foreign market entry strategies 2

Global Marketing – Foreign Market Entry Strategies___________________________________________________________________________

1.0 INTRODUCTION........................................................................................2

2.0 RESEARCH METHODOLOGY..............................................................3

3.0 LIMITATIONS.............................................................................................3

4.0 FACTORS AFFECTING MARKET ENTRY.....................................3

4.1 Market Related Characteristics..................................................................4

4.2 Cost-Related Aspects....................................................................................4

4.3 Political/Legal Factors.................................................................................4

4.4 Tariff and Non-Tariff Barriers...................................................................4

MARKET ENTRY MODES..................................................................................5

5.0 EXPORTING.................................................................................................5

5.1 Indirect Exporting........................................................................................55.1.1 Export Management Company (EMC) or Export Houses.....................65.2.1 Agents and Distributors.........................................................................9

6.0 CONTRACTUAL AGREEMENTS.......................................................10

6.2 Franchising.................................................................................................11

7.0 COOPERATIVE AGREEMENTS........................................................12

7.1 Joint Ventures.............................................................................................13

7.2 Strategic Alliances......................................................................................15

8.0 Establishing Wholly Owned Subsidiaries...........................................16

8.1 Greenfield Operations................................................................................16

8.2 Acquisitions.................................................................................................17

9.0 THE ALTERNATIVE APPROACH....................................................17

9.1 Pre-Market-Entry Activities.....................................................................18

9.2 Market-Entry Strategies............................................................................189.2.1 Product Strategy...................................................................................199.2.2 Pricing Strategy....................................................................................199.2.3 Distribution Strategy............................................................................209.2.4 Promotion Strategy..............................................................................20

10.0 SUMMARY...............................................................................................20

11.0 CONCLUSION......................................................................................22

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1.0 INTRODUCTION

According to Malhotra, Agarwal & Ulgado, (2003) the choice of foreign market entry

strategies is a crucial part of the internationalisation process for firms. The entry

mode a firm chooses for a foreign market has major influences on the extent to which

the firm capitalises on market potential and on the strategic control it has over market

development. These entry modes include exporting, the use of agents and

distributors, contractual arrangements such as licensing and franchising, joint

ventures, strategic alliances, and wholly owned foreign direct investment (FDI),

including greenfield investments and mergers and acquisitions. This paper will

attempt to assess each of these entry modes, analysing the advantages and

disadvantages of each.

2.0 RESEARCH METHODOLOGY

For the purpose of this paper secondary research was undertaken. International

marketing and global marketing textbooks were the main source used. A small

number of relevant Journal articles were reviewed. These articles were accessed

through the data the electronic database Business Source Premier.

3.0 LIMITATIONS

Due to time constraints and the overall nature of this paper no primary research or

empirical research was conducted. The paper is based solely on previous literature on

the topic. The group have also been constrained by a maximum page limit for the

paper. Some topics and entry modes could be discussed in far greater detail.

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4.0 FACTORS AFFECTING MARKET ENTRY

Before assessing each market entry modes the group believe it is necessary to give a

brief overview of the market selection process. Certain criteria must be examined to

assess the attractiveness of the market. When assessing potential markets for entry,

firms should consider all of the following factors – market-related characteristics,

cost-related aspects, the legal and political environments, and tariff and non-tariff

barriers. (Johansson, 1997; Jeannet & Hennessey, 2004; Keegan & Schlegelmilch,

2001; Hollensen, 1998; Kotabe & Helsen, 2001)

4.1 Market Related CharacteristicsThese characteristics relate to areas such as market size and potential, market growth,

product-fit to market demands, buying power of customers, market seasons and

fluctuations, and the level and quality of competition (Hollensen, 1998). Companies

should evaluate these factors when deciding on which foreign markets to enter. These

factors help establish the attractiveness of the market and the extent to which the

company’s products or services are suited to that market.

4.2 Cost-Related AspectsJeannet & Hennessey (2004) state transportation costs, freight, and logistics are some

cost-related aspects that should be considered when assessing markets. Any company

wishing to enter a foreign market should consider these, as such costs are likely to

vary from country to country, thus each market must be evaluated individually in

order to weigh up the costs that may be incurred upon entry.

4.3 Political/Legal FactorsJohansson, (1997) argues that political risk is one of the first considerations firms take

in to account when deciding on what foreign markets to enter. Jeannet & Hennessey,

(2004 p.212) propose that political risk may result from “in anything from limitations

on the number of foreign company officials and on the amount of profits paid to the

parent company, to refusal to issue a business licence”. The possibility of changes in

government policy is another factor that may have an impact on profitability (Keegan

& Schlegelmilch, 2001).

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4.4 Tariff and Non-Tariff BarriersTariffs and duties are significant factors of the regulatory environment of foreign

countries and should be evaluated by companies when assessing potential foreign

markets. Non-tariff barriers include licensing regulations, packaging and labelling

requirements, weight requirements, quotas, and trade control (Keegan &

Schlegelmilch, 2001). The authors outline that not all of these barriers are

discriminatory in that some are put in place to ensure public health and safety,

however “the line between social well-being and protection is a fine one” (Gillespie,

Jeannet and Hennessey, 2004, p.34). These together with the above mentioned tariff

barriers are important factors in the evaluation of foreign markets.

The factors mentioned above represents a brief overview of the main factors that a

company should consider when evaluating what markets to enter. These factors may

also be useful in assessing which market entry modes to use, as for example a

regulation that requires local management may encourage a firm to use franchising or

joint ventures.

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MARKET ENTRY MODES

5.0 EXPORTING

Exporting can take two forms, indirect and direct exporting. Indirect exporting is best

suited to small firms with limited resources who have only a passing interest in

exporting, while direct exporting is a strategy used by a firm that wants to establish a

greater presence in foreign markets. The characteristics, merits and limitations of each

are outlined below..

5.1 Indirect ExportingTerpstra & Sarathy, (1997) state “The firm is an indirect exporter when its products

are sold in foreign markets but no special activity for this purpose is carried on within

the firm” (1997, p. 514). This method of foreign market entry involves the exporting

manufacturer hiring an independent organisation, which becomes, in effect, the export

department for the producer. Indirect exporting is often said to be like a domestic sale

(Terpstra & Sarathy, 1997); (Hollensen, 1998). The producer completes a domestic

sale that, in turn, results in an export sale by someone else (Walvoord, 1982). Simply

put, indirect exporting involves selling to others who export. Thus the firm is not

engaging meaningfully in global marketing as the firm’s products are being carried

abroad by others.

This market entry mode is more likely to be exercised by a firm who primarily view

international markets as a means of disposing excess production, or a firm with

limited resources available for international expansion (Hollensen, 1998). Indirect

exporting often becomes the natural first step for newcomers to the international

scene, as it requires minimal financial and management commitment, when compared

to direct exporting.

The main advantage of indirect exporting is that it offers access to foreign markets

without the complexities and risks of direct exporting. For companies with little or no

experience in selling abroad the use of a domestic intermediary provides the firm with

readily available expertise (Jeannet & Hennessey, 2004). Also these types of

distribution channels are inherently less expensive than their direct exporting

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counterparts (Walvoord, 1982) as operations such as transportation are handled by the

independent organisation.

There are a number of disadvantages with this entry mode. It offers least control over

how, when, where and by whom the products are sold (Doole & Lowe, 2001). As a

result the exporting firm loses control of the 4 P’s, which may lead to products being

sold through unsuitable channels, with poor supporting services and little promotion,

while being inappropriately priced. This loss of control may damage the firm and its

products image and reputation abroad. The only protection in this situation is for the

firm to do a thorough background search to make sure that the domestic

intermediary’s reputation will not hinder the firm’s reputation (Walvoord, 1982).

There is also the disadvantage that the skills and know-how developed through direct

exporting experiences are accumulated outside the firm and not in it (Johansson,

1997).

Authors differ on what they consider to be the most important methods of indirect

exporting. Doole & Lowe (2001) offer domestic purchasing, piggyback operations,

and Export Management Company (EMC) or Export Houses and trading companies

to be the main methods. Hollensen (1998) agrees with the previous methods while

adding brokers as another important method of indirect exporting. Johansson (1997)

focuses on trading companies and EMC’s as the important methods. After

examination of the literature EMC’s are most commonly highlighted. Consequently

this method of indirect exporting will now be discussed.

5.1.1 Export Management Company (EMC) or Export Houses

EMC’s or Export houses are specialist companies established to act as the export

department for an array of companies (Hollensen, 1998; Doole & Lowe, 2001). The

EMC carries out business in the name of each firm it represents. EMC’s take care of

the necessary exporting documentation. Their knowledge of local buying behaviour

and government regulations are specifically useful in hard to penetrate markets

(Hollensen, 1998). EMC’s are particularly advantageous in helping small to medium

sized firms with little international market experience as they allow individual firm’s

to gain far wider exposure of their products in foreign markets at much lower costs

than they could achieve on their own. By carrying a large range of products, EMC’s

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can spread their selling and administration costs over more companies as well as

reducing transportation costs due to the economies gained from large shipments.

Authors (Hollensen, 1998; Doole & Lowe, 2001) have identified similar

disadvantages of EMC’s, which include:

Selection of markets may be made on the basis of what is best for the EMC

rather than what is best for the producer. The EMC may specialise, for

instance, by geographical region, the market chosen, however, may not

correspond to the producer’s objectives.

Sometimes EMC’s are tempted to carry too many product ranges as a result

some products may not be given the required attention from salespeople.

Competing product lines may be carried by the EMC. Some product lines

may be given preferential treatment, again to the detriment of another firm.

EMC’s are paid on commission therefore products which may require a

sustained marketing effort to achieve success in the longer term may be

overshadowed by products with immediate sales potential.

Therefore much time should be devoted to carefully selecting a suitable EMC and the

firm must be prepared to dedicate resources to managing the relationship and

monitoring their performance (Doole & Lowe, 2001).

5.2 Direct ExportingAccording to Hollensen “direct exporting occurs when a manufacturer or exporter

sells directly to an importer or buyer located in a foreign market” (1998, p.225).

The difference between indirect and direct exporting is that in the latter, the

manufacturer performs the export task rather than delegating it to others. The

exporting firm handles every aspect of the exporting process from market research

and handling documentation to foreign distribution and collections of payments.

As indirect exporters grow more confident they may venture to undertake their own

exporting operations (Hollensen, 1998). These operations include building up

overseas contacts; undertaking market research, handling documentation and

transportation and designing and implementing marketing mix strategies.

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A company may engage in direct exporting if they wish to establish a more permanent

role in international markets.

Direct exporting has a number of advantages over indirect exporting. Firstly, there is

greater potential profit. Direct exporting is a more proactive approach to foreign

markets than indirect exporting. The exporting firm has “greater control over the

selection of markets, greater control over the elements of the marketing mix, improved

feedback about the performance of individual products, changing situations in

individual markets and competitor activity, and the opportunity to build up expertise

in international marketing” (Doole & Lowe, 2001) pg. 255). A closer relationship is

established with buyers and more knowledge is gained on the marketplace. Another

advantage of direct exporting is that the firm’s foreign partner will have a vast

knowledge of the local marketplace such as local customs. Thus the foreign partner

becomes a prime source of invaluable market research (Walvoord, 1982). Due to its

day-to-day operations of a foreign market the firm will generate much in-house

knowledge.

There are a number of drawbacks associated with direct exporting. The company

needs to devote more time, personnel, and corporate resources than indirect exporting

requires. The level of commitment required to engage in direct exporting is substantial

and takes the form of investment in the international operation through allocating time

and resources to a number of supporting activities (Doole & Lowe, 2001). The firm

must also bear the distribution, administrative and marketing costs of their

international operations. This increased level of commitment leads to an increase in

the level of responsibility and risk faced by the firm. In particular the firm has to

endure risk of collecting payments in international markets. Hollensen (1998)

identifies the two main modes of direct exporting to be agents and distributors. These

will now be discussed.

5.2.1 Agents and Distributors

The use of agents is the most frequently used method to initially penetrate a foreign

market. An agent is an individual or a company that represents a foreign organisation

in the target market. Products are sold into the target market through this third party.

The agent is usually from the foreign market, however this is not essential. Agents

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usually work on a commission basis and within a clearly defined geographical area.

Agents usually represent a number of firms and are not exclusively promoting the

firm’s products.

A high degree of control on fixed payment (commission basis) related to the level of

sales turnover. Many of the costs of doing business abroad are avoided. It does not

involve the capital commitment of direct investment, nor does it put the firms know

how at risk as licensing may do. For companies with little or no experience in selling

abroad the use of a domestic intermediary provides the firm with readily available

expertise (Jeannet & Hennessey, 2004).

Agents offer very little control to the firm on operations in foreign markets. Agents

are not employees of the firm thus operate for their own interests. Some agents

represent a large number of firms and neglect the ones that bring in the lowest returns

(Hibbert, 1989). Firms do not gain valuable export experience as this is accumulated

outside the company. Depending on the agreement collection of payments may not be

handled by the agent and may be the responsibility of the firm.

Distributors are different from agents in that they generally purchase the exporter’s

products with a view to reselling them in the foreign market. The distributor is

responsible for the marketing, promotion and distribution of the firm’s product in the

target market. A commission is not paid to the exporter because the exporter has

already received payment for the goods. As distributors are established in the market

they generally good market knowledge, contacts and an established distribution

network. They often require guarantees from the exporter with regards to product

quality, and after sales service. The exporter on the other hand may have demands in

relation to how the product is to be marketed or how it is priced. Similar to with an

agent, the exporter can limit the geographical area or the industry sector in which the

distributor can work (Hibbert, 1989).

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6.0 CONTRACTUAL AGREEMENTS

Contractual agreements take the form of licensing and franchising. Licensing as a

form of market entry is beat suited to a firm that wishes to participate in international

marketing but do not have the resources or know-how to do so. Franchising, is a form

of licensing that offers a company a chance to develop a presence in a foreign market

while retaining a significant amount of control over their operation. Licensing and

franchising will now be discussed in greater detail below.

6.1 Licensing According to Johansson (1997, p.154) licensing involves “offering a foreign company

the rights to use the firm’s proprietary technology and other know-how, usually in

return for a fee plus a royalty on revenues”. The licensor may give the licensee the

right to use the firm’s patent on a particular product or a process, manufacturing

know-how, technical advice and assistance, marketing advice, or the use of a

trademark or the company’s name (Hollensen, 1998). The time periods for licences

may vary, as noted by Jeannet & Hennessey (2004), depending on the level of

investment required by the licensee to enter the market. As it is usually the licensee

who makes all the necessary capital investments with regard to equipment, marketing

expenditure etc., this party may insist on a lengthy agreement in to recover the cost of

investment.

Hollensen (1998) describes licensing as a two-way process where both parties bring

substantial benefits to the relationship. The licensor, while allowing the licensee to

gain access to their manufacturing capabilities, technology, trade marks etc., also

benefits from access to the capabilities of the licensee, which may be in areas such as

technology or manufacturing capabilities. In this way, a two-way process is created

between licensor and licensee that benefits both parties as information is exchanged

which may aid in improving the operations of both parties.

Hollensen (1998) outlines the various licensor-licensee arrangements. When a

licensing agreement involves a product or service, the licensee is usually responsible

for the production, delivery and marketing of the product/service in an agreed area.

The licensee bears all the risk associated with investment in the venture. Royalties or

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fees are the licensor’s main source of income resulting for the licensing agreement

and may involve a combination of an initial lump sum paid at the start of the contract

and an on-running loyalty based on licensee sales.

According to Jeannet & Hennessey, (2004) licensing is beneficial, if a company

wishes to engage in international marketing but does not have the capability or the

time to do so. In this case the company can still realise the benefits of foreign markets

by using a licensee who may bring experience of the potential market and marketing

know-how, enabling the licensor to engage in international marketing. Licensing is

also a relatively inexpensive way of achieving foreign market entry.

The main disadvantage of licensing is the limited form of participation by the licensor

in a foreign market. As the manufacturing and technological know-how is licensed out

to the licensee, the licensor loses control and can be adversely affected if the licensee

does not exploit all the potential returns of the agreement. Jeannet & Hennessey

(2004) propose another significant disadvantage in terms of the licensors dependence

on the licensee to create sales thus producing royalties for the licensor.

6.2 FranchisingDoole & Lowe (2001) state franchising is a means by which a company can market its

goods and services by granting the franchisee the legal rights to use their business

format. According to (Keegan & Schlegelmilch, 2000) it differs from licensing, in that

there is an entire business concept transferred between parties and a greater degree of

control over operations is maintained.

There are two major types of franchising outlined by (Hollensen, 1998). Firstly there

is product and trade name franchising. This type of franchising involves a distribution

system where suppliers agree contracts with dealers to buy or sell products or product

lines. The dealer uses the trade name and trademark of the company. The second type

outlined by Hollensen (1998) is the business format ‘package’ franchising.

International business format franchising “is a market entry mode that involves a

relationship between the entrant (the franchisor) and a host country entity, in which

the former transfers, under contract, a business package (or format), which it has

developed and owns, to the latter” Hollensen (1998, p.242).

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The main advantage of franchising is it represents a quick way for a company to enter

a foreign market, and similar to the case of licensing, this option represents a

relatively inexpensive mode of entry (Keegan & Schlegelmilch, 2000). However,

unlike licensing, franchising involves a greater element of control. In franchising there

are contractual agreements in place that provides the franchisor with a great degree of

control over the franchisee’s operations, thus enabling the brand image to be upheld

and protected internationally. The franchisee’s profits are tied to their efforts and

performance. For this reason the franchisee will be motivated to do all they can to

ensure the business works and to ensure the venture is profitable. Thus, as the

franchisee grows the business, the franchisor will receive a fee tied to the franchisee’s

profits.

Doole and Lowe (2001) identify differences in culture exist in different foreign

markets as a potential disadvantage of franchising. While there is a contractual

agreement in place between the franchisor and franchisee as to how the franchise

operations should be carried out, the risk still remains of problems in relation to

performance standards. If a franchise is not operated to the standards set out by the

parent company, this may have a damaging affect on the brand (Kotabe & Helsen,

2001).

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7.0 COOPERATIVE AGREEMENTS

Joint ventures and strategic alliances are two forms of cooperative agreements that

may be undertaken between firms to develop a presence in a foreign market. Joint

ventures are best suited to two companies with complementary products or services,

thus enabling a good strategic fit. Strategic alliances may be used by a firm that have a

desire to enter foreign markets but lack the ability or confidence to do it alone, thus

seeking the assistance of a player in the foreign market. These will now be discussed

in greater detail.

7.1 Joint Ventures“ A joint venture is any kind of cooperative arrangement between two or more

independent companies which leads to the establishment of a third entity

organisationally separate from the “parent” companies.” (Buchel et al., 1998, pg. 6).

A joint venture with a local partner represents a more extensive form of participation

in foreign markets than either exporting or licensing. A joint venture is differentiated

from other forms of strategic alliances and collaborative agreements as the partners

create a separate legal entity. (Cateora & Graham, 2002) highlight four factors

associated with joint ventures:

1. “JVs are established, separate, legal entities.”

2. “They acknowledge intent by partners to share in management of the JV.”

3. “They are partnerships between legally incorporated entities such as

companies, chartered organisations, or governments, and not between

individuals.”

4. “Equity positions are held by each partner.”

A joint venture may be the only way to enter a country or region if government

contract negotiation practices routinely favour local companies or if laws prohibit

foreign control but permit joint ventures. Besides operating to reduce political and

economic risk, joint ventures provide a less risky way to enter markets with regards to

legal and cultural issues than would be the case in an acquisition of an existing

company (Keegan & Schlegelmilch, 2000). In joint ventures the costs and risk of

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going global are reduced, safeguarding resources that cannot be obtained via the

market. Firms have improved access to financial resources, benefit of economies of

scale and advantage of size. They also may have access to new technology and

managerial practices. The strategic goals of a joint venture are focused on the

creation and exploitation of synergies as well as the transfer of technologies and

skills. The equity share of the international company can range between 10% and 90%

but is generally 25-75% (Terpstra & Sarathy, 1997). There are six types of joint

ventures available to organisation and these are outlined below.

Complementary technology ventures: The partners combine their technologies to

diversify their existing product/mkt portfolios.

Market technology joint ventures: Combination of Mkt knowledge of 1 partner with

the production or product know how of the other

Sales joint venture: The producer and a local partner cooperate in an

arrangement, which is a mixture of independent

representation and own branch.

Concentration joint ventures: Competing partners cooperate to form larger and

more economical units.

Research &Development joint ventures: Create synergy by making joint use of research

facilities, exploiting opportunities to specialise

and standardise, combining know how and

sharing risks.

Supply joint ventures: Competitors with similar input needs cooperate to

safeguard supplies, reduce procurement costs or

prevent the entry of new competitors.

Adapted from (Buchel et al., 1998)

According to Buchel et al., (1998) the reasons to form a joint venture can be spread

out over internal reasons, competitive goals and strategic goals. Internal reasons

would be to spread the cost and risk of going global, safeguarding resources which

cannot be obtained via the market, improving access to financial resources, benefits of

economies of scale and advantage of size, access to new technology, managerial

practices and to encourage entrepreneurial employees. In the area of competitive

goals joint ventures would influence the structural evolution in the specific industry,

the pre-empting of competitors, the defending of the company as globalisation makes

boundaries retract, and the creation of a stronger competitive unit. The strategic goals

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focus on the creation and exploitation of synergies, the transfer of technologies and

skills and the diversification.

The main disadvantage of this global expansion strategy is that a company incurs very

significant costs associated with control and coordination issues that arise when

working with a partner. Conflict may arise between the two management teams and

the relationship might deteriorate especially if they are competitors. This scenario can

occur when joint ventures are formed as a source of supply for third country markets.

This must be carefully thought out in advance. One of the main reasons for joint

venture “divorce” is disagreement about third country markets in which partners face

each other as actual or potential competitors (Buchel et al., 1998).

Internationality also poses problems between partners with regards to cultural barriers,

different negotiating styles, ideas, pay systems, business practices and human

resources. Cross-cultural differences in managerial attitudes and behaviour can

present formidable challenges for joint ventures (Keegan & Schlegelmilch, 2000).

Terpstra & Sarathy, (1997) identify the problem of conflicting interests between

partners as well as the difficulty firms face integrating join ventures into their

operations. Disagreements also arise on the issue of the position in the value chain

like the compatibility of products with the partners. Buchel et al., (1998) also

proposes that property relation is a huge bone of contention as it encompasses the

agreements on profit sharing, which firm has the authority to make what decisions and

control, the layout and structure of contracts and the dominance of one of the partners.

Other problems that management must deal with are problems of harmony: the

insufficient agreement between the partners.

Problems of translation: from the strategic principles to a joint venture action plan

Problems of coherence: differing demands on the joint venture.

Problems of adjustment: changes in the environmental circumstances of the joint

venture over time. (Buchel et al., 1998)

7.2 Strategic AlliancesCateora & Graham (2002) define a strategic alliance as “a business relationship

established by two or more companies to cooperate out of mutual need and to share

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risk in achieving a common objective.” Alliances differ from joint ventures because in

an alliance both firms pool their resources directly in a collaboration that goes beyond

the bounds of a joint venture (Jeannet & Hennessey, 2004). The use of strategic

alliances as an international market entry mode has increased as firms increasingly

recognise the necessity to internationalise and feel the need for foreign help. Jeannet

& Hennessey (2004) outline three different types of strategic alliances:

Technology-Based Alliances: As the name suggests firms share technology

capabilities in these alliances. The most common reasons for firms entering

these alliances include access to markets, access to complementary

technologies, and a decrease in time taken for new innovations.

Production-Based Alliances: Production facilities and capabilities are shared

between companies with component linkages to reduce costs. This form of an

alliance is most commonly used when the production requirements are very

expensive to acquire.

Distribution-Based Alliances: Firms sometimes form alliances with an

emphasis on distribution. A number of drinks companies have formed strategic

alliances with the sole emphasis on distribution of the products.

The main advantage of strategic alliances is the opportunities for rapid expansion into

new markets and access to new technology. They also offer more efficient production

and marketing costs and access to additional sources of capital.

The drawbacks of strategic alliances are similar to those of joint ventures. The parties

involved must be able to work together successfully despite any cultural differences

that may occur between them. Differences of managerial styles may cause a problem,

and also could disagreements may occur on the perceived level of importance of each

party involved.

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8.0 Establishing Wholly Owned Subsidiaries

Companies, wanting to enter foreign markets while retaining ultimate control and

avoiding the related costs of other entry strategies, may pursue a wholly owned

subsidiary approach. Greenfield operations is one such approach where the company

establishes a completely new operation in the foreign market, while strategic

acquirements may be used to establish a position in a foreign market by purchasing an

existing business.

8.1 Greenfield OperationsGreenfield investments are when a firm attempts to establish operations in a foreign

country from scratch. The main reasons for a Greenfield operation is to acquire raw

materials, to operate at lower manufacturing costs, to avoid tariff barriers, to satisfy

local demand, or to penetrate local markets (Hollensen, 1998). It is particularly

affective for market penetration for a number of reasons. There is the elimination

price escalation caused by transport costs, custom duty fees, and local turnover taxes.

Also, a supply of goods can usually be guaranteed to resellers, minimizing potential

channel conflicts. There is also a greater willingness for a foreign manufacturing

facility to adapt products and services to local customer requirements (Johansson,

1997).

The major disadvantage of Greenfield operations is a firm has to establish suppliers,

buyers, establish distribution channels etc. from scratch. A huge resource commitment

is required which leads to massive risks. FDI generally means the company becomes a

full-fledged member of the economic and social scene and therefore is exposed to

country specific threats. The brand image can be affected if a company sets up

manufacturing facilities to avail of lower cheaper labour, as products must carry a

country of origin label (Johansson, 1997).

8.2 AcquisitionsRather than establishing a wholly owned subsidiary from scratch the company can

consider an acquisition of an existing company. Acquisitions offer swift entry into a

market and often provide access to distribution channels, an existing customer base,

and, sometimes an established brand name (Hollensen, 1998). An existing company

will already have a product line to be exploited, much of the distribution network and

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dealers needed, and a company can simply get on with marketing its new products in

conjunction with the existing line (Johansson, 1997).

A number of disadvantages exist with acquisitions. The cost of acquiring an existing

company is generally high. It is often difficult to find a suitable company to acquire,

whos existing product range are compatible with the new products to be introduced.

Rationalisation of operations is sometimes required, especially if certain functions are

to be centralised. As a result employees may need to be laid off in some of these

functional areas, which could lead to bad publicity. Sometimes employees of the

acquired company look on an acquisition of a their company unfavourably

The Emerging Electronic Marketing Mode

Gronroos (1999) identified the growing importance of the electronic marketing mode

in international markets. “Electronic marketing as an internationalising strategy means

that the service firm extends its accessibility through the use of advanced electronic

technology” (Gronroos, 1999, p.295). Electronic strategies change the logistics of

services more so than for goods. The reason for this is that at some point a physical

object has to travel from the maker to the consumer but services however, do not

necessarily require a physical presence. Hence the use of technology has reduced the

need to have local physical presence in many downstream and support activities. It

allows networks to concentrate and pool knowledge and resources from separate

locations.

The use of hardware, software and network technologies have brought about this new

market entry strategy. For example, “the Internet can be used as a form of market

entry as it is a way of communicating its offerings and putting them up for sale, and a

way of collecting data about the buying habits and patterns of its customers and using

network partners to arrange delivery and payment” ( Gronroos, 1999, p.295).

The research in this area is limited at the moment as it is a new and emerging area

and further empirical research is needed.

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9.0 THE ALTERNATIVE APPROACH

Kotler, Fahey & Jatusripitak, (1985) outline an alternative approach to market entry

not discussed in the majority marketing textbooks. This approach proved immensely

successful for Japanese firms and contributed in a large way to the extraordinary

growth of the Japanese Economy in the 1970s and 1980s. They developed a high

degree of proficiency in formulating entry strategies to penetrate every market

selected as a target. The Japanese did not originally formulate the market entry

strategies but they do display the Japanese ability for meticulous implementation of

classic marketing techniques displayed elsewhere. Japanese entry strategies can be

discussed in two stages (i) Pre-market entry strategies and, (ii) Market entry

strategies. This alternative approach for market entry will now be discussed.

9.1 Pre-Market-Entry Activities The Japanese do not merely export products made for their domestic market to new

markets. They spend large amounts of time analysing market opportunities and

attempt to gain a deep understanding of how customers and markets work in the target

markets they are considering. Market feasibility studies and marketing research are

considered the two most important pre-entry market activities undertaken by the

Japanese.

The pre-market-entry strategy usually follows a number of steps:

Study teams are sent to the country. These teams spend several months

conducting a feasibility study before making their recommendations.

Sales subsidiaries and personnel are stationed in various companies.

Japanese trading companies and the government body JETRO conduct market

research on many markets and provide numerous valuable insights and market

information to Japanese companies.

Graduate students are sent to these countries to conduct market research.

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All these different sources of market information will be channelled to the

company. The collective information will be analysed and market

opportunities will be identified before any market is entered.

9.2 Market-Entry StrategiesOnce an opportunity has been identified the Japanese will produce a strategic market

entry plan that incorporates the 4Ps.

9.2.1 Product Strategy

The Japanese had three product categories for foreign market entry. The first category

is lower-cost products. While American companies were concentrated on creating

sophisticated products carrying high prices, the Japanese were content to manufacture

small, simple, more standardized products. This strategy was aimed at building

market share, while at the same time drive down costs. A famous example of this was

Honda’s entry into the motorcycle market where they introduces a smaller, less

powerful, easier-to-operate machine that was different from anything else on the

market.

The second category is products with innovative features. Some Japanese

companies entered foreign markets by offering products with more functions and

features than existing products on the market. This strategy was used for technical

products with short lifecycles. The aim of this strategy is to speed up and shorten the

product lifecycle in order to deter competitors introducing a similar product to the

market.

The third category involves products with high quality and service. If products are

unreliable and if service cannot be guaranteed it is unlikely a company will succeed in

a market. Reliability was of key importance to Japanese firms. These firms often

stressed their superior quality as a distinguishing factor of theirs. Service was also

focused on and the firms would go out of their way to deal with customers who had

problems.

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9.2.2 Pricing Strategy

Every market the Japanese entered they used a similar pricing entry strategy. Products

were introduced at deliberately low price to build up market share and to gain a long

run dominant position in the market. These firms were willing to sacrifice profits and

in some cases incur losses, which are seen as an investment in their long-term

development in the market. Often Japanese companies used an entry strategy that

linked low quality, high quality and superior service in the same offering. Sometimes

market leadership positions were gained in each of these three attributes.

9.2.3 Distribution Strategy

Product distribution was a major challenge for Japanese companies as they initially

had a poor quality reputation. To overcome this they chose to focus on specific market

segments and entry points. Many companies chose to focus on the Californian market

initially before expanding across America. Japanese firms also focused on selective

distribution channels and dealers by seeking out distribution channels that would

maximise market coverage.

Another distribution strategy used by Japanese firms was to have US firms distribute

their goods under US brand names. This was used to overcome the barriers to

distribution in American markets. They also established their own overseas sales

subsidiaries in order to better understand the market and to be better able to manage

marketing in these markets. Middlemen responsible for selling their products were

usually offered higher commission for selling Japanese products than those of their

competitors in order to create product push from these sources.

9.2.4 Promotion Strategy

These firm’s promotional strategies reflected their long-term intentions in the foreign

market. To support the push strategy created through distribution channels they spend

heavily on advertising and promotion. Firms that were selling under their own

corporate brand name particularly spent heavily on advertising. These firms pushed

their own name and tried to develop their own image and reputation.

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10.0 SUMMARY

To summarize this paper the group have devised a model outlining the advantages and

disadvantage of each foreign market entry strategy discussed. The firms most likely to

use each entry strategy are also highlighted.

Advantages Disadvantages Best Suited ToIndirect Exporting

Less complexities than direct exporting

Less Risk Involved Readily Available

Expertise

Loss of control over 4P’s Poor Supporting Services Little Promotion Minimal experience

gained within the firm. Less Profit Potential

Firms getting rid of excess capacity. Small firms with limited resources.

Direct Exporting

Greater Profit Potential Greater control over

marketing mix. Closer to marketplace Closer relationship with

buyers. In-house experience

and knowledge gained

High risk More time, personnel

and corporate resources committed.

Substantial Investment Distribution,

administrative and marketing costs faced by the firm

Firms that wish to establish a more permanent role in international markets.

Licensing Inexpensive way of achieving foreign market entry

Licensor takes minimal risks

Limited participation in international markets.

Licensor passes technology know how on to other party.

Dependent on Licensee to exploit products potential.

Lack of control over operations.

Companies that wish to participate in international markets but do not have the time or capabilities to do so.

Franchising Quick way for company to enter foreign market

Relatively Inexpensive Reasonable level of

control. Profits dependent for

both parties on performance of franchise

Brand image at threat from poor performance from franchisee.

Minimal skill and experience gained within the firm.

Firms with strong a brand or processes.Effective method of internationalisation for services firms.

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Joint Ventures

May be only way of gaining access to markets

Improved access to financial resources

Economies of scale Access to new

technologies and management practices.

Significant costs JV vulnerable as it is

reliant on relationship between two parties.

Cultural differences prominent

JV partner may become dynamic competitor.

Companies with complementary products and capabilities.Companies with a good “fit”.

Strategic Alliances

Can rapidly expand into new markets

May offer efficient marketing and production

Access to additional sources of capital

Not a separate legal entity.

Reliant on positive relationship between parties involved.

Firms that recognise the necessity to internationalise but feel the need for foreign help.

Acquisitions Swift access into market.

Access to distribution channels

Existing customer base High control

Very high costs Difficult to find suitable

company for acquisition Compatibility problems

with companies’ products.

Large, heavily resourced firms that can identify a suitable firm for acquisition.

Greenfield Operations

Access to Raw materials

Lowers manufacturing costs

Avoids tariffs Market penetration Total control

Have to establish operations from scratch

Must set up distribution channels, source suppliers & distributors etc.

Huge resource commitment

Large heavily resourced firms.Firms who wish to reduce costs, particularly labour costs.

11.0 CONCLUSION

The selection of a market entry strategy is critical to the success of a firm’s foreign

operations. Each firm planning on internationalising has a differing set of

circumstances. These circumstances can be either internal or external to the firm.

Internal circumstances include availability of resources, experience of staff and spirit

of entrepreneurship. External circumstances include size of home market,

attractiveness of foreign markets, and political conditions in foreign markets to name

but a few. These circumstances determine the suitability of the different market entry

strategies.

Due to advances in telecommunications and increases in trade agreements the world is

truly becoming a global village. The trend of globalisation has led to fierce

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competition where internationalisation is no longer an option but a necessity in many

industries. Foreign market entry is no longer restricted to large multinationals and is

now a matter of concern for all businesses regardless of size.

REFERENCESBuchel, B., Prange, C., Probst, G., Ruling, C.; (1998) International Joint Venture Management: Learning to Cooperate and Cooperating to Learn, London

Cateora, P. & Graham, J. (2002) International Marketing. NY, McGraw-Hill.

Doole, I. & Lowe, R. (2001) International Marketing Strategy. London, Thomson.

Hollensen, S. (1998) Global marketing : A Market-Responsive Approach. London, Prentice Hall.

Jeannet, J.-P. & Hennessey, D. (2004) Global Marketing Strategies. Boston, Houghton Mifflin.

Johansson, J. (1997) Global marketing : Foreign Entry, Local Marketing, and Global Management. Chicago, Irwin.

Keegan, W. & Schlegelmilch, B. (2001) Global Marketing Management - A European Perspective. London, Prentice Hall.

Kotabe, M. & Helsen, K. (2001) Global marketing Management. NY, John Wiley and Sons.

Kotler, P., Fahey, L. & Jatusripitak, S. (1985) The New Copetition - What Theory Z Didn't Tell You About Marketing. New Jersey, Prntice-Hall.

Malhotra, N. K., Agarwal, J. & Ulgado, F. M. (2003) Internationalization and entry modes: A multitheoretical framework and research propositions. Journal of International Marketing, 11(4), pp. 1-31.

Terpstra, V. & Sarathy, R. (1997) International Marketing. Florida, The Dryden Press.

Walvoord, W. (1982) Foreign market entry strategies. S.A.M. Advanced Management Journal, 48(2) Spring, pp. 14-27.

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foreign market entry strategies 2

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