chapter three.pdf

CHAPTER – III MARKET ENTRY STRATEGIES 1  MARKET ENTRY STRATEGIES When a company decides to go international, it faces a host of decisions.  Which countries should it enter and in what sequence?  What criteria should be used (proximity, stage of develo...

CHAPTER – III MARKET ENTRY STRATEGIES 1  MARKET ENTRY STRATEGIES When a company decides to go international, it faces a host of decisions.  Which countries should it enter and in what sequence?  What criteria should be used (proximity, stage of development, geographic region, cultural and linguistic criteria, the competitive situation, or other factors)?  How should it enter new markets? 2  MARKET ENTRY STRATEGIES  Expansion directly through acquisition of a local established company or indirectly using agents or representatives?  Should the new market be supplied with imported product from the home or third countries or locally manufactured product? This part addresses these questions and examines various strategies that a company can utilize to "go international" starting with exporting and advancing to foreign direct investment. 3 MARKET ENTRY MODES Exporting Licensing, Franchising, Joint ventures, and Foreign direct investment when it is an option for foreign companies. 4  A. EXPORTING Exporting is the most traditional and well established form of operating in foreign markets. Exporting can be defined as 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. 5  Indirect exporting Indirect market entry may occur in number of ways: Foreign sales through domestic organization: in this case, the firm waits buyers to come by and buy from its premises. (I.e. products are sold in the domestic market but used or resold abroad in several ways). For e.g. a foreign wholesale or retail organizations that have buying offices in the firm’s home country may find the firm’s products desirable for their country’s market 6  Through export management companies: another form of indirect exporting is through EMC, an independent export organization. If a company chooses not to perform its own marketing and promotion in-house, there are numerous export service providers from which to choose. 7  Piggyback Marketing: whereby one manufacturer obtains distribution of products through another's distribution channels one manufacturer uses its overseas distribution to sell another company’s product along with its own. Successful piggyback marketing requires that the combined product lines be complementary. They must appeal to the same customer, and they must not be competitive with each other. 8  Counter trade Counter trade: a system of international trade in which countries exchange goods or services, rather than pay for imports with currency Counter trade can also be used to stimulate home industries or where raw materials are in short supply. 9  Types of Counter trade Barter- Barter, possibly the simplest of the many types of counter trade, is a onetime direct and simultaneous exchange of products of equal value (i.e., one product for another). By removing money as a medium of exchange barter makes it possible for cash-tight countries to buy and sell. Counter purchase (Parallel Barter) - It involves two separate transactions-each with its own cash value. 10 A supplier sells a product at a set price and orders unrelated products to offset the cost to the initial buyer. Buyer pays with hard currency, whereas the supplier agrees to buy certain products within a specified period. 11  An agreement between two persons or companies t o buy goods or services from each other, usually at different times. E.g., Company A may buy goods from Company B in Ma rch, and then sell different goods to Company B in April.  It is the agreement of an exporter to purchase a quantity of unrelated goods or services from a country in exchange for and approximate in value to the goods exported. 12  Switch Trading- Switch trading involves a triangular. When goods, from the buying country are not easily usable or salable; it may be necessary to bring in a third party to dispose of the merchandise. This is so when especially two parties entered into parallel or pay back where the seller has no need for the item bought he may sell the product on, usually at a discounted price, to a third party. Compensation Trade (Buyback) - where the customer agrees to buy goods on condition that the seller buys some of the customer's own products in return (compensatory products). 13  Company ‘’A’’ provides machinery, or technology to Company ‘’B’’  Company ‘’A’’ buys products made by this machinery from Company ‘’B’’. 14  Direct Exporting In this option, the manufacturer itself performs the export task directly rather than delegating it to others (the company itself sells to buyers in another country). Hence, in direct exporting the task of market contact, market research, physical distribution, export documentation, pricing etc are all fall on the firm. The advantages of direct exporting is that it gives the company better control to manage activities in accordance with its interest, better sales, better market information and communication, better expertise of foreign market etc. 15  Licensing: Can be defined as a method of foreign operation whereby one company (the licensor) in one country agrees to permit a company in another country (the licensee) to use the manufacturing, processing, trademark, know-how, patent right. Is a printed document that gives official permission to a person or group to own something or do something. A company with advanced technology, know-how, or a strong brand image can use licensing agreements to supplement its bottom-line profitability with little initial investment. 16  Contractual Agreements The only cost is the cost of signing the agreement and of policing its implementation. The principal disadvantage of licensing is that it can be a very limited form of participation. When licensing technology or know-how, what a company does not know can put it at risk. 17  Franchising: is a network of interdependent business relationships that allows a number of people to share: brand identification, a successful method of doing business, a proven marketing & distribution system. Business operated under license: a business licensed to sell a company's products exclusively in a particular area or to operate a business that carries that company's name 18  In short, franchising is a strategic alliance between groups of people who have specific relationships and responsibilities with a common goal to dominate markets, i.e., to get and keep more customers than their competitors. Franchising is one of the business strategies a company may use in capturing market share. Franchising is a business strategy for getting and keeping customers. 19  Joint Ventures: Is a partnership between two or more participating companies that have joined forces to create a separate legal entity. Its characteristics: Joint Venture is established, separate legal entities Partners agree to share in the management of the JV. They are partnership between legally incorporated entities such as companies, governments, not between individuals. Equity positions are held by each of the partners. 20  Joint Ventures A joint venture with a local partner represents a more extensive form of participation in foreign markets than either exporting or licensing or franchising. The advantages of it:  sharing of risk and the ability to combine different value chain strengths  Companies that lack sufficient capital resources might seek partners to jointly finance a project.  It is the only way to enter a country or region if government bid award practices routinely favor local companies or if laws prohibit foreign control but permit joint ventures. 21  Consortia: is similar to joint venture but it is different in that it involve a large number of participants and they frequently operate in a country or market in which none of the participants is currently active. Developed to pool financial and managerial resources and to lessen risks. Often, huge construction projects are built under a consortium arrangement in which major contractors with different specialties form a separate company specifically to negotiate for and produce one job. 22  Strategic International Alliances Cooperation between international firms can take many forms, such as licensing of proprietary technology, sharing of production facilities, co-funding of research projects and marketing of each other’s products using existing distribution networks. It is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving common goal and objectives. Although an SIA is not strictly a market entry strategy method, many of the contractual agreements discussed earlier can be classified as SIAs. 23  Foreign Direct Investment After companies gain experience outside the home country via exporting or licensing and joint ventures, the time comes for many companies when a more extensive form of participation in global markets is wanted. The desire for control and ownership of operations outside the home country drives the decision to invest. Foreign direct investment (FDI) figures record investment flows as companies invest in or acquire plant, equipment, or other assets outside the home country. By definition, direct investment presumes that the investor has control or significant influence over the investment, as opposed to portfolio. 24  Foreign Direct Investment The most extensive form of participation in global markets is 100 percent ownership, which may be achieved by start-up or acquisition. Ownership requires the greatest commitment of capital and managerial effort and offers the fullest means of participating in a market. Companies may move from licensing or joint venture strategies to ownership in order to achieve faster expansion in a market, greater control, or higher profits. In many countries, government restrictions may prevent majority or 100 percent ownership by foreign companies. 25  Foreign Direct Investment By establishing wholly owned foreign production (FDI), a company may capitalize on low cost labor, avoid high import taxes, reduce the high costs of transportation to the market, gain access to raw materials gain market entry etc. 26  Management Contracts It’s a system where a management company agrees to manage some or all functions of another company’s operation in return for management fees, a share of the profits, and sometimes an option to purchase stock in the company at a given price. 27  Management Contracts It often permits participation in a foreign venture without capital risk or investment and is a major tool for maintaining managerial control in situations where government requires nationals to own a majority of stock interest. It is widely evidenced in services sector, e.g. hotel industry, private hospital management where administration is contracted. 28  Criteria for selecting a market entry mode Selection of market entry mode has an important bearing on strategy, and can later prove to be a severe constraint on future intended international expansion unless due care and attention has been exercised in terms of any contractual arrangement. The criteria to be considered include: – Speed of market entry desired – Costs to include direct and indirect costs – Flexibility requires – Risk factors – Investment payback period – Long-term profit objectives 29 30