Foreign market entry strategies

Ashutosh Sharma

Sakshi Madan

Basic foreign expansion entry decisions

• A firm contemplating foreign expansion

must make four decisions

o Which markets to enter??

o When to enter these markets??

o What is the scale of entry??

o Which is the best mode of entry??

Basic Market Entry Decision- Which Market??

• Different long-run profit potential for firms

o Size of market o Purchasing power (present wealth)o Future wealth

• Benefits cost & risks trade off– rank markets

o Future economic growth rateso Free market system & country’s capacity for growtho Stable and developing markets without upsurge in inflation

rates or private-sector debt

• Value an international business can create in a market

o Suitability of product for market o Nature of indigenous competitiono Not widely available & satisfies an unmet needo Greater value translates into an ability to charge higher prices & build sales volume

more rapidly

Basic Market Entry Decision – Timing of Entry??

• Early entry - Firm enters foreign market before other foreign firms

• First mover advantage

o Ability to preempt rivals & capture demand by establishing strong brand name

o Build sales volume and ride down the experience curve with a cost advantage

o Create switching cost that tie customers into products & services

• First mover disadvantages –

o Pioneering costs o Time & effort in learning the rules of the gameo Mistakes due to ignoranceo Liability of being a foreignero Costs of promoting & establishing a product – educating customers (KFC in

China -> benefit to McDonald’s)

Mode of Entry

Scale of Entry??

Large scale entry

Requires commitment of significant resources & implies rapid entry

Strategic commitment

•Decision that has long term impact & is difficult to reverse (entering market on large scale)

•Change the competitive playing field & unleash number of changes – e.g. how competitors might react

Can limit strategic flexibility

Small Scale Entry:Advantages:

Time to learn about the market.Limits company exposure.

Disadvantages:May be difficult to build market share.Difficult to capture first-mover

Which Foreign market entry mode?

EXPORTING• The commercial activity of selling and shipping goods to a foreign

country

• Indirect Exporting

• Export management companies

Direct Exporting

o Firms set up their own exporting departmentsAdvantages:

• Easy implementation of strategy• Less investment abroad which helps small firms also to enter international

business• Minimal risks• Casual international marketing effort• Firm may manufacture in centralized location & export to other national

markets to realize scale economies from global sales volume (Sony/TV, Matsushita/VCR, Samsung/Chips)

Disadvantages:

• Susceptibility to trade barriers

• Logistical difficulties

• Less suitable for service products

• Susceptibility to exchange-rate fluctuation

• Not appropriate if other lower cost manufacturing locations

exist

• High transport costs can make exporting uneconomical

especially bulk products

CONTRACTUAL AGREEMENTS are long-term, non-equity associations between a company and another in a foreign market

LICENSING• An arrangement whereby a licensor grants the rights to intangible property to

another entity for a specified period and in return, the licensor receives a

royalty fee from the licensee.

• Offers know-how, shares technology, and shares brand name with licensee;

licensee pays royalties; lower-risk entry mode; permits access to markets• Licensor and the licensee

• Benefits:o Appealing to small companies that lack resourceso Faster access to the marketo Rapid penetration of the global markets

• Caveats:o Other entry mode choices may be affectedo Licensee may not be committedo Lack of enthusiasm on the part of a licensee

FRANCHISING• Franchising is a specialized form of

licensing in which the franchisor not only

sells intangible property to the franchisee,

but also insists that the franchisee agree to

abide by strict rules as to how it does the

business

• Longer-term commitments• Benefits:

o Overseas expansion with a minimum investment

o Franchisees’ profits tied to their effortso Availability of local franchisees’

knowledge

• Caveats:

o Revenues may not be adequateo Availability of a master franchisee

Contract manufacturing

• Contract manufacturing is a process that establish a working agreement

between two companies.

• As part of the agreement, one company will custom produce parts or other

materials on behalf of their client.

• Benefits:

o Labor cost advantageso Savings via taxation, lower energy costs, raw materials, and overheadso Lower political and economic risko Quicker access to markets

• Caveats:

o Contract manufacturer may become a future competitoro Lower productivity standards

Management contracting

• A management contract is an arrangement under which

operational control of an enterprise is vested by contract

in a separate enterprise which performs the necessary

managerial functions in return for a fee.

Advantages:

• Management contracts are often formed where there is a

lack of local skills to run a project.

• It is an alternative to foreign direct investment as it does

not involve as high risk and can yield higher returns for

the company when foreign government actions restrict

other entry methods.

Disadvantages:

• Loss of control

• Time delays

• Loss of flexibility

• Loss of quality

• Compliance

STRATEGIC ALLIANCE• Cooperative agreements between potential or actual competitors

• A strategic international alliance (SIA) is a business relationship established by

two or more companies to cooperate out of mutual need and to share risk in

achieving a common objective

• SIAs are sought as a way to shore up weaknesses and increase competitive

strengths.

• Licensing, Joint venture, consortia etc

• Firms enter SIAs for several reasons:

o Opportunities for rapid expansion into new markets

o Access to new technology

o More efficient production and innovation

o Reduced marketing costs

o Strategic competitive moves

o Access to additional sources of products and capital

Joint Ventures• Cooperative joint venture

• Equity joint venture

• Benefits:

o Higher rate of return and more control over the operationso Creation of synergyo Sharing of resourceso Access to distribution networko Contact with local suppliers and government officials

• Caveats:

o Lack of controlo Lack of trusto Conflicts arising over matters such as strategies, resource allocation, transfer pricing, ownership of critical

assets like technologies and brand names

• Drivers Behind Successful International Joint Ventures :

o Pick the right partner

o Establish clear objectives from the beginning

o Bridge cultural gaps

o Gain top managerial commitment and respect

o Use incremental approach

Strategic alliances- Consortia

• Consortia are similar to joint ventures and could be

classified as such except for two unique characteristics:o They typically involve a large number of participants

o They frequently operate in a country or market in which none

of the participants is currently active.

• Consortia are developed

to pool financial and

managerial resources and

to lessen risks.

WHOLLY OWNED SUBSIDIARY• The firm owns 100% of the stock

• The firm can either set up a

o Green-field venture:- Offer the company more flexibility

than acquisitions in the areas of human resources,

suppliers, logistics, plant layout, and manufacturing

technology.

o OR

o Acquisitions :- It can acquire an established firm in

the host nation.• Alliances between partners that are related in

terms of products, technologies, and markets• Similar cultures, assets sizes and venturing

experience• A shared vision on goals and mutual benefits

Advantages:•Reduces the risk of loosing control over technological competence•Tight control over operations•Helps to achieve location economies

Disadvantages:•Larger commitment and risk•Most costly method •Risk of national expropriation

Selecting an entry mode

Technological Know-How

Management Know-How

Wholly owned subsidiary, except:

1. Venture is structured to reduce risk of loss of technology.

2. Technology advantage is transitory.

Then licensing or joint venture OK

Franchising, subsidiaries (wholly owned or joint venture)

Pressure for Cost Reduction

Combination of exporting and wholly owned subsidiary

• Reasons for exit:

o Sustained losses

o Volatility

o Premature entry

o Ethical reasons

o Intense

competition

o Resource

reallocation

Exit Strategies• Risks of exit:

o Fixed costs of exito Disposition of assetso Signal to other marketso Long-term opportunities

• Guidelines:

o Contemplate and assess all options to salvage the foreign business

o Incremental exito Migrate customers

Thank You