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Overseas Market Selection

Methods of market entry


Entry strategies

Chapter Overview
1. Target Market Selection
2. Choosing the Mode of Entry
3. Exporting
4. Licensing
5. Franchising
6. Contract Manufacturing
7. Joint Ventures
8. Wholly Owned Subsidiaries
9. Strategic Alliances
10. Timing of Entry
11. Exit Strategies
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There are a variety of ways in


which organizations can enter
foreign markets.
The three main ways are by direct
or indirect export or production in a
foreign country

Introduction
The need for a solid market entry decision is an integral
part of a global market entry strategy.
Entry decisions will heavily influence the firms other
marketing-mix decisions.
Global marketers have to make a multitude of decisions
regarding the entry mode 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
markets

in the entered
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Selecting the Target Market


A crucial step in developing a global expansion
strategy is the selection of potential target markets
(see Exhibit 9-1 for the entry decision process).
A four-step procedure for the initial screening
process:
1. Select indicators and collect data
2. Determine importance of country indicators
3. Rate the countries in the pool on each
indicator
4. Compute overall score for each country
Chapter 9

Selecting the Target Market

Chapter 9

Copyright (c) 2007 John Wiley &


Sons, Inc.

Choosing the Mode of Entry


Decision Criteria for Mode of Entry:
Market Size and Growth
Risk
Government Regulations
Competitive Environment/Cultural Distance
Local Infrastructure

Choosing the Mode of Entry

Choosing the Mode of Entry

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Choosing the Mode of Entry

Classification of Markets:
Platform Countries (Singapore & Hong Kong)
Emerging Countries (Vietnam & the Philippines)
Growth Countries (China & India)
Maturing and established countries (examples:
South Korea, Taiwan & Japan)
Company Objectives
Need for Control
Internal Resources, Assets and Capabilities
Flexibility
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Choosing the Mode of Entry


Mode of Entry Choice: A Transaction Cost
Explanation
Regarding entry modes, companies normally
face a tradeoff between the benefits of
increased control and the costs of resource
commitment and risk.
Transaction Cost Analysis (TCA) perspective
Transaction-Specific Assets (assets valuable
for a very narrow range of applications)
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1. Exporting
Exporting is the most traditional and well
established form of operating in foreign
markets.
Exporting can be defined as the marketing
of goods produced in one country into
another.

Whilst no direct manufacturing


is required in an overseas
country, significant investments
in marketing are required.

The advantages of exporting are:


Manufacturing is home based thus, it is
less risky than overseas based
gives an opportunity to "learn" overseas
markets before investing in bricks and
mortar
reduces the potential risks of operating
overseas.

The disadvantage is mainly that


one can be at the "mercy" of
overseas agents and so the lack
of control has to be weighed
against the advantages.

A distinction has to be drawn


between passive and aggressive
exporting.
A passive exporter awaits orders or
comes across them by chance;

An aggressive exporter
develops marketing strategies
which provide a broad and clear
picture of what the firm intends
to do in the foreign market.

Piggybacking
Piggybacking is an interesting development.
The method means that organizations with little
exporting skill may use the services of one that
has.
Another form is the consolidation of orders by a
number of companies in order to take advantage
of bulk buying.

Normally these would be


geographically adjacent or able
to be served, say, on an air
route.

The fertilizer manufacturers of


India, for example, could
piggyback with the China who
both import potassium from
outside their respective
countries.

Countertrade
By far the largest indirect method of
exporting is countertrade.
Competitive intensity means more and
more investment in marketing.

In this situation the organization


may expand operations by
operating in markets where
competition is less intense but
currency based exchange is not
possible.

Also, countries may wish to


trade in spite of the degree of
competition, but currency again
is a problem.

Countertrade can also be used to


stimulate home industries or where
raw materials are in short supply.
It can, also, give a basis for
reciprocal trade.

2. Licensing
Licensing is defined as "the method of
foreign operation whereby a firm in one
country agrees to permit a company in
another country to use the manufacturing,
processing, trademark, know-how or some
other skill provided by the licensor".

Licensing is a contractual agreement


whereby one company (the licensor)
makes an asset available to another
company (the licensee) in exchange for
royalties, license fees, or some other form
of compensation

It is quite similar to the


"franchise" operation. Coca
Cola is an excellent example of
licensing.

Licensing involves little expense


and involvement.
The only cost is signing the
agreement and policing its
implementation.

Licensing gives the following


advantages
Good way to start in foreign operations and open
the door to low risk manufacturing
relationships:
1. Linkage of parent and receiving partner
interests means both get most out of marketing
effort
2. Capital not tied up in foreign operation and
3. Options to buy into partner exist or provision
to take royalties in stock.

The disadvantages are:


1. Limited form of participation - to length of agreement,
specific product, process or trademark
2. Potential returns from marketing and manufacturing
may be lost
3. Partner develops know-how and so licence is short
4. Licensees become competitors - overcome by having
cross technology transfer deals and
5. Requires considerable fact finding, planning,
investigation and interpretation.

3. Franchising
Franchising refers to the methods of
practicing and using another person's
philosophy of business.
The franchisor grants the independent
operator the right to distribute its products,
techniques, and trademarks for a
percentage of gross monthly sales and a
royalty fee.

Various tangibles and


intangibles such as national or
international advertising,
training, and other support
services are commonly made
available by the franchisor.

Agreements typically last five to


twenty years, with premature
cancellations or terminations of
most contracts bearing serious
consequences for franchisees.

4. Contract Manufacturing
Contract manufacturing is work subcontracted to a manufacturer by a
company that owns the product design
and IPR.
In some cases, the manufacturer takes
the responsibility of marketing the
products using the vendors brand and
provides after-sales support

Currently, the top five companies in


the global contract manufacturing
marketSolectron, Flextronics,
SCI, Celestica and Jabilaccount
for more than a third of the global
market.

Looking at this emerging trend,


some smart Indian hardware
product companies like D-Link,
TVS Electronics and WeP
Peripherals have started
offering CM services.

This not only helps the


hardware product company derisk its business model but also
means full utilisation of its
production facilities.

And being product companies,


these companies understand
the clients business more than
any other contract
manufacturer.

5. Joint ventures
Joint ventures can be defined as "an
enterprise in which two or more investors
share ownership and control over property
rights and operation".

Joint ventures are a more


extensive form of participation
than either exporting or
licensing. In Maruti has a joint
venture agreement with Suzuki
in car manufacturing

Joint ventures give the following


advantages:
1. Sharing of risk and ability to combine the
local in-depth knowledge with a foreign
partner with know-how in technology or
process Joint financial strength
2. May be only means of entry and
3. May be the source of supply for a third
country.

They also have disadvantages:


Partners do not have full control of
management
May be impossible to recover capital if
need be
Disagreement on third party markets to
serve and
Partners may have different views on
expected benefits.

6. Wholly Owned Subsidiaries


The most extensive form of participation is
100% ownership and this involves the
greatest commitment in capital and
managerial effort.
The ability to communicate and control
100% may outweigh any of the
disadvantages of joint ventures and
licensing.

However, as mentioned earlier,


repatriation of earnings and capital
has to be carefully monitored.
The more unstable the environment
the less likely is the ownership
pathway an option.

Wholly Owned Subsidiaries


A subsidiary, in business matters, is an
entity that is controlled by a bigger and
more powerful entity.
The controlled entity is called a company,
corporation, or limited liability company,
and the controlling entity is called its
parent (or the parent company).

The reason for this distinction is


that a lone company cannot be
a subsidiary of any organization;
only an entity representing a
legal fiction as a separate entity
can be a subsidiary.

While individuals have the


capacity to act on their own
initiative, a business entity can
only act through its directors,
officers and employees.

he most common way that


control of a subsidiary is
achieved is through the
ownership of shares in the
subsidiary by the parent.

These shares give the parent the


necessary votes to determine the
composition of the board of the
subsidiary and so exercise control. This
gives rise to the common presumption
that 50% plus one share is enough to
create a subsidiary.

7. Strategic Alliance
A Strategic Alliance is a formal
relationship between two or more parties
to pursue a set of agreed upon goals or to
meet a critical business need while
remaining independent organizations.

Partners may provide the strategic


alliance with resources such as
products, distribution channels,
manufacturing capability, project
funding, capital equipment,
knowledge, expertise, or intellectual
property.

The alliance is a cooperation or


collaboration which aims for a
synergy where each partner
hopes that the benefits from the
alliance will be greater than
those from individual efforts.

The alliance often involves


technology transfer (access to
knowledge and expertise),
economic specialization shared
expenses and shared risk.

Export processing zones (EPZ)


Whilst not strictly speaking an entry-strategy,
EPZs serve as an "entry" into a market.
They are primarily an investment incentive for
would be investors but can also provide
employment for the host country and the transfer
of skills as well as provide a base for the flow of
goods in and out of the country. One of the best
examples is the Mauritian EPZ12, founded in the
1970s.

Identifying foreign markets,

Market selection process


Whether a company is marketing in several
countries or is entering a foreign market for
the first time, planning is essential to success.
The first-time foreign marketer must decide
what products to develop, in which markets,
and with what level of resource commitment.

For the company already committed,


the key decisions involve allocating
effort and resources among countries
and product(s), deciding on new
markets to develop or old ones to
withdraw from, and determining which
products to develop or drop.

Guidelines and systematic


procedures are necessary for
evaluating international
opportunities and risks and for
developing strategic plans to take
advantage of such opportunities.

Phase I-Preliminary Analysis


and Screening; Matching
Company/Country
Whether a company is new to international
marketing or heavily involved, an
evaluation of potential markets is the first
step in the planning process.

A critical first step in the


international planning process is
deciding in which existing
country market to make a
market investment.

A company's strengths and


weaknesses, products,
philosophies, and objectives
must be matched with a
country's constraining factors
and market potential.

In the first part of the planning


process, countries are analyzed
and screened to eliminate those
that do not offer sufficient
potential for further
consideration.

Emerging markets pose a special


problem since many have
inadequate marketing
infrastructures, distribution
channels are underdeveloped, and
income level and distribution vary
among countries.

The next step is to establish screening


criteria against which prospective
countries can be evaluated.
These criteria are ascertained by an
analysis of company objectives,
resources, and other corporate
capabilities and limitations.

It is important to determine the


reasons for entering a foreign
market and the returns expected
from such an investment.

A company's commitment to
international business and its
objectives for going international
are important in establishing
evaluation criteria.

A company guided by the global market


concept looks for commonalties among
markets and opportunities for
standardization, whereas a company guided
by the domestic market extension concept
seeks markets that accept the domestic
marketing mix as implemented in the home
market.

Minimum market potential, minimum profit,


return on investment, acceptable
competitive levels, standards of political
stability, acceptable legal requirements, and
other measures appropriate for the
company's products are examples of the
evaluation criteria to be established.

Once evaluation criteria are set,


a complete analysis of the
environment within which a
company plans to operate is
made.

The environment consists of the


uncontrollable elements discussed
earlier and includes both home-country
and host-country restraints, marketing
objectives, and any other company
limitations or strengths that exist at the
beginning of each planning period.

Although an understanding of uncontrollable


environments is important in domestic
market planning, the task is more complex
in foreign marketing because each country
under consideration presents the foreign
marketer with a different set of unfamiliar
environmental constraints.

It is this stage in the planning


process that more than anything
else distinguishes international
from domestic marketing
planning.

The results of Phase 1


provide the marketer with the
basic information necessary
to:
(1) evaluate the potential of a
proposed country market;

(2) identify problems that would


eliminate the country from
further consideration;

(3) identify environmental elements which need


further analysis;
(4) determine which part of the marketing mix can
be standardized for global companies or which
part of and how the marketing mix must be
adapted to meet local market needs; and
(5) develop and implement a marketing action
plan.

Information generated in Phase 1 helps a


company avoid the mistakes.
With the analysis in Phase 1 completed, the
decision maker faces the more specific task
of selecting country target markets,
identifying problems and opportunities in
these markets, and beginning the process of
creating marketing programs.

Phase 2-Adapting the Marketing


Mix to Target Markets.
A more detailed examination of the
components of the marketing mix is the
purpose of Phase 2.
When target markets are selected, the
market mix must be evaluated in light of
the data generated in Phase 1.

In which ways can the product,


promotion, price, and
distribution be standardized and
in which ways must they be
adapted to meet target market
requirements?

Incorrect decisions at this point lead to


costly mistakes through lost efficiency
from lack of standardization; products
inappropriate for the intended market;
and/or costly mistakes in improper
pricing, advertising, and promotional
blunders.

The primary goal of Phase 2 is to


decide on a marketing mix adjusted
to the cultural constraints imposed
by the uncontrollable elements of
the environment that effectively
achieve corporate objectives and
goals.

Phase 2 also permits the marketer to


determine possibilities for
standardization.
By grouping all countries together and
looking at similarities, market
characteristics that can be
standardized become evident.

Frequently, the results of the


analysis in Phase 2 indicate that
the marketing mix would require
such drastic adaptation that a
decision not to enter a particular
market is made.

For example, a product may have


to be reduced in physical size to fit
the needs of the market, but the
additional manufacturing cost of a
smaller size may be too high to
justify market entry.

Also the price required to be


profitable might be too high for a
majority of the market to afford. If
there is no way to reduce the price,
sales potential at the higher price
may be too low to justify entry.

On the other hand, additional


research in this phase may
provide information that can
suggest ways to standardize
marketing programs among two
or more country markets.

The answers to three major


questions are generated in Phase
2:
(1) which elements of the marketing
mix can be standardized and where
is standardization not culturally
possible?

(2) Which cultural/environmental


adaptations are necessary for
successful acceptance of the
marketing mix? And

(3) will adaptation costs allow profitable


market entry? Based on the results in Phase
2, a second screening of countries may take
place, with some countries dropped from
further consideration. The next phase in the
planning process is development of a
marketing plan.

Phase 3-Developing the


Marketing Plan.
At this stage of the planning process, a
marketing plan is developed for the target
market-whether a single country or a global
market set.
The marketing plan begins with a situation
analysis and culminates in the selection of an
entry mode and a specific action program for the
market.

The specific plan establishes


what is to be done, by whom,
how it is to be done, and when.
Included are budgets and sales
and profit expectations.

Just as in Phase 2, a decision


not to enter a specific market
may be made if it is determined
that company marketing
objectives and goals cannot be
met

Phase 4-Implementation and


Control.
A "go" decision in Phase 3 triggers
implementation of specific plans and
anticipation of successful marketing.
However, the planning process does not
end at this point.

All marketing plans require coordination and


control during the period of implementation.
Many businesses do not control marketing
plans as thoroughly as they could even
though continuous monitoring and control
could increase their success.

An evaluation and control


system requires performance
objective action, that is, to bring
the plan back on track should
standards of performance fall
short.

A global orientation facilitates the


difficult but extremely important
management tasks of coordinating
and controlling
the complexities of international
marketing.

While the model is presented as a


series of sequential phases, the
planning process is a dynamic,
continuous set of interacting
variables with information
continuously building among
phases.

The phases outline a crucial path to be


followed for effective, systematic planning.
Although the model depicts a global
company operating in multiple country
markets, it is equally applicable for a
company interested in a single country.

Phases 1 and 2 are completed for


each country being considered, and
Phases 3 and 4 are developed
individually for the target market
whether it consists of a single
country or a series of separate
country markets.

A global company uses the same


process but integrates planning and
information to serve as many
markets as feasible and then
concentrates on a global market set
in Phases 3 and 4.

Utilizing a planning process encourages the


decision maker to consider all variables that
affect the success of a company's plan.
Furthermore, it provides the basis for
viewing all country markets and their
interrelationships as an integrated global
unit.

As a company expands into


more foreign markets with
several products, it becomes
more difficult to efficiently
manage all products across all
markets.

Marketing planning helps the marketer focus on all


the variables to be considered for successful
global marketing.
Regardless of which of the three strategies
(domestic market extension, multi-domestic, or
global) a company chooses, rigorous information
gathering, analysis, and planning are necessary
for successful marketing.

With the information developed in the


planning process and a country market
selected, the decision of the entry mode can
be made.
The choice of mode of entry is one of the
more critical decisions for the firm because
the choice will define the firm's operations
and affects all future decisions in that
market.