Global Market Entry Strategies:
1. Exporting as an Entry Strategy:
Exporting represents the least commitment on the part of the firm entering a foreign market. Exporting to a foreign market is a strategy many companies follow for at least some of their markets. Since many countries do not offer a large enough opportunity to justify local production, exporting allows a company to centrally manufacture its products for several markets and therefore to obtain economies of scale. Furthermore, since exports add volume to an already existing production operation located elsewhere, the marginal profitability of such exports tends to be high.
A firm has two basic options for carrying out its export operations. The form of exporting can be directly under the firm`s control or indirect and outside the firm`s control. It can contact foreign markets through a domestically located (in the exporters country of operation) intermediary-an approach called indirect exporting. Alternatively, it can use an intermediary located in the foreign market-an approach termed direct exporting.
Indirect Exporting: Indirect exporting includes dealing through export management companies of foreign agents, merchants or distributors. Several types of intermediaries located in the domestic market are ready to assist a manufacturer in contacting international markets or buyers. The major advantage for managers using a domestic intermediary lies in that individual`s knowledge of foreign market conditions. Particularly, for companies with little or no experience in exporting, the use of a domestic intermediary provides the exporter with readily available expertise. The most common types of intermediaries are brokers, combination export and manufacturers` export agents. Group selling activities can also help individual manufacturers in their export operations.
Direct Exporting: Direct exporting includes setting up an export department within the firm or having the firm`s sales force sell directly to foreign customers or marketing intermediaries. A company engages in direct exporting when it exports through intermediaries located in the foreign markets. Under direct exporting, an exporter must deal with a large number of foreign contacts, possibly one or more for each country the company plans to enter. Although a direct exporting operation requires a larger degree of expertise, this method of market entry does provide the company with a greater degree of control over its distribution channels than would indirect exporting. The exporter may select from two major types of intermediaries: agents and merchants. Also, the exporting company may establish its own sales subsidiary as an alternative to independent intermediaries. Successful direct exporting depends on the viability of relationship built up between the exporting firm and the local distributor or importer. By building the relationship well, the exporter saves considerable investment costs.
The independent distributor earns a margin on the selling price of the products. Although the independent distributor does not represent a direct cost to the exporter, the margin the distributor earns represents an opportunity that is lost to the exporter. By switching to a sales subsidiary to carry out the distributor`s tasks, the exporter can earn the same margin. With increasing volume, the incentive to start a sales subsidiary grows. On the other hand, if the anticipated sales volume is small, the independent distributor will be more efficient since sales are channeled through a distributor who is maintaining the necessary staff for several product lines. The lack of control frequently causes exporters to shift from an independent distributor to wholly owned sales subsidiaries.
Many companies export directly to their own sales subsidiaries abroad, sidestepping independent intermediaries. The sales subsidiary assumes the role of the independent distributor by stocking the companys products and/or services, sometimes jointly advertising and promoting products, selling to buyers and assuming the credit risk. The sales subsidiary offers the manufacturer full control of selling operations in a foreign market. Such control may be important if the company`s products require the use of special marketing skills such as advertising or selling. The exporter finds it possible to transfer or export not only the product but also the entire marketing program that often makes the product a success.
The operation of a subsidiary adds a new dimension to a company`s international marketing operation. It requires the commitment of capital in a foreign country, primarily for the financing of account receivables and inventory. Also, the operation of a sales subsidiary entails a number of general administrative expenses that are essentially fixed in nature. As a result, a commitment to a sales subsidiary should not be made without careful evaluation of all the costs involved.
2. Foreign Production as an Entry Strategy:
Many companies realize that to open a new market and serve local customers better, exporting into that market is not a sufficiently strong commitment to realize strong local presence. As a result, these companies look for ways to strengthen their base by entering into one of several ways to manufacture.
Licensing: Licensing is similar to contract manufacturing, as the foreign licensee receives specifications for producing products locally, but the licensor generally receives a set fee or royalty rather than finished products. Licensing may offer the foreign firm access to brands, trademarks, trade secrets or patents associated with products manufactured. Under licensing, a company assigns the right to a patent (which protects a product, technology or process) or a trademark (which protects a product name) to another company for a fee or royalty. Using licensing as a method of market entry, a company can gain market presence without an equity (capital) investment. The foreign company, or licensee gains the right to commercially exploit the patent or trademark on either an exclusive (the exclusive right to a certain geographic region) or an unrestricted basis. Due to advantages of low risk and low investment, licensing is a particularly attractive mode for small and medium-sized firms. Licensing also is an effective mode for testing the future viability of more active involvement with a foreign partner.
Licenses are signed for a variety of time periods. Depending on the investment needed to enter the market, the foreign licensee may insist on a longer licensing period to pay off the initial investment. Typically, the licensee will make all necessary capital investments (machinery, inventory and so forth) and market the products in the assigned sales territories, which may consist of one or several countries. Licensing agreements are subject to negotiation and tend to vary considerably from company to company and from industry to industry.
Companies use licensing for a number of reasons. For one, a company may not have the knowledge or the time to engage more actively in international marketing. The market potential of the target country may also be too small to support a manufacturing operation. A licensee has the advantage of adding the licensed product`s volume to an ongoing operation thereby reducing the need for a large investment in new fixed assets. A company with limited resources can gain advantage by having a foreign partner market its products by signing a licensing contract. Licensing not only saves capital because no additional investment is necessary but also allows scarce managerial resources to be concentrated on more lucrative markets. Also, some smaller companies with a product in high demand may not be able to satisfy demand unless licenses are granted to other companies with sufficient manufacturing capacity.
In some countries where the political or economic situation appears uncertain, a licensing agreement will avoid the potential risk associated with investments in fixed facilities. Representing an export of technology rather than goods (as in exporting) or capital, licensing is an attractive mode in markets where political and economic uncertainties make a greater involvement risky. Both commercial and political risks are absorbed by the licensee. In other countries governments favor the granting of licenses to independent local manufacturers as a means of building up an independent local industry. In such cases, a foreign manufacturer may prefer to team up with capable licensee despite a large market size, because other forms of entry may not be possible.
A major disadvantage of licensing is the companys substantial dependence on the local licensee to produce revenues and thus royalties usually paid as a percentage on sale volume only. Once a license is granted, royalties are paid only if the licensee is capable of performing an effective marketing job. Since the local company`s marketing skills may be less developed, revenues from licensing may suffer accordingly.
Another disadvantage is the resulting uncertainty of product quality. A foreign company`s image may suffer if a local licensee markets a product of substandard quality. Ensuring a uniform quality requires additional resources from the licenser that may reduce the profitability of the licensing activity.
Thus, the producer loses some control in certain situations. The risk of losing control of intellectual property and/or technological advantages can also be mentioned as another disadvantage of licensing.
Another potential problem is that the licensee may adapt the licensed product and compete head on with the licensor. The possibility of nurturing a potential competitor is viewed by many companies as a disadvantage of licensing. With licenses usually limited to a specific time period, a company has to guard against the situation in which the licensee will use the same technology independently after the license has expired and therefore turn into a competitor.
Although there is a great variation according to industry, licensing fees in general are substantially lower than the profits that can be made by exporting or local manufacturing. Depending on the product, licensing fees may range anywhere between 1 percent and 20 percent of sales, with 3 to 5 percent being more typical for industrial products. Conceptually, licensing should be pursued as an entry strategy if the amount of the licensing fees exceeds the incremental revenues of any other entry strategy such as exporting or local manufacturing. A thorough investigation of the market potential is required to estimate potential revenues from any one of the entry strategies under consideration.
Franchising: Franchising is a special form of licensing in which the franchiser makes a total marketing program available including the brand name, logo, products and method of operation. Usually the franchise agreement is more comprehensive than a regular licensing agreement in as much as the total operation of the franchisee is prescribed. It differs from licensing principally in the depth and scope of quality controls placed on all phases of the franchisee`s operation. The franchise concept is expanding rapidly beyond its traditional businesses (such as service stations, restaurants and real-estate brokers) to include less traditional formats such as travel agencies, used car dealers, the video industry and professional and health improvement services. About 80 percent of all McDonald`s restaurants are franchised and as of 1999 the firm operated about 24,500 stores in 116 countries.
Local Manufacturing: A common and widely practiced form of market entry is the local manufacturing of a company`s products. Many companies find it to their advantage to manufacture locally instead of supplying the particular market with products made elsewhere. Numerous factors such as local costs, market size, tariffs, laws and political considerations may affect a choice to manufacture locally. The actual type of local production depends on the arrangements made; it may be contract manufacturing, assembly or fully integrated production. Since local production represents a greater commitment to a market than other entry strategies, it deserves considerable attention before a final decision is made.
Under contract manufacturing, a company arranges to have its products manufactured by an independent local company on a contractual basis. This is an entry mode in which a firm contracts with a foreign firm to manufacture parts or finished products or to assemble parts into finished products. The manufacturer`s responsibility is restricted to production. Afterward, products are turned over to the international company which usually assumes the marketing responsibilities for sales, promotion and distribution. In a way, the international company rents the production capacity of the local firm to avoid establishing its own plant or to circumvent barriers set up to prevent the import of its products. Contract manufacturing differs from licensing with respect to the legal relationship of the firms involved. The local producer manufactures based on orders from the international firm but the international firm gives virtually no commitment beyond the placement of orders. Typically, the contracting firm supplies complete product specifications to the foreign firm, sets production volume and guarantees purchase. Lower labor costs abroad are the major incentive for using this entry mode.
Typically, contract manufacturing is chosen for countries with a low-volume market potential combined with high tariff protection. In such situations, local production appears advantageous to avoid the high tariffs, but the local market does not support the volume necessary to justify the building of a single plant. These conditions tend to exist in the smaller countries in Central America, Africa and Asia. Of course, whether an international company avails itself of this method of entry also depends on its products. Usually, contract manufacturing is employed where the production technology involved is widely available and where the marketing effort is of crucial importance in the success of the product.
By moving to an assembly operation, the international firm locates a portion of the manufacturing process in the foreign country. Typically, assembly consists only of the last stages of manufacturing and depends on the ready supply of components or manufactured parts to be shipped in from another country. Assembly usually involves heavy use of labor rather than extensive investment in capital outlays or equipment. Motor vehicle manufacturers and electronics industries have made extensive use of assembly operations in numerous countries.
Often, companies want to take advantage of lower wage costs by shifting the labor-intensive operation to the foreign market; this results in a lower final price of the products. In many cases, however, the local government forces the setting up of assembly operations either by banning the import of fully assembled products or by charging excessive tariffs on imports. As a defensive move, foreign companies begin assembly operations to protect their markets. However, successful assembly operations require dependable access to imported parts. This is often not guaranteed and in countries with chronic foreign exchange problems, supply interruptions can occur.
To establish a fully integrated local production unit represents the greatest commitment a company can make for a foreign market. Since building a plant involves a substantial outlay in capital, companies only do so where demand appears assured. International companies may have any number of reasons for establishing factories in foreign countries. Often, the primary reason is to take advantage of lower costs in a country, thus providing a better basis for competing with local firms or other foreign companies already present. Also, high transportation costs and tariffs may make imported goods uncompetitive.
Some companies want to build a plant to gain new business and customers. Such an aggressive strategy is based on the fact that local production represents a strong commitment and is often the only way to convince clients to switch suppliers. Local production is of particular importance in industrial markets where service and reliability of supply are main factors in the choice of product or supplier.
Many times, companies establish production abroad not to enter new markets but to protect what they have already gained through exporting. Changing economic or political factors may make such a move necessary. The Japanese car manufacturers who had been subject to an import limitation of assembled cars imported from Japan, began to build factories in United States in the 1980s to protect their market share. As mentioned above, Japanese manufacturers` reasons for the local production were partly political as the United States imposed import targets for several years. Also, with the value of the yen increasing to one hundred yen per US dollar, exports from Japan became uneconomical compared with local production. Thus, to defend market positions, Japanese car companies instituted a longer-term strategy of making cars in the region where they are sold.
Moving with an established customer can also be a reason for setting up plants abroad. In many industries, important suppliers want to keep a relationship by establishing plants near customer locations; when customers build new plants elsewhere, suppliers move too.
Another reason can also be shifting production abroad to save costs.
3. Ownership Strategies:
Companies entering foreign markets have to decide on more than the most suitable entry strategy. They also need to arrange ownership, either as a wholly owned subsidiary, in a joint venture, or more recently in strategic alliance.
Joint Ventures: In a joint venture, an investing firm owns roughly 25 to 75 percent of a foreign firm, allowing the investing firm to affect management decisions of the foreign firm. Under a joint venture (JV) arrangement, the foreign company invites an outside partner to share stock ownership in the new unit. The particular participation of the partners may vary, with some companies accepting either a minority or majority position. In most cases, international firms prefer wholly owned subsidiaries for reasons of control; once a joint venture partner secures part of the operation, the international firm can no longer function independently, which sometimes lead to inefficiencies and disputes over responsibility for the venture. If an international firm has strictly defined operating procedures, such as for budgeting, planning and marketing, getting the JV company to accept the same methods of operation may be difficult. Problems may also arise when the JV partner wants to maximize dividend payout instead of reinvestment or when the capital of the JV has to be increased and one side is unable to raise the required funds. Experience has shown that JVs can be successful if the partners share the same goals with one partner accepting primary responsibility for operations matters. Despite the potential for problems, joint ventures are common because they offer important advantages to the foreign firm. By bringing in a partner the company can share the risk for a new venture. Furthermore, the JV partner may have important skills or contacts of value to the international firm. Sometimes, the partner may be an important customer who is willing to contract for a portion of the new unit`s output in return for an equity participation. In other cases, the partner may represent important local business interests with excellent contacts to the government. A firm with advanced product technology may also gain market access through the JV route by teaming up with companies that are prepared to distribute its products. Many international firms have entered Japan, China and Eastern Europe with JVs. But, not all joint ventures are successful and fulfill their partners` expectations. Despite the difficulties involved, it is apparent that the future will bring many more joint ventures. Successful international and global firms will have to develop the skills and experience to manage JVs successfully often in different and difficult environmental circumstances. And in many markets, the only viable access to be gained will be through JVs.
Strategic Alliances: A more recent phenomenon is the development of a range of strategic alliances. Alliances are different from traditional joint ventures in which two partners contribute a fixed amount of resources and the venture develops on its own. In an alliance, two entire firms pool their resources directly in a collaboration that goes beyond the limits of a joint venture. Although a new entity may be formed, it is not a requirement. Sometimes, the alliance is supported by some equity acquisition of one or both of the partners. In an alliance, each partner brings a particular skill or resource-usually they are complementary-and by joining forces, each expects to profit from the other`s experience. Typically, alliances involve either distribution access, technology transfers or production technology with each partner contributing a different element to the venture. Alliances can be in the forms of technology-based alliances, production-based alliances or distribution-based alliances.
Although many alliances have been forged in a large number of industries, the evidence is not yet in as to whether these alliances will actually become successful business ventures. Experience suggests that alliances with two equal partners are more difficult to manage than those with a dominant partner. In particular, it is important to recognize that the needs and aspirations of partners may change over the life of an alliance and do so in divergent ways. Predicting what the goals and incentives of the various parties will be under various circumstances is a critical part of effective planning. Furthermore, many observers question the value of entering alliances with technological competitors, such as between western and Japanese firms. The challenge in making an alliance work lies in the creation of multiple layers of connections or webs that reach across the partner organizations. Eventually such connections will result in the creation of new organizations out of the cooperating parts of the partners. In that sense, alliances may very well be just an intermediate stage until a new company can be formed or until the dominant partner assumes control.
Entering Markets Through Mergers and Acquisitions: Although international firms have always made acquisitions, the need to enter markets more quickly than through building a base from scratch or entering some type of collaboration has made the acquisition route extremely attractive. This trend has probably been aided by the opening of many financial markets, making the acquisition of publicly traded companies much easier. Most recently even unfriendly takeovers in foreign markets are now possible. Nevertheless, international mergers and acquisitions are difficult to make work.
A major advantage of acquisitions is that they can quickly position a firm in a new business. By purchasing an existing player, a firm does not have to take the time to establish its presence or develop for itself the resources it does not already possess. This can be particularly important when the critical resources are difficult to imitate or accumulate. Acquiring an existing firm also takes a potential competitor out of the market. Despite these advantages, acquisitions can have serious drawbacks. First and foremost, acquisitions can be a very expensive way to enter a market. In addition to the likelihood of overbidding, acquisitions pose a number of other challenges. Most targets contain bundles of assets and capabilities, only some of which are of interest to the acquirer. Disposing of unwanted assets or maintaining them in the portfolio is often done at significant cost, either in real terms or in management time. Although these obstacles are serious, a number of acquisitions fail on another account: the post acquisition integration process fails. Integrating an acquired company into a corporation is probably one of the most challenging tasks confronting top management.
Preparing An Entry Strategy Analysis:
Of course, assembling accurate data is the cornerstone of any entry strategy analysis. The necessary sales projections have to be supplemented with detailed cost data and financial need projections on assets (managerial, financial, etc. resources). The data need to be assembled for all entry strategies under consideration. Financial data are collected not only on the proposed venture but also on its anticipated impact on the existing operations of the international firm. The combination of the two sets of financial data results in incremental financial data incorporating the net overall benefit of the proposed move for the total company structure.
For best results, the analyst must take a long-term view of the situation. Asset requirements, costs and sales have to be evaluated over the planning horizon of the proposed venture, typically three to five years for an average company. Furthermore, a thorough sensitivity analysis must be incorporated. Such an analysis may consists of assuming several scenarios of international risk factors that may adversely affect the success of the proposed venture. The financial data can be adjusted to reflect each new set of circumstances. One scenario may include a 20 percent devaluation in the host country, combined with currency control and difficulty of receiving new supplies from foreign plants. Another situation may assume a change in political leadership to a group less friendly to foreign investments. With the help of a sensitivity analysis approach, a company can quickly spot the key variables in the environment that will determine the outcome of the proposed market entry. The international company then has the opportunity to further add to its information on such key variables or at least to closely monitor their development. It is assumed that any company approaching a new market is looking for profitability and growth. Consequently, the entry strategy must support these goals. Each project has to be analyzed for the expected sales level, costs and asset levels that will eventually determine profitability. Sales, costs and assets levels have to be estimated before. Also, profitability has to be estimated (past sales analysis, market test method). In order to do this, assessing international risk factors, maintaining flexibility and assessing total company impact are required. Market research that focuses on buying patterns, customer segmentation on ability to pay especially in developing countries, etc. (survey of buyers` intentions, composite of sales force opinion, expert opinion) (SWOT Analysis-strenghts, weaknesses, opportunities, threats)
Entry Strategy Configuration:
In reality, most entry strategies consist of a combination of different formats. We refer to the process of deciding on the best possible entry strategy mix as entry strategy configuration.
Rarely do companies employ a single entry mode per country. A company may open up a subsidiary that produces some products locally and imports others to round out its product line. The same foreign subsidiary may even export to other foreign subsidiaries, combining exporting, importing and local manufacturing into one unit. Furthermore, many international firms grant licenses for patents and trademarks to foreign operations, even when they are fully owned. This is done for additional protection or to make the transfer of profits easier. In many cases, companies have bundled such entry forms into a single legal unit, in effect layering several entry strategy options on top of each other.
Bundling of entry strategies is the process of providing just one legal unit in a given country or market. In other words, the foreign company sets up a single company in one country and uses that company as a legal umbrella for all its entry activities. However, such strategies have become less typical-particularly in larger markets, many firms have begun to unbundle their operations.
When a company unbundles, it essentially divides its operations in a country into different companies. The local manufacturing plant may be incorporated separately from the sales subsidiary. When this occurs, companies may select different ownership strategies, for instance, allowing a JV in one operation while keeping full ownership in another part. Such unbundling becomes possible in the larger markets such as the United States, Germany and Japan. It also allows the company to run several companies or product lines in parallel. Global firms granting global mandates to their product divisions will find that each division will need to develop its own entry strategy for key markets.
Portal or E-Business Entry Strategies: The technological revolution of the Internet with its wide range of connected and networked computers has given rise to the virtual entry strategy. Using electronic means, primarily web pages, e-mail, file transfer and related communications tools, firms have begun to enter markets without ever touching down. A company that establishes a server on the Internet and opens up a web page can be connected from anywhere in the world. Consumers and industrial buyers who use modern Internet browsers, such as Netscape, can search for products, services or companies and in many instances even make purchases online. Whatever the forecasts, most experts agree that the opportunity for Internet-based commerce will be huge. The Internet will eliminate some of the hurdles that plagued smaller firms from competing beyond their borders. Given the low cost of the Internet, it is very likely that many more established firms will use the Internet as the first point of contact for countries where they do not yet have a major base. However, there are many challenges to would-be Internet-based global marketers. One of the biggest is language. The second big challenge is the fulfillment side of the e-business. Here, we are dealing with completing a sale, shipping, collecting funds and providing after-sales service to customers all over the world.
Circumstances may make companies want to leave a country or market. Other than the failure to achieve marketing objectives, there may be political, economic or legal reasons for a company to want to dissolve or sell an operation (management myopia).
International companies have to be aware of the high costs attached to the liquidation of foreign operations; substantial amounts of severance pay may have to be paid to employees and any loss of credibility in other markets can hurt future prospects.
Sometimes, an international firm may need to withdraw from a market to consolidate its operations. This may mean a consolidation of factories from many to fewer such plants. Production consolidation when not combined with an actual market withdrawal is not really what we are concerned with here. Rather, our concern is a company`s actual abandoning its plan to serve a certain market or country. This is differentiation between production withdrawal or consolidation and brand withdrawal. A firm can consolidate production elsewhere while retaining a strong brand and marketing presence.
Changing political situations have at times forced companies to leave markets. Changing government regulations can at times pose problems, prompting some companies to leave a country. Exit strategies can also be the result of negative reactions in a firm`s home market.
Several of the markets left by international firms over the past decades have changed in attractiveness, making companies reverse their exit decisions and enter those markets a second time.