MGT382 Lecture 5 Market Entry

5
INTERNATIONAL MARKETING
MGT 382
Dr Nasreen Gul
Lecture 5: International market entry

Recap
• Internationalisation is a necessity for many
companies seeking to maintain a competitive
advantage
• Environment analysis in international settings helps
organisations to identify opportunities and threats
and prioritise particular markets, identify target
market segments and develop knowledge to inform
strategic decisions
• With a decision on WHICH markets to enter, HOW
to enter becomes a question
All images in this presentation are used for educational purposes. Fair dealing.
Where is Market Entry decision placed in

internationalisation strategy making
1. The decision to internationalise: should the

company stay in home country or expand abroad.
2. International market selection: which markets
should we enter?
3. Entry Mode Strategy
4. Designing the global marketing programme: global
marketing mix
5. Implementing and coordinating the global
marketing programme
Objectives for today:

• Evaluate different market entry timing
strategy
• Examine, compare and contrast major

market entry modes
• Discuss criteria for entry modes selection

Basic Foreign
Entry Decisions
• A firm making the decision to expand into a
foreign market must consider the following
questions:
– Which markets do we enter?
– When should we enter this market?
– What is the scale of entry?
– Which is best mode of entry?
Market entry timing
• When to enter a new market:

– First in: be the market pioneer - create the market
– Early in: during introduction / growth stage
– Late in: wait for market maturity
Which is best?
First/early entry
• Gains first mover advantage (FMA) for:

– Establishing strong brand and customer loyalty
before competitors
– Building sales volume and gaining a cost
advantage
– Creating switching costs making it difficult for
customers to move to a competitor
• BUT: high development costs

Late entry
• Late movers hold advantages for:

– Learning from mistakes of first mover(s)
– Having more time to research and develop the
product for the market
– Keeping development costs lower
• BUT: difficult to establish brand loyalty and

more difficult to establish high market share
Market entry timing strategies
High Advanced
Advanced
countries
countries
Waterfall approach (“trickle-down”)
Developing
Developing
per capita
countries
countries
GNP
Less
Less developed
developed
countries
countries “Trickle-up”
Low
Time
Shower approach
(‘sprinkler’ strategy) Lymbersky (2008)
Advanced
Advanced Developing
Developing Less
Less developed
developed
Source: Keegan and Green (2011) countries
countries countries
countries countries
countries
Types of Market Entry Modes

KEY TYPES:
 Wholly-owned subsidiary
Hierarchical
 Company acquisition
 Assembly operations
ENTRY MODE:  Joint venture
Levels of involvement
 Strategic alliance
an institutional
Intermediary
arrangement  Franchising
necessary for the entry  Licensing
of a company’s
products and services  Direct marketing
into a foreign market  Distributors and agents
 Sales force
 Trading companies
Export  Export management
companies
 Piggyback operations
 Domestic purchasing
Hollensen’s classification (2010)
100% internalising Hierarchical modes

High control, high risk, low flexibility
Intermediate modes
Shared control and risk, split
(contractual modes)
ownership
100% externalising Export modes

Low control, low risk, high flexibility
In essence, entry mode decision is underpinned by

evaluation of risk versus control
1. Export Modes
Foreign
Overseas market X
Foreign sales
market Y subsidiary
Foreign
intermediaries
Indirect
Direct exporting
exporting
Home
intermediary
Piggyback
A
Source: based on Jiang (2007)
Home market
1.1 Indirect Export
 Company uses independent export representatives located in

own country
 Domestic operations
 Least cost (no need for distribution system) and risk but little
control
– Export by an agent – a representative assists a business in
transporting and/or selling their products in a foreign country
– Export Management Company (EMC) or Exporting Houses (EH);
– Trading companies
– The Piggyback solution - an indirect mode of export which
entails an inexperienced SME ‘riding’ on the capabilities of a
larger company already experienced in foreign markets
1.2 Direct Export
 Company uses intermediaries Criteria

located in overseas markets.
o Reputation / financial
 More investments, but more
control, more experience strength / resources
o Knowledge/ expertise /
 Own sales people abroad Or
contacts
foreign intermediaries o Attention/ effort / attitude
 Agents/distributors to new products
 Longer term commitment o Customer service
 80-85% of exports are direct o Future strategy
exports. o Relationship development
Direct Export: Agent
 Individual (agent) acts on exporter’s behalf
 The agent will act on behalf of the manufacturer. The agent will not
stock the product, he will earn money from the turnover he creates for
the manufacturer and he will often earn a percentage of the turnover
the product makes (commission)
 Agent selection criteria: contacts with potential customers;

responsibilities to other companies; resources/salesforce etc.
 Advantages: market knowledge, complementary products
 Disadvantages: commitment? wants steady turnover? too small?

Direct Export: Distributor
 The distributor will act as the importer of the company’s product into the market and
will stock the product. Distributors have much more freedom to set own price and will
earn from the difference between the buying and selling price.
 Business partner with financial status, geographical area and market expertise,
technical knowledge
 Sole representative/exclusive rights
 Advantages: takes title to products; more committed/substantial investment e.g.

salesforce, technical support team
 Disadvantages: exclusivity problems?
 Selection  crucial. Distributor motivation?

Direct marketing
 Mail order, telephone marketing, media marketing, direct mail and
electronic commerce
 Low cost method with little risk: cost effective method of market entry
 Not depend on direct face-to-face contact
 Challenges
– need to build and maintain up-to-date databases
– need for sophisticated multilingual data processing
– to develop reliable credit control and secure payment systems.
– variety of methods in different markets
– Infrastructure - ?
 Advantages: global/flexible/cost savings; dis-intermediation (B-2-C);
convenience
 Disadvantages: language - ?; 24 hour support; payment; fulfilment house in
overseas markets
Direct Export:
Management contracts
 Operational control of a company in a particular market is vested in

a separate enterprise that manages the company for a fee
 Business skills/management expertise; market knowledge
 Large construction projects; production; personnel management,
accounting, marketing, training, etc
 Widely utilised in airline, hospitality industries (e.g., Hilton Hotels
provides management services to hotels it does not own)
 Advantages: ease of entry; access to market knowledge
 Disadvantages: fee/low profit levels; exposing in-company
knowledge and know-how (trust?); management company remains
independent and can become your competitor – may be
detrimental to competitive advantage
Direct Export: Overseas office
 When agents/distributors are difficult to find

 Local personnel, + resident sales/marketing managers
 After-sales provision; market research
 Used for large B2B contracts/revenue outweighs cost
 Advantages: project corporate image; obtain
feedback; avoid commission fees
 Disadvantage: unable to appreciate corporate systems
 Challenges: host country laws and government
favourable? CSR?
2. Intermediate Methods
• Licensing refers to the exchange of rights,

such as manufacturing rights, to another in
exchange for payment
• Special licensing arrangements:
– Contract manufacturing
– Company provides technical specifications to a
subcontractor or local manufacturer
– Allows company to specialize in product design while
contractors accept responsibility for manufacturing facilities
– Franchising
Franchising
 Franchising is a rapidly growing form of licencing in which the

franchisor provides a standard package of products, systems and
management services, and the franchisee provides market
knowledge, capital and personal involvement in the management.
 Lends itself to rapid international expansion
 Limited degree of risk
 Suited to transition economies/provides structure
 Liked/favoured across countries
 Emphasis on standardisation
 Brand/product/service/business system
Franchising agreement
(Coughlan et al 2006)
For franchisee: For franchisor:
• Surplus capital • United brand

• Ambition • Uphold image
• Independence • Control right
Franchising
• Freedom • Fast growing
agreement
• Easier start-up by using others’
• Effectiveness capital
• Professional help • Well-motivated
• On-going support partners
• Standard guard • Stable HR turnover
What term refers to a method in which a party grants the legal right to
another party to make use of the total business concept (incl. branding,
trademarks, products, method of operation) in return for a fee? _______
Indicative franchise cost

Subway: £10, 000 plus 8% royalty fee and 4.5% advertising
fee
Avis: £25,000 + 10% Royalty
Burger King: £25,000 + 4% Royalty
+ 4% Advertising levy
Domino’s Pizza: £90,000 + 5.5% Royalty
McDonalds: £50,000 / £1m + 5% Royalty
Spar: £25,000 + 1.5% Royalty
An Example
• https://www.youtube.com/watch?v=u5LL597q
a4s
Licensing
Advantages:
• Entry to closed markets
• Avoid tariff barriers
• Limited capital investment
• Low exit costs
• Licensee’s market knowledge
• Bulky products (lowering transportation costs)
Disadvantages
• Quality control
• Contractual problems
• Lower profits?
• Licensee as competitor?
Franchising
Advantages:
• Quick market entry
• Franchisor’s package/max. control. More control than with licensing
• Franchisee provides capital/market knowledge
• Less risk for both? Profitable for franchisor?
Disadvantages:
• Difficult to find competent franchisees
• Time-consuming
• Monitoring of quality/supervision
Challenges:
• Lack of franchising laws in some countries (Egypt)
• Control  technology infrastructures and support essential: internet, company intra-nets, video
conferences etc
• Cultural problems (or solutions?)
3. Hierarchical modes
 Cooperative modes: Joint Venture or Strategic Alliance (e.g., operation
with a partner/partners)
 Wholly owned subsidiaries
 Many hierarchical modes involve Foreign Direct Investment (FDI): the

purchase or establishment of income generating assets in foreign
country entailing control of the operation or organization (Buckley, 2001)
 Equity ranges from 100% to as little as 10-25%
 Highest level of involvement a company can make in an overseas market

3.1 Joint ventures

• Refers to an equity partnership between two or more
partners whereby they create a new company through
sharing of complimentary expertise or resources
• Reasons:
– Complementary technology or management skills can lead to
new opportunities
– Firms with partners in host countries can increase speed of
market entry
– Less developed countries may restrict foreign ownership
– Costs of global operations in R&D and production can be shared
Joint Venture Example

3.1 Joint ventures

Advantages:
• Firms with partners in host countries can increase speed of market entry
• Complementary skills/resources or management skills can lead to new opportunities
• Market knowledge
• Overcome bureaucracy
• More profitable long term
• More control
• Less developed countries may restrict foreign ownership
• Costs of global operation in R&D and production can be shared.
Disadvantages:
• Different aims/objectives
• Culture clash, e.g.US vs Japanese J-Vs: individual vs group values
• Big investment (time, finance, other resources)
3.2 Strategic alliance

• Strategic alliances are voluntary (contractual)
arrangements between firms involving either a pooling
or trading of resources: partnership of equals
– Production/ distribution/ technology based
• Factor to consider:
– Equal partners
– Limited time span
– More strategic, global focus
– With specific functions
– Could well be competitors
Strategic Alliances:
 Marketing: airlines
 R & D: pharmaceuticals
 Production: cars (manufacturer-supplier relationships)
 Technology sharing/exchange
 Distribution relationships
 Cross-licencing
Strategic Alliance Example

in Airline Industry
Sky Team: https://www.flyingblue.com/skyteam/the-skyteam-alliance.html
 20 airline partners with HQs in four different continents
 Attuned timetables (e.g., more connections and

destinations); provision of customer lounges; loyalty
scheme operating across all partner airlines; co-operate
on fares, tickets, share information, etc.
 Response to global competition  enhanced customer

experience  differentiation and competitive advantage
Reasons for strategic alliance
 Insufficient resources
 Pace of innovation and market diffusion
 High research and development costs
 Concentration of firms in mature industries
 Government co-operation
 Self protection
 Market access
Choosing and Working

with a Partner
 Compatibility, capability, commitment

 Respect and equality
 Management of diversity/culture
 CEO/Chairman involvement
 Anticipating potential areas of conflict and strategizing
ahead on conflict management and resolution
(contingency planning)
3.3 Wholly-owned subsidiary
 Most expensive method of market entry

 Requires greatest amount of commitment, time and
resources
 Indicates the firm is taking the long term view 
Demonstrates commitment
 High risk
o Very significant investment
o Withdrawal from the market can be costly – not just in
financial outlay, but also in terms of the firms
reputation in the international and domestic market.
 An option when market assured
Routes to establishing
wholly owned subsidiaries
Acquisition/ Greenfield
Take over investment
Acquisition/take over
• Faster method vs setting up own subsidiary
• Availability of companies?
• Takes time to evaluate possible companies
• Advantages: trained labour force; brands; existing

customers; distribution
• Disadvantages: demotivated workers - ?; poor image or

reputation - ?; old products - ?; integration issues - ?;
responsible corporate behaviour - ?
Greenfield investment
• Parent company builds up operations fully
• Advantages: maximum control; highest protection of know-

how; signals commitment to the market/country;
leveraging government stimulation (if these in place)
• Disadvantages: highest cost; investment into overcoming

established competition – they have advantage of time; exit
-?
Reasons for overseas

production
• Product • Tariff barriers and quotas
o avoiding problems, e.g. • Government regulations
perishability
e.g. local investment
• Services • Government contacts
o dependant for success on local
intellectual property, knowledge • Market information
& sensitivity feedback
• Local manufacture • Preference of market
o faster response
o • Desire to be close to
just-in-time delivery
o proximity to raw materials foreign customers
• May benefit lower cost: • International culture in
o Transporting / warehousing firm
o Labour cost
Evaluating main entry options

Entry Advantages Disadvantages
options
Exporting Least restrains, low cost Trade barriers, little control over agents,
structure little knowledge of foreign market /
customers
Licensing, Low costs and risks Little control over operation, quality
Franchising issue, on-going channel support
(franchising); future competitor
(licensing)
Joint Venture Shared costs and risks, access to Technology leak, not always in control,
partner’s existing channels possible conflicts, limited life-span
Strategic Easier access to alliance Potential threat from partner, interest
alliance partner’s distribution network conflict
Wholly Full control, protection of High risks and costs (short-term)
owned technology and know-how, fit
subsidiary into own global strategy
Criteria for entry

mode selection
• External environment:
– Trade barriers, government rules/ requirements
– Market size, nature and power of competition
– Intermediaries availability & suitability
• Company factors:
– Objectives, expectations (size/ value, speed, risk, cost/
control, resources, flexibility, payback pressure)
– Abilities, skills, attitudes of company management
– Existing foreign market involvement
– Nature of the product
Images attributions
[1] I-5 Design & Manufacture (2007). Copyright by I-5 Design & Manufacture [Photograph]. Retrieved 21
September, 2014, from Flickr https://www.flickr.com/photos/i5design/4886682532 Reproduced with permission
from the creator. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivs 2.0 Generic
License.

[2] Luke Zeme (2012). Copyright by Luke Zeme [Photograph]. Retrieved 21 September, 2014, from Flickr
https://www.flickr.com/photos/lukezemephotography/8233073411 Reproduced with permission from the creator.
Licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic License.
[3] Emily Hoyer (2007). Copyright by Emily Hoyer [Photograph]. Retrieved 21 September, 2014, from Flickr
https://www.flickr.com/photos/flavor32/438222001 Reproduced with permission from the creator. Licensed under
the Creative Commons Attribution-NonCommercial-NoDerivs 2.0 Generic License.

[4] Dorli Photography (2012). Copyright by Dorli Photography [Photograph]. Retrieved 21 September, 2014, from
Flickr https://www.flickr.com/photos/dorlino/8660083757/in/photostream/ Reproduced with permission from the
creator. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivs 2.0 Generic License.

[5] Angel Abril Ruiz (2012). Copyright by Angel Abril Ruiz [Photograph]. Retrieved 21 September, 2014, from Flickr
https://www.flickr.com/photos/aabrilru/6832155239 Reproduced with permission from the creator. Licensed
under the Creative Commons Attribution 2.0 Generic License.

[6] Ahmad Nawawi (2011). Copyright by Ahmad Nawawi [Photograph]. Retrieved 21 September, 2014, from Flickr
https://www.flickr.com/photos/ahmadnawawi/6326052575 Reproduced with permission from the creator.
Licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic License.

[7] hjl (2012). Copyright by Melina Stathopoulos [Photograph]. Retrieved 22 September, 2014, from Flickr
https://www.flickr.com/photos/hjl/7540743972 Reproduced with permission from the creator. Licensed under the
Creative Commons Attribution-NonCommercial 2.0 Generic License

[8] The Sixth Ward (2013). Copyright by The Sixth Word [Photograph]. Retrieved 22 September, 2014, from The
Sixth Ward http://www.sixthward.us/2013/01/whos-knocking-at-your-door.html Reproduced with permission
from the creator. Licensed under the Creative Commons Attribution-ShareAlike 3.0 Unported License.

[9] Jerry Wong (2011). Copyright by Jerry Wong [Photograph]. Retrieved 21 September, 2014, from Flickr
https://www.flickr.com/photos/wongjunhao/6180716843 Reproduced with permission from the creator.
Licensed under the Creative Commons Attribution-NonCommercial-NoDerivs 2.0 Generic License.

[10] Otis Yang (2011). Copyright by Otis Yang [Photograph]. Retrieved 21 September, 2014, from Flickr
https://www.flickr.com/photos/otis0329/9123574165 Reproduced with permission from the creator. Licensed
under the Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic License.
[11] Maria Elena (2014). Copyright by Maria Elena [Photograph]. Retrieved 23 September, 2014, from Flickr
https://www.flickr.com/photos/melenita/15086864676 Reproduced with permission from the creator. Licensed
under the Creative Commons Attribution 2.0 Generic License.

[12] Gordon Joly (2007). Copyright by Gordon Joly [Photograph]. Retrieved 21 September, 2014, from Flickr
https://www.flickr.com/photos/loopzilla/439516532 Reproduced with permission from the creator. Licensed
under the Creative Commons Attribution-ShareAlike 2.0 Generic License.

MGT382 Lecture 5 Market Entry

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5

Lecture 5: International market entry

Where is Market Entry decision placed in

1. The decision to internationalise: should the

Objectives for today:

• Examine, compare and contrast major

• Discuss criteria for entry modes selection

Market entry timing

• When to enter a new market:

• Gains first mover advantage (FMA) for:

• BUT: high development costs

• Late movers hold advantages for:

• BUT: difficult to establish brand loyalty and

Market entry timing strategies

Types of Market Entry Modes

Hollensen’s classification (2010)

100% internalising Hierarchical modes

100% externalising Export modes

In essence, entry mode decision is underpinned by

1.1 Indirect Export

 Company uses independent export representatives located in

1.2 Direct Export

 Company uses intermediaries Criteria

Direct Export: Agent

 Individual (agent) acts on exporter’s behalf

 Agent selection criteria: contacts with potential customers;

 Advantages: market knowledge, complementary products

 Disadvantages: commitment? wants steady turnover? too small?

Direct Export: Distributor

 Sole representative/exclusive rights

 Advantages: takes title to products; more committed/substantial investment e.g.

 Disadvantages: exclusivity problems?

 Selection  crucial. Distributor motivation?

 Operational control of a company in a particular market is vested in

Direct Export: Overseas office

 When agents/distributors are difficult to find

• Licensing refers to the exchange of rights,

 Franchising is a rapidly growing form of licencing in which the

• Surplus capital • United brand

Indicative franchise cost

 Wholly owned subsidiaries

 Many hierarchical modes involve Foreign Direct Investment (FDI): the

 Equity ranges from 100% to as little as 10-25%

 Highest level of involvement a company can make in an overseas market

3.1 Joint ventures

Joint Venture Example

3.1 Joint ventures

3.2 Strategic alliance

 Production: cars (manufacturer-supplier relationships)

Strategic Alliance Example

 20 airline partners with HQs in four different continents

 Attuned timetables (e.g., more connections and

 Response to global competition  enhanced customer

Reasons for strategic alliance

Choosing and Working

 Compatibility, capability, commitment

3.3 Wholly-owned subsidiary

 Most expensive method of market entry

• Faster method vs setting up own subsidiary

• Takes time to evaluate possible companies

• Advantages: trained labour force; brands; existing

• Disadvantages: demotivated workers - ?; poor image or

• Parent company builds up operations fully