The Internationalization Process & Market Entry Strategies

Market Entry Decisions

• Foreign Market Selection

• Timing & Order of Entry

• Market Expansion Strategies

• Mode of Entry Decisions

Foreign Market Selection

Step 1: Preliminary Screening of Foreign Markets

Key Question:

– Which foreign markets warrant further detailed investigation?

Decision Based On:

– Intl. Environmental Variables

Foreign Market Selection

Step 2: Assessment of Industry Market Potential

Key Question:

– What is the aggregate demand in each of the selected markets?

Decision Based On:

– Market Access Data

– Product Potential Information

– Infrastructural Facilities

Foreign Market Selection

Step 3: Company Sales Potential Analysis

Key Question:

– How attractive is the potential demand for my products?

Decision Based On:

– Sales Volume Forecasts

Timing & Order of Entry Decisions

• Sprinkler Approach

-- Entering Multiple Foreign Markets Simultaneously

• Waterfall Approach

-- Initially Entering One or More Lead Markets and Timing Subsequent Entry in a Phased Manner

Segmentation, Targeting & Product Positioning

• Market Segmentation Dividing the market into distinct groups of buyers with

different needs, characteristics and/or behavior

• Market Targeting Evaluating each market segment’s attractiveness and

selecting one or more market segments to enter

• Product Positioning Planning for the product to occupy a clear,

distinctive, and desirable place relative to competing products in the mind of target customers

Consumer Market Segmentation• Geographic

Different geographical regions, cities, countries

• Demographic Age, sex, income, education, occupation, religion, race, nationality

• Psychographic Social class, lifestyles, personalities

• Behavioral Purchase occasion, benefits sought, user status, usage rate, loyalty

International Market Segmentation Approaches

• Develop Cut-Off Criteria

• Shortlist based on Preliminary Screening

• Micro segmentation– Individual Country based– Cross-border segments

Requirements for Effective Segmentation

• Measurable• Sizable• Accessible• Actionable

Target Marketing

• Evaluating Market Segments

– segments size and growth

– segment structural attractiveness (Competitive

Intensity)

– company objectives and resources

• Selecting Market Segments

Global Target Market Strategies

• Universal Segments– “Global Teen Segment”– Standardized Approach– Differentiated Strategies

• Diverse Segments– Same product, different target segments– Canon AE-1 Camera

• Mixed Strategy

A Comparison of U.S. and Mexican Ads for Speed Stick Brand Deodorants

Comparison of Perceptions of U.S. v.s. Mexican Males

IDEAL VECTOR (Mex)

DEGREE

DEGREE

SPEED STICK

BRUTOLD SPICE SURE

GILLETTE

RIGHT GUARD

EFFECTIVENESS

LACK OF RESIDUE

SPEED STICKBRUT

OLD SPICE

SURE

GILLETTERIGHT GUARD

IDEAL VECTOR (U.S.)

- U.S. Consumers - Mexican Consumers

Comparison of Perceptions of U.S. v.s. Mexican Females

LACK OF RESIDUE

EFFECTIVENESS

IDEAL VECTOR (U.S.)

IDEAL VECTOR (Mex)

SECRET

LADY SPEED STICK

SURE

MUM

SECRET

LADY SPEED STICK

MUM

TEEN SPIRIT

TEENSPIRIT

- U.S. Consumers - Mexican Consumers

Market Expansion Strategies

• Concentration vs Diversification

– Countries vs Segments

Conc Div

Conc 1 2

Div 3 4

Market Expansion Strategies

• Strategy 1:– When product appeals to a definite group

of customers across markets and cost of penetration is very high (HDTV)

• Strategy 2:– When product line appeals to different

segments & cost of penetration is relatively high (consumer electronic goods)

Market Expansion Strategies

• Strategy 3:– Defined homogenous

segments across markets (Benz, Jaguar, etc.)

• Strategy 4:– Products with mass appeal with

relatively low cost of penetration (most consumer non-durable goods)

Choice of Entry Modes• Exporting

– Direct vs Indirect

• Contractual Agreements– Licensing, Franchising, etc.

• Equity Based– Joint Ventures– WOS

• Strategic Alliance

Choosing the Mode of Entry

• Decision Criteria for Mode of Entry– Market Size and Growth– Risk– Government Regulations– Competitive Environment– Local Infrastructure

Choosing the Mode of Entry (cont)

• Company Objectives

• Need for Control

• Internal Resources, Assets, and Capabilities

• Flexibility

• Mode of Entry Choice : A Transaction Cost Explanation

Exporting

• Indirect Exporting

• Cooperative Exporting

• Direct Exporting

Stages in the Export Process

• Uninterested

• Partially Interested

• Exploring

• Experimental

• Experienced

Indirect Channels of Exports• Merchants vs Agents• Trading company

– General Trading Companies• Sogo Shosha (C. Itoh; Mitsui, Mitsubishi, etc.)

– Export Trading Companies• Daewoo, Sears World Trade

• Export/Import Broker• Export Management Company

– international sales specialists who function as the export dept. of mfrs.

Cooperative Arrangements

• Piggyback Marketing– GE; Borg-Warner, etc.

• Marketing Cooperative Associations

• Export Cartels– OPEC– DeBeers Central Selling Orgn.– Webb-Pomerene Associations

Direct Channels of Exports

• Export departments

• Export Sales Subsidiary

• Foreign Sales Branch/Subsidiary

• Storage or Warehousing facilities

• Travelling Salesperson

Advantages and Disadvantages of Entry Modes

Entry Mode Advantage Disadvantage

Exporting Ability to realize location andexperience curve economies

High transport costsTrade barriersProblems with local marketing agents

Turnkeycontracts

Ability to earn returns fromprocess technology skills incountries where FDI isrestricted

Creating efficient competitorsLack of long-term market presence

Licensing Low development costs andrisks

Lack of control over technologyInability to realize location and

experience curve economiesInability to engage in global strategic

coordination

Advantages and Disadvantages of Entry Modes

Entry Mode Advantage Disadvantage

Franchising Low development costs andrisks

Lack of control over qualityInability to engage in global strategic

coordination

Jointventures

Access to local partner’sknowledge

Sharing development costs andrisks

Politically acceptable

Lack of control over technologyInability to engage in global strategic

coordinationInability to realize location and

experience economies

Whollyownedsubsidiaries

Protection of technologyAbility to engage in global

strategic coordinationAbility to realize location and

experience economies

High costs and risks

International Strategic Alliances

• Strategic Alliance– refers to any type of cooperative

agreements between two or more firms who are potential or actual competitors.

– Can take multiple forms including: JVs, R&D collaborations, piggy backing, sourcing relationships, etc.

International Strategic Alliances

• In general, any relationship that involves mutual dependence and shared decision making between two or more firms can be characterized as a strategic alliance.

• It differs from traditional JVs in that:– strategic alliances are increasingly between firms in

the industrialized nations– the focus is on creation of new products and

technologies rather than the distribution of existing ones

Why Strategic Alliances?

• Rising R&D Costs• Shortening Product Life Cycles• Growing Barriers to Market Entry• Increasing Need for Global Scale Economies• Expanding Importance of Global Standards• Forms the basis of Building and Sustaining

Competitive Advantage in Industries undergoing major Transitions

Managing International Alliances

• The Logic of Collaboration– Identifying when, where, and why to collaborate– An alliance is usually one of several options for

pursuing a strategic goal; it is never an end in itself

– Strategic Goals: Product Exchange; Corporate Learning & Market Positioning

– Cost-Benefit Tradeoffs– Alternatives to Collaboration: Self-Sufficiency;

Buying the Inputs or Skills; Full Acquisition.

Key Issues in Managing International Alliances

• Selecting Partners– Knowing how to maximize benefits and

minimize risks of partnerships– Complementary needs and assets

• Structuring Alliances– Choosing organizational forms that provide

incentives for success– Contracts vs. Equity Relationships

Key Issues in Managing International Alliances

• Building Alliance Networks– Creating a system of reinforcing alliances, and avoiding

chaos– Network Design: Is the whole greater than the sum of the

parts?

Who controls the network? & Where is competitive advantage created?

• Alliance Dynamics– Managing with an eye to the forces for change in a

relationship

Key Issues in Managing International Alliances

• Limits to Alliances– Recognizing the constraints on collaborative

strategies– Organizational Constraints; Strategic Gridlock;

Dependence

• The Role of Governments– Antitrust laws– Host government intervention

INCOTERMS

• Ex-works (EXW)

• Free Carrier (FCA)– inland vs destination point

• Free Alongside Ship (FAS)– seller responsible for inland transportation.

unloading and wharfage– Loading, ocean transportation and insurance

are buyer’s responsibilities

INCOTERMS

• Free on Board (FOB)

• Cost & Freight (CFR)

• Cost, Insurance & Freight (CIF)– port charges– documentation charges– other charges

• Delivery Duty Paid (DDP)

Terms of Payment

• Consignment• Open Account• Documents against Acceptance (Time

Draft)• Documents against Payment (Sight Draft)• Letter of Credit• Confirmed LC• Cash in Advance

Letter of Credit

A Letter of Credit is an instrument issued by a bank, at the request of a buyer.

The bank promises to pay a specified amount of money on presentation of documents stipulated in the L.C.

Letter of Credit• Irrevocable vs Revocable LC

– An irrevocable L.C. cannot be modified or cancelled without the consent of the exporter

• Confirmed vs Unconfirmed– A confirmed L.C. is one where a domestic bank

certifies the credibility of the issuing bank

• Revolving vs Non-revolving

Bill of Lading

The bill of lading is a document used in ocean transportation that serves 3 distinct functions:

– it is the contract of carriage between the shipper and the transportation company

– it is a receipt of goods– it is evidence of title to the merchandise

Export Pricing Strategies

• Standard Worldwide Pricing

• Rigid Cost-Plus Pricing

• Marginal Cost-Plus Pricing

• Market-Differentiated Pricing

Price Escalation• Export Related Costs

– Cost of adapting products to foreign markets– Operational costs

• personnel• market research• shipping & insurance• communication costs

– Tariffs & Taxes– Costs associated with hedging, factoring/forfaiting

Strategic Options to Deal with Price Escalation

• Reorganizing/shortening the distribution channel

• Product modification (backward innovation)

• Shipping & Assembling components in Free Trade Zones

• Overseas Production or sourcing (duty drawbacks)

Marginal vs Rigid Cost-Plus Pricing

• Firm-specific Factors– Extend of product differentiation– Corporate stance toward exporting– Financial resources to sustain initial losses– Domestic Gross Margins– Need for long term capacity utilization– Economies of scale benefits

Marginal vs Rigid Cost-Plus Pricing

• Export Market Specific Factors– Growth Potential– End-User Price Sensitivity– Competitive Intensity– Terms of Sale & Financing– Exchange rate risk

Export Strategies When Domestic Currency is Weak

• Stress Price Benefits

• Expand Product line and add more costly features

• conduct conventional cash-for-goods sale

• use rigid cost-plus pricing wherever possible

• Bill foreign customers in domestic currency

Export Strategies When Domestic Currency is Weak

• Minimize expenditures in host country currency

• Minimize borrowing in host country

• Buy needed services (advertising, insurance, etc.) in domestic market

International Transfer Pricing

• Transfer pricing is the pricing of sales within members of a corporate family

– HQ to Subsidiaries– Subsidiaries to HQ– Subsidiary to Subsidiary

Why Use Transfer Pricing?

• Reduction of Taxes

• Reduction of Tariffs

• Increase Competitiveness of certain foreign markets

• Minimization of foreign exchange risks

• Minimization of political risks

• Management of cash flows

Types of International Transfer Pricing

• Cost-based– most effective strategy but open to tough laws

• market based (dealer price)

• arm’s-length transaction

Why Use Counter trade?

• Lack of money

• Lack of value of money

• No convertibility of currency

• Offset financial risk

• Other factors that make it more efficient to exchange goods directly than to use money as an intermediary

• As a competitive strategy

• Excellent mechanism to get a foothold into foreign markets

Major Drawbacks

“Instead of there being a double coincidence of wants, there is likely to be a want of coincidence; so that, unless a hungry tailor happens to find an undraped farmer, who has both food and a desire for a pair of pants, neither can make a trade.”

Paul Samuelson

• Transactions purely bilateral in nature and thus are not competitive

• Trade is formulated on the basis of the willingness to countertrade and not on economic considerations

• Creates economic inefficiencies

Types of Countertrade

• Counterpurchase or parallel barter (46%)– Involves both cash & kind transactions– Parallel reciprocity (a special case)

• Buyback (11%)– Technology in return for finished goods– Levi Strauss in Hungary

• Offset (27.5%)– Cost offsets through investments– Can be in multiple forms– Common in high cost deals (defense)

• Swaps (11%)– Debt for debt swaps– Debt for equity swaps– Debt for product swaps– Debt for education swaps

• Clearing Arrangements– Extend over long period– Involve basket of goods– Held as deposits representing purchasing

power (credit - debit account)

• Switch Trading (4.5%)– A type of clearing arrangement where credit

can be sold or transferred to a third party

Information Requirements for Intl. Marketing

• Strategic Decisions– Foreign market selection– Mode of entry decision– Product/Market portfolio strategies– Market expansion strategies

• Tactical Decisions– Marketing mix strategies for individual country

markets

Depends on the type of decision

Measurement

THE INTERNATIONAL MARKETING RESEARCH PROCESS

FIRM OBJECTIVE

INFORMATION REQUIREMENT

PROBLEM DEFINITION

CHOOSE UNIT OF ANALYSIS

EXAMINE DATA AVAILABILTY Can Secondary Data be Used?

ASSESS VALUE OF RESEARCH

RESEARCH DESIGN

DATA ANALYSIS

INTERPRETATION/ PRESENTATION

Firm’s Needs

Market Orientation

Strategic Orientation

Problem Orientation

Self Reference Criterion

Country

Region

Global

Subgroup/Segments Within Countries

Cost/ Benefit Analysis

Causal

Descriptive

Exploratory

Data Preparation

Data Manipulation

T-tests & Cross TAbs

Experimental Design & ANOVA

Multivariate Techniques

Advantages / Disadavantages of Secondary Research

Sources of Secondary Data

Types of Problems That CAn be Solved Using Secondary Data

Frequency & Ease of Use

Issues inPrimary Data Collection

Qualitative Methodsi

Surveys

Instrument Design

Scale Development

Sampling

Types

Sources of Bias

Country/ Regional Specific Bias

Equivalence

Coding

Wording

Format

Construct

Sampling

Analysis

Yes

No

Problem Identification and Definition

• Problem may not always be couched in the same terms in different countries or cultural contexts

Beware of “self-reference criterion”

Eg: “Why doesn’t powder detergent sell in Africa?

Issues in Multi-Country Data Collection

• Availability

• Accuracy

• Comparability (the issue of equivalence)

• Cost

The EMIC - ETIC Dilemma

• EMIC – Each culture is unique– Advocates “culture-specific” approach

• ETIC – Assessing universal attitudes and behavior– Advocates “culture-free” approach

The schools of thought

Major Sources of Secondary Data for IMR

• U.S. government

• Other government embassies

• International organizations

• Directories and newsletters

• Electronic databases

Primary Sources of Data

• Qualitative research methods

• Survey research

• Experimentation

Qualitative Research

• Individual interviews

• Focus groups

• Projective techniques

• Observational methods

• Language

• Unavailability of certain segment of population– Interviewing women in Saudi Arabia

• Interviewer bias

Cultural Influences

• Not all societies encourages frank and open exchanges– High context vs low context cultures

– Status consciousness

– Gender roles

– Role of elders

• Disagreement may be seen as impolite or certain topics may be taboo

• differences in perceptions and attitudes

Survey Research

• Mail Survey– Efficiency of postal system– Absence of street and house numbers

• Eg: In Venezuela houses have names (“Casa Rosa”) not numbers

– Literacy rate– Reluctance to respond in writing particularly

sensitive issues (Eg: ownership of imported cars in Brazil)

• Telephone Survey– Availability of telephones– Efficiency of telephone system

• Eg: “Hung up” - Russian telephone system

• Mall Intercepts– Not common outside U.S

Questionnaire Design

• Format– Structured vs Unstructured– Direct vs Indirect

• Content– Sensitivity of cultures

• Wording– “Translation-Re-translation”

The Issue of “Equivalence”

• Construct Equivalence– Are we studying the same phenomenon in

countries X, Y, and Z?• Eg: Bicycles

- Recreation/exercise in the U.S.- Basic mode of transportation in developing countries

• Measurement Equivalence– Are the phenomenon in countries X, Y, and Z

measured the same way?• Eg: Questionnaire translation and interpretation

issues

• Sampling Equivalence– Are the samples used i countries X, Y, and Z

equivalent?• Eg: Literacy rates

Key Pitfalls in Conducting an International Marketing Research

• Selecting a domestic research company to do your international research

• Rigidly standardizing methodologies across countries• Interviewing in English around the world• Setting inappropriate sampling requirements• Lack of consideration given to language• Lack of systematic intl. communications procedure• Misinterpreting multi-country data across countries• Not understanding cultural differences while

conducting qualitative research