foreign market entry strategies

Country evaluation, selection & Foreign market entry strategies

GEETA SHIROMANIASSOCIATE PROFESSOR

Basic foreign expansion entry decisions

• A firm contemplating foreign expansion must make three decisions– Which markets to enter??– When to enter these markets??– What is the scale of entry??– Which is the best mode of entry??

Basic Market Entry Decision- Which Market??

200 nation-states • Different long-run profit potential for firms

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

• Benefits cost & risks trade off– rank markets– Future economic growth rates– Free market system & country’s capacity for growth– Stable and developing

markets without upsurge in inflation rates or private-sector debt

Basic Market Entry Decision- Which Market??

• Value an international business can create in a market– Suitability of product for market – Nature of indigenous competition– Not widely available & satisfies an unmet need– Greater value translates into an ability to charge

higher prices & build sales volume more rapidly

Basic Market Entry Decision- Which Market??Process of country

evaluation & selection

Scan for alternatives

Choose & weight variables

Collect & analyze data for variables

Use tools to compare variables & narrow

alternatives

Make final country Selection

Basic Market Entry Decision – Timing of Entry??

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

• First mover advantage– Ability to preempt rivals & capture demand by

establishing strong brand name– Build sales volume and ride down the experience

curve with a cost advantage– Create switching cost that tie customers into

products & services

Basic Market Entry Decision – Timing of Entry??

• First mover disadvantages - Pioneering costs – Time & effort in learning the rules of the game– Mistakes due to ignorance– Liability of being a foreigner– Costs of promoting & establishing a product –

educating customers (KFC in China -> benefit to McDonald’s)

Scale of Entry??• Large scale entry

– Requires commitment of significant resources & implies rapid entry (Dutch ING spend billions to acquire US operations)

• 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

Scale of Entry??• 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

Basic market entry decisions

• Discussion based on developing country considerations– Can use MNEs to

learn & bench mark against

– Can focus on niches the MNE ignores or can’t serve

– Can piggyback with MNEs (eg; Jollibee)

Which Foreign market entry mode?

EXPORTING

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

• The most common overseas entry approach for small firms

EXPORTING

• Exporting can be either – direct or indirect– In direct exporting the

company sells to a customer in another country

– In contrast, indirect exporting usually means that the company sells to a buyer (importer or distributor) in the home country who in turn exports the product

EXPORTING• The Internet is becoming

increasingly important as a foreign market entry method

• Initially, Internet marketingfocused on domestic sales,however, a surprisingly large number of companies started receiving orders from customers in other countries, resulting in the concept of:– international Internet marketing

(IIM).

Exporting..

Advantages:• 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)

Exporting..

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

• Contractual agreements are long-term, non-equity associations between a company and another in a foreign market

• Approaches:– Licensing– Franchising – Contract manufacturing– Management contracting– Turnkey projects

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

Licensing..

Advantages:• Helps company to spread out its R&D &

investment costs with incremental income• Little additional capital or time investment• Legitimate means of capitalizing on intellectual

property in a foreign market.• Receive royalties for granting the rights to

intangible property to licensee for specified period (patents, inventions, formulas, processes, designs, copyrights, trademarks)

Licensing..

Advantages:• Allows firm to participate where there are

barriers to investment (Fuji-Xerox)

• Frequently used when firm possesses intangible property but does not want to develop the business application itself (Coco-Cola/clothing)

• Primarily used by manufacturing firms

Licensing..Disadvantages:

• Inconsistent product quality may effect product image negatively

• The agreement generally prohibits the originating firm from exploiting the assets in particular foreign markets

• Does not give firm tight control over manufacturing, marketing & strategy to realize experience curve & location economies

• Firms can lose control over the competitive advantage of their technological know-how. – Solution: Cross licensing agreements

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 business

• Longer-term commitments

Franchising..

Advantages:• Important way of gaining foreign returns on

certain kinds of customer-service and trade name assets

• Limited financial commitment

• Involves longer term commitment than licensing. Primarily used by service firms (McDonalds)

Franchising..Advantages:

• Franchiser sells intangible property (trademark) & insists franchisee agrees to abide by strict business rules (location, methods, design, staffing, supply chain)

• Royalty payments that are some percentage of franchisee’s revenues

• Firm relieved of many costs & risks of opening new market.

Franchising..Disadvantages:

• No manufacturing so no location economies & experience curve

• May inhibit the ability to take profits out of one country to support competitive attacks in another

• Risk of worldwide reputation if no quality control– Firm can set up “master franchise” in each country –

subsidiary which is JV (McDonalds & local firm)

TURNKEY PROJECTS

• A product or service which can be implemented or utilized with no additional work required by the buyer (just by 'turning the key')".

• The contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel

Turnkey project..

Advantages:• A way of earning great economic returns from

the know-how & exporting process technology• This strategy is useful where FDI is limited by

host government regulations• Less risky than FDI in countries with unstable

political and economic environment• Means of exporting process technology

(chemical, pharmaceutical, petroleum, mining)

Turnkey project..

Disadvantages:• Firm has no long term interest in the country –

can take minority equity interest in company• Firm may inadvertently create a competitor

(middle east oil refineries)• If firm’s process technology is a source of

competitive advantage, then selling technology is also selling competitive advantage to potential competitors

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.


Advantages:• The client does not have to maintain

manufacturing facilities, purchase raw materials, or hire labor in order to produce the finished goods so less capital investment is required

• Helps to achieve benefits of economies of scale• Helps to achieve location economies


Disadvantages:• Less management control• Potential security or confidentiality issues• Complexity• Potential quality issues

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.

Management contracting

• Management contracts involve not just selling a method of doing things (as with franchising or licensing) but involves actually doing them.

• A management contract can involve a wide range of functions, such as technical operation of a production facility, management of personnel, accounting, marketing services and training.


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

Strategic alliances

• Firms enter SIAs for several reasons:– Opportunities for rapid expansion into new

markets– Access to new technology– More efficient production and innovation– Reduced marketing costs– Strategic competitive moves– Access to additional sources of products and

capital

Strategic alliances- JOINT VENTURES

• A JV entails establishing a firm that is jointly owned by two or more otherwise independent firms.

JOINT VENTURE

• Four Characteristics define joint ventures:– JVs are established, separate, legal entities– The acknowledged intent by the partners to share

in the management of the JV– There are partnerships between legally

incorporated entities such as companies, chartered organizations, or governments, and not between individuals

– Equity positions are held by each of the partners

Strategic alliances- Consortia

• Consortia are similar to joint ventures and could be classified as such except for two unique characteristics:– They typically involve a large number of participants– 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.

Joint ventures..

Advantages:• Smaller investment • Local marketing and production/ procurement

of expertise from local partner • Better understanding of the host country• Typically 50/50 with contributed team of

managers to share operating control

Joint ventures..

Advantages:• Firm benefits from local partner’s knowledge

of competitive conditions, culture, language, political system & business system

• Sharing market development costs & risks with local partner

• In some countries, political considerations make JVs the only feasible entry mode

Joint ventures..

Disadvantages:• Risk of giving control of technology to the

partners• Shared ownership arrangement can lead to

conflicts and battles of control between the investing firms.

Structuring the alliance to reduce opportunism

WHOLLY OWNED SUBSIDIARY

• The firm owns 100% of the stock

• The firm can either set up a – Green-field venture or – It can acquire an

established firm in the host nation

Wholly owned subsidiary

Advantages:• Reduces the risk of loosing control over

technological competence• Tight control over operations• Helps to achieve location economies

Wholly owned subsidiary..

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

foreign market entry strategies

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