Market Entry Modes
One of the most significant decisions to be taken in business is how to enter a new overseas market because of commitments to be made; commitment in terms of dollars to be invested, personnel for managing the international organization, and determination to stay in the market long enough to realize a return on these investments, therefore selecting the most appropriate market entry mode is vital. A mode of entry into an international market is the channel which the organization employs to gain entry to a new international market.
In this report I will go through different alternatives of Market entry divided into two main methods; direct and indirect each sub-categorized into several options. Here I will be considering modes of entry into international markets such as the Exporting, Contract manufacturing, Franchising, Strategic International Alliances, International Joint Ventures and Foreign Direct Investment. In this section examples of companies and their strategy and my own experience will be presented.
Finally stages and strategy of international marketing strategy using SOSTAC plan (Situation, Objectives, Strategy, Tactics, Actions and Control) will be covered. International market entry methods: Exporting: Exporting accounts for some 10 percent of global economic activity.  Exporting can be either direct or indirect. Direct exports represent the most basic mode of exporting, capitalizing on economies of scale in production concentrated in the home country and affording better control over distribution.
With direct exporting, the company sells to a customer in another country. This method is the most common approach employed by companies taking their first international step because the risks of financial loss can be minimized. However more information will be needed to choose the market and more costs than indirect method the company will get more feedback from targeted countries and have Control over selection of foreign markets. Indirect exporting usually means that the company sells to a buyer (importer or distributor) in the home country, which in turn exports the product.
Therefore indirect exporting the sale is like a domestic sale. In fact the firm is not really engaging in global marketing, because its products are carried abroad by others. Such an approach to exporting is most likely to be appropriate for a firm with limited international expansion objectives. This method may also be adopted by a firm with minimal resources to devote to international expansion, which wants to enter international markets gradually, testing out markets before committing major resources and effort to developing an export organization.
Indirect exporting can be achieved using Domestic Purchasers, Trading companies piggybacking and export management companies. Therefore it has advantages of fast market access, little or no financial commitment and low risk. From the other side the company will have little or no control over distribution, sales and marketing, and will not fully learn how to operate overseas. Choosing direct or indirect modes as well established form of operating in foreign markets should be wise and with evaluating the company resources.
The below example will show my own experience regarding the export mode, which is a Malaysian industrial lubricant manufactures approach to enter the Middle East market. The company A, who is selling the products through direct export into South East market, intended to enter the Middle East. As an SME, the company could not get enough information to of the market, competitors and procedures and approvals needed to enter the tenders which the common way to purchase specialty industrial lubricants. During 3 years of effort the achievement is not considerable.
The solution was to appoint a local distributor and marketing arm, which has the experience and enough information of the market. The sales during next two years has gone up sharply with lower risk exposure and the Malaysian company has increased the knowledge of targeted markets and customers. Contract manufacturing There are some parameters which will encourage a company to produce overseas:
* Having the advantage of being close to foreign customers. * Lower production and labour costs * Avoiding high transportation costs * Avoiding Tariffs and non-Tariff barriers Fulfilling some countries preference to produce locally It will be a good option when the company lacks resources and is not willing to invest equity to establish manufacturing and selling operations directly. Even though a local firm is responsible for production and selling, but the company is able to develop and control R&D, marketing, distribution, sales and servicing of its products in international markets, then it is possible for the contractor to sell the products in the country of production or some other foreign market.
A good example of contract manufacturing is IKEA. With its business formula based on low cost and affordability and IKEA have 2500 suppliers in over sixty countries. Having exclusive contract manufacturing with its suppliers, they are working closely with them to reduce costs and sharing technical know-how. Benetton is another example which employs contract manufacturers to produce clothing. Licensing: Licensing is another way in which the firm can establish local production in foreign markets without capital investment.
It differs from contract manufacturing as it is usually for a longer term and involves much greater responsibilities for the national firm, because more value chain functions have been transferred to the licensee by the licensor. A licensing agreement is an arrangement wherein the licensor gives something of value to the licensee in exchange for certain performance and payments from the licensee. The licensor may give the licensee the right to use one or more of Patent rights, trademark rights, and the rights to use technological processes.
Although licensing may be the least profitable way of entering a market, the risks and headaches are less than those for direct investments. It is a legitimate means of capitalizing on intellectual property in a foreign market, and such agreements can also benefit the economies of target countries. As an example of licensing, Starbucks used it in New Zealand after doing its internal external audit. Internal audit showed that Starbucks was lacking knowledge of this new market because the characteristic of New Zealand’s business environment was unfamiliar.
To form the licensing agreement with an experienced firm, Restaurant Brands New Zealand Ltd. was a way to gain knowledge from its local partner. Besides that, the comparatively large size of the firm made it have the capability to commit resources. However, Starbucks needed its partner to commit more managerial resources and lacked the capital due to the fast speed of its growth in the 1990s and internationalization process planned. Thus the global management efficiency and the management risk attitude combined together to incentivize Starbucks to find an efficient and low-risk entry mode: licensing.
As for the external factors, there were few cultural differences or market barriers and a large market potential. However, because of the low level of competitive intensity, Starbucks was able to choose the low-control licensing entry mode as opposed to a high-control entry mode such as a joint venture. Franchising Franchising was almost unknown in Europe until the beginning of the 1970s. It is popularized in the United States, where over one-third of retail sales are derived from franchising, in comparison with about 11 per cent in Europe (Young et al. , 1989, p. 111).
Franchising is a rapidly growing form of licensing in which the franchiser provides a standard package of products, systems, and management services, equipment, operation manual, initial trainings, site approval and all the support necessary for the franchisee to run its business in the same way it is done by the franchisor and the franchisee provides market knowledge, capital, and personal involvement in management. The key factors that influence success of franchising approaches are monitoring costs the principal’s international experience, and the brand equity in the new market.
Franchises these days include variety of businesses like soft drinks, motels, retailing, fast foods, car rentals, automotive services, recreational services and etc. for example Of the top 10 franchises in 2010, according to Entrepreneur’s Franchise 500, five are food-related; Subway, McDonald’s, 7-Eleven, Dunkin’ Donuts and Ampn Mini Market. In financial services H&R Block is number six on Entrepreneur’s Franchise 500, offering tax preparation and electronic filing services. Franchises in emerging market economies of Eastern Europe, the former republics of Russia, and China are the Shining examples of the above.
As instance McDonald’s is n Moscow with its first store seated 700 inside and 27 cash registers, and KFC is in China (the Beijing KFC store has the highest sales volume of any KFC store in the world). An example of hotel industry will elaborate more on franchising. Hilton began franchising its hotels in 1965 and currently 36% of company revenues are franchise fees. Hilton does not participate directly in the management or the operations of franchised hotels but conducts periodic inspections to ensure that the specified standards are maintained. The franchisees pay Hilton an initial fee based on the number of rooms and a continuing fee based on revenues.
Hilton is involved in the approval of plans for and the location of the franchised hotels and also assists in the design. Hilton promotes the brand globally. Marketing and sales support includes national sales and marketing efforts, national and regional advertising, public relations, special marketing programs and access to a range of support materials such as camera-ready advertising formats and logos. The reasons of popularity of franchising can be because of Low political risk and cost alongside with the possibility of simultaneous expansion into different regions of the world.
Strategic International Alliances A Strategic Alliance 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. They are formed by the aim of bearing up weaknesses and increase competitive strengths. The reasons to enter alliances are for rapid expansion into new markets, access to new technology, more efficient production and innovation, reduced marketing costs, strategic competitive moves, and access to additional sources of products and capital.
Airline industry is the most visible example of international alliances. American Airlines, Cathay Pacific, British Airways, Japan Airlines, Finnair, Mexicana, Malev, Iberia, LAN, Royal Jordanian, and Quantas are partners in the one world Alliance, which integrates schedules and mileage programs. This kind of alliance is pursing the objectives of covering the ones weaknesses with another’s strength, reducing costs and taking lower risk. Some other industries in which SIA is more common are: Telecommunications, Electronics, Pharmaceuticals, Information technology and Specialty chemicals.
Here we will describe an example of alliance with multiple objectives and the strategy taken by the firms to achieve them. It involves C-Itoh (Japan), Tyson Foods (United States), and Provemex (Mexico). It is an alliance that processes Japanese-style yakitori (bits of marinated and grilled chicken on a bamboo stick) for export to Japan and other Asian countries. Each company had a goal and made a contribution to the alliance. C-Itoh’s goal was to find a lower-cost supply of yakitori; because it is so labor intensive, it was becoming increasingly costly and noncompetitive to produce in Japan.
C-Itoh’s contribution was access to its distribution system and markets throughout Japan and Asia. Tyson’s goal was new markets for its dark chicken meat, a byproduct of demand for mostly white meat in the U. S. market. Tyson exported some of its excess dark meat to Asia and knew that C-Itoh wanted to expand its supplier base. But Tyson faced the same high labor costs as C-Itoh. Provemex, the link that made it all work, had as its goal expansion beyond raising and slaughtering chickens into higher value-added products for international markets. Provemex’s contribution was to provide highly cost-competitive labor.
Through the alliance, they all benefited. Provemex acquired the know-how to bone the dark meat used in yakitori and was able to vertically integrate its operations and secure a foothold in a lucrative export market. Tyson earned more from the sale of surplus chicken legs than was previously possible and gained an increased share of the Asian market. C-Itoh had a steady supply of competitively priced yakitori for its vast distribution and marketing network. Thus, three companies with individual strengths created a successful alliance in which each contributes and each benefit.
International Joint Ventures A joint venture is a partnership of two or more participating companies that have joined forces to create a separate legal entity, which is the distinctive factor with other kinds of alliances. In international joint ventures these parties will be based in different countries, and this obviously complicates the management of such an arrangement. Reasons for willingness of joint ventures can be described as below:
* New opportunities in existing sectors through complementary technology or management skills provided sectors (e. g. ultimedia, in which information processing, communications and the media are merging). * Increasing speed of market entry with finding partners in the host country. * Many less developed countries, such as China and South Korea, try to restrict foreign ownership. * Reducing the cost of global operations in R&D and production to achieve competitive advantage. The formal difference between a joint venture and a strategic alliance is that a strategic alliance is typically a non-equity cooperation, meaning that the partners do not commit equity into or invest in the alliance.
The joint venture can be either a contractual non-equity joint venture or an equity joint venture. Despite above advantages IJV, it is difficult to manage because of choice of partners and the qualities of the relationships between the executives, how control is shared, institutional (legal) environments, marketing capabilities, experience, and the extent to which knowledge is shared across partners. As examples of IJV we can mention Sony-Ericsson which was a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones in 2001.
The stated reason for this venture is to combine Sony’s consumer electronics expertise with Ericsson’s technological leadership in the communications sector. Both companies have stopped making their own mobile phones. In 2011 Sony acquired Ericsson mobile manufacturing. On October 27, 2011, Sony announced that it would acquire Ericsson’s stake in Sony Ericsson for €1. 05 billion ($1. 47 billion), making the mobile handset business a wholly owned subsidiary of Sony. The transaction’s completion is expected to occur in January 2012.
Chief portfolio manager of Sony believes that the deal will increase management freedom at the mobile phone unit to speed up development of new products. Another example of JV is Virgin Mobile India Limited. It is a cellular telephone service provider company which is a joint venture between Tata Tele service and Richard Branson’s Service Group. Currently, the company uses Tata’s CDMA network to offer its services under the brand name Virgin Mobile, and it has also started GSM services in some states.