International Marketing & Operations

Global Target Market Selection and Entry

Sandy De Mel (Mainly From Kotabe & Helsen)
Adapted by Tariku Atomsa (PhD)
Chapter 7
1

Lesson Overview
1. Target Market Selection
2. Choosing the Mode of Entry
Exporting
Licensing
Franchising
Contract Manufacturing / Management Contract
Joint Ventures
Wholly Owned Subsidiaries
Strategic Alliances
3. Timing of Entry
4. Exit Strategies
Q: Why marketers are concerned about the right entry
decision ?

Introduction
Making the right entry decision heavily impacts the

company's performance in global markets

Although marketing mix decisions play a big role,

many of this decisions can easily be corrected

However, market entry decisions are far more

difficult to remedy
Hence, the need for a solid market entry strategy is

emphasized
Entry decisions heavily influence the firms other

marketing-mix decisions.
3

Introduction
Global marketers have to make a multitude of

decisions regarding the entry strategy which may

include:
(1) the target product/market
(2) the goals of the target markets
(3) the mode of entry
(4) the time of entry
(5) a marketing-mix plan
(6) a control system to check the performance in the
entered market
4

1. Target Market Selection

A crucial step in developing a cross border expansion
strategy is the selection of potential target markets.
(Exhibit 9-1)
To identify market opportunities marketers begin with a large
pool of candidate countries Then, do preliminary screening
Not to ignore countries that offer viable opportunities
Not to waste time on countries that offer no or little
potential
A four-step procedure for the initial screening process:
1. Select indicators & collect data (Information about the
indicator)
2. Determine the importance of country indicators (the
more critical the indicator the more will be its weight to
be attached)
3. Rate the countries in the pool on each indicator (give
score values. 0 = very unfavorable, 100 = very favorable)5

Target Market Selection

Compute overall score for each country (sum
weighted scores for each indicator by country. The
highest overall score is one that is the most
attractive)

The four-step procedure of initial screening

(Use Slide 14
)
Select
Rate Each
Compute
Determine

Indicator Overall Scor

Indicators Importance
Collect Data(Give Weight) (Give Score) (Low High)

Exercise:
What are the purposes of examining indicators? (Exhib
What are the types of indicators that marketers can use
What determines the types of indicators to be identified
Where to get data concerning the indicators?
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Target Market Selection

What are the purposes of examining indicators? (Exhibit 93)
To identify opportunities & threats
To identify the overall market attractiveness of the target
market
Make ultimate decision to enter or not enter the target
market
What are the types of indicators that marketers can use?
There are global (economic, political, etc.) & specifc
indicators (market size & entry barrier, etc.)
What determines the types of indicators to be identified &
examined?
The strategic objectives of the company based on its
global mission
The nature of the product that the company will offer
Where to get data concerning the indicators?
7
From publicly available data sources

Target Market Selection

Target Market Selection

Henkel is an international comp

Headquartered in Dusseldorf, Ge
Operates in 3 business areas:

Home care (laundry detergent,

dishwashing liquid)

Personal care (shampoo, tooth

hair colorants, Dial soap & Righ

Adhesives, Sealants & Surfac

Treatment, Electronic Mate

Presence in 125 countries on 5 c

Target Market Selection

Broad Indicators to Identify Potential Target Markets:
Demographic & Socio-cultural (growth & density, gender
makeup, age distribution, employment levels, education
levels, language, customs & culture. etc.)
Macroeconomic (GDP, GDP growth, market growth & size,
inflation rate, etc.)
Government Policies (import tariffs, currency exchange
controls, non-tariff barriers, IPRs protection, political stability,
investment policies, taxation, etc.)
Environmental (climate, geography, physical infrastructure
distribution system, transportation, telecommunications)
Industry Specifc (Porters five forces, growth of the
industry, Stability of the industry, risks of the industry)
Thus, it will be important to identify & evaluate the
Decision Criteria before choosing the mode of entry: (Slide
14)
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2. Choosing the Mode of Entry

Several decision criteria influence the choice of entry
mode
Two classes of decision criteria can be distinguished:
Internal (firm-specific) & external (environment specific)
(Slide 10)
The combination of all factors determines the overall
market attractiveness of countries
Classifcation of countries based on their respective
market attractiveness (Exhibit 9-4)
Platform countries can be used to gather intelligence
& establish network (Singapore & Hong Kong) (Slide 16)
Emerging countries the major goal is to build up
initial presence (via liaison office) (Vietnam & the
Philippines)
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Choosing the Mode of Entry

Growth countries offer early mover advantages &
build signifcance presence to capitalize on future
market opportunities (China & India)
Maturing & established countries have few growth
prospects than the other markets (South Korea, Taiwan &
Japan)
Local competitors are well-established
These markets have solid infrastructure
The prime task further develop the market via strategic
alliances, major investments or acquisitions
The key Internal Decision Criteria
Company Objectives represent key influence in
choosing entry modes (frms with limited aspirations vs.
ambitious objectives)
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Choosing the Mode of Entry

Need for Control level of control over foreign
operations (Regarding entry modes, companies normally
face a trade-of b/n the benefits of increased control &
the costs of resource commitment & risk) twodimensional
Internal Resources, Assets & Capabilities firms with
limited assets are constrained to low-commitment
entry modes (exporting & licensing)
Flexibility as the environment changes new market
segments emerge
Hence, an entry mode that looks very appealing now
necessarily may not be attractive in the future
Environmental changes (e.g. customers become more
demanding, price sensitive, strong local competitors, etc.)
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Country

Country 1

Country 2

Country 3

Market Selection Model/Decision

Criteria

Indicator 1

Weight

Points

Indicator 2

Weight

Points

Indicator 3

Weight

Points

Total

Choosing the Mode of Entry

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Choosing the Mode of Entry

Platform countries are those countries that serve as a business
hub for investors
Therefore, Hong Kong & Singapore serve as Asian business hub
for investors who want establish a presence in the Asian region
Asia, specially China, is emerging as the worlds economic
growth engine
Hong Kong has proven as on of the most important key locations
for trade, finance & regional headquarters and yet the worlds
freest economy (www.klakogroup.com)
Hence, Hong Kong is the perfect base from which to access Asian
and Chinas dynamic market
Both countries compete to gain dominance as Asias Best Place
to Do Business
They have been luring foreign investors with their tax friendly
policies, easy company incorporation procedures, excellent
infrastructure, etc. (www.guidemesingsingapore.com ) (Refer 7
pages word document)

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Choosing the Mode of Entry

Mode of Entry Choice: A Transaction Cost Explanation
Although high-control entry modes are favored, other criteria
suggest low-control mode
The different entry modes can be classified according to the
degree of control they offer the entrant
Ideally the entrant would like to have as much control as
possible
However, entry modes that offer a large degree of control
also entail substantial resource commitments & huge
amount of risk
Therefore, the entrant must make a trade-of b/n the benefits
of increased control & the costs of resource commitment
& risk
One useful framework to resolve this dilemma is the so called
Transaction Cost Analysis (TCA) perspective
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Choosing the Mode of Entry

A given task can be looked at as a make-or-buy
decision where the firm either:
contracts the task to outside agents or partners (lowcontrol mode) or does the job internally (high-control
mode)
TCA argues that the desirable governance structure
(high vs. low control mode) depends on the comparative
transaction costs, that is, the cost of running the
operation
The TCA approach begins with the premise that
markets are competitive
Low-control modes are preferable because the
competitive pressures force the outside partner to
comply with its contractual duties
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Choosing the Mode of Entry

When the market mechanism fails, however, highcontrol entry modes become more desirable
Transaction-specifc Assets (TSA)
From the TCA angle market failure typically happens
when transaction-specifc assets become valuable
These are assets that are valuable for only a very
narrow range of applications brand equity,
proprietary technology & knowhow
When these types of assets become very important,
the firm might be better off to adopt a high-control
entry mode to protect the value of these assets
against opportunistic behaviors
Q. What are the conditions that force MNCs to enter with
wholly owned subsidiaries & partnerships,
respectively?
19

Choosing the Mode of Entry

Based on empirical study of entry decisions made by
180 largest MNCs over 15-year period:
Wholly Owned Subsidiary is preferable when:
The entry involves R&D intensive line of business
The entry involves advertising intensive line of
business (high brand quality)
The MNC has accumulated a substantial amount
of experience with foreign entries
Partnership is preferable when:
The entry is in a highly risky country
The entry is in socio-culturally distant country
There are legal restrictions on foreign ownership
of assets
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Choosing the Mode of Entry

What is a Transaction Cost?
The meaning of TC with regard to the transaction of
goods & services:
Transaction cost is a cost incurred in making economic
exchange
In buying & selling, people pay commission, exert
efort & energy, etc.
Thus, the costs above & beyond the cost of the product
is the transaction cost note that internal & external
transaction costs
In the following, Mode of Entry Options will be presented

Exercise: Describe the different Mode of Entry Options

(Exhibit 9-12)

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Market Entry Alternatives

Source: Adapted from Gnther Mller & Christoph
high

Lechner, in: Klaus Macharzina & Michael Oesterle

Acquisition/
Wholly-Owned Subsidiary

Control and
Foreign Market Presence

Joint
Ventures
Franchising
Licensing
Direct
Exporting
Indirect
Exporting
Production in the
Home Market

low
low

Production Abroad

Resource Deployment

high

Exporting
Indirect Exporting using a middleman based in home
market to do the exporting (Its advantages &
disadvantages)
Export merchants trading companies that buy the
firms goods & sell in the foreign market
They are specialized in specific product and/or region
Export agents trading companies that act for local
manufacturers as negotiators
They receive commission & no associated risk
Export management companies (EMC)
independent firms that act as the exclusive export sales
department
Some act as agents & others as distributors
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Exporting
Cooperative Exporting when a firm is not willing
to commit resources to own distribution channels
but still wants to have some control
Piggyback Exporting using the overseas
distribution network of another company to sell a
firms goods in the foreign market
Example: Wrigley, the U.S. chewing gum
company, entered India by piggybacking on
Parrys, a local confectionary firm
Direct Exporting when firms set up their own
exporting departments to sell goods (its
advantages & disadvantages)
Decision Criteria for Mode of Entry (Exhibit 9-12)
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Licensing
Licensing is the involvement of the Licensor & the
Licensee
Thus, licensing is a contractual transaction in
which the licensor offers some proprietary assets
to the licensee in exchange of royalty fee.
Benefts:
Appealing to small companies that lack resources
Faster access to the market
Rapid penetration of the global markets
Caveats:
Other entry mode choices may be affected
Licensee may not be committed
Lack of enthusiasm on the part of a licensee
Biggest danger is the risk of opportunism
Licensee may become a future competitor
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Licensing
How to seek a good licensing agreement?:
Seek patent or trademark protection
Thorough profitability analysis
Careful selection of prospective licensees
Contract parameter (technology package, use conditions,
compensation & provisions for the settlement of disputes)

Franchising
Franchising is the association of the Franchisor & the
Franchisee
Franchising is an arrangement whereby the franchisor
gives the franchisee the right to use the franchisors
trade names, trademarks, business models, knowhow
in a given territory for a specific time period
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Franchising
To seize opportunities in foreign markets, the
method of choice is often master franchising
Within this system, the franchisor gives a master
franchise to a local entrepreneur, that will, in
turn, sell local franchises within its territory
Usually, the master franchise holder agrees to
establish a certain number of outlets over a given
time horizon
Benefts
Caveats:
:
Overseas
Revenues may not be adequate
expansion with a
Availability of a master
minimum
franchisee
investment
Lack of control over the
Franchisees
franchisees operations
profits tied to its
Problem in performance
efforts
standards
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Availability of local

Contract Manufacturing (Outsourcing)

Benefts:
Labor cost advantages
Savings via taxation, lower energy costs, raw materials &
overheads
Lower political & economic risk
Quicker access to markets
Caveats:
Contract manufacturer may become a future competitor
Lower productivity standards
Backlash from the companys home-market employees
regarding HR & labor issues
Issues of quality & production standards
Qualities of an ideal subcontractor:
Flexible/geared toward just-in-time delivery
Able to meet quality standards
Solid financial footings
Able to integrate with companys business
Must have contingency plans
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Expanding through Joint Ventures

Cooperative joint venture agreement to

collaborate but does not involve any equity
investments
One partner contributes manufacturing
technology & the other provides access to
distribution channels (e.g., Cisco)
Equity joint venture arrangement in which the
Benefts:
Caveats:
partners agree to raise capital
proportion to the
Lack ofincontrol
on the venture
Higher rate of return & more
equity stake agreed upon Lack of trust
control over the operations
Conflicts arising over matters
Creation of synergy
Strategies
Sharing of resources
Resource allocation
Access to distribution network
Transfer pricing
Contact with local suppliers &
Ownership of critical assets
government officials
Technologies & brand nam
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Expanding through Joint Ventures

Drivers Behind Successful International Joint
Ventures :
Pick the right partner
Establish clear objectives from the beginning
Bridge cultural gaps
Gain top managerial commitment & respect
Use incremental approach
Create a launch team during the launch phase:
Build & maintain strategic alignment
Create a governance system
Manage the economic interdependencies
Build the organization for the joint venture
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Entering New Markets through Wholly

Owned Subsidiary

MNCs often prefer to enter new markets with 100 %

ownership

Acquisitions, Mergers & Greenfeld operations are

ownership strategies to enter foreign markets
Acquisitions & Mergers where MNCs buys or merges
an/with existing companies
Greenfeld Operations where MNCs start from scratch
Benefts:
Greater control & higher profits
Strong commitment to the local market on the part of
companies
Allows the investor to manage & control marketing,
production & sourcing decisions
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Entering New Markets through Wholly

Owned Subsidiary
Caveats:
Risks of full ownership
Developing a foreign presence without the support of a
third part
Risk of nationalization
Issues of cultural & economic sovereignty of the host
country
Acquisitions & Mergers
Quick access to the local market
Good way to get access to the local brands
Greenfeld Operations
Offer the company more flexibility than acquisitions in
the areas of human resources, suppliers, logistics, plant
layout & manufacturing technology
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Creating Strategic Alliances

Strategic Alliance a form of cooperative r/ship to
achieve strategically signifcant goals that are
mutually beneficial
Types of Strategic Alliances
Simple licensing agreements b/n two partners
technology swaps in high-tech industries to reduce
new product development cost
Market-based alliances access to distribution
channels or trademarks
Operations & logistics alliances join forces by
setting up a partnership to bring scale of economies
Operations-based alliances a desire to transfer
manufacturing know-how
34

Creating Strategic Alliances

The Logic Behind Strategic Alliances (Exhibit 9-9)
There are four generic reasons for forming strategic
alliances (Lorange, etal, 1992)
Defend important portfolio & has l/ship position
Catch Up important portfolio & lacks l/ship position
Remain portfolio plays minor role & has l/ship position
Restructure portfolio plays minor role & has no l/ship
position
The scheme has two dimensions:
the strategic importance of the business unit to the
parent company
competitive position of the business
Peripheral the business portfolio plays minor role
35

Creating Strategic Alliances

Defend create an alliance to sustain the firms l/ship
position by:
learning new skills
getting access to new markets
developing new technologies or
enhancing capabilities that help the company to reinforce
its competitive advantage
Catch Up create an alliance to support a core business
in which there is no l/ship position to compete more
effectively
Remain - create an alliance to remain in a business by
enabling the company to get the maximum efficiency
Restructure - create an alliance to rejuvenate the
business which is not core & in which it has no l/ship
position
36

Creating Strategic Alliances

37

Creating Strategic Alliances

Cross-Border Alliances that Succeed:
Alliances b/n strong & weak partners seldom work
Autonomy & flexibility
Equal ownership
Other factors:
Commitment & support of the top management of the
partners organizations
Strong alliance managers are the key
Alliances b/n partners that are related in terms of
products, technologies & markets
Have similar cultures, assets sizes & venturing
experience
Tend to start on a narrow basis & broaden over
time
A shared vision on goals & mutual benefts
38

3. Timing of Entry
When should firms enter foreign markets? Early vs. late
Although there is a frst-mover advantages, there are also
drawbacks
Several firms have been sufered badly by entering too
early
IKEAs first venture in Japan in 1974 was a complete
failure the Japanese consumers were not ready for the
concept of self-assembly & high quality furniture
However, IKEA reentered Japan in late 2005, but this time
offering assembly services & home delivery
From a study made, companies that entered China relatively
late often had an advantage over earlier entrants
A main reason is that latecomers faced fewer restrictive
business regulations
39

Timing of Entry
International market entry decisions should also
cover the following timing-of-entry issues:
When should the firm enter a foreign market?
Mode of entry issues
Market knowledge
Various economic attractiveness variables , etc.
Other important factors include:
Level of international experience
The larger the frm size
The broader the scope of products & services
Near-market knowledge generated in similar
markets
40

4. Exit Strategies
So far we have concentrated on global entry strategies
In the this section, we will concentrate on the exit
(divestment) strategies
Exits in global marketing are not uncommon
In 2001, Colgate-Palmolive sold its laundry
detergent brands in Mexico to Henkel, its German
competitor
Gateway closed down its personal computer
manufacturing operations in Ireland & Malaysia
Reasons for exit companies may have multiple
reasons to pull out of their foreign markets:
Sustained losses after period of time willing to
sustain losses
41

Exit Strategies
Volatility volatile exchange rate, weak rule of law,
political instability, inflation, etc.
Emerging markets with high growth potential often are
very volatile
Premature entry poor marketing infrastructure
(distribution & supply), low buying power, lack of strong
local partners, etc.
Ethical reasons operating in countries with a
questionable human rights record ( affects the image of
the company)
Intense competition when there exists intense rivalry
among firms
Resource reallocation inappropriate allocation of
resources (poor operations due to overexpansion )
necessitate closing or restructuring of operations
42

Exit Strategies
Just as there are barriers to entry, there are exit barriers
that could delay or complicate an exit decision
Risks of exit:
Fixed costs of exit fixed assets, payment packages,
long term contracts (sourcing raw materials or distributed
products)
Disposition of assets lack of buyers, low liquidation
value
Signal to other markets exit one country could create
negative spillover in other markets (firms commitment
may be questionable)
Long-term opportunities loosing future prospect
because of not paying a price for short-term risks
Companies should handle exit decisions carefully.
Here are few guidelines that managers should consider an
exit decision
43

Exit Strategies
Guidelines:
Contemplate & assess all options to salvage the
foreign business
Analyze why results are below expectations
Original targets (market share, return on investment,
etc.) may have been too ambitious
Costs could be squeezed by sourcing locally rather than
importing materials or using local staff instead of
expatriates
Repositioning or retargeting the business
Incremental exit short of a full exist, firms can retrench
their operations & restart when demand or cost conditions
improve
Migrate customers if existing proves to be the optimal
decision, the firm has to enter into contracts with thirdpart service providers in order to customers get aftersales service support & parts
44