INTERNATIONAL MARKET SELECTION AND ENTRY

by

Pressures for Cost Reduction and Local Responsiveness

Pressures for cost reductions
Global competitors seek to minimize unit costs through location economies . In commodity-type product industries, intense price competition.

Pressures for local responsiveness arise from:

Differences in local consumer tastes and preferences. Differences in infrastructure and traditional practices. Differences in distribution channels among countries. Host government economic and political demands.

Four Basic Strategies

Strategic Choice
International strategy
Create value by transferring skills and products abroad.

Multidomestic strategy
Maximize local responsiveness (taste& preference)by customizing products and marketing strategy for local markets.

Global strategy
Pursue low-cost status, offer standardized global products.

Transnational strategy
Use global learning to achieve low-cost status, differentiation, and local responsiveness simultaneously.

The Advantages and Disadvantages of Different Strategies for Competing Globally

Strategy
International

Advantages

Disadvantages

Transfer of distinctive Lack of local competencies to responsiveness Inability to realize location foreign markets
economies Failure to exploit experience-curve effects Ability to customize Inability to realize location product offerings and economies marketing in accordance Failure to exploit with local responsiveness experience-curve effects Failure to transfer distinctive competencies to foreign markets

Multidomestic

The Advantages and Disadvantages of Different Strategies for Competing Globally

Strategy
Global

Advantages Ability to exploit experience-curve effects Ability to exploit location economies

Ability to exploit experiencecurve effects Ability to exploit location economies Ability to customize product offerings and marketing in accordance with local responsiveness Reaping benefits of global learning

Disadvantages Lack of local responsiveness

Transnational

Difficulties in implementation because of organizational problems

Entry Strategies

Uncontrollable

Where are we in the strategy?

Culture
Marketing Research

Environment Economic

Political & Legal

Controllable
Segmentation and positioning Planning

Competitive Analysis

We are here!
Organising/ Restructuring Market Entry Strategy

Promotion s

Logistics and Distribution

Products & Services

Pricing

Basic Entry Decisions

Which foreign markets?
Politically and financially stable Developed and developing nations Free market systems

Timing of entry
Pioneering costs versus first-mover advantages.

Scale of entry and strategic commitments

Scale of entry affects the nature of competition in the national market. Implications of risks and benefits must be weighed carefully.

Selecting Market Entry

Overview
Must decide what country to enter Must allocate the right resources Decide what to sell Decide where to sell Select the criteria for decision making Seek an acceptable equity share Acquire the right fit Design an exit strategy

Determinants of Entry Strategy

Degree of contact with foreign market desired
no contact - export intermediary some contact - foreign import intermediary high contact - subsidiary, FDI, etc.

Determined by:
market potential firms capabilities and experience managerial commitment to export, market and risk tolerance

Basic Entry Decisions

Which foreign markets?
Politically and financially stable Developed and developing nations Free market systems

Timing of entry
Pioneering costs versus first-mover advantages.

Scale of entry and strategic commitments

Scale of entry affects the nature of competition in the national market. Implications of risks and benefits must be weighed carefully.

The Choice of Entry Mode

Exporting Licensing Franchising Joint Ventures Wholly Owned Subsidiaries

Choice of International Entry Mode

Exporting

Common way to enter new international markets. No need to establish operations in other nations. Establish distribution channels through contractual
relationships.

May have high transportation costs. May encounter high import tariffs. May have less control on marketing and distribution. Difficult to customize product.

Foreign production
Licensing
no physical asset exposure
though IP risk remains
License

Licensor
(domestic manufacturer) Owns IP Qualcomm Royalties & fees 1 to 15%

Licensee
(O/S Manufacturer) Manufacture & sell Ericsson uses CDMA technology in headphones

Choice of International Entry Mode

Licensing
Firm authorizes another firm to manufacture & sell its products Licensing firm is paid a royalty on each unit produced and sold. Licensee takes risks in manufacturing investments. Least risky way to enter a foreign market.

Licensing firm loses control over product quality & distribution.

Relatively low profit potential.
9-16 2006 by Nelson, a division of Thomson Canada Limited.

Franchising
Franchisor
(Country A) Owns IP

Franchisee
(Country B) Trade name Trade mark Business Models (marketing plan) Operating manuals Standards Training Quality monitoring Limited time Limited territory

Royalties & fees

Master Franchisor Local entrepreneurs
Examples Subway World Gym Fitness Mailboxes etc.

 Franchising
A specialized form of licensing where the franchiser sells intangible property (usually a brand or trademark). The franchisee agrees to follow the strict rules and business plans of the company

Joint Ventures
Firm C
Firm A

50% 50% New entity in host country - both have equity

Firm B

Home country

Host country

Contribution
Technology Manufacturing expertise

Contribution
Distribution network Labour Finance Local market knowledge E.g. McDonalds

 Joint Venture
Separate corporations come together to form a new corporate entity Two or more companies have an ownership stake, but combine resources for mutual benefit Sharing knowledge can be dangerous for the companies involved

Problems with joint ventures

lack of legal structure
e.g. PRC, no accounting standards poor proprietary rights

lack of trust
mutual conflicts resource allocation

access to technology profit sharing problems

Choice of International Entry Mode

Acquisitions
Enable firms to make most rapid international expansion. Can be very costly.

Legal and regulatory requirements may present barriers to foreign ownership.

Usually require complex and costly negotiations. Potentially disparate corporate culture.
9-22 2006 by Nelson, a division of Thomson Canada Limited.

Choice of International Entry Mode

New Wholly-Owned Subsidiary

Greenfield Venture

Most costly & complex of entry alternatives. Achieves greatest degree of control. Potentially most profitable, if successful. Maintain control over technology, marketing and
distribution. May need to acquire expertise & knowledge that is relevant to host country.
Could require hiring host country nationals or consultants at high cost.

Strategic Competitiveness Outcomes

International diversification facilitates innovation in the firm.
Provides larger market to gain more and faster returns form investments in innovation. May generate resources necessary to sustain a large-scale R&D program. Generally related to above-average returns, assuming effective implementation and management of international operations. International diversification provides greater economies of scope and learning.

Exit and Re-entry Strategies

Consolidate operations
reduce plant, close operations consolidate operations
Ford: Closing plant in UK GM: closed plant in UK Sterile : closed plant in tuticorin

Re-entry
acquisition:
e.g., Coke acquired Parle (repurchased of Indian bottler/distributor)