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ENTRY AND EXPANSION

STRATEGIES

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Identifying Foreign Markets

Selection of market is very

important because the firm willsucceed only if it is marketing

the right product to the right

market. Selection of the rightmarket minimizes the risk and

avoids wastage of time and

effort, increasing the chances of success. It is better to

concentrate on a few fruitful

markets rather than spread over

thinly.

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Classification of world market

I. Warren J. Keegan has classified

World Market on the Basis of

Stages of Demand

1. Existing market

2. Latent markets3. Incipient markets

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Existing Markets

Consumer needs are know andare already being met by some

products.The market opportunities can be

assessed by estimating theconsumption rate and the shareof imports in the currentconsumption.

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Latent Markets

There are potential customers.

As no one has offered a product to fulfill thelatent need there is no existing market

Incipient MarketsThese markets do not exist in the present.

Conditions and trends can be identified that

point towards the emergence of future needsand preferences for products and servicesthat will create a latent market, which if supplied will become an existing market

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II Classification on the Basis of

Stages of Development

1. Industrial economies

2. More developed developing

countries

3. Raw material exporting economies

4. Subsistence economies

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Industrial EconomiesThey devote their resources to production of

sophisticated and high technology products

They have an acute shortage of labour and thustend to import labour-intensive products likeelectronics, light engineering goods, spares andcomponents, decorative articles etc.

They are particular about keeping the countrypollution free

They are willing to provide technology to set upproduction and processing units in developing

countriesThese countries lay more emphasis on research

and development

The major Industrial economies are- USA, UK,France, Japan and Germany.

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More Developed Developing

CountriesThese countries would like to update

technology

They would like to import machineryand equipment to set up newmanufacturing facilities

They are also interested in setting up

joint ventures in other countriesThey include Brazil, Mexico, Hong

Kong, India etc.

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Raw Material Exporting EconomiesThese countries export oil and other

natural resources.They have inadequate infrastructure and

therefore they need various types of products like consumer durables, food

products, transport equipment, servicefacilities etc.

They are interested in importing Turnkeyprojects.

This category includes countries in theGulf area and those in Africa and Latin America.

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Subsistence EconomiesThese countries need equipment to

exploit their untapped resources.They also need the infrastructure

facilities like railways, roads,

buildings, transport equipment,power generation equipment,transmission line towers, etc.

They provide a lot of scope forTurnkey projects like housing,schools, hospitals etc.

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Decision Criteria for International Business

Political risk

Market access

Costs considerations

Shipping consideration

Country infrastructureForeign Exchange

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Selecting Foreign Markets

Selection should be based on a number of criteria:

market-related characteristics

cost-related aspects

the regulatory framework

tariffs, duties & non-tariff trade

barriers

the importance of these selection criteria

depends upon the industry & the markets

taken into account

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Market Selection Criteria

1. Market Potential

2. Market Access

3. Shipping Cost & Time

4. Appraising Level & Quality of Competition

5. Service

6. Product Fit7. Exchange rate, availability

& convertibility of local money

C iti l Q ti f

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Critical Questions for a

Product-Market Profile: The 9 W´s1.Who buys our product?

2.Who does not buy our product?

3.What need or function does our product serve?

4.What problem does our product solve?

5.What are customers currently buying to satisfy the needand/or solve the problem for which our product is

targeted?

6.What price are they paying for the products they are

currently buying?

7.When is our product purchased?

8.Where is our product purchased?

9.Why is our product purchased?

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A Multi-Stage Selection Process

Approx. 150

countries

Markets which drop out

due to restrictions („must“

criteria)

Markets which are filtered out

based on a first set of

selection criteria

Markets which are filtered out

based on a second set of

selection criteria

Potential foreign

target markets

Source: adapted from D.J.G. Schneider, and R.U. Müller, Datenbankgestützte Marktselektion: Eine methodische Basis für Internationalisierungs-strategien, Stuttgart,1989

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Visiting the Potential Market

Visiting the market is essential afterassessment and selection of potentialmarket(s)

Goals:

to confirm (or contradict)assumptions regarding marketpotential

to gather additional (primary) datato develop a marketing plan in co-

operation with the local agent or

distributor

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Alternative channels available are-

1) International Marketing Middlemen:-Export Merchants

-Export/Trading houses

-Trading companies (both Export &

Import)

-Export Drop shipper

-Agents/Brokers

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2) Co-operative

Organizations:

- Piggyback

marketing

-Exportingcombinations

3) Direct Exporting channels

-Importer

-Wholesalers

-Distributor

-Retailer

-Government department

-Customers

-State Buying Organisation

-Joint Venture/Licensing

-Industrial Buyer

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A) PRODUCTION IN HOME

COUNTRY - EXPORT

Direct Exporter

Importer

Customer

Wholesaler

Retailer

Foreign Distributor

Agent

Government Depts.

Overseas Marketing

Subsidiary

Indirect Exporter

Trading Company

Export Merchants

Export/Trading House

Agents/Brokers

Other modes

B) FOREIGN PRODUCTION

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B) FOREIGN PRODUCTIONLicensing

Franchising

Joint Venture

Manufacturing

Management Contract

Assembly Operations

Turnkey Operations

Acquisitions

Strategic AllianceGlobal Strategic Partnership

Keiretsu

Beyond Strategic Alliance

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EXPORTING

This method involves production of goods andservices in the home country followed bydistribution in the foreign country.

It is commonly adopted by countries entering intoforeign market for the first time.

The risks involved are minimum as the companysimply exports its excess production as and when itreceives orders.

It is the most common mode of overseas entry.But lack of international marketing activities and

lack of product modifications makes the company’s marketing strategy inflexible and ineffective.

Example- GM exports cars from America.

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Exporting

Direct market representationvia wholesalers or retailers or

directly to the consumers

Independent representationindependent distributor

Piggyback marketing

distribution through anotherdistributor´s channel

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Exporting: A Developmental Process

Stages of the firm1.Firm is unwilling to export.

2. Firm fills unsolicited export orders (export seller).

3. Firm explores the feasibility of exporting (may bypass

stage 2).

4. Firm exports to one or more markets on a trial basis.

5. Firm is an experienced exporter to one or more markets.

6. Firm pursues country or region focused marketing.

7. Firm evaluates the global market potential. All markets,

domestic & international, are regarded as equally worthy

of consideration.

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Export-Related Problems

Logistics

Legal procedure

Servicing exports

Sales promotion

Foreign market

intelligence

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Licensing

“Licensing is a contractualarrangement whereby one

company (licensor) makes anasset available to anothercompany (licensee) in

exchange for royalties,license fees or other form of compensation”

Li i

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When the company wants to protect its patents and trade mark rights, it licenses the production of its products in the foreign

market to another company in return for a fixed royalty. The owner of the brand name gets free advertising for his

products/trademark.

This is done when

The markets are developing very fastExport barriers have been put up

Capital is scarce

Import restrictions discourage direct entry

Country is sensitive to foreign ownershipTransportation costs are very high as compared to the

product value

Example – Coca Cola has licensed its brand name to more than200 licensees in more than 30 countries, Disneyland haslicensed Tokyo Disneyland in Japan

Licensing cont….

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Disadvantages of Licensing

By granting a license to a foreign company, the manufacturer is

producing a competitor who is gaining technological andproduct knowledge.

At some time the licensee may refuse to renew the contractand he may use the acquired knowledge to his own profit.

Another problem is when the licensee performs poorly, it maybring the reputation of the product down on worldwide basis.

Licensing may damage a product’s image psychologically (evenif the product is good), because people prefer imported goods

whereas the licensed goods are produced within the country. Example Revlon, etc.

Over licensing dilutes the value of the product, example, PierreCardin has licensed 800 products.

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Franchising

A form of licensing

“The company permits itsname, logo, cultural design andoperations to be used in

establishing a new firm orstore.”

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Joint Ventures

A joint venture is a partnership at corporate levelWhen a company does not possess the capacity to analyse

and handle a particular market, it enters into a JV

Company run by two or more partner firms

Risk is shared and different value chain strengths are

combined

Influence depends on degree of ownership

Good opportunity to build on local know-how

JV finds greater acceptance by local authorities

Example TOYS’R’US and Amazon.com have entered in a

JV to form TOYS’R’US.com, an on-line toy store.

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The main reasons for sharing the control of

the market are-

To protect oneself from political and economic risk

When the company does not possess competentpersonnel to handle foreign market

When it is short of capital

When a company feels that it would be to their mutualadvantage to enter in JV because of specific resources

possessed by the other partner like distributionnetwork, knowledge of culture etc.

When wholly owned activities are not allowed by theforeign government.

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MANUFACTURINGWhen a company moves along its lifecycle, it

develops an international orientation. Thismotivates it to invest in foreign market anddevelop its own manufacturing and marketingsystem within that market.

Many multinationals are entering India by thismode and taking advantage and a competitiveedge over other companies who export to this

country.Example- Nestle has manufacturing units in

India.

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Advantages of manufacturing-

Reduction of additional costs involved inforeign marketing

No duties on products produced within

the foreign country

Transportation cost is minimized

Advantage of low labour cost in somecountries

Access to raw material.

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MANAGEMENT CONTRACT

A company may not possess the managerial ortechnical talent and therefore may not be in aposition to exploit its assets. In such a

situation the company may sign a ManagementContract with a foreign company to manage theassets till it has resources or technology

required for managing the assets.Example- Foreign companies taking

Management Contract to manage hotels inMiddle East, Egypt etc.

ASSEMBLY OPERATIONS

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ASSEMBLY OPERATIONS Assembly means the fitting or joining together of

fabricated components.

The methods used to join or fit together solidcomponents may be welding, soldering, gluing,laminating, sewing etc.

In this strategy, parts or components are produced in

various countries in order to gain each country’s comparative advantage.

The capital intensive parts may be produced inadvanced nations and the labour intensive assemblies

may be produced where labour is abundant andlabour costs are low.

Example- Manufacturers of consumer electronics,video games, calculators, PC’s etc. in Hongkong,

Taiwan and other countries.

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TURNKEY OPERATIONS

This is an agreement by the seller to supply a buyer

with a facility fully equipped and ready to be operatedby the buyer’s personnel, who will be trained by theseller

This term is generally used in fast food franchising

The franchiser agrees to select the store site, build thestore, equip it, train the franchisee and his employeesand also sometimes arrange finances

Such large scale projects include fast food industry,steel mills, cement, fertilizer and chemical plants andthose related to advanced technologies andtelecommunication

Example- Domino’s, McDonald, Pizza Hut.

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Wholly-owned Subsidiaries/Acquisition

Direct investment through acquisition is consideredwhen a manufacturer wants to enter a foreign marketrapidly and retain maximum control

Although every government welcomes foreign

investment that starts an enterprise as it increasesemployment etc., but generally this means that thedomestic ownership has been replaced

This is perceived as exploitation or a blow to national

prideDue to this sensitive nature, there are a number of

legal hurdles in Acquisition

Example- Procter and Gamble acquired Richardson-

Vicks.

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Wholly-owned Subsidiaries/Acquisition Cont…

Represents the most extensive engagementabroad

Subsidiary is either established through thecreation of a new facility or the acquisition of an existing firm

Company has complete decision power &

controlInvestor achieves greater flexibility

In many countries majority or 100% ownership

by foreign companies is forbidden

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Entry mode Risk Control Profit potential

Contract manufacturing

Indirect exporting

Licensing

Management contracting

Direct exporting

Joint ownership

Direct investment

Low

Low

Low

Low

Medium

Medium

High

Low

Medium

Medium

Medium

High

Medium

High

Low

Low

Low

Medium

Medium

High

High

STATEGIC ALLIANCE

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STATEGIC ALLIANCEStrategic Alliance has been receiving a great

deal of attention as large multinational firmsfind it necessary to identify strategic partnersto penetrate a market.

SA may be the result of mergers, acquisitions,

joint venture, licensing agreement, partially orwholly owned subsidiaries etc.

SA is a contractual agreement whereby two or

more partners agree to co-operate with eachother and utilize each others resources andexpertise to achieve rapid global marketpenetration.

Example- General Motors and Toyota.

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DEMANDS ON STRATEGIC ALLIANCES

Competitive collaborations offer significant

advantages

Characteristics:

Participants remain independent following to

the formation of the alliance

Participants share the benefits of the alliance as

well as control over the performance of

assigned tasks

Participants make ongoing contributions in

technology, products and other key strategic

areas

GLOBAL STRATEGIC PARTNERSHIP

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GLOBAL STRATEGIC PARTNERSHIP

Two or more companies develop a joint

long-term strategyThe relationship is reciprocal

Vision & efforts are truly global

Transfer of resources between partners

Partner must know their core strength and

be able to defend their positionWhen in new markets, partners must retain

identities

Exam le- Intel and Hewlett-Packard(HP).

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Four Principles of GSPs

1. Partners are still in competition

with each other

2. Some conflict is to be expected3. Must understand where

cooperation ends & competitive

compromise begins

4. Learning from partners is critical

Co-operative Strategies in Japan:

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Co-operative Strategies in Japan: KEIRETSU

Inter-business alliance or enterprise group,

where different companies or company groupsare intertwined

Operates in a broad spectrum of markets

Keiretsu executives sit on each other`s boards& share information

Foreign competitors interpret keiretsu

relations as cartels which dominate the marketand restrict competition

The most famous keiretsu are Mitsui and

Mitsubishi

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BEYOND STRATEGIC ALLIANCES

Information, communication technologies and

globalisation have fostered new forms of

strategic alliances:

Relationship enterprise

Groups of firms in different industries will be

held together by common goals that

encourages them to act like a single firm

Virtual corporation

Multiple co-operations which are employed

only when needed

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PRODUCTION ABROAD

Ownership and

Control

Licensing Franchising

Management

Contracts

Equity Joint Ventures

Ownership &

Strategic Alliances

0

0 100 %

100 %

Control

O w n e r s h

i p

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MARKET EXPANSION STRATEGIES

Narrow focus: concentratedmarkets/concentratedcountries

Country focus: diverse

markets/concentratedcountries

Country diversification: concentrated

markets/diverse countriesGlobal diversification:

diverse markets/diversecountries

Summary

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SummaryThe choice of potential foreign markets must be

based on a thorough evaluation of criteria which

influence the potential success abroad; eg marketpotential, market access, or product fit.

Once the potential foreign market is selected, a

company has to decide how to enter this market.Companies can choose among a wide range of

alternatives, when participating in foreign markets

Ownership requires substantial resources, butoffers full control

Co-operative strategies include global strategicpartner-ships, the Japanese keiretsu or the virtual

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