Lesson 28. INTERNATIONAL MARKET ENTRY STRATEGIES
Module 8. International marketing
INTERNATIONAL MARKET ENTRY STRATEGIES
When a domestic company decides to do international business, it must decide a best mode of entry. The major entry modes are indirect exporting, direct exporting, licensing, joint ventures, and direct investment. This chapter describes various international market entry modes.
28.2 International Market Entry
Doing business in many nations is a strategic decision. It has long term financial and structural implications. It requires careful analysis of different market entry options available to a firm. Selection of the mode depends upon the ability and willingness of firm to allocate resources, the level of control desired over the international operations by the firm and the level of risk firm is willing to take.
28.2.1 International market entry module
International market entry is carried out first by home production and than by other country production through various modes as described in this section.
126.96.36.199 Home production
This implies that goods and services are produced in home country and sold to overseas market. This is the most simple and common international market entry mode. It involves lower risk and less allocation of resources. This is adopted by following mechanisms.
Bilkey and Tesar have identified following stages in export marketing.
Firm is not in exporting; ignores unsolicited
Firm supplies unsolicited business; does not examine feasibility of active exporting.
Firm actively examines the feasibility of exporting
Firm exports on experimental basis to a country of close business distance.
Firm becomes an experienced exporter to that country.
Firm explores feasibility of exporting to countries with greater business distance.
b) Indirect exports
It is the process of selling products to an export intermediary in the firm’s home country, who would then sell it in foreign markets. This mode is suitable for a firm which has limited experience of exposure to overseas markets and has less resource for investment in export development. This can be carried out by (i) Selling to a foreign firm or buying agent in home country (ii) Exporting through a merchant intermediary (export house/ trading house). The trading house carry out following functions: Selection of market and conducting market research, identifying the customers and evaluating them, performing negotiations of commercial or technical nature, developing the vendors, product/packaging adoption and technology up gradation, imports of items required for export production, arrangement of finances, counter trading, ensuring protection against export through insurance, carry out export documentation and shipping, provide timely payments, deals with claims, provide after sale service, ensure spare part availability, great distribution network abroad, develop and maintain special relations with government.
As large number of functions is being carried out by export houses, it provides following benefits to firms adopting international marketing.
- It provides best option for firms having limited resources to enter into international market.
- As export house obtain shipment from many firms, it is possible for to get competitive price for exports and reduced operational cost which can be carried to firms in the form of discounted prices.
- Risks associated with exports like commercial, transport and credit risk is borne by export house.
- Due to consolidated shipment, they have better negotiating power.
- As many marketing activities are carried out by export house, it results into saving in financial and operational resources of firm.
c) Direct export
Here all the activities which are carried out by export house/trading house in case of indirect export are carried out by firm itself. This is carried out by foreign based independent market intermediaries (agents and distributors). Agents do not take title to goods; assume no risk or responsibility and gets commission according to work. Agent is considered as exporting company in the given market and finds wholesalers and retailers for its products. An overseas distributor is a foreign based merchant who buys the product on his own account and resells them to wholesaler and retailers to earn profit.
I. Advantages of direct export
- Higher profit is realized by exporter due to absence of intermediaries.
- Firm develop in house skills for export operations with passage of time.
- Firm builds its own rapport/ brand image in the foreign market due to direct contact with foreign importers.
II. Disadvantages of direct export
- More allocation of resources
- More risk.
d) Complimentary exporting (piggy backing)
Here well established distribution network of a foreign country is used by home country to sell their products in foreign market. The home company/exporting company is referred to as rider and foreign company is referred to as carrier. The carrier may act as an agent on commission base or as an independent distributor which outright buys the product. Complimentary exporting is generally adopted for allied products from unrelated companies that are non competitive.
Advantages of complimentary exporting
- Allows the company to enter into international marketing without developing its own distribution channel.
- Helps the firm to learn and understand the process of international marketing.
- For Carrier Company, it helps to broaden the product line.
Disadvantages of complimentary exports
- Carrier may be conscious about uninterrupted supply of products from rider to maintain continuity.
- Carrier is also conscious about quality and warranty of product.
- Rider may be conscious about handling over of selling activities to carrier which may not be compatible with firm’s long term objectives.
28.2.2 Other country production
Exporting as a measure of international marketing is preferable when currency and home country is weak. When home currency becomes strong then it is wise to take it to other countries having weaker currency. The change in production facilities may be effected either by contractual alliances or foreign direct investment.
Contractual entry modes: Company can enter into contractual arrangements so as to have beneficial effect for both the companies. A company having excellent production facilities at home but lacking distribution competencies abroad may enter in to contractual agreement with a company having excellent distribution network in related product. Contractual entry modes may be adopted by following measures.
Under this mode, two companies enter in to agreement wherein one company allows use of its intellectual property such as trademark, copyright, patent, process technology, design or specific business skills in lieu of agreed royalty payment. The firm which transfers the intellectual property is called licenser and the firm which receives it, is called licensee.
a) Advantages of licensing
- It allows fast penetration in international markets specially for technology intensive product and processes.
- It opens up markets having high level of tariff and low tariff barriers.
- It decreases economic and political risks of international marketing and provide opportunity to do business in sensitive markets.
- It helps in reducing duplicate product’s market in developing and underdeveloped nations.
- Less cost is incurred for exiting the market.
b) Disadvantages of licensing
- The quality of the product is dependent upon licenser. Lack of commitment by licensee may have negative impact on image of the licenser.
- The licenser may be creating potential competitor in the form of licensee.
This mode is gently adopted for service sector wherein the transfer of intellectual property and other assistance is required for a longer period. The company which provides intellectual property and other assistance is called franchiser and the receiving company is called franchisee.
188.8.131.52 Turn-key projects abroad
Some engineering companies which possess competencies in constructing dams, bridges etc. can obtain international contract and can enter in to international market. For an international market turnkey project, a firm carries out all the activities right from conceptualizing, designing, constructing and carrying out preliminary testing of a prepared structure for a foreign client organization. The various types of turnkey projects are (a) Built and transfer (b) Built, operate and transfer, (c) Built, operate and own. This mode of entry into international market allows companies to take advantage of their core competencies and exploit export opportunities.
184.108.40.206 Management contracts
Under this mode a firm enters into contract with foreign company to provide technical and managerial skills/know how for a specific period. This is a low risk, low mode of entry. This mode is specially used in managing hotels, catering services, operation of power plants etc.
a) Strategic alliance
When two companies cooperate with each other to achieve common strategic goals but they do not establish a separate company, such a relationship is called strategic alliance. In today’s competitive world, majority of the companies are willing to focus on their core competencies, which increases scope for strategic alliance. Strategic alliance reduces individual risk of firms but at times give rise to conflicts due to difference of opinion among companies.
220.127.116.11 Contract manufacturing
Under this system, manufacturing operations of an international firm are done at off shore location on contract basis. Under this mode the contracted firm carries out the production activities and the marketing activities are carried out by the main firm. This mode is advantages to many firms as it is not required to invest its resources in manufacturing, which can be done at other locations by contracting firm at reduced cost. Due to low exit cost, it is possible for the main firm to change contracted firm if is necessary to maintain quality of the finished product.
18.104.22.168 Assembly or mixing in foreign market
Under this mode a manufacturing firm exports various components of the product in completely knocked down condition and assembles them in foreign country. This helps the firm to eliminate the high cost of shipping and high import tariffs, counter non tariff barriers for imports. Manufacturing firm can also avail the facility of cheap labour if assembly of parts is to be undertaken in developing or underdeveloped nations.
22.214.171.124 Joint ventures
If a company wants to retain complete control of all its foreign country operations/assignments then it enters into a joint venture with other country with equity partition. The firms involved in joint ventures contribute their complementary expertise and resources. As compared to other modes, this provides access to foreign capital market but at the same time involves more risk as compared to other modes of entry without equity participation. Also at times opportunistic behaviour of partner firms adds to high rate of dissolution.
126.96.36.199 Wholly owned foreign subsidiaries
If a firm is willing to have complete control and ownership of international operations, then it chooses to have foreign direct investment to own foreign operations. This option is helpful to the firm to develop foreign market with growth potential by way of product differentiation and competitive response. The firm can also avail the incentives provided by host government to foreign companies. But this mode requires more financial and other operational resources. It also involves higher risk and requires sufficient experience of international business.
A company can set up a wholly owned subsidiary by any of the following modes.
It provides speedy access to the resources of a foreign company such as skilled man power, its product and brand, its distribution channel.
b) Greenfield operations
In this mode, a company creates the production and marketing facilities on its own from initial stage. Acquisition can be adopted by bigger firms, whereas Greenfield operation strategy operation strategy is suitable for smaller firms with limited financial resources.
When a firm intends to do marketing in other countries, first all it is necessary to thoroughly analyze economic characteristics such as gross national product, income and population. Based upon this a market may be chosen and then the firm decides a suitable market entry mode. Each market entry strategy has its own strength and weaknesses. In most of the cases, the strategies are not mutually exclusive. A company may use multiple strategies in different markets as well as within the same market. The appropriateness of a strategic option depends upon corporate objectives, market conditions and political realities.