Foreign Market Entry Strategies: Various ways to enter the international market.
Any company that wants to enter the international market has to take some strategic decisions pertaining to that foreign market; it has to analyse the market and plan its entry in that market, besides considering other factors.
Concentration versus Diversification
Concentration: A company may concentrate its efforts by entering countries that are highly similar in terms of market characteristics and infrastructure to the domestic market or that are geographically close to the domestic market.
Diversification: A company may prefer to diversify risk by entering countries that differ in terms of environmental and market characteristics. For example, an economic recession in one country could be counterbalanced by growth in another market.
Waterfall Approach versus Shower Approach
Waterfall: Entering first a single key market in order to build up experiences in international operations. Subsequently entering other markets one after the other. This is the preferred option when a firm lacks experience in foreign markets, firm is small and has limited resources, is highly risk averse, enters international markets late and faces intense local competition.
Shower: Entering a number of markets simultaneously in order to leverage its core competence and resources rapidly. Rapid entry facilitates early market penetration across a number of markets, creates entry barriers, and enables the firm to build up experience rapidly. Requires substantial financial and management resources and entails higher risk. This is the preferred option when a firm seizes an emerging opportunity or to prevent competition. It focuses on achieving economies of scale in production and marketing by integrating and consolidating operations across markets
Market Entry Strategies
Various strategies a firm can use to enter the foreign market include Exporting, Licensing, Franchising, Mergers and Acquisitions, Strategic Alliance, Contract Manufacturing, Joint Ventures, Turnkey Project, Wholly Owned Subsidiary.
Export is the most common mode for initial entry into international markets. A firm’s products are manufactured in the domestic market or a third market and then transferred to the host market.
Exporting allows a company to manufacture its products centrally and thus achieve economies of scale (lower product prices, more profits). Exporting got more and more cost effective through both decreasing transportation costs and reduction of tariffs. Exporting requires only limited investments compared to other market entry modes.
- Pros: Limited investment and commitment required. Immediate access to local market experience and contacts through intermediates. Risk diversification
- Cons: Limited control over marketing mix variables when working with intermediates. Intermediates add extra costs. Possible trade restrictions
Direct exporting occurs when the manufacturing company exports directly to customers or to intermediaries located in foreign markets. No domestic intermediary is involved. The manufacturing firm must deal with a large number of foreign contacts and is directly involved in handling documentation, physical delivery and pricing policies of the product being sold. It requires more expertise, management time and financial resources than does indirect exporting, but it gives the company a greater degree of control over its distribution channels.
Indirect exports occurs when the exporting manufacturer uses independent organizations located in the home market to transfer products/services into the foreign market. These independent organizations are, for example, export houses or trading companies. It is not really global marketing because products are carried abroad by others. It’s useful for companies with little or no experience in exporting. They can use the readily available expertise and knowledge of the foreign market conditions.
A licensing agreement is an arrangement wherein the licensor gives something of value to the licensee in exchange for a certain performance and fees (royalties). Licensing is a way in which a firm can establish local production in foreign markets without capital investment.
The licensor gives the licensee the right to use/produce one or more of the following things: A patent covering a product or process, Manufacturing know how, Technical advice and assistance, Marketing advice or assistance , Use of a trademark/trade name
The foreign company or licensee gains the right to exploit the patent or trademark commercially on either an exclusive (the sole right to sell in a geographic region) or a nonexclusive basis.
Licensing periods are usually 16-20 years.
Typically the licensee makes all the necessary capital investments (machinery, inventory) and markets the products in the assigned sales territories which may consist of one or several countries.
- A company can gain market presence without making equity investment
- A company can engage in licensing with limited knowledge, time or capital.
- The market potential of the target country may be too small to support a new manufacturing facility.
- A company may benefit from government support.
- Dependence on the local licensee to produce revenues/sales. Royalties (license fees) are usually paid based on a percentage of sales volume.
- Licensing fees are generally lower than the profits that can be made through exporting or local manufacturing.
- Uncertainty of product quality; a foreign company’s image may suffer if a local licensee markets a product of substandard quality.
- Licensees may need to be trained.
- Licensees must be audited.
- The possibility of nurturing a potential competitor. Licensees can use similar technology independently after the license has expired.
Franchising is a special form of licensing in which the franchisor makes a total marketing programme available including the brand name, logo, products and methods of operation. Usually the franchise agreement is more comprehensive than a regular licensing agreement. The total operation of the franchise is prescribed.
The franchise agreement is normally for 5-10 years.
Examples: US fast food chains with operations in Latin America, Asia, Europe, and the Middle East – McDonald’s, Kentucky Fried Chicken, Burger King Finding the right franchisee is critical for successful franchising.
While many franchisees are individual entrepreneurs, in some countries, companies or wealthy individuals buy master franchises that give them exclusive rights to a whole city, a whole country or a whole global region.
The Cheesecake factory entered into an exclusive franchise agreement with the Kuwait-based Alshaya Group to build and operate the cheesecake factory restaurants across the Middle East.
Greater degree of control compared to licensing. Low risk, low cost entry mode (franchisees invest in equipment). Ability to develop new and distant international markets quickly.
The search for competent franchisees can be expensive and time-consuming. Costs of creating and marketing a unique package of products and services recognized internationally. Risk of free-riding on valuable brand names and image losses if the franchisee underperforms.
A joint venture is a partnership between two or more parties. The joint venture partner is usually a local firm or an individual located in the host market. The local company invites an outside partner to share stock ownership in a new unit = equity participation. Management contracts can designate which partner has management control of the venture. Each partner agrees to a joint venture to get access to the other partner’s skills and resources.
Access to local expertise and contacts in local markets. Overcome host government restrictions.Shared risk of failure.
Loss of control; dependence on local partner. Locked into a long-term investment. Disputes over responsibility for the venture; or over dividend payout versus reinvestment. Cultural differences between participating firm.
Strategic alliance is a non-equity joint venture, meaning that the partners do not commit equity into the alliance. An strategic alliance commonly involves two or more firms (e.g. MNC and local firm) in which each partner brings a particular skill or resource – usually they are complementary.
By joining forces each firm expects to profit from the other’s experience. It typically involves technology development, production or distribution.
This mode helps a firm speed up entry into multiple markets, and gain access to assets and technologies that may be specific to certain countries.
Wholly Owned Subsidiaries
This involves purchasing an established business in the host country. By purchasing a local company the firm eliminates the need to build manufacturing and distribution capabilities from scratch.
An established brand gives the firm immediate market presence and market share. In some cases the government might allow entry only by acquisition in order to protect a depressed industry from new entrants.
Pros: This is a good strategy when entering saturated and highly competitive markets with substantial entry barriers. It allows rapid entry, and provides access to distribution channels, an existing customer base and in some cases established brand names.
Cons: Business for sales often have problems. Requires high investments.
When appropriate acquisition targets cannot be found or when they are too expensive, a firm may decide to establish operations in the host country from scratch.
Pros: A new facility means a fresh start and an opportunity for the international company to shape the local firm into its own image and requirement. New plants can incorporate the latest technology and equipment.
Cons: It takes longer to build a plant than to establish one. Requires high investment.
Hollensen, S., 2020. Global marketing. Harlow: Pearson.
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