export can also allow a company to develop a space for its product which can be exploited in the future if the market growth rate and size increase. Exports from developing countries to developed countries is viewed negatively due to quality concerns but if the process is reversed then the perception is reversed too (Aulakh, Kotabe, and Teegen, 2000, 358).

In the case of Apple, export entry mode allows the company a low-cost penetration in most of the markets around the globe. As discussed before, Apple is present only a fraction of markets in the world but its products are sold almost all over the world which is made possible through this entry mode. Apple uses an export/distribution system to increase its reach and keep the costs low. Using export as an entry mode allows Apple to reach its customers in developing countries easily and maximize its sales. As Apple products are very expensive therefore its demand is low in countries where people cannot afford high-end technology. In this situation, the selected entry mode allows Apple to supply according to the low demand and selling to those who can afford the product. It saves Apple marketing, infrastructure, logistic and other costs and makes the small export a feasible venture. The company enjoys ownership and internalization advantages but the location advantages are gone. There are many markets where Apple is using export-based entry mode despite huge location advantages.

The disadvantages of this mode of entry are important too. First of all, the company cannot control its product in a foreign market if this mode of entry is selected. Furthermore, this mode of entry is one of the slowest channels for internationalization of business (Axinn and Matthyssens, 2002, 443). The absence of the company from the market is another major drawback with exports because with this entry mode the psychic distance with the customer is very wide and experiential learning is mostly absent (Axinn and Matthyssens, 2002, 443-4). The company has to depend on other companies for selling the product and these other companies are not efficient enough to maximize sales in their domestic markets. Moreover, importers do not deal with the product exclusively therefore the product is sold with products from main international competitors. At the beginning of internationalization, firms followed the simple model of engaging in exports and then shifting to FDI but now they are discarding exports and starting with FDI (Narula, 2006). In the context of Apple, it should be estimated whether exports to small markets are generating any significant profit or not.

5.2 Reason for Selecting Export

One of the major aspect of the deal signed between Iran and the USA over the matter of Iran’s nuclear program was revitalizing the economy. This goal is not achieved yet but the country is making it’s business environment attractive to foreign companies (Morris, 2016). Development of infrastructure, liberalization of market and deregulation is transforming the Iranian economy. But the market needs more years to become lucrative because Iran is still trying to reduce the risk factors associated with its market (Dubowitz and Dershowitz, 2016). Within this context, Apple cannot opt for FDI entry mode because it is not justified the size of the market and the potential customer the market can offer right now. The export entry mode is used by Apple in many countries with the same market conditions therefore it is a natural choice here. The export model of entry would allow Apple to bring its product to Iran and develop brand perception for future use. The sanctions destroyed Iran’s infrastructure and market potential over the years and without regaining them back, Iran cannot hope to attract a stronger entry mode from MNEs including Apple.

6 Conclusion

The paper examined the internationalization of Apple Inc. and analyzed the entry and business models that the company uses for selling its high-end electronic products. The paper also developed an understanding of eclectic paradigm and the OLI framework. Using the OLI framework on India and Iran, the paper detailed strategies for Apple to enter both markets. These strategies are not only supported by the scholarship on the matter of internationalization but they also took the market conditions of both countries into account too. Based on this exercise, the paper recommends FDI entry mode for India and Exports based entry mode for Iran. Both suggestions are supported by strong rationale, ground conditions and economic theories of internationalization.

The paper argues that in India, the entry mode that Apple is currently using is wrong because of which Apple failed in this market. The reasons behind the failure of Apple in India are used to suggest FDI entry mode. Indian market offers ownership, location and internalization advantages but Apple is not maximizing these advantages with the current approach it is using. Suggestion of FDI is made because it will allow Apple to properly penetrate the market and improve its standing in the market. Iran, on the other hand, recently started its recovery process and its market is still trying to stand on its feet. Furthermore, Apple is not focusing on this recovering economy at all. Considering the present condition of Iran and the potential of its market, the paper recommended exports based entry mode.

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