Market Entry Strategies

Modes of Entry into Foreign Market.

 Modes of entry into an international market are the

channels which an organization employs to gain
entry to a new international market.
 Export is the most common mode for initial entry
into international market.
Different Export Channels-
 Indirect Export
 Direct Export
 Cooperative Export
 Indirect Export

This is when the manufacturing firm does not take direct care of exporting
activities. Instead another domestic company such as an export house or
trading company performs these activities often without the
manufacturing’s firms involvement in the foreign sales of its product.

This method may also be adopted by a firm with minimal resources to

devote to international expansion, which wants to enter international
markets gradually, testing out markets before committing major
resources and effort to developing an export organisation. There are five
main entry modes of indirect exporting
 Export buying Agent
 Broker
 Export management company/Export house.
 Trading Company
 Piggyback
 Indirect Export

 Export Buying Agent(Export Commission House)

The export buying agent is a representative of foreign buyers who resides
in the exporter’s home country. The agent offers services to the foreign
buyers: such as identifying potential sellers and negotiating prices. It
sends specifications to manufacturers inviting bids. Other conditions
being equal, the lowest bidder gets the order and there is no
sentimentality, friendship or sales talk involved.
 Broker
Another type of agent based in the home country is the export/import
broker. The chief function of a broker is to bring a buyer and seller
together. Thus the broker is a specialist in performing the contractual
function, and does not handle the products sold or bought. For its services
the broker is paid a commission by the principal.
 Indirect Export
 Export Management Company/Export Houser
Export House or EMC’s are specialist companies set up to act as the ‘export
department’ for the range of companies. As such the EMC conducts business
in the name of each manufacturer it represents. All correspondence with
buyers and contracts are negotiated in the name of the manufacturer and all
the quotations and orders are subject to confirmation by the manufacturer.

 Trading Company
Trading companies are part of the historical legacy from colonial days and
although different in nature now, they are still important trading forces in
Africa and the Far East. Trading companies play a central role in diverse
areas as shipping, warehousing, finance, technology transfer, planning
resource development, construction and regional development, insurance,
consulting, real estate and deal making in general(including facilitating
investment and joint ventures).
Another aspect of their operations is to manage counter-trade
activities(barter).
 Indirect Export

 Piggyback
In piggybacking the export-inexperienced SME, the rider deals with a
larger company(the ‘carrier’) which already operates in certain foreign
markets and is willing to act on behalf of the rider that wishes to export to
those markets. This enables the carrier to utilize fully its established
export facilities(sales subsidiaries) and foreign distribution. The carrier is
either paid commission and so acts an agent or alternatively, buys the
product outright and so acts as an independent distributors.
 Direct Export Modes

 Direct exporting occurs when a manufacturer or exporter sell

s directly to an importer or buyer located in foreign market
area.
As exporters grow more confident they may decide to undertake
their own exporting task. This will involve building up overseas
contacts, undertaking market research, handling documentation
and transportation.
 Distributors
Exporting firms may work through distributors, which are the
exclusive representatives of the company and are generally the
sole importer’s of the company’s product in their markets. As
independent merchants, distributors buy on their own accounts
and have substantial freedom to choose their own customers
and to set the conditions of sale
 Direct Export Methods

 Agents
Agents may be exclusive, where the agent has exclusive rights to specified
sales territories, semi exclusive, where the agent handles the exporter’
goods along with other non competitive goods from other companies or
non exclusive where the agent handles a variety of goods, including some
that may compete with exporter’s products.
Exclusive agents are widely used for entering international markets. They
cover rare geographic areas and have subagents assisting them. Agents
and subagents share commissions on pre agreed basis
 Direct Export Modes

 Cooperative Export Modes/Export marketing Groups

Export marketing groups are frequently found among SMEs attempting to
enter export markets for the first time. Many such firms do not achieve
sufficient scale economies in manufacturing and marketing because of the size
of the local market or the inadequacy of the management and marketing
resources available. These characteristics are typical of traditional, mature,
highly fragmented industries such as furniture and clothing
Manufacture A1, A2 and A3 have their core competencies in the upstream
functions of the following complementary product lines
A1 Living room Furniture
A2 Dining room Furniture
A3 Bedroom Furniture.
Together they form a broader product concept that could be more attractive to
a buyer in a furniture retail chain, especially if the total product concept
targets a certain lifestyle of the end customers. The cooperation between the
manufactures often results in creation of a new export association, presenting
a united front to world markets and gaining significant economies of scale
 Licensing

 Under licensing, a foreign licensor provides a local

licensee with access to technologies, patents, trademarks,
know-how or brand/company name in exchange for
financial or some other form of compensation. The
licensee has exclusive rights to produce and market the
product in the specified area for a limited period. The
licensor usually gets royalty or license fees on the sale of
the product.
 The advantage of licensing lies in the fact that the
company (licensor) can enter a new market without
making substantial investments. But the company loses
control over production and marketing of the product.
Further the reputation of the licensor is dependent on
the performance of the licensee.
 Licensing

 One danger of licensing is the loss of product and process

know-how to third parties (licensee), who may become
competitors once the agreement is over. A company can use
licensing to exploit new technology simultaneously in many
markets, if it lacks the necessary resources to set up
manufacturing facilities and sell the products. Licensing is
popular in R&D intensive industries where companies often
license technologies which do not fit with their overall
strategy.
 Licensing agreements must ensure sustaining competitive
advantage to the licensor. Adequate supervision of licensees is
important. Exchange of new developments by the licensee
with the licensor can also be made compulsory in the licensing
agreement. A licensing agreement that goes bad can damage
the brand equity of the licensor forever.
 The Licensing Process

Licensor leases the Licensee uses the

rights to use intellectual intellectual property to
property create products

Earns new revenues with Pays a royality to

low investments licensor
 Basic Issues in International Licensing

 Specifying the boundaries of the agreement.

 Determining compensation
 Establishing rights, privileges, and constraints
 Specifying the duration of the contract.
Eg. Pepsico, Coke Bottling Plant
 Licensing Advantage and Disadvantages

Advantages: Disadvantages:

• Low financial risks • Limited market

opportunities/profits
• Low-cost way to assess market
potential • Dependence on licensee

• Avoid tariffs, NTBs, restrictions • Potential conflicts with licensee

on foreign investment
• Possibility of creating future
• Licensee provides knowledge of competitor
local markets
 Franchising

 Franchising is a type of licensing agreement where packages of

services are offered by the franchiser to the franchisee in return
for a payment. The two types of franchising are product and
trade name franchising, and business format franchising. An
example of product and trade name franchising is Pepsi Cola
selling its syrup together with the right to use its trademark and
name, to independent bottlers.

 Business format franchising is used in service industries such as

restaurants, hotels and retailing where the franchiser exerts a
high degree of control on the franchisees based in the overseas
market. In business format franchising, the franchiser, like
McDonald’s, lends operating procedures, quality control, as well
as the product and trade name.
 Contract Manufacturing

Contract manufacturing is outsourcing entire or part of

manufacturing operations.
E.g.: pharmaceuticals, Personal Care products etc.
The iPad and iPhone, which are products from Apple Inc., are
manufactured in China by Foxconn. Hence, Foxconn is a
contract manufacturer and Apple benefits from a lower cost
of manufacturing devices
Advantage:
Disadvantage:
• Low financial risks
• Reduced control (may affect
• Minimize resources devoted to
quality, delivery schedules, etc.)
manufacturing .
• Reduce learning potential.
• Focus firm’s resources on
• Potential public relations
other elements of the value
problems
chain
 Management Contract

 A management contract is an agreement between two

companies whereby one company provides managerial
assistance, technical expertise and specialised services to
the second company for a certain period of time in return
for monetary compensation.

 Turnkey Project : A turnkey project is a contract under

which a firm agrees to fully design, construct and equip a
manufacturing/business/service facility and turn the
project over to the purchaser when its ready for
operation, for a remuneration
 Joint Ventures

 The multinational corporation enters into a joint-venture

agreement with a company from the target country market.
Two types of joint venture are Contractual and Equity joint
ventures.

 In contractual joint ventures, no joint enterprise with a

separate identity is formed. Two or more firms enter into a
partnership to share the cost of an investment, the risks and
the long-term profits. The partnership can be formed for
completing a project, or for a long term co-operative effort.

 In an equity joint venture, a new company is formed in which

the foreign and local companies share ownership and control.
 Joint Ventures
 Both partners bring in their expertise in different areas that help
in realizing the success of the venture. Both the partners can
specialize in their particular areas of technological expertise. The
foreign investor benefits from the local management talent and
knowledge of local markets and regulations.

 A joint venture may be necessary due to legal restrictions on

foreign investment. A joint venture also reduces the investment
required by a foreign firm, besides reducing risk. The danger of
expropriation is less when a company has a national partner than
when the foreign firm is the sole owner. Forming a joint venture
with a local partner may be the only way of entering markets
which are very competitive and saturated. The Japanese set up
joint ventures in the US primarily for this reason. The foreign
partner stands to gain from local expertise.
 Joint Ventures

 But such joint ventures face many hurdles. The local partner
is satisfied if the joint venture is reasonably successful in the
local market but the foreign investor has bigger targets. They
want to dominate the local market and also want to extend
operations to neighbouring markets. Most local partners do
not bring technology and money on the table, and are
primarily valued because of their knowledge of the local
system, culture, market and government policies and
regulations.

 Once the foreign investor gets sufficiently knowledgeable

about the local conditions, they find no use for the local
partner. Most of the joint ventures formed with the purpose of
entering a country market are dissolved, or the foreign
investor buys out the local partner.
 Direct Investment

 Businesses that make foreign direct investments are often

called multinational corporations (MNCs) or multinational enterprises
(MNEs). A MNE may make a direct investment by creating a new foreign
enterprise, which is called a greenfield investment, or by the acquisition of
a foreign firm, either called an acquisition or brownfield investment.

 The company entering the foreign market invests in foreign-based

manufacturing facilities. The company commits maximum amount of
capital and managerial efforts in this mode of entry. The company can
acquire a foreign manufacturer or facility, or build a new facility.

 Direct investment means that the company has control and significant
stake in its operations in other countries. The complete form of
participation in foreign countries is 100 per cent ownership, which can be
established as a start-up, or can be achieved by acquiring local companies.
 Direct Investment

 Acquisition of companies in foreign countries is a fast

way to enter a new market. It provides the company
ready access to a product portfolio, manufacturing
facilities, customers, qualified employees, local
management, knowledge about local conditions and
contact with local authorities.

 In saturated markets, acquisition may be the only

feasible way of establishing a manufacturing facility in a
foreign market. But differing styles of management
between foreign investors and local management teams
may cause problems. In many countries, 100 per cent
ownership by foreign companies may not be permitted
due to government restrictions.
 Direct Investment

 In direct investment, the foreign investor has greater

degree of control than licensing or joint ventures. It is
able to prevent leakage of proprietary information. The
company is able to avoid tariff and non-tariff barriers.
The distribution cost is lowered. Being based in the local
market, the company is more sensitive to local tastes and
preferences.

 It is also easier now to establish links with local

distributors. It is now in a better position to strengthen
ties with the government of the host country. But direct
investment is expensive and risky. If the venture fails, the
foreign investor loses lot о money. And there is always a
risk of expropriation, however minimal.
 Parallel Imports(Gray Market)-Gray market goods that are
sold outside the regular distribution channels of a company, usually
because there is discrepancy between the price charged in different
countries.
 FTZ(Foreign Trade Zones)- FTZs are areas of country that
have acquired a special customs status, with the specific purpose of
encouraging foreign investments and exports.

 Maquiladoras