MARKET ENTRY STRATEGIES

Choosing the correct market entry strategy is critical to your long-term success. Most small companies use the direct exporting strategy by engaging an agent or distributor but there are a number of options for you to examine and these are discussed below in order of least costly and least control to most expensive and most control. There are ten distinct market entry strategies for you to consider. The most appropriate one is determined by market potential, your degree of international expertise and experience and the resources that you can commit to entering your chosen international market. The strategy that you choose is also determined to a certain extent by the country you have chosen to enter as discussed in the section on market research.

EXPORTING
Direct exporting is that the market entry strategy chosen by most small companies. The reason for this is quite straightforward. Direct exporting is the most basic entry into international markets. Direct exporting involves the use of agents or distributors. It is important to understand the difference between an agent and a distributor. An agent works on your behalf to sell your product into the country market you have chosen, for a commission. A distributor buys your product and then resells it in the market at a mark-up. In other words an agent is your salesperson and a distributor is your customer. When deciding on either an agent or a distributor it is important to remember that your final price in the market will be higher than if you just sold it directly in the market. Another drawback to direct exporting is that, because the firm makes few if any marketing investments in the new country, market share may be below potential. Advantages of Exporting: A) It is a relatively low-cost activity to get involved in international business and expand profit. B) A firm can further create economies of scale which should lead to lower cost and hence expansion of profit

Disadvantages of Exporting: A) In relation to location economies, a firm may not always be located in the best region for that specific area and is therefore restricted to the cost disadvantages of the current location (if present). B) The firm is further depended on the fluctuation of transportation costs. High transportation costs can make it uneconomical to get involved in the import or export of a certain good. C) Related to point B is the fact that exposure to a foreign market will likely involve government regulations. One of these can be the availability of trade barriers such as tariffs and quotas or other hidden barriers. D) Lastly, an exporting firm will have to work with an agent which is not necessarily loyal to one brand (product). This limited control over the marketing activities or other value added activities will unlikely expose the full potential of a certain market.

LICENSING
Licensing, as a market entry strategy, is best used by those companies that have a component of intellectual property in their product although it can be used by any type of company depending on what they are wanting to license. You can license technology, a manufacturing process or the rights to market your product. While licensing can be complicated and intricate and as such it is important to have legal assistance in developing a licensing agreement, there are three distinct components of all licensing agreements. The first is that the agreement must be for a certain period of time that is negotiated by the licensor and the licensee. The more technologically advanced your product is and the degree of intellectual property buried in your product the shorter the time period of the license as advances in technology have changed the curve of the product life cycle. The second component of any licensing agreement revolves around the price of the agreement. The price is composed of two factors; the purchase price and the percentage you as the licensor will receive for each unit sold over the term of the agreement. The third component is that the agreement needs to be for a specific technology, manufacturing process or marketing activity.

Advantages of Licensing: A license allows a company to take a product to market without the expense of setting up locally and all the risks and costs associated with that.

A larger and more powerful licensee in a new market can provide instant market access and deter competitors and imitators.

A license can be used to enable products to be supplied locally where there is no opportunity to manufacture in the locality.

It is possible with the right kind of license and overseas business partner to create an extensive market presence very early on in the products life cycle. This will help make maximum profits for the licensor.

In certain circumstances it is possible to divide up a particular market so that different companies can license the same product but apply it in different areas. For example, it is possible to take disinfection kits and divide up the market into human and animal markets then find different companies with the right market presence.

It is possible to work with a licensee in a foreign market and learn from them. For example, it may be possible to improve products or to adjust them so that they meet local market needs. This can often be done early on in the products life cycle to help achieve better market coverage.

An overseas licensee may well save a lot of expense in terms of research and development. For example, reciprocal licensing in the car and telecommunications industries enables companies to exploit the fruits of research carried out by one company alone.

Where well-known brands are licensed overseas, the local licensee can take advantage of an established brand with a known name and goodwill. It is very important for the licensor to ensure that brand standards are maintained in an overseas market.

It is possible to negotiate further income streams from support services and training.

Disadvantages of Licensing:

It is important for the company to find the right partner to license with in a local situation. Understanding what an overseas partner can do is essential to making licensing a success.

It is important to ensure that there are proper control provisions in the license. It is especially important with licensing to have a well-drafted license drawn up by experts. The license should contain things such as full audit provisions and as licensor it may be important to police those audit provisions.

In the long term, royalty payments from a license may not provide the maximum for a licensor. It could be that setting up locally can generate better profits in the long run.

It is absolutely key to the success of the license for it to be properly negotiated and drafted. Licensing can be a complex arrangement and it is important for a licensor to be properly guided in terms of royalty payments, audit provisions and minimum sales.

The licensor is often required to provide technical assistance and training in brand standards etc. depending upon where the licensee is based. This will need to be factored into the licensing arrangements.

The licensor must be satisfied that the licensee can make a local market from the products. Some products are more popular in some cultures than in others.

FRANCHISING
Franchising is becoming a more popular market entry strategy given the world wide branding of various products as a result of the internet. International franchise agreements are the same as domestic ones with the obvious exception that they must meet the commercial laws of the country you are franchising too. Franchising is not a strongly recommended market entry strategy if you do not have solid brand recognition in your own country or your product is culturally based. Franchising presents a couple of distinct issues for small firms using this strategy to gain market access. The first is that you are potentially creating your own competition by teaching the franchisee how to operate your type of business in their market. The second is that franchises often require a fair degree of hands-on management and this can be difficult and costly particularly when your franchise(s) are long distances away. Advantages from the Franchisors point of view: 1. Financial: Franchising creates another source of income for the franchisor, through payment of franchise fees, royalty & levies in addition to the possibility of sourcing private label products to franchisees. This capital injection provides an

improved cash flow, a higher return on investment and higher profits. Other financial benefits that the franchisor enjoys are reduced operating, distribution and advertising costs. Of course that also means more allocated funds for research and development. Additionally, there will always be economies of scale with regard to purchasing power. 2. Operational: The franchisor can have a smaller central organization when compared to developing and owning locations themselves. Franchising also means uniformity of procedures, which reflects on consistency, enhanced productivity levels and better quality. Effective quality control is another advantage of the franchise system. The franchisee is usually self-motivated since he has invested much time and money in the business, which means working hard to bring in better organizational and monetary results. This also reflects on more satisfied customers and improved sales effectiveness. 3. Strategic: To the franchisor, franchising means the spreading of risks by multiplying the number of locations through other peoples investment. That means faster network expansion and a better opportunity to focus on changing market needs, which in its turn means reduced effect from competitors.

4. Administrative: With a smaller central organization, the business maintains a more cost effective labour force, reduction of key staff turnover and more effective recruitment. Advantages from a Franchisees point of view: 1. Avoiding the unnecessary trial and error period in starting and operating a new business. 2. Lower financial risk, compared to other ventures, because investment costs are lower and profit margins are higher. 3. Business Format Franchising complete packages ensure a ready to go turn-key franchised unit. 4. Managing a small business whilst depending on the power of the franchisor company which has a bigger organization. 5. The franchisee has an opportunity to run a proven business concept with a successful operational track record. 6. The opportunity to learn the latest developments and changes in the local and global market from the franchisor and focus entirely on developing the sales revenues. 7. The benefit of operating under a recognized trade name/trademark, which can have better marketing results. 8. The franchisee has access to accumulated business experience and technical know-how in managing the business. 9. A unified store design which leverages the business reputation in marketing the concept. 10. Easier purchasing, storing, and product display systems. Disadvantages from a Franchisors point of view: 1. Considerable capital allocation is required to build the franchise infrastructure and pilot operation. At the beginning of the franchise program, the franchisor is required to have the appropriate resources to recruit, train, and support franchisees. 2. At the beginning of the franchise program there is a broader risk that the trade name can be spoiled by misfits until such time the franchisor is capable of selecting the right candidate for the business. 3. There is a risk that franchisees exercise undue pressure over the franchisor in order to implement new policies and procedures.

4. The franchisor has to disclose confidential information to franchisees and this may constitute a risk to the business. Disadvantages from a Franchisees pint of view: 1. The requirement to pay the franchise fees and royalty to the franchisor, which in some cases can be exaggerated. 2. The transfer of all goodwill built in the local market to the franchisor upon expiration or termination of the franchise contract. 3. The necessity of abiding by the franchisors operating systems, standards, policies and procedures. 4. Reduced corporate profit margin due to payment of royalties and levies.

JOINT VENTURES
Joint ventures, or JVs, as they are commonly referred to is the most sophisticated of the partnership trio. A JV is the formation of a third independent company owned, but not necessarily, managed by the partners. It is an independent corporate entity on its own. The most famous JV is the one between Sony and Ericsson with the creation of Sony/Ericcson Cell Phones. The Sony/Ericsson JV is a classic example of this type of partnership. Both companies brought an expertise to the partnership; Sony marketing, Ericsson manufacturing. Rather than compete in an already competitive market, the cell phone market, they decided to join forces using their complementary advantages. JVs require a financial, time and resources commitment. The Advantages of Joint Venture:

Provide companies with the opportunity to gain new capacity and expertise Allow companies to enter related businesses or new geographic markets or gain new technological knowledge

access to greater resources, including specialized staff and technology sharing of risks with a venture partner

Joint ventures can be flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business' exposure.

In the era of divestiture and consolidation, JVs offer a creative way for companies to exit from non-core businesses.

Companies can gradually separate a business from the rest of the organisation, and eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other.

The Disadvantages of Joint Venture:

It takes time and effort to build the right relationship and partnering with another business can be challenging. Problems are likely to arise if:

The objectives of the venture are not 100 per cent clear and communicated to everyone involved.

There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners.

Different cultures and management styles result in poor integration and co-operation. The partners don't provide enough leadership and support in the early stages. Success in a joint venture depends on thorough research and analysis of the objectives.

STRATEGIC ALLIANCES
Strategic alliances are simply a business-to-business collaboration. Strategic alliances can be formed for all a range of purposes from joint marketing to joint production to collaborative design or distribution. The value in them is that you do not have to engage in a formal agreement, commit to a long term contract and they provide you with immediate market access and knowledge. Advantages of the Strategic Alliance: Get instant market access, or at least speed your entry into a new market. Exploit new opportunities to strengthen your position in a market where you already have a foothold. Increase sales. Gain new skills and technology. Develop new products at a profit. Share fixed costs and resources. Enlarge your distribution channels. Broaden your business and political contact base. Gain greater knowledge of international customs and culture. Enhance your image in the world marketplace.

Disadvantages of the Strategic Alliance: Weaker management involvement or less equity stake. Fear of market insulation due to local partner's presence. Less efficient communication. Poor resource allocation. Difficult to keep objectives on target over time. Loss of control over such important issues as product quality, operating costs, employees, etc.

TURNKEY PROJECTS
Turnkey projects are as the name implies. You build something, a factory, a hydro facility, a pulp mill to start up condition and hand over the key to the owner. Turnkey projects have become a popular market entry strategy for firms that have a particular expertise that can be transferred. Engineering firms are very likely candidates to use the turnkey project option as a market entry strategy. The firm uses the knowledge and expertise it has gained in its domestic market to sell to a buyer in another country. Often the buyer is a government and is often financed or paid for with assistance from an international aid agency such as the World Bank. It is important to market the appropriate type of turnkey project which will be defined by the level of economic development, culture, legal environment and degree of infrastructure in the target market.

COUNTERTRADE
Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money. A monetary valuation can however be used in counter trade for accounting purposes. In dealings between sovereign states, the term bilateral trade is used. OR "Any transaction involving exchange of goods or service for something of equal value." Types of countertrade There are five main variants of countertrade:

Barter: Exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment.Barter is the direct exchange of goods between two parties in a transaction. The principal exports are paid for with goods or services supplied from the importing market. A single contract covers both flows, in its simplest form involves no cash. In practice, supply of the principal exports is often held up until sufficient revenues have been earned from the sale of bartered goods. One of the largest barter deals to date involved Occidental Petroleum Corporation's agreement to ship sulphuric acid to the former Soviet Union for ammonia urea and potash under a 2 year deal which was worth 18 billion euros. Furthermore, during negotiation stage of a

barter deal, the seller must know the market price for items offered in trade. Bartered goods can range from hams to iron pellets, mineral water, furniture or olive-oil all somewhat more difficult to price and market when potential customers must be sought.

Switch trading: Practice in which one company sells to another its obligation to make a purchase in a given country.

Counter purchase: Sale of goods and services to one company in other country by a company that promises to make a future purchase of a specific product from the same company in that country.

Buyback: occurs when a firm builds a plant in a country - or supplies technology, equipment, training, or other services to the country and agrees to take a certain percentage of the plant's output as partial payment for the contract.

Offset: Agreement that a company will offset a hard - currency purchase of an unspecified product from that nation in the future. Agreement by one nation to buy a product from another, subject to the purchase of some or all of the components and raw materials from the buyer of the finished product, or the assembly of such product in the buyer nation.

Compensation trade: Compensation trade is a form of barter in which one of the flows is partly in goods and partly in hard currency.

Advantages and Disadvantages of Countertrade: Countertrade has its pros and cons. A major benefit of countertrade is that it facilitates conservation of foreign currency, which is a prime consideration for cash-strapped nations. Other benefits include increased employment, higher sales, better capacity utilization and ease of entry into challenging markets. A major drawback of countertrade is that the value proposition may be uncertain, especially in cases where the goods being exchanged have significant price volatility. Other disadvantages of countertrade include complex negotiations, potentially higher costs and logistical issues.

CONTRACT MANUFACTURING
Contract manufacturing is a process that establishes a working agreement between two companies. As part of the agreement, one company custom produces parts or other materials on behalf of their client. In most cases, the manufacturer also handles the ordering and shipment processes for the client. As a result, the client does not have to maintain manufacturing facilities, purchase raw materials, or hire labor in order to produce the finished goods.

The basic working model used by contract manufacturers translates well into many different industries. Since the process is essentially outsourcing production to a partner who privately brands the end product, there are a number of different business ventures that can make use of a contract manufacturing arrangement. There are a number of examples of pharmaceutical contract manufacturing currently functioning today, as well as similar arrangements in food manufacturing, the creation of computer components and other forms of electronic contract manufacturing. Even industries like personal care and hygiene products, automotive parts, and medical supplies are often created under the terms of a contract manufacture agreement.

MANAGEMENT CONTRACT
A 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 contracts involve not just selling a method of doing things (as with franchising or licensing) but involve 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. In Asia, many hotels operate under management contract arrangements, as they can more easily obtain economies of scale, a global reservation systems, brand recognition etc. It is not unusual for contracts to be signed for 25 years, and having a fee as high as 3.5% of total revenues and 6-10% of gross operating profit. The Marriott International Corporation operates solely on management contracts.

Management contracts have been used to a wide extent in the airline industry, and when foreign government action restricts other entry methods. 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. The first recorded management contract was initiated by Qantas and Mr Duncan Upton in 1978.

MERGERS AND ACQUISITIONS

Mergers and acquisitions (abbreviated M&A) is an aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations. Advantages of mergers and acquisitions are: A merger does not require cash. A merger may be accomplished tax-free for both parties. A merger lets the target (in effect, the seller) realize the appreciation potential of the merged entity, instead of being limited to sales proceeds. A merger allows the shareholders of smaller entities to own a smaller piece of a larger pie, increasing their overall net worth. A merger of a privately held company into a publicly held company allows the target company shareholders to receive a public company's stock, despite the liquidity restrictions of SEC Rule 144a. A merger allows the acquirer to avoid many of the costly and time-consuming aspects of asset purchases, such as the assignment of leases and bulk-sales notifications.

Of considerable importance when there are minority stockholders is the fact that upon obtaining the required number of votes in support of the merger, the transaction becomes effective and dissenting shareholders are obliged to go along.

Disadvantages of mergers and acquisitions are: Diseconomies of scale if business becomes too large, which leads to higher unit costs. Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration. May need to make some workers redundant, especially at management levels - this may have an effect on motivation. May be a conflict of objectives between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business.