Entrepreneurship Chapter 9

International Market Entry

• See table 3.1 pg 424 for overview on different market entry strategies.

Elements to consider

• To select the best strategy, companies must consider the markets they have selected, the products or services they wish to sell and their overall aims for international trade.

• See table 3.2 page 425 for market entry considerations

Market entry strategies

1. Exporting: It is the traditional method for trading internationally and involves goods produced by a company in one country being delivered to another country and marketed there.

Direct exporting: Involves a company selling goods directly to a customer in an international market.

a. Most important types of customers for direct exporting are:i. Importers → operate by importing goods into their country. Useful

because they have researched the local market and are confident they can sell goods they import.

ii. Wholesalers → companies that purchase goods in bulk and distribute them to retailers or other customers in the local market. Useful because they have an established customer base.

iii. Distributors → Wholesalers that only carry non-competing lines of goods.

iv. Retailers → Companies that sell to end consumers

v. Government procurement departments → local government departments that seek out providers of goods and services that are required for servicing the public.

vi. Consumers → customers that can be reached directly using sales methods such as television promotions, e-commerce, door-to-door selling.

Finding Customers

b. If a company wants to export, they should contact its country’s embassy in foreign markets, which will provide them with valuable information and important business contacts.

c. Once a distributor, retailer or wholesaler is found, the following questions should be asked:

i. Does the business have a solid financial backing?

ii. Does the business have a reputation for paying invoices on time?

iii. Does the business have a wide coverage of the target market?

iv. How much stock will the business hold?

d. Make sure the business you deal with trades in ethical ways!!

Government Procurement

e. Government departments are excellent customers as they account for 20% of a country’s GDP.

f. Company’s also have prestige when they are able to be known as government suppliers.

g. See page 429 for list of questions to answer before dealing with governments.

Business Models

h. A wide range of business models to accomplish this can be used:

i. Having en export department within the company

ii. Establish a sales office in the target market

iii. Employ overseas sales personnel

iv. Selling to an intermediary or by contracting an agent → companies new to direct exporting should start with this.

v. Agent: Represents the company on a commission basis and can engage in promotional work or help establish deals.

i. See table 3.3 for advantages/disadvantages of using agents vs. distributors.

Advantages/Disadvantages of Direct Exporting

j. Advantages of direct exporting:

i. Company controls its manufacturing process, and the process is based in the company’s facilities.

ii. Less risky since it is less susceptible to political instability in foreign markets.

iii. Company can withdraw from the market relatively cheaply and easily.

iv. Companies can obtain in-depth information about trade in the target market.

k. Disadvantages of direct exporting:

i. Companies need to invest significantly in researching market information and preparing marketing strategies.

ii. Companies without exporting skills and experience can make expensive errors.

iii. Target markets in trade blocs are very difficult to break into.

iv. Intermediaries will be representing other companies and cannot be relied on to operate in the best interest of the exporting company.

v. Exporting will be more difficult when the domestic currency is very strong in comparison to the target market’s currency.

When is Direct Exporting a Suitable Strategy?

l. Simple entry strategy suitable for companies that want to expand their market share or maximize their profit

m. Useful if the organization has the necessary skills, knowledge and finances.

n. Successful if the market selected is readily accessible and has similar regulations and customs to the company’s country.

o. If the market selected is too far, the transportation costs can make the product too expensive for consumers.

p. Companies must be comfortable with a substantial amount of risk.

q. Main advantage = provides the exporter with a lot on control over the process of how the product is positioned and sold.

*** See table 3.4 page 432-433 for conditions for direct exporting***

Indirect exporting: A company sells to an intermediary in their own country, which then sells the goods to the international market and takes on the various responsibilities that go along with selling and marketing abroad.

a. Can sell to the following intermediary customers:

i. Export houses: Wholesalers that purchase goods and sell them to international markets.

ii. Confirming houses: Companies that represent foreign businesses that do not have a well-established reputation and cannot obtain credit to purchase goods from other countries.

iii. Foreign companies based in the company’s country: Large companies that establish offices overseas and purchase locally produce products.

Piggybacking

b. This is when companies (termed “riders”) use the skills, experience, or resources of a company that is more experienced in exporting (termed “carrier”).

c. To use piggybacking, the following factors must be present:

i. The product or service that the rider wants to sell is complementary to the product line or function provided by the carrier.

ii. The product or service is suitable for the carrier’s distribution and marketing chain.

iii. The product or service has a markup substantial enough to justify efforts by the carrier

iv. The product or service has sufficient demand in the target market to predict substantial sales

Countertrade

d. Method most used for indirect exporting and is estimated to comprise 30% of international trade.

e. In this method, payments for goods and services are made by deliveries of other goods and services as well as, or in place of, financial payments.

f. One form of countertrade is called “buyback” which is when a buyer agrees to purchase a set quantity of goods on condition that the seller purchases the buyer’s product in return.

Advantages/Disadvantages of Indirect Exporting

g. Advantages:

i. Cheapest entry strategy available.

ii. Flexible and exporting activities can cease whenever needed.

iii. No exporting experience or skills are required.

iv. Intermediary company takes on all the risk.

h. Disadvantages:

i. Control of activities overseas is lost to the intermediary company.

ii. Will not gain valuable knowledge on how target market functions.

iii. Impossible for company to establish after-sales service or additional value-added activities.

When is Indirect Exporting a Suitable Strategy?

i. Should be considered by a company wanting to enhance its cash flow or increase its profits.

j. Not useful for a service.

k. Not useful for companies looking to develop long-term market share.

l. Often chosen by smaller and newer companies.

m. Good for companies that cannot deal with considerable amounts of risk.

n. Company has no control over the market its products are sold to, how they are sold, how they are marketed or the price obtained for them.

*** See table 3.5 page 437-438 for conditions for indirect exporting.***

2. Licensing: A transfer-related market entry strategy that involves a company granting permission to a company in another country to use its intellectual property for a defined time period.

Advantages/Disadvantages of Licensing

a. Advantages:

i. Good method if a company has valuable intellectual property.

ii. Requires little initial costs.

iii. Enables a company to enter a market that has restrictions on foreign companies.

iv. Licensor benefits from the licensee company’s local market knowledge.

v. Licensor gains a market stronghold very rapidly.

vi. Licensor’s capital is not tied up in foreign operations.

vii. Licensor has the option to expand into the market further by investing in the licensee at a later date.

b. Disadvantages:

i. Entry into market is limited

ii. Terms of the license must be monitored over the lifetime of the agreement, and enforcement might become necessary.

iii. Licensee might use the intellectual property provided to become a competitor.

iv. Intensive research and planning is required to identify the best licensee and develop a beneficial licensing agreement.

When is Licensing a Suitable Strategy?

c. Companies who want to increase their market share and have a proprietary product that can be easily manufactured at a foreign location should use this.

d. Best strategy for companies looking to expand into one or more markets with minimal risk.

e. Not good for companies that cannot cope with the risk that its intellectual property could be lost or that there might be increasing levels of competition.

*** See table 3.6 pages 440-441 for conditions for licensing. ***

3. Franchising: Similar to licensing, but company grants permission to use its name or trademarked goods.

a. Two forms of franchising:

i. First-generation: Company purchasing the franchise obtains permission to use a name or produce goods.

ii. Second-generation: Company purchasing the franchise receives a complete business package including instructions and directions on how it must operate, staff training and advice.

Advantages/Disadvantages of Franchising

b. Advantages:

i. Enables companies to establish international presence rapidly without having to invest significantly in the target market.

ii. Parent company benefits from the knowledge of the local market and their ties to the business community and government.

iii. Second generation franchise allow for more control in foreign markets, which enable the parent company to protect its reputation.

c. Disadvantages:

i. Product or service provided must be standardized across all countries.

ii. If one franchise fails, consumers will perceive the failure to be companywide.

When is franchising a suitable strategy?

d. Only suitable if companies have a name or trademark that they know will be seen as attractive in a target market.

e. Strategic objective should be to gain market coverage rapidly.

f. Should be prepared to devote time to researching laws and local customs as well as make trips to support franchises.

g. Should also be able to cope with potential loss of sales to their franchisees.

*** See table 3.7 pages 442-443 for conditions to franchising. ***

4. Subcontracting: Another transfer-related market entry strategy that involves a company providing a foreign manufacturer with raw materials, semi-finished products, components, a design or the technology to produce goods.

a. In many cases, the foreign manufacturer is simply sued as a processor or assembly agent.

b. Different levels of subcontracting include:

i. Original equipment manufacturer (OEM): A company in a foreign market produces goods to a required design and specification provided by the subcontracting party.

ii. Own design and manufacture (ODM): A company in a foreign market designs and manufactures a product for a company.

Advantages/Disadvantages of Subcontracting

c. Advantages:

i. Enables a company to produce goods at a lower cost than domestic production.

ii. No real cost to establish the manufacturing process in the target market.

iii. The relationship with the target market is relatively easy to terminate

iv. The company does not have to obtain a business license to conduct operations.

v. The company is free to focus on other core competencies

vi. The products can be produced in the target market, removing the need for transportation over long distances and payment of import duties and taxes.

vii. Products produced by subcontractors are sold under the contracting company’s brand name.

viii. Many governments welcome subcontracting agreements

ix. The company can benefit from the knowledge and experience of local manufacturers.

d. Disadvantages:

i. Distribution, marketing and sales must be organized

ii. Finding suitable subcontractors can be difficult and time consuming

iii. Subcontractors must be vetted carefully and monitored continuously

iv. There is the potential for a company’s reputation being damaged if a subcontractor is found to be operating in an unethical manner.

When is subcontracting a suitable strategy?

e. Companies with a strategic goal of reducing costs should consider subcontracting if they have a product that can be manufactured easily at a foreign location.

f. Can also allow a company access to complementary resources and diversify.

g. Beneficial when companies do not have substantial funds to invest in overseas expansion.

h. Cheap way to enter an overseas market.

i. Enables flexibility as production can cease once agreement is over.

j. Company needs to be able to cope with the risk that intellectual property can be lost or that it might increase levels of competition in the future.

*** See page 446 for conditions for subcontracting. ***

5. Strategic Alliances: A form of partnership with a local company in the target market in which businesses agree to share knowledge, skills and resources and, agree to share all profits and losses.

a. See figure 3.9 page 447 for ways to conduct strategic alliances.

Advantages/Disadvantages of Strategic Alliances

b. Advantages:

i. Companies can benefits from marketing knowledge and business skills that a local firm has developed.

ii. Allows company to sell goods at a competitive price as it avoids the additional expenses of duties, import taxes and transportation costs.

iii. Companies can develop a local presence without having to invest in the market.

iv. Problems with cultural and language differences can be avoided.

v. Requirements for local professional accreditation to conduct business activities are met by the partner company.

vi. Partnerships often receive tax benefits from the local government.

vii. Companies can bid for contracts in the local market.

c. Disadvantages:

i. Reputation of local partner will have impact on the company.

ii. Requires substantial commitment, so must choose partners carefully.

iii. Contract must be carefully drawn out and a process for dispute settlement established.

6. Branch Offices: Setting up a representative office in the foreign market.

a. Is a foreign direct investment entry strategy.

b. Often used as a first step to enter a market.

c. Good way to get solid information about market dynamics, customer preferences and product suitability.

d. Any type of business can benefit from this.

e. Retail Outlet: Creating a network of retail outlets on behalf of the parent company.

i. Can be wholly owned by parent company, or owned by operators with an exclusive relationship to the parent.

ii. Gives the parent company direct control over the whole distribution chain.

iii. Puts the company in direct contact with its customers.

Advantages/Disadvantages of Branch Offices

f. Advantages:

i. Relatively simply way to establish a presence, gather useful intelligence, network, perform product testing or even do marketing before making a more serious commitment to resources.

ii. Overcomes most market barriers.

iii. Gives company complete control over how everything is done.

iv. Gives the company direct contact with end-users.

g. Disadvantage:

i. Very expensive and time consuming.

When is opening a branch office a suitable strategy?

h. When company want to establish or expand their presence in a target country relatively easily.

i. When they can devote the managerial time required to employ personnel, find and manage offices, and maintain operations.

j. When they can deal with the legal aspects of being liable for civil action taken against the office.

7. Joint Venture: Tightly coupled form of strategic alliance and is also a form of foreign direct investment in which two or more companies form a strategic relationship with the aim of conducting business in a foreign market.

a. Partnership forms a separate business entity in the market for a limited duration.

b. Each participant must invest properly, finances or skills, and receive an interest in the assets and profits of the venture.

c. There are forms of joint ventures:

i. Research and development: Aim to share technical skills and knowledge to speed up the development of a new process or technology.

ii. Production: Involve one company providing production facilities to manufacture the goods of another company.

iii. Marketing and distribution: Involve a partnership between a company with goods or services and a company with marketing and distribution experience in a target market.

iv. Hybrid: Involve one or more of the functions in the other three types.

Advantages/Disadvantages of Joint Ventures:

d. Advantages:

i. Provide company with higher sales volumes, greater market penetration and greater profit potential than any other entry strategy.

ii. Since everything is shared, it reduces the amount invested by the company and reduces its risk.

iii. Can help reduce feelings of animosity shown to foreign companies by customers and governments.

e. Disadvantages:

i. Each partner must relinquish some control over the operations and management decisions must be shared.

ii. If one partner wants to pull out, it can be difficult to regain any of the funds invested in the venture.

iii. Sharing profits can be difficult if one perceives their investment as more important than the other.

When is a joint venture a suitable strategy?

f. When the company’s objectives are to maximize profits, rapidly expand market share or diversify their company’s activities.

g. When they can commit to a long-term investment.

h. When they are comfortable with a moderate amount of risk.

*** See table 3.10 pages 451-452 for conditions for joint-venture. ***

8. Greenfield Investment: Ultimate market entry strategy in which a company builds a wholly owned subsidiary in the target market.

a. Involves companies building everything they need in the foreign market from the ground up.

Advantages/Disadvantages of Greenfield Investment

b. Advantages:

i. Provides an opportunity for companies with substantial resources to invest to break into a new market while maintaining a high level of control over operations.

ii. It has the use of cheaper production facilities

iii. It obtains access to new processes, skills and personnel

iv. It can position itself as a local company

v. It can expand into new areas of trade and reposition itself.

vi. It can gain access to in-depth local marketing skills and knowledge.

c. Disadvantages:

i. Most expensive and riskiest strategy of all.

ii. Must to commitment to long-term association with the country they are entering, because losses of pulling out are substantial.

iii. No guarantee a large investment will be successful.

iv. Foreign investment could be substantially limited by the foreign market.

v. Careful planning must be made in order to establish the best form of investment.

When is Greenfield investment a suitable strategy?

d. Used most often by large, multinational corporations.

e. Good strategy when companies are facing trade barriers and might not be able to export to a market or when governments in a target market favor local positions.

f. To be successful, companies should be willing to invest long-term into their chosen market.

g. Should also be able to handle high levels of risk.

h. Market should be one that supports foreign investment.

*** See table 3.11 pages 453-454 for conditions for Greenfield investment. ***

9. Mergers and Acquisitions: A forms of direct investment.

a. Mergers: The ultimate form of partnership, because two companies are joined together.

b. Mergers can sometimes be considered a form of strategic alliance.

c. Acquisition: One company takes over another.

d. Acquisitions are usually faster transactions and purchasing company retains all business control rather than sharing it.

e. Mergers do not require cash and can often be accomplished without having to pay taxes.

Market Entry Strategies for Services

• Reasons for difference in strategies:

o Services are intangible

o Services are often produced in the location at which the customers will consumer it.

o Service provision relies on human interaction more than selling of goods.

• Selling consultancy services: It involves a service company providing a service to a customer in a foreign market.

o Commonly used by business and tax advisors, website designers, architects, engineers and accountants.

o Benefits include:

Can withdraw from the market relatively cheaply and easily if they need to.

Can obtain in-depth information about trade in the target market.

Do not have to share profits with partner companies.

o Disadvantages include:

Need to invest significantly in researching market information and preparing marketing strategies.

Foreign markets are very difficult to break into.

Obtaining payments for services delivered overseas can be problematic.

Customers in the foreign market will have a tendency to select a domestic service provider.

• Licensing

o Companies who provide technical services can sell a license to other service providers in the target market.

o Common for internet service providers, IT application service providers, or IT infrastructure service providers.

• Franchising

o Operates in the same way product franchising does.

o Popular for tax service providers, interior design services, courier services and computer maintenance services.

• Branch Offices

o Large service companies are more likely to use this

o Important because service relies on human interaction.

• Joint Ventures

o Important for service companies looking to target markets where foreign service provision is prohibited or in which government regulation dictates that a certain percentage of service companies must be owned by local businesspeople.

• Hiring a Sales Representative

o Similar to agents for product companies.

o Can identify local opportunities and market the service provider in the foreign market.

o Good when companies are uncertain about how to market its service in the foreign market or when there are language and culture barriers.

o Not used frequently by companies as a means to enter international markets.

Gathering Competitive Intelligence

• Key mistake companies make = ignore competitive environment.

• Competitive Landscape Map (CLM): A simple chart that indicates what is important to consumers in the chosen market.

o Should develop CLMs that:

One that justifies price and quality

One that justifies product and service qualities

One that justifies sales strategy

One that justifies key product differences.

o On each chart, company should indicate position of its competitors.

o Need to use competitive intelligence in order to obtain information about competitors through publicly available sources.

• Research for Competitive Intelligence

o Company profiles

Should use directories to find information about competitors

Information provided includes industry analysis and company information organized by country.

Can also look at company websites.

o News Stories

Should read newspaper articles from target market to gain an understanding of major industry initiatives.

Employee advertisements are also another useful tool of information as number of people being hired and positions advertised will give indications of future activities.

o Industry activities and sources

Companies can attend trade shows, conferences and seminars to get information.

Can also contact their country’s embassy in the target markets and obtain information from the trade commissioner there.