6a .market entry strategies

Internationalization

chandramenon@ymail.com

International market selection process - introduction

• Why is it important to identify the ‘right market’ to enter?• Influences likelihood of success • Influences nature of marketing programmes• Affects firm’s ability to coordinate foreign operations

• How do usually SMEs choose their markets?• Low psychic distance• Low cultural distance• Low geographical distance

Potential determinants of the firm’s choice of foreign markets

The firm The environment

International

market segmentation

INTERNATIONAL MARKET SELECTION

(IMS)

Source: Hollensen, Global Marketing 4e, Pearson Education 2008.

Determinants of firm’s choice

The firm• Degree of

internationalization• Size/amount of

resources• Type of industry/nature

of business• Internationalization

goals• Existing networks of

relationships

The environment• International industry

structure• Degree of

internationalization of the market

• Host country:• Market potential• Competition• Distance• Market similarity

International Market Segmentation

The firm Environment

Step 1: Selection of segmentation criteria

Step 2: Development of segments

Step 3: Screening of segments

Step 4: Microsegmentation

Market entry

Source: Hollensen, Global Marketing 4e, Pearson Education 2008.

8-7

Criteria for effective segmentation

• Measurability

• Accessibility

• Substantiality/profitability

• Actionability

The basis of international market segmentation

General characteristicsGeographic

Language

Political factors

Demography

Economy

Industrial structure

Technology

Social organization

Religion

Education

Specific characteristicsCulture

Lifestyle

Personality

Attitudes and tastes

High degree of measurability,

accessibility, and actionability

Low degree of measurability,

accessibility, and actionability, but high degree of relevance

Source: Hollensen, Global Marketing 4e, Pearson Education 2008.

Market expansion strategies: waterfall approach

Advanced

countries

Developing

countries

Less developed

countries

Gro

ss n

atio

nal

p

rod

uct

per

cap

ita

TimeSource: Hollensen, Global Marketing 4e, Pearson Education 2008.

high

low

Market expansion strategies: shower approach

Advanced

countries

Developing

countries

Less developed

countries

Source: Hollensen, Global Marketing 4e, Pearson Education 2008.

How to enter market?

ENTRY MODES & STRATEGIES 1/3

ENTRY MODES

EXPORTING INTERMEDIATEHIERARHICAL

(INVESTMENT)

DIRECT INDIRECT GREENFILED BROWNFIELD

RISK CONTROL FLEXIBILITY

ENTRY MODES & STRATEGIES 2/3

EXPORT MODES

INTERMEDIATE MODES

INVESTMENT MODES

100% resource EXTERNALIZATION ( control; risk; flexibility)

Partial resource EXTERNALIZATION (shared risk and control; shared ownership)

100% resource INTERNALIZATION (control; risk; flexibility)

ENTRY MODES & STRATEGIES 3/3

Level of inclusion

DIRECT EXPORTING: directly in charge of your own exporting

Domestic-based sales representative

Appropriate when “order taking” is the main sales task

PROS: increased market presence, larger market control

CONS: larger costs but still no permanent market presence

INDIRECT EXPORTING

• Working through your company or domestic exporter

• Using: export buying agent, broker, export management company, trading company, piggyback

• PROS: easy access to international markets; low risk and low costs

• CONS: low control, lack of market presence

INDIRECT EXPORT MODES

Distributors• Independent merchants who take possession and usually

title of goods for resale.• Usually will seek exclusive rights for a specific territory• Represent the manufacturer/exporter in all aspects of sales

and service • May or may not handle other or competing products

Agents• Represents an exporting company, which sells to

wholesalers, retailers and sometimes end-users in the home country.

• Do not take title to goods• Typically paid on commission• May represent other companies’ products as well

WHAT SHOULD AGENTS AND DISTRIBUTORS HAVE?

• Knowledge of the market• Ability to cover the assigned territory• Prompt payment• Good sales organization• Administrative support – warehousing, delivery, sales

records, sales forecasts (purchase forecasts), credit, etc. • Adequate stocks• Competitive information• Marketing research, advertising and promotional support• A marketing plan• Ability to work together

INTERMEDIATE ENTRY MODES

• Contract Manufacturing

• Licensing

• Franchising

• Joint Ventures/ Strategic Alliances

CONTRACT MANUFACTURING

• Allows the firm to have foreign production without making a final commitment

• Lack of resources, capacities or lack of the will to invest in production

• Concentration on other functions rather than production, e.g. R&D, marketing distribution

EXAMPLE: contract manufacturing

Benetton relies upon a contractual network of

small overseas manufacturers

LICENSING

• Licensing to a foreign company to use a manufacturing process, trademark, patent or formula in return for a fee. Includes an agreement between the possessor of the intellectual property (the licensor) and the receiver of the license (the licensee)

• The licensor gains access to a market with relatively low risk.• The licensor can concentrate on R&D and core

competencies• Government regulations on direct investment and import

barriers may make licensing the only alternative

• Main drawback: the licensor may be creating a potential competitor!

RIGHTS THAT MAY BE OFFERED IN A LICENSING AGREEMENT

• Patent covering a product or process

• Manufacturing know-how not subject to a patent

• Technical advice and assistance

• Marketing advice and assistance

• Use of a trade mark/trade name

LIFE-CYLE BENEFITS OF LICENSING

FRANCHISING

• Selling a business service to investors with sufficient capital but often little prior business experience.

• Usually used in service and people-intensive economic activities (restaurants, retail, hotels, banks, insurance, car rentals....)

• Two types:1. Product and trade name franchising – similar to trademark licensing2. Business format “package” franchising – goes beyond licensing to include an entire business concept or format

• Successful franchisor-franchisee relationships is a key!

EXAMPLE: franchising

JOINT VENTURES/STRATEGIC ALLIANCES

• Forming a partnership with a local firm• Strategic alliance is a non-equity cooperation, while the joint

venture is usually an equity cooperation (a new company is formed)

PROS:• Access to market (culturally, politically, ...)• Shared costs and risk• Builds goodwill with host government (FDI regulations,

investment climate)

CONS:• Unreliable partners• Different goals and objectives of partners

JOINT VENTURE

Parent firm

A

Parent firm

B

Joint venture C

REASONS FOR JOINT VENTURES

• Complementary technology or management skills can lead to new opportunities

• Firms with partners in host countries can increase speed of market entry

• Less developed countries may restrict foreign ownership• Costs of global operations in R&D and production can be

shared

DESIRABLE PARTNER RESOURCES

Development know-how

Sales and service expertise

Critical manufacturing capabilities

Low-cost production facilities

Reputation/brand equity

Market access/knowledge

cash

STRATEGIC ALLIANCES

Parent firm

A

Parent firm

B