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Foreign market entry strategies

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Geeta Shiromani
Geeta Shiromani

The document discusses various factors and strategies for foreign market entry decisions faced by firms. It covers evaluating which markets to enter based on size, growth rates, and product suitability. It also discusses timing of entry, scale of entry, and different modes of entry including exporting, contractual agreements like licensing and franchising, turnkey projects, contract manufacturing, management contracting, strategic alliances, joint ventures, consortia, and wholly owned subsidiaries. The optimal choice depends on a firm's needs around control, investment, risks, and location-specific advantages.

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Country evaluation, selection & Foreign market entry strategiesGEETA SHIROMANIASSOCIATE PROFESSOR
Basic foreign expansion entry decisionsA firm contemplating foreign expansion must make three decisionsWhich markets to enter??When to enter these markets??What is the scale of entry??Which is the best mode of entry??
Basic Market Entry Decision- Which Market??200 nation-states Different long-run profit potential for firmsSize of market Purchasing power (present wealth)Future wealthBenefits cost & risks trade off– rank marketsFuture economic growth ratesFree market system & country’s capacity for growthStable and developing markets without upsurge in inflation rates or private-sector debt
Basic Market Entry Decision- Which Market??Value an international business can create in a marketSuitability of product for market Nature of indigenous competitionNot widely available & satisfies an unmet needGreater value translates into an ability to charge higher prices & build sales volume more rapidly
Basic Market Entry Decision- Which Market??Process of country evaluation & selectionScan for alternativesChoose & weight variablesCollect & analyze data for variablesUse tools to compare variables & narrow alternativesMake final country Selection
Basic Market Entry Decision – Timing of Entry??Early entry - Firm enters foreign market before other foreign firmsFirst mover advantageAbility to preempt rivals & capture demand by establishing strong brand nameBuild sales volume and ride down the experience curve with a cost advantageCreate switching cost that tie customers into products & services
Basic Market Entry Decision – Timing of Entry??First mover disadvantages - Pioneering costs Time & effort in learning the rules of the gameMistakes due to ignoranceLiability of being a foreignerCosts of promoting & establishing a product – educating customers (KFC in China -> benefit to McDonald’s)
Scale of Entry??Large scale entry Requires commitment of significant resources & implies rapid entry (Dutch ING spend billions to acquire US operations)Strategic commitment Decision that has long term impact & is difficult to reverse (entering market on large scale)Change the competitive playing field & unleash number of changes – e.g. how competitors might reactCan limit strategic flexibility
Scale of Entry??Small Scale Entry:Advantages:Time to learn about the market.Limits company exposure.Disadvantages:May be difficult to build market share.Difficult to capture first-mover
Basic market entry decisionsDiscussion based on developing country considerationsCan use MNEs to learn & bench mark againstCan focus on niches the MNE ignores or can’t serveCan piggyback with MNEs (eg; Jollibee)
Which Foreign market entry mode?
EXPORTINGThe commercial activity of selling and shipping goods to a foreign countryThe most common overseas entry approach for small firms
EXPORTINGExporting can be either direct or indirectIn direct exporting the company sells to a customer in another countryIn contrast, indirect exporting usually means that the company sells to a buyer (importer or distributor) in the home country who in turn exports the product
EXPORTINGThe Internet is becoming increasingly important as a foreign market entry methodInitially, Internet marketing focused on domestic sales, however, a surprisingly large number of companies started receiving orders from customers in other countries, resulting in the concept of:international Internet marketing (IIM).
Exporting.. Advantages:Easy implementation of strategyLess investment abroad which helps small firms also to enter international businessMinimal risksCasual international marketing effortFirm may manufacture in centralized location & export to other national markets to realize scale economies from global sales volume (Sony/TV, Matsushita/VCR, Samsung/Chips)
Exporting..Disadvantages:Susceptibility to trade barriersLogistical difficultiesLess suitable for service productsSusceptibility to exchange-rate fluctuationNot appropriate if other lower cost manufacturing locations existHigh transport costs can make exporting uneconomical especially bulk products
CONTRACTUAL AGREEMENTSContractual agreementsare long-term, non-equity associations between a company and another in a foreign marketApproaches:LicensingFranchising Contract manufacturingManagement contractingTurnkey projects
LICENSINGAn arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period and in return, the licensor receives a royalty fee from the licensee.Offers know-how, shares technology, and shares brand name with licensee; licensee pays royalties; lower-risk entry mode; permits access to markets
Licensing..Advantages:Helps company to spread out its R&D & investment costs with incremental incomeLittle additional capital or time investmentLegitimate means of capitalizing on intellectual property in a foreign market.Receive royalties for granting the rights to intangible property to licensee for specified period (patents, inventions, formulas, processes, designs, copyrights, trademarks)
Licensing..Advantages:Allows firm to participate where there are barriers to investment (Fuji-Xerox)Frequently used when firm possesses intangible property but does not want to develop the business application itself (Coco-Cola/clothing)Primarily used by manufacturing firms
Licensing..Disadvantages:Inconsistent product quality may effect product image negativelyThe agreement generally prohibits the originating firm from exploiting the assets in particular foreign marketsDoes not give firm tight control over manufacturing, marketing & strategy to realize experience curve & location economiesFirms can lose control over the competitive advantage of their technological know-how. Solution: Cross licensing agreements
FRANCHISINGFranchising is a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does businessLonger-term commitments
Franchising..Advantages:Important way of gaining foreign returns on certain kinds of customer-service and trade name assets Limited financial commitmentInvolves longer term commitment than licensing. Primarily used by service firms (McDonalds)
Franchising.. Advantages: Franchiser sells intangible property (trademark) & insists franchisee agrees to abide by strict business rules (location, methods, design, staffing, supply chain)Royalty payments that are some percentage of franchisee’s revenuesFirm relieved of many costs & risks of opening new market.
Franchising..Disadvantages:No manufacturing so no location economies & experience curveMay inhibit the ability to take profits out of one country to support competitive attacks in anotherRisk of worldwide reputation if no quality controlFirm can set up “master franchise” in each country – subsidiary which is JV (McDonalds & local firm)
TURNKEY PROJECTSA product or service which can be implemented or utilized with no additional work required by the buyer (just by 'turning the key')".The contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel
Turnkey project..Advantages:A way of earning great economic returns from the know-how & exporting process technologyThis strategy is useful where FDI is limited by host government regulationsLess risky than FDI in countries with unstable political and economic environmentMeans of exporting process technology (chemical, pharmaceutical, petroleum, mining)
Turnkey project..Disadvantages:Firm has no long term interest in the country – can take minority equity interest in companyFirm may inadvertently create a competitor (middle east oil refineries)If firm’s process technology is a source of competitive advantage, then selling technology is also selling competitive advantage to potential competitors
Contract manufacturingContract manufacturing is a process that establish a working agreement between two companies. As part of the agreement, one company will custom produce parts or other materials on behalf of their client.
Contract manufacturing Advantages:The client does not have to maintain manufacturing facilities, purchase raw materials, or hire labor in order to produce the finished goods so less capital investment is requiredHelps to achieve benefits of economies of scaleHelps to achieve location economies
Contract manufacturing Disadvantages:Less management controlPotential security or confidentiality issuesComplexityPotential quality issues
Management contractingA management contract is an arrangement under which operational control of an enterprise is vested by contract in a separate enterprise which performs the necessary managerial functions in return for a fee.
Management contractingManagement contracts involve not just selling a method of doing things (as with franchising or licensing) but involves actually doing them. A management contract can involve a wide range of functions, such as technical operation of a production facility, management of personnel, accounting, marketing services and training.
Management contracting Advantages: Management contracts are often formed where there is a lack of local skills to run a project.It is an alternative to foreign direct investment as it does not involve as high risk and can yield higher returns for the company when foreign government actions restrict other entry methods.
Management contracting Disadvantages: Loss of controlTime delaysLoss of flexibilityLoss of qualityCompliance
STRATEGIC ALLIANCECooperative agreements between potential or actual competitorsA strategic international alliance (SIA) is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving a common objectiveSIAs are sought as a way to shore up weaknesses and increase competitive strengths.Licensing, Joint venture, consortia etc
Strategic alliancesFirms enter SIAs for several reasons:Opportunities for rapid expansion into new marketsAccess to new technologyMore efficient production and innovationReduced marketing costsStrategic competitive movesAccess to additional sources of products and capital
Strategic alliances- JOINT VENTURESA JV entails establishing a firm that is jointly owned by two or more otherwise independent firms.
JOINT VENTUREFour Characteristics define joint ventures:JVs are established, separate, legal entitiesThe acknowledged intent by the partners to share in the management of the JVThere are partnerships between legally incorporated entities such as companies, chartered organizations, or governments, and not between individualsEquity positions are held by each of the partners
Strategic alliances- ConsortiaConsortia are similar to joint ventures and could be classified as such except for two unique characteristics:They typically involve a large number of participantsThey frequently operate in a country or market in which none of the participants is currently active.Consortia are developed to pool financial and managerial resources and to lessen risks.
Joint ventures..Advantages:Smaller investment Local marketing and production/ procurement of expertise from local partner Better understanding of the host countryTypically 50/50 with contributed team of managers to share operating control
Joint ventures..Advantages:Firm benefits from local partner’s knowledge of competitive conditions, culture, language, political system & business systemSharing market development costs & risks with local partnerIn some countries, political considerations make JVs the only feasible entry mode
Joint ventures..Disadvantages:Risk of giving control of technology to the partnersShared ownership arrangement can lead to conflicts and battles of control between the investing firms.
Structuring the alliance to reduce opportunism
WHOLLY OWNED SUBSIDIARYThe firm owns 100% of the stockThe firm can either set up a Green-field venture or It can acquire an established firm in the host nation
Wholly owned subsidiaryAdvantages:Reduces the risk of loosing control over technological competenceTight control over operationsHelps to achieve location economies
Wholly owned subsidiary..Disadvantages:Larger commitment and riskMost costly method Risk of national expropriation
Selecting an entry modeTechnological Know-HowWholly owned subsidiary, except: 1. Venture is structured to reduce risk of loss of technology. 2. Technology advantage is transitory.Then licensing or joint venture OKManagement Know-HowFranchising, subsidiaries (wholly owned or joint venture)Pressure for Cost ReductionCombination of exporting and wholly owned subsidiary

More Related Content

Foreign market entry strategies

  • 1. Country evaluation, selection & Foreign market entry strategiesGEETA SHIROMANIASSOCIATE PROFESSOR
  • 2. Basic foreign expansion entry decisionsA firm contemplating foreign expansion must make three decisionsWhich markets to enter??When to enter these markets??What is the scale of entry??Which is the best mode of entry??
  • 3. Basic Market Entry Decision- Which Market??200 nation-states Different long-run profit potential for firmsSize of market Purchasing power (present wealth)Future wealthBenefits cost & risks trade off– rank marketsFuture economic growth ratesFree market system & country’s capacity for growthStable and developing markets without upsurge in inflation rates or private-sector debt
  • 4. Basic Market Entry Decision- Which Market??Value an international business can create in a marketSuitability of product for market Nature of indigenous competitionNot widely available & satisfies an unmet needGreater value translates into an ability to charge higher prices & build sales volume more rapidly
  • 5. Basic Market Entry Decision- Which Market??Process of country evaluation & selectionScan for alternativesChoose & weight variablesCollect & analyze data for variablesUse tools to compare variables & narrow alternativesMake final country Selection
  • 6. Basic Market Entry Decision – Timing of Entry??Early entry - Firm enters foreign market before other foreign firmsFirst mover advantageAbility to preempt rivals & capture demand by establishing strong brand nameBuild sales volume and ride down the experience curve with a cost advantageCreate switching cost that tie customers into products & services
  • 7. Basic Market Entry Decision – Timing of Entry??First mover disadvantages - Pioneering costs Time & effort in learning the rules of the gameMistakes due to ignoranceLiability of being a foreignerCosts of promoting & establishing a product – educating customers (KFC in China -> benefit to McDonald’s)
  • 8. Scale of Entry??Large scale entry Requires commitment of significant resources & implies rapid entry (Dutch ING spend billions to acquire US operations)Strategic commitment Decision that has long term impact & is difficult to reverse (entering market on large scale)Change the competitive playing field & unleash number of changes – e.g. how competitors might reactCan limit strategic flexibility
  • 9. Scale of Entry??Small Scale Entry:Advantages:Time to learn about the market.Limits company exposure.Disadvantages:May be difficult to build market share.Difficult to capture first-mover
  • 10. Basic market entry decisionsDiscussion based on developing country considerationsCan use MNEs to learn & bench mark againstCan focus on niches the MNE ignores or can’t serveCan piggyback with MNEs (eg; Jollibee)
  • 11. Which Foreign market entry mode?
  • 12. EXPORTINGThe commercial activity of selling and shipping goods to a foreign countryThe most common overseas entry approach for small firms
  • 13. EXPORTINGExporting can be either direct or indirectIn direct exporting the company sells to a customer in another countryIn contrast, indirect exporting usually means that the company sells to a buyer (importer or distributor) in the home country who in turn exports the product
  • 14. EXPORTINGThe Internet is becoming increasingly important as a foreign market entry methodInitially, Internet marketing focused on domestic sales, however, a surprisingly large number of companies started receiving orders from customers in other countries, resulting in the concept of:international Internet marketing (IIM).
  • 15. Exporting.. Advantages:Easy implementation of strategyLess investment abroad which helps small firms also to enter international businessMinimal risksCasual international marketing effortFirm may manufacture in centralized location & export to other national markets to realize scale economies from global sales volume (Sony/TV, Matsushita/VCR, Samsung/Chips)
  • 16. Exporting..Disadvantages:Susceptibility to trade barriersLogistical difficultiesLess suitable for service productsSusceptibility to exchange-rate fluctuationNot appropriate if other lower cost manufacturing locations existHigh transport costs can make exporting uneconomical especially bulk products
  • 17. CONTRACTUAL AGREEMENTSContractual agreementsare long-term, non-equity associations between a company and another in a foreign marketApproaches:LicensingFranchising Contract manufacturingManagement contractingTurnkey projects
  • 18. LICENSINGAn arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period and in return, the licensor receives a royalty fee from the licensee.Offers know-how, shares technology, and shares brand name with licensee; licensee pays royalties; lower-risk entry mode; permits access to markets
  • 19. Licensing..Advantages:Helps company to spread out its R&D & investment costs with incremental incomeLittle additional capital or time investmentLegitimate means of capitalizing on intellectual property in a foreign market.Receive royalties for granting the rights to intangible property to licensee for specified period (patents, inventions, formulas, processes, designs, copyrights, trademarks)
  • 20. Licensing..Advantages:Allows firm to participate where there are barriers to investment (Fuji-Xerox)Frequently used when firm possesses intangible property but does not want to develop the business application itself (Coco-Cola/clothing)Primarily used by manufacturing firms
  • 21. Licensing..Disadvantages:Inconsistent product quality may effect product image negativelyThe agreement generally prohibits the originating firm from exploiting the assets in particular foreign marketsDoes not give firm tight control over manufacturing, marketing & strategy to realize experience curve & location economiesFirms can lose control over the competitive advantage of their technological know-how. Solution: Cross licensing agreements
  • 22. FRANCHISINGFranchising is a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does businessLonger-term commitments
  • 23. Franchising..Advantages:Important way of gaining foreign returns on certain kinds of customer-service and trade name assets Limited financial commitmentInvolves longer term commitment than licensing. Primarily used by service firms (McDonalds)
  • 24. Franchising.. Advantages: Franchiser sells intangible property (trademark) & insists franchisee agrees to abide by strict business rules (location, methods, design, staffing, supply chain)Royalty payments that are some percentage of franchisee’s revenuesFirm relieved of many costs & risks of opening new market.
  • 25. Franchising..Disadvantages:No manufacturing so no location economies & experience curveMay inhibit the ability to take profits out of one country to support competitive attacks in anotherRisk of worldwide reputation if no quality controlFirm can set up “master franchise” in each country – subsidiary which is JV (McDonalds & local firm)
  • 26. TURNKEY PROJECTSA product or service which can be implemented or utilized with no additional work required by the buyer (just by 'turning the key')".The contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel
  • 27. Turnkey project..Advantages:A way of earning great economic returns from the know-how & exporting process technologyThis strategy is useful where FDI is limited by host government regulationsLess risky than FDI in countries with unstable political and economic environmentMeans of exporting process technology (chemical, pharmaceutical, petroleum, mining)
  • 28. Turnkey project..Disadvantages:Firm has no long term interest in the country – can take minority equity interest in companyFirm may inadvertently create a competitor (middle east oil refineries)If firm’s process technology is a source of competitive advantage, then selling technology is also selling competitive advantage to potential competitors
  • 29. Contract manufacturingContract manufacturing is a process that establish a working agreement between two companies. As part of the agreement, one company will custom produce parts or other materials on behalf of their client.
  • 30. Contract manufacturing Advantages:The client does not have to maintain manufacturing facilities, purchase raw materials, or hire labor in order to produce the finished goods so less capital investment is requiredHelps to achieve benefits of economies of scaleHelps to achieve location economies
  • 31. Contract manufacturing Disadvantages:Less management controlPotential security or confidentiality issuesComplexityPotential quality issues
  • 32. Management contractingA management contract is an arrangement under which operational control of an enterprise is vested by contract in a separate enterprise which performs the necessary managerial functions in return for a fee.
  • 33. Management contractingManagement contracts involve not just selling a method of doing things (as with franchising or licensing) but involves actually doing them. A management contract can involve a wide range of functions, such as technical operation of a production facility, management of personnel, accounting, marketing services and training.
  • 34. Management contracting Advantages: Management contracts are often formed where there is a lack of local skills to run a project.It is an alternative to foreign direct investment as it does not involve as high risk and can yield higher returns for the company when foreign government actions restrict other entry methods.
  • 35. Management contracting Disadvantages: Loss of controlTime delaysLoss of flexibilityLoss of qualityCompliance
  • 36. STRATEGIC ALLIANCECooperative agreements between potential or actual competitorsA strategic international alliance (SIA) is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving a common objectiveSIAs are sought as a way to shore up weaknesses and increase competitive strengths.Licensing, Joint venture, consortia etc
  • 37. Strategic alliancesFirms enter SIAs for several reasons:Opportunities for rapid expansion into new marketsAccess to new technologyMore efficient production and innovationReduced marketing costsStrategic competitive movesAccess to additional sources of products and capital
  • 38. Strategic alliances- JOINT VENTURESA JV entails establishing a firm that is jointly owned by two or more otherwise independent firms.
  • 39. JOINT VENTUREFour Characteristics define joint ventures:JVs are established, separate, legal entitiesThe acknowledged intent by the partners to share in the management of the JVThere are partnerships between legally incorporated entities such as companies, chartered organizations, or governments, and not between individualsEquity positions are held by each of the partners
  • 40. Strategic alliances- ConsortiaConsortia are similar to joint ventures and could be classified as such except for two unique characteristics:They typically involve a large number of participantsThey frequently operate in a country or market in which none of the participants is currently active.Consortia are developed to pool financial and managerial resources and to lessen risks.
  • 41. Joint ventures..Advantages:Smaller investment Local marketing and production/ procurement of expertise from local partner Better understanding of the host countryTypically 50/50 with contributed team of managers to share operating control
  • 42. Joint ventures..Advantages:Firm benefits from local partner’s knowledge of competitive conditions, culture, language, political system & business systemSharing market development costs & risks with local partnerIn some countries, political considerations make JVs the only feasible entry mode
  • 43. Joint ventures..Disadvantages:Risk of giving control of technology to the partnersShared ownership arrangement can lead to conflicts and battles of control between the investing firms.
  • 44. Structuring the alliance to reduce opportunism
  • 45. WHOLLY OWNED SUBSIDIARYThe firm owns 100% of the stockThe firm can either set up a Green-field venture or It can acquire an established firm in the host nation
  • 46. Wholly owned subsidiaryAdvantages:Reduces the risk of loosing control over technological competenceTight control over operationsHelps to achieve location economies
  • 47. Wholly owned subsidiary..Disadvantages:Larger commitment and riskMost costly method Risk of national expropriation
  • 48. Selecting an entry modeTechnological Know-HowWholly owned subsidiary, except: 1. Venture is structured to reduce risk of loss of technology. 2. Technology advantage is transitory.Then licensing or joint venture OKManagement Know-HowFranchising, subsidiaries (wholly owned or joint venture)Pressure for Cost ReductionCombination of exporting and wholly owned subsidiary

Editor's Notes

  1. Turnkey project is exporting the process technology to other country . It is most common in pharmaceutical, petroleum refining and material refining industries.