entry strategies in international marketing

Overseas Market Selection

Methods of market entryEntry strategies

*Chapter Overview1. Target Market Selection2. Choosing the Mode of Entry3. Exporting4. Licensing5. Franchising6. Contract Manufacturing7. Joint Ventures8. Wholly Owned Subsidiaries9. Strategic Alliances10. Timing of Entry11. Exit Strategies

There are a variety of ways in which organizations can enter foreign markets.

The three main ways are by direct or indirect export or production in a foreign country

*IntroductionThe need for a solid market entry decision is an integral part of a global market entry strategy.Entry decisions will heavily influence the firms other marketing-mix decisions.Global marketers have to make a multitude of decisions regarding the entry mode which may include: (1) the target product/market(2) the goals of the target markets(3) the mode of entry(4) The time of entry(5) A marketing-mix plan(6) A control system to check the performance in the entered markets

Chapter 9*Selecting the Target MarketA crucial step in developing a global expansion strategy is the selection of potential target markets (see Exhibit 9-1 for the entry decision process).A four-step procedure for the initial screening process:1. Select indicators and collect data2. Determine importance of country indicators3. Rate the countries in the pool on each indicator4. Compute overall score for each country

*Choosing the Mode of EntryDecision Criteria for Mode of Entry:Market Size and GrowthRiskGovernment RegulationsCompetitive Environment/Cultural DistanceLocal Infrastructure

*Choosing the Mode of Entry

*Choosing the Mode of EntryClassification of Markets:Platform Countries (Singapore & Hong Kong)Emerging Countries (Vietnam & the Philippines)Growth Countries (China & India)Maturing and established countries (examples: South Korea, Taiwan & Japan)Company ObjectivesNeed for ControlInternal Resources, Assets and CapabilitiesFlexibility

*Choosing the Mode of EntryMode of Entry Choice: A Transaction Cost ExplanationRegarding entry modes, companies normally face a tradeoff between the benefits of increased control and the costs of resource commitment and risk.Transaction Cost Analysis (TCA) perspectiveTransaction-Specific Assets (assets valuable for a very narrow range of applications)

1. Exporting Exporting is the most traditional and well established form of operating in foreign markets.

Exporting can be defined as the marketing of goods produced in one country into another.

Whilst no direct manufacturing is required in an overseas country, significant investments in marketing are required.

The advantages of exporting are: Manufacturing is home based thus, it is less risky than overseas basedgives an opportunity to "learn" overseas markets before investing in bricks and mortar reduces the potential risks of operating overseas.

The disadvantage is mainly that one can be at the "mercy" of overseas agents and so the lack of control has to be weighed against the advantages.

A distinction has to be drawn between passive and aggressive exporting.

A passive exporter awaits orders or comes across them by chance;

An aggressive exporter develops marketing strategies which provide a broad and clear picture of what the firm intends to do in the foreign market.

Piggybacking Piggybacking is an interesting development.

The method means that organizations with little exporting skill may use the services of one that has.

Another form is the consolidation of orders by a number of companies in order to take advantage of bulk buying.

Normally these would be geographically adjacent or able to be served, say, on an air route.

The fertilizer manufacturers of India, for example, could piggyback with the China who both import potassium from outside their respective countries.

Countertrade

By far the largest indirect method of exporting is countertrade.

Competitive intensity means more and more investment in marketing.

In this situation the organization may expand operations by operating in markets where competition is less intense but currency based exchange is not possible.

Also, countries may wish to trade in spite of the degree of competition, but currency again is a problem.

Countertrade can also be used to stimulate home industries or where raw materials are in short supply.

It can, also, give a basis for reciprocal trade.

2. Licensing Licensing is defined as "the method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor".

Licensing is a contractual agreement whereby one company (the licensor) makes an asset available to another company (the licensee) in exchange for royalties, license fees, or some other form of compensation

It is quite similar to the "franchise" operation. Coca Cola is an excellent example of licensing.

Licensing involves little expense and involvement.

The only cost is signing the agreement and policing its implementation.

Licensing gives the following advantagesGood way to start in foreign operations and open the door to low risk manufacturing relationships: Linkage of parent and receiving partner interests means both get most out of marketing effort Capital not tied up in foreign operation and Options to buy into partner exist or provision to take royalties in stock.

The disadvantages are: Limited form of participation - to length of agreement, specific product, process or trademark Potential returns from marketing and manufacturing may be lost Partner develops know-how and so licence is short Licensees become competitors - overcome by having cross technology transfer deals and Requires considerable fact finding, planning, investigation and interpretation.

3. FranchisingFranchising refers to the methods of practicing and using another person's philosophy of business.

The franchisor grants the independent operator the right to distribute its products, techniques, and trademarks for a percentage of gross monthly sales and a royalty fee.

Various tangibles and intangibles such as national or international advertising, training, and other support services are commonly made available by the franchisor.

Agreements typically last five to twenty years, with premature cancellations or terminations of most contracts bearing serious consequences for franchisees.

4. Contract ManufacturingContract manufacturing is work sub-contracted to a manufacturer by a company that owns the product design and IPR.

In some cases, the manufacturer takes the responsibility of marketing the products using the vendors brand and provides after-sales support

Currently, the top five companies in the global contract manufacturing marketSolectron, Flextronics, SCI, Celestica and Jabilaccount for more than a third of the global market.

Looking at this emerging trend, some smart Indian hardware product companies like D-Link, TVS Electronics and WeP Peripherals have started offering CM services.

This not only helps the hardware product company de-risk its business model but also means full utilisation of its production facilities.

And being product companies, these companies understand the clients business more than any other contract manufacturer.

5. Joint ventures

Joint ventures can be defined as "an enterprise in which two or more investors share ownership and control over property rights and operation".

Joint ventures are a more extensive form of participation than either exporting or licensing. In Maruti has a joint venture agreement with Suzuki in car manufacturing

Joint ventures give the following advantages: Sharing of risk and ability to combine the local in-depth knowledge with a foreign partner with know-how in technology or process Joint financial strength May be only means of entry and May be the source of supply for a third country.

They also have disadvantages: Partners do not have full control of management May be impossible to recover capital if need be Disagreement on third party markets to serve and Partners may have different views on expected benefits.

6. Wholly Owned Subsidiaries The most extensive form of participation is 100% ownership and this involves the greatest commitment in capital and managerial effort.

The ability to communicate and control 100% may outweigh any of the disadvantages of joint ventures and licensing.

However, as mentioned earlier, repatriation of earnings and capital has to be carefully monitored.

The more unstable the environment the less likely is the ownership pathway an option.

Wholly Owned SubsidiariesA subsidiary, in business matters, is an entity that is controlled by a bigger and more powerful entity.

The controlled entity is called a company, corporation, or limited liability company, and the controlling entity is called its parent (or the parent company).

The reason for this distinction is that a lone company cannot be a subsidiary of any organization; only an entity representing a legal fiction as a separate entity can be a subsidiary.

While individuals have the capacity to act on their own initiative, a business entity can only act through its directors, officers and employees.

he most common way that control of a subsidiary is achieved is through the ownership of shares in the subsidiary by the parent.

These shares give the parent the necessary votes to determine the composition of the board of the subsidiary and so exercise control. This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary.

7. Strategic AllianceA Strategic Alliance is a formal relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations.

Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property.

The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts.

The alliance often involves technology transfer (access to knowledge and expertise), economic specialization shared expenses and shared risk.

Export processing zones (EPZ)

Whilst not strictly speaking an entry-strategy, EPZs serve as an "entry" into a market.

They are primarily an investment incentive for would be investors but can also provide employment for the host country and the transfer of skills as well as provide a base for the flow of goods in and out of the country. One of the best examples is the Mauritian EPZ12, founded in the 1970s.

Identifying foreign markets,

Market selection processWhether a company is marketing in several countries or is entering a foreign market for the first time, planning is essential to success.

The first-time foreign marketer must decide what products to develop, in which markets, and with what level of resource commitment.

For the company already committed, the key decisions involve allocating effort and resources among countries and product(s), deciding on new markets to develop or old ones to withdraw from, and determining which products to develop or drop.

Guidelines and systematic procedures are necessary for evaluating international opportunities and risks and for developing strategic plans to take advantage of such opportunities.

Phase I-Preliminary Analysis and Screening; Matching Company/Country Whether a company is new to international marketing or heavily involved, an evaluation of potential markets is the first step in the planning process.

A critical first step in the international planning process is deciding in which existing country market to make a market investment.

A company's strengths and weaknesses, products, philosophies, and objectives must be matched with a country's constraining factors and market potential.

In the first part of the planning process, countries are analyzed and screened to eliminate those that do not offer sufficient potential for further consideration.

Emerging markets pose a special problem since many have inadequate marketing infrastructures, distribution channels are underdeveloped, and income level and distribution vary among countries.

The next step is to establish screening criteria against which prospective countries can be evaluated.

These criteria are ascertained by an analysis of company objectives, resources, and other corporate capabilities and limitations.

It is important to determine the reasons for entering a foreign market and the returns expected from such an investment.

A company's commitment to international business and its objectives for going international are important in establishing evaluation criteria.

A company guided by the global market concept looks for commonalties among markets and opportunities for standardization, whereas a company guided by the domestic market extension concept seeks markets that accept the domestic marketing mix as implemented in the home market.

Minimum market potential, minimum profit, return on investment, acceptable competitive levels, standards of political stability, acceptable legal requirements, and other measures appropriate for the company's products are examples of the evaluation criteria to be established.

Once evaluation criteria are set, a complete analysis of the environment within which a company plans to operate is made.

The environment consists of the uncontrollable elements discussed earlier and includes both home-country and host-country restraints, marketing objectives, and any other company limitations or strengths that exist at the beginning of each planning period.

Although an understanding of uncontrollable environments is important in domestic market planning, the task is more complex in foreign marketing because each country under consideration presents the foreign marketer with a different set of unfamiliar environmental constraints.

It is this stage in the planning process that more than anything else distinguishes international from domestic marketing planning.

The results of Phase 1 provide the marketer with the basic information necessary to: (1) evaluate the potential of a proposed country market;

(2) identify problems that would eliminate the country from further consideration;

(3) identify environmental elements which need further analysis;

(4) determine which part of the marketing mix can be standardized for global companies or which part of and how the marketing mix must be adapted to meet local market needs; and

(5) develop and implement a marketing action plan.

Information generated in Phase 1 helps a company avoid the mistakes.

With the analysis in Phase 1 completed, the decision maker faces the more specific task of selecting country target markets, identifying problems and opportunities in these markets, and beginning the process of creating marketing programs.

Phase 2-Adapting the Marketing Mix to Target Markets.

A more detailed examination of the components of the marketing mix is the purpose of Phase 2.

When target markets are selected, the market mix must be evaluated in light of the data generated in Phase 1.

In which ways can the product, promotion, price, and distribution be standardized and in which ways must they be adapted to meet target market requirements?

Incorrect decisions at this point lead to costly mistakes through lost efficiency from lack of standardization; products inappropriate for the intended market; and/or costly mistakes in improper pricing, advertising, and promotional blunders.

The primary goal of Phase 2 is to decide on a marketing mix adjusted to the cultural constraints imposed by the uncontrollable elements of the environment that effectively achieve corporate objectives and goals.

Phase 2 also permits the marketer to determine possibilities for standardization.

By grouping all countries together and looking at similarities, market characteristics that can be standardized become evident.

Frequently, the results of the analysis in Phase 2 indicate that the marketing mix would require such drastic adaptation that a decision not to enter a particular market is made.

For example, a product may have to be reduced in physical size to fit the needs of the market, but the additional manufacturing cost of a smaller size may be too high to justify market entry.

Also the price required to be profitable might be too high for a majority of the market to afford. If there is no way to reduce the price, sales potential at the higher price may be too low to justify entry.

On the other hand, additional research in this phase may provide information that can suggest ways to standardize marketing programs among two or more country markets.

The answers to three major questions are generated in Phase 2: (1) which elements of the marketing mix can be standardized and where is standardization not culturally possible?

(2) Which cultural/environmental adaptations are necessary for successful acceptance of the marketing mix? And

(3) will adaptation costs allow profitable market entry? Based on the results in Phase 2, a second screening of countries may take place, with some countries dropped from further consideration. The next phase in the planning process is development of a marketing plan.

Phase 3-Developing the Marketing Plan. At this stage of the planning process, a marketing plan is developed for the target market-whether a single country or a global market set.

The marketing plan begins with a situation analysis and culminates in the selection of an entry mode and a specific action program for the market.

The specific plan establishes what is to be done, by whom, how it is to be done, and when. Included are budgets and sales and profit expectations.

Just as in Phase 2, a decision not to enter a specific market may be made if it is determined that company marketing objectives and goals cannot be met

Phase 4-Implementation and Control. A "go" decision in Phase 3 triggers implementation of specific plans and anticipation of successful marketing. However, the planning process does not end at this point.

All marketing plans require coordination and control during the period of implementation.

Many businesses do not control marketing plans as thoroughly as they could even though continuous monitoring and control could increase their success.

An evaluation and control system requires performance objective action, that is, to bring the plan back on track should standards of performance fall short.

A global orientation facilitates the difficult but extremely important management tasks of coordinating and controlling the complexities of international marketing.

While the model is presented as a series of sequential phases, the planning process is a dynamic, continuous set of interacting variables with information continuously building among phases.

The phases outline a crucial path to be followed for effective, systematic planning.

Although the model depicts a global company operating in multiple country markets, it is equally applicable for a company interested in a single country.

Phases 1 and 2 are completed for each country being considered, and Phases 3 and 4 are developed individually for the target market whether it consists of a single country or a series of separate country markets.

A global company uses the same process but integrates planning and information to serve as many markets as feasible and then concentrates on a global market set in Phases 3 and 4.

Utilizing a planning process encourages the decision maker to consider all variables that affect the success of a company's plan.

Furthermore, it provides the basis for viewing all country markets and their interrelationships as an integrated global unit.

As a company expands into more foreign markets with several products, it becomes more difficult to efficiently manage all products across all markets.

Marketing planning helps the marketer focus on all the variables to be considered for successful global marketing.

Regardless of which of the three strategies (domestic market extension, multi-domestic, or global) a company chooses, rigorous information gathering, analysis, and planning are necessary for successful marketing.

With the information developed in the planning process and a country market selected, the decision of the entry mode can be made.

The choice of mode of entry is one of the more critical decisions for the firm because the choice will define the firm's operations and affects all future decisions in that market.

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entry strategies in international marketing

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