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Module:
Strategic International Business Management (RKC)
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Index
1. Rationale ……………………………………………………………………………………………………………. 3
2. Analysis …………………………………………………………………………………………………………….… 3
References ……………………………………………………………………………………………………………….…….. 15
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1. Rationale.
The rationale for the authors selection of South Korea as a potential target market
for Spotify’s international expansion strategy is based on an analysis done that
included South Africa and Russia. (See Appendix A)
With over 20 billion listening hours since their launch seven years ago, Spotify is
gearing itself to bring music to more customers that ever before (Spotify, 2015).
“We want to be in a lot of different places. However, I can't speculate about when
we get there” (Daniel Ek, 2011).
Becoming a global company is an achievement not to be taken lightly, and not every
business that sets out to do it accomplishes the goal. (Forbes: 2013) Spotify’s
international expansion success and the experience gained places them in a
favorable position for further expansion and South Korea is no exception.
2. Analysis.
The following factors with respect to South Korea’s suitability as potential target
market were analyzed:
3
South Korea’s ranking of 37 (out of 167) on the Corruption Perception
Index, positions it well above the average (Transparency International,
2016) but is still a point of concern.
4
Recent regulatory reform and infrastructure investment has
corporations convinces that Korea is a prime investment destination.
Of all the building blocks of social life, the impact of population growth
and age structure is the most predictable. Notwithstanding these
predictability, demographics are often ignored, despite the influence
they can have over the market's long-term performance (Peter
Temple, 2011). The Statistical Portal (2014) indicate that the
worldwide distribution of internet users is highly concentrated
between the ages of 15 and 44 years old. As much as 73% of all
internet usage is done by this demographic.
Enrolment rates at all levels of education are among the highest in the
world with a literacy rate of 99.9% (World Bank: 2015)
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2.4 Technological Factors.
Over the past two decades, Korea has become one of the leading IT
nations in the world. It ranked number one among 152 countries on
the ICT Development Index in 2011. Koreans also rated highly in
internet access, number of wireless broadband subscribers, and wired
broadband subscribers (Korea Communications Commission, 2011).
These factor will contribute to a smooth entry into the South Korean
market by any firm heavily dependent on technology.
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2.6 Environmental Factors.
Although South Korea is well accustomed to Typhoons and
Earthquakes any larger than normal occurrence will have a huge
impact on infrastructure and economic growth. This in turn will have
an impact on spending patterns with a direct impact on luxuries like
streaming services.
3. SWOT Analysis.
To fully grasp the complexity of the entry into a foreign market by Spotify,
the author makes use of information gathered by completing a SWOT
analysis, supported by Porters Five Forces Analysis, Internal Factor
Evaluation (IFE) Matrix and an External Factor Evaluation (EFE) Matrix. The
key points are discussed below.
3.1. External Factors Evaluation
General Opportunities. At the time of preparing this report, Spotify
was available in 59 countries (Spotify, 2016). The fact that South Korea
is the 4th easiest economy to do business in, has a stage 3 Innovation-
Driven Economy, has the 22nd most sophisticated economy in the
world and with internet saturation rate at a staggering 86%, it is
astounding that the recommended entry into the South Korean
market has not happened earlier. The opportunity is available now to
not only fuel Spotify’s drive to add more subscribers to the existing 30
million, but also to add to the already growing list of artists. Spotify
currently has over 28 million songs in its library and their entry into
the South Korean market and subsequent addition of local repertoire
which is high in demand as indicated in the Digital Music Report (2014)
where 100% of the top albums of 2013 was locally signed artists.
Type of Service
Competitor Name Download Subscription Advertising
Service Service Supported
Service
Bugs X X
Melon X X
Naver Music X X
Soribada X X
Deezer X X
MNET X X
Naver TV Cast X
Youtube X
Genie X
Monkey 3 X X
Ollehmusic X X
Groovers X
Mpion X
Samsung Music X X
Table 4: Industry Rivals
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Threat of Buyer Power: The threat of buyers having any bargaining
power is virtually nonexistent with respect of purchasing the Premium
subscription for as long as the Spotify brand appeals to the subscriber.
The service is uniform through its offering in any given market. The
only choice a subscriber has is weather the subscriber wishes to have
the free option with adverts or upgrade to the Premium subscription
where they can have offline playlists without adverts. Where buyers
have much bigger bargaining power is when it comes to switching
costs. The cost to buyers to migrate to other services is very low and
should there be any substantial loss of perceived brand value, large
numbers of subscribers can migrate or switch to other services at
virtually zero cost.
Strengths.
- No differentiation between free and paid subscription with respect
to content.
- 70% of revenue paid to record labels and artists.
- Very transparent in dealing with record labels and artists.
- Artists can create playlists directly on Spotify’s website.
- Artists can sell their merchandise directly to Spotify subscribers on
their website.
- Unique agreement with FaceBook to share music with other Spotify
subscribers
- App development to link playlists with other social media like
Twitter.
- No music algorithms to suggest new songs to subscribers.
Subscribers search and build their own playlists.
- App availability over multiple platforms
- Abality to have local content available immediately upon launch in
a new market.
- Potential for cooperation with Handset manufacturers
Weaknesses.
- Bargaining power of suppliers.
- Potential of large content loss if alienation of prominent artists
occurs.
- Repetitive commercials on free platform.
- Loss of subscribers in free platform to rivals.
- No algorithm for song suggestions.
- With free subscription needs constant data connection
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- Subscription cannot be shared between individuals at the same
time.
4. Modes of Entry
If the decision is made to enter the South Korean market, Spotify must be
aware of the impact the different entry modes will have on the success of
the entry. The decision on which one of the modes to use as entry can have
a detrimental effect on the success of that entry (Taşdemir, 2014).
Various ways of entering a foreign market is available and these include
exporting, licensing, joint ventures and direct investment amongst others.
Whichever mode is chosen, a certain set of resource and organizational
control requirements will have to be considered (Ahsan and Musteen, 2011).
Below find an evaluation, related to South Korea, indicating the general
advantages and disadvantages of the various modes of entry.
4.1 Exporting.
Advantage Disadvantage
Limited product adaption required No control over sales
Distribution straightvfrom source Supply line length
Minimum foreign investment Trade barriers
Economy of scale Import taxes
Speed of entry Tariffs
Bilateral agreements Industry protection
Regional cooperation Shipping cost
No exit strategy needed Branding constraints
New market opportunity Cost of warranties
Prohibits regional expansion
Dependence on exporter
Reduced learning potential
4.2 Licensing
Advantage Disadvantage
Low investment No control over assets
Speed of entry Licensee may become competitor
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Limited trade barriers Licence period is limited
Limited tariffs Limited control over exit strategy
Return of Investment Knowledge transferred
Legal protection Management distance
Limited cultural distance Contract negotiation
Limited import barriers Quality control
New market opportunity Customer perception
Branding recognition Potential loss of proprietary info
Royalty compensation
Circumvents barrier of entry
Advantage Disadvantage
Shared investment risk Partner selection difficulty
Shared resources Cultural differences
Empowerment conditions Foreign partner relationship
Knowledge transfer Dilution of control
Investor advantages Knowledge transfer
New market opportunity Partner may become competitor
Circumvents barrier of entry Limited control over exit strategy
Shared technologies
Advantage Disadvantage
Small cultural distance Currency fluctuations
Low political risk Political change
Legal protection High labour cost
Investor tax incentives High capital cost
Control over sales Potential labour unrest
Control over brand
Own skills utilization
Proprietary protection
Resource transfer
Full ownership
Option of acquisitions
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No profit share
R&D controll
Spotify does not export a tangible product as such therefore the Export mode
of entry can be discounted as option.
Licensing and Joint Ventures as mode of entry are good options but the
disadvantages as per the above analysis outweighs the benefits Spotify
stands to gain by using them as modes of entry.
The author recommends that Spotify uses the Direct Investment option as
mode of entry into South Korea specifically. As a fully owned venture Spotify
can go into partnerships, joint ventures and licensing agreements from inside
South Korea and thereby exploit all three entry modes.
Legal Protection. Roy and Oliver (2009) report that the level of
accurate legal assistance of the country of entry exuberates the
concerns with respect to worries regarding identifying and negotiating
with partners in the host country. Being present in the host country
gives Spotify better access to proper local legal advice for various
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matters regarding industry regulations, labour and tax laws and
proprietary protection amongst others.
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References:
Ahsan and Musteen (2011). Multinational Enterprises’ Entry Mode Strategies and Uncertainty: A
Review and Extension, International Journal of Management Reviews, Vol. 13, (2011,) 376 - 392
Black, Hugo L (1971). United States of America Supreme Court Justice 1886 - 1971
Digital Music Report (2014). IFPI Digital Music Report 2014. Lighting Up The Markets.
Gatignon and Anderson (1988). The multinational corporation's degree of control over foreign
subsidiaries: An empirical test of a transaction cost explanation. J Law Econ Organ, 4 (2) (1988)
Korea Communications Commission (2011). “Korea ranks global No. 1 in ICT field.” September
15, pp. 1-2
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Morschett (2010). Decades of research on market entry modes: What do we really know about
external antecedents of entry mode choice? J Int Manage, 16 (1) (2010)
Roy and Oliver (2009). International joint venture partner selection: the role of the host-country
legal environment. J Int Bus Stud, 40 (5) (2009)
The Statistical Portal (2014). Distribution of internet users worldwide as of November 2014, by
age group. http://www.statista.com/statistics/272365/age-distribution-of-internet-users-
worldwide/
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World Bank (2015). Adult Literacy Rate. http://data.worldbank.org/indicator/ SE.ADT.LITR.ZS
17
Appendix A
In the score above South Korea and South Africa obtained the same amount of
points. These points were allocated using date from different sources which were
calculated up to 2014/15.
Recent developments in the South African political environment (IMF, 2016)
which are not reflected in the above ratings will carry a negative weight with
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respect to making the decision on which country will be identified as the suitable
candidate for expansion into.
Similarly, the 2014/15 ratings of Russia might be bias against them due to political
events over that period in Ukraine and Crimea. (The Nation, 2014)
2. Economic Factors
3. Social Factors
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4. Technological Factors
5. Legal Factors
Black Economic Empowerment laws are constantly being adapted and BEE
ratings is now mandatory for all new entrants into the corporate market.
South Africa has a high occurrence of pirated music and film and with high
levels of corruption not much can be expected to be done to effectively
combat the problem.
5.2 Russia:
Recent Political fallouts with the west and the sharp drop in crude oil prices
has forced the Russian government to embark on a program of rapid change
to save the economy. Results are that tax laws and other legislation are
constantly adapted to stimulate economic growth. It makes it difficult to plan
on the short and medium term. Russia has a high occurrence of pirated music
and film.
Russia has recently introduced a new law whereby copyright owners can
apply to fast track the judicial process to settle disputes of piracy.
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5.3 South Korea:
South Korea’s anti-piracy legislation came into effect in 2009 and great
strides were made to combat illegal copying and distribution of copyrighted
products.
In 2009 South Korea was cited as the country with the second most cases of
music piracy.
6. Environmental Factors
6.1 South Africa:
The South African region is currently undergoing one of the biggest droughts
on record. It has already put a damper on economic growth and will have an
influence on near future spending patterns as food gets more expensive.
6.2 Russia:
Russia’s huge geographical area makes it unlikely that one single
environmental event will have a significant effect on its economy.
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8. Conclusion
The author’s interpretation of PESTEL and the analyzing of recent data indicates
clearly that between the three countries suggested, South Korea is the country
suited for Spotify’s future international expansion.
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