Экономические науки./ 6. Маркетинг и менеджмент.

Akayev G.U.

Kazakh-British Technical University, Kazakhstan

Company profitability effect on its new market entry

Profitability is one of the company factors, which is ‘considered when evaluating entry-timing determinants.’ (Fuentelsaz at al., 2002:249.) To be operational companies must be profitable, having higher income than costs (De Wit and Meyer, 2004:597). Investors seek a financial incentive for an investment done in a commercial risk as an alternative for the funds to be put in commercial bank deposits or invested into low risk government bonds. In Johnson et al. (2008:368-371), profitability as one of the measure of return is a ‘common way of assessing proposed projects’ by managers. Among different financial analyses tools, examples of profitability measures may include Return on equity, which is a measure of the earning power of the funds invested into a particular strategic option. Thus, a company must bring a higher return on the shareholder’s equity than could be realized from investing in the other alternatives.

In Cotterill and Haller (1992:427, 432), entry is related, among the others, to ‘the competency of potential entrants as measured by their recent return on equity.’ Potential entrants with such competency of actual profits ‘have the ability to finance expansion plans of entering new markets either internally or by raising money externally from banks or capital markets.’

This is supported by De Wit and Meyer (2004), who argue that profitability is not only a ‘result’ of the company activity, but also its ‘source’ of competitive power, as track record of company profitability provides it with an opportunity to raise new capital, either through borrowings at attractive rates or by issuing new shares. The raised new capital then can be used for strategic initiatives like new market entry and diversification for purpose to sustain company’s competitive position. ‘For publicly traded corporations strong profitability is usually reflected in higher share prices, which is not only beneficial to the shareholders at that moment, but also makes it easier to acquire other firms and to pay with shares.’ (De Wit and Meyer, 2004:598.)

A different view from the above is provided by some empirical works ‘pointing that poorly performing firms are those which tend to be risk seekers.’ (Fuentelsaz at al., 2002:249.) In Bowman (1982:33), ‘low-profit companies take larger risks and are more likely to enter into new (riskier) ventures.’ Bowman’s research findings are also further reviewed by Fiegenbaum and Thomas (1986).

However, ‘more competent firms should have higher expected profitability from the operation in any additional market and, therefore, should be the first to respond to environmental changes stimulating entry. Differences in profitability should be especially important in the presence of capital market imperfections, given that these could provide firms with internally generated funds to finance their expansion and surmount entry barriers.’ (Fuentelsaz at al., 2002:249.) Bourgeois (1981:35) suggests, that ‘success of the firm breeds slack, which mutes the problem of scarcity and provides a source of funds for innovations that would not ordinarily be approved in the face of scarcity. Thus, presence of slack resources allows an organization to compete in its environment more boldly.’ ‘As with slack resources the organization can literally afford to experiment with new strategies by, for example, entering new markets.’ (Hambrick and Snow, 1977 – in Bourgeois, 1981:35.)

As a conclusion, it can be considered that profitable companies are more able to overcome entry barriers and are more likely to enter a new market.

Literature:

1. Bourgeois, L.J., 1981, On the Measurement of Organizational Slack, Academy of Management Review, 6, pp. 29-39.

2. Bowman, E., 1982, Risk Seeking by Troubled Firms, Sloan Management Review, 23, pp. 33-42.

3. Cotterill, R.W., Haller, L.E., 1992, Barrier and Queue Effects: a Study of Leading US Supermarket Chain Entry Patterns, Journal of Industrial Economics, 40(4):427-440.

4. De Wit, B., and Meyer, R., 2004, Strategy: Process, Content, Context, 3^rd Ed., Thomson Learning.

5. Fiegenbaum, A., and Thomas, H., 1986, Dynamic and Risk Measurement Perspectives on Bowman’s Risk-Return Paradox for Strategic Management: an Empirical Study, Strategic Management Journal, 7(5), pp. 395-407.

6. Fuentelsaz, L., Gomez, J., and Polo, Y., 2002, Followers’ Entry Timing: Evidence From the Spanish Banking Sector After Deregulation, Strategic Management Journal, 23, pp. 245-264.

7. Johnson, G., Scholes, K., and Whittington, R., 2008, Exploring Corporate Strategy, Text and Cases, 8th Ed., FT Prentice Hall.