Im CH - 3

CHAPTER THREE
International markets entry decisions
By: Zinabu Girma (MA)

Chapter outline
• Major decisions in international marketing

• Factors to consider before going global
• Selecting foreign markets
• The major ways of foreign market entry
Exporting, franchising, and licensing, wholly owned

subsidiaries, mergers/acquisitions and joint ventures.
By: Zinabu Girma (MA)

07/03/2023 2
Major Decisions in International Marketing
Deciding whether
to go abroad
Deciding which
markets to enter
Deciding how to
enter the market
Deciding on the
marketing program
Deciding on the
marketing organization
07/03/2023 By: Zinabu Girma (MA) 3
1. Deciding whether to go abroad
• Most companies would prefer to remain domestic

if their domestic market were large enough,
managers would not need to learn other languages
and laws, deal with volatile currencies, face
political and legal uncertainties, or redesign their
products to suit different customer needs and
expectations
Cont’d…..
• Several factors are drawing more and more
companies into the international arena:
1. Global firms offering better products or lower prices

can attack the company's domestic market. The company
might want to counterattack these competitors in their
home markets.
2. The company discovers that some foreign markets
present higher profit opportunities than the domestic
market.
Cont’d
3. The company needs a larger customer base to achieve

economies of scale.
4. The company wants to reduce its dependence on any

one market.
5. The company's customers are going abroad and

require international servicing.

Cont’d
Before making a decision to abroad, the
company must weight several risks:
• The company might not understand foreign customer
preferences and fail to offer a competitively attractive
product.
• The company might not understand the foreign
country's business culture or know how to deal
effectively with foreign nationals.
Cont’d
• The company might underestimate foreign
regulations and incur unexpected costs.
• The country might realize that it lacks managers with
international experience.
• The foreign country might change its commercial
laws, devalue its currency, or undergo a political
revolution and expropriate foreign property

2. Deciding which markets to enter:
• The company needs to define the marketing

objectives and policies. What proportion of foreign
to total sales will it seek?
• How many markets to enter?
• The company must decide whether to market in a few
countries or many countries and determine how fast
to expand.
Cont’d
 Generally speaking, it makes sense to operate in

fewer countries when:
• Market entry and market control costs are high.
• Product and communication adaptation costs are
high.
• Population and income size and growth are high in
the initial countries chosen.
• Dominant foreign firms
07/03/2023 can
By: Zinabu establish high barriers to10
Girma (MA)
Cont’d
Evaluating Potential markets: In general a

company prefers to enter countries that:
• Rank high on market attractiveness,
• That are low in market risk,
• In which it possesses a competitive advantage.

3. Deciding how to enter the market
• Once a company decides to target a particular

country, it has to determine the best strategy
of entry:
3.1. Selecting a Market Entry mode
• There is no one, single universal best foreign
market entry strategy.
• The firm should consider all alternative
channel strategies when entering each
market.
Cont’d
• The best strategy will be the one which is situational
best, optimal in that it is often a satisfying strategy
which takes into consideration market competition,
perceived risk, and established corporate policy
with regard to forms of market entry.

Cont’d
• The factors to be considered in selection of a market
entry strategy are:
Corporate objectives/ambition/resources.
Nature of the market/product category/
competition.
Personnel.
Speed of market entry desired.
Costs to include direct and indirect cost
Risk Factors.
Investment payback period.
Cont’d
 The principal modes of engagement are listed

below:
 Exporting
 Contractual Agreements (Licensing, Franchising,
Management contracts (turnkey projects )
 Direct investment activities (wholly owned
subsidiaries, joint ventures, and mergers/acquisitions
Five Mode of Entry Into Foreign Markets

Cont’d

3.2.1 Exporting
• Is a strategy in which a company, without any

marketing or production or organization overseas,
exports a product from its home base market abroad.
• It allows a company to enter foreign markets with a
minimum of change in its product line, company
organization, investment, or company mission.

Cont’d
• The main advantage
– Risks are minimal because the company simply
exports its excess production capacity when it
receives orders from abroad.
• The problem
– A desire to keep international activities simple,
together with a lack of product modification, make
a company’s marketing strategy inflexible and
unresponsive.

Cont’d
 Exporting is often chosen as a means of entry when the
following prevail.
• The firm is small and lacks the resources required
for foreign joint ventures or international direct
investment.
• Substantial commitment is inadvisable owing to political
risk, or uncertain or otherwise unattractive markets.
• There is no political or economic pressure to
manufacture abroad.
Cont’d
 Exporting can be either
– Direct Exporting: the company sells to a customer in

another country.
– Indirect exporting: usually means that the company
sells to a buyer in the home country who in turn exports
the product. Customers include large retailers,
wholesale supply houses, trading companies, and others
that buy to supply customers abroad.
3.2.1.1 Direct Exporting Activities
 Involves firm shipping goods directly to a foreign
market.
 Advantages are
 More control over the export process,
 Potentially higher profits, and
 A closer relationship to the overseas buyer and
marketplace.
 Disadvantages are
 The company needs to devote more time,
personnel, and corporate resources than indirect
07/03/2023
exporting requires.By: Zinabu Girma (MA) 22
Cont’d
The most common form of direct export activities are:
A.Agents
•Agent is an individual or firm authorized to act on behalf of
another, such as by executing a transaction or selling.
• The agent does not assume any financial risk in the
transaction, as a dealer would.
•Agents share commissions paid by the exporter on a pre-agreed
basis.
•Agents may be:
 Exclusive: where the agent has exclusive rights to specified sales
territories;
Cont’d
 Semi-exclusive: where the agent handles the exporter’s
goods along with other non - competing goods from other
companies; or
 Non-exclusive, where the agent handles a variety of goods,
including some that may compete with the exporter’s
products.
B. Distributors
• Distributors are the exclusive representatives of the
company and are generally the sole importers of the
company’s product in their markets.
• A foreign distributor is a merchant who purchases goods
from an exporter, often at a substantial discount and resells it
for a profit.
Cont’d
• The foreign distributor generally provides
support and service for the product, thus
relieving the company of these responsibilities.
• 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.
• Normally the terms and length of association
between the company and the foreign
distributor are established by contract.
Cont’d
C. Foreign Retailers
• A company sell directly to foreign retailers
• The growth of major retail chains in international markets has
created new opportunities for this type of direct sale.
• This method relies mainly on traveling sales representatives
who directly contact foreign retailers,
D. Internet
• Nowadays, companies are actively designing internet
catalogues targeting specific countries with multilingual
Websites.
• International internet marketing should not be overlooked as
an alternative market entry strategy by the small or large
company.
3.2.1.2 Indirect Exporting
• The firm does not have to develop an oversea sale force. It

will only hire independent international middlemen in the
countries concerned.
• Firms that adopt the indirect export method in their
international business usually have three options of
domestic middlemen arrangements.
a) Domestic Based Export Merchants
• Buys the manufacturers’ products and then sell them
abroad.
Cont’d
• With this arrangement, the exporting company only sells its
products to the export merchant in the home country.
• The merchant takes title to the product, it shoulders all the
burden and risks involved in exporting the product to foreign
markets
b). Domestic-Based Export Agents
• The agents seek and negotiate foreign purchases and are paid
commissions.
• The agents simply agree to seek for foreign buyers for the
company.
Cont’d
• Their job normally is to bring foreign buyers into contact with

domestic sellers.
• The exporting firm will bear the whole risk involved in the
business.
c). Cooperative Organization
• The cooperative organizations serve many producers with

non -competing interests by making careful plans on how
to export the products on their behalf.
3.2.2. Contractual agreement
• Are long-term, non equity associations between a

company and another in a foreign market.
• They serve as a means of transfer of knowledge
rather than equity.
 Contractual agreements include:
Licensing
 Franchising
Management Contracting

A. Licensing
• Licensing is way in which the firm can establish local

production in foreign markets without capital
investment.
• The owner of technology, formula, or product who is
called licensor, will allow the licensee to use the
technology or formula and manufacture product and sell
in the market for an agreed period of time on the
payment of the prescribed fee to the licensor.
Cont’d
• An agreement that permits a foreign company to use
industrial property (i.e., patents, trademarks, and
copyrights), technical know-how and skills (e.g.,
feasibility studies, manuals, technical advice),
architectural and engineering designs, or any
combination of these in a foreign market.
• Essentially, a licensor allows a foreign company to
manufacture a product for sale in the licensee’s country
and sometimes in other specified markets.
• The licensee will pay royalty.
B. Franchising
• Arrangement where one party (the franchiser) grants

another party (the franchisee) the right to use its
trademark or trade-name as well as certain business
systems and processes, to produce and market a good
or service according to certain specifications.
• Franchising is the practice of using another firm's
successful business model.
Cont’d
• Two important payments

are made to a franchisor:
(a) a royalty for the
trademark and (b)
reimbursement for the
training and advisory services
given to the franchisee.
Cont’d
• There are many advantages to buying a franchise:
– Corporate image
– Training
– Savings in time
Characteristics or features of a franchise:
Well established business
Needs limited investment
Easy entry in new markets
Business has large establishments
 Helps in diverting business risks
 Separates labor and specialization
Cont’d
Obligations of the parties
• The franchisor is involved in securing protection for
the trademark, controlling the business concept
and securing know-how.
• The franchisee is obligated to carry out the services
for which the trademark has been made prominent or
famous
• The place of service has to bear the franchisor's signs,
logos and trademark in a prominent place.
• The uniforms worn by the staff of the franchisee
have to be of a particular design and color.
Franchising Vs. Licensing
• In franchising, the franchisee and the franchisor are

very closely linked and have better working
relationships. The franchisee gets to retain the rights
to the franchisor’s logo and trademark.
• Franchisees are often an extension of the parent
company, in that they represent the parent
company’s brand and image.
• Therefore, they are usually provided some level of
training and support.
Cont’d
• Licensees do not get to have territorial rights from

the parent company. This means that licensing
organization gets to sell products in the same
geographical area.
• Licensees also do not receive the same extent of
support and training as compared to a franchisee.

C. Management Contracting
• In management contracting, a local investor in a

foreign market provides capital whereas a firm from
"outside" provides the necessary know-how to manage
the company.
• In a management contract, the supplier brings
together a package of skills that will provide an
integrated service to the client without incurring the risk
and benefit of ownership.
Cont’d
• One specialized form of management contract is the

turnkey operation.
• Here the arrangement permits a client to acquire
a complete operational system, together with the
skills investment sufficient to allow unassisted
maintenance and operation of the system
following its completion.
Cont’d
• A turnkey operation is an
agreement by the seller to
supply a buyer with a
facility fully equipped and
ready to be operated by the
buyer’s personnel, who will
be trained by the seller.

3.2.3 Direct investment activities
• International business a company would directly

construct a fixed asset within a foreign country, with
the aim of manufacturing a product within the
overseas market.
• Direct investment has the most control and the
most risk attached.
• Some of the direct investment modes of the
international marketing
07/03/2023
are discussed here;
By: Zinabu Girma (MA) 42
Cont’d
A. Wholly –owned subsidiary

• A subsidiary company is a company that is completely or
partly owned and wholly controlled by another company
that owns more than half of the subsidiary's stock.
• The subsidiary can be a company, corporation, or limited
liability company. The controlling entity is called its
parent company, parent, or holding company.

Cont’d
• A wholly-owned subsidiary is a company whose

stock is entirely owned by another company.
• The owner of a wholly-owned subsidiary is known
as the parent company or holding company.
• Because the parent company owns all of the stock of
the wholly -owned subsidiary, the parent company
can control all of its activities.
Cont’d
• Wholly owned subsidiaries allow the parent company

to retain the greatest amount of control, but also
leave the parent with all the costs and
risks of full ownership.
• The subsidiary continues to operate with the
permission of the holding company, either with or
without direct input from the controlling entity.
B. Joint Venture (JVs)
• A joint venture is a partnership of two or more

participating companies that have joined forces to create a
separate legal entity.
• A joint venture is simply a partnership at corporate level,
and it may be either domestic or international. An
international joint venture is one in which the partners are
from more than one country.

Cont’d
A joint venture can be attractive to an international

marketer when:
 It enables a company to utilize the specialized
skills of a local partner;
 It allows the marketer to gain access to a
partner’s local distribution system;

Cont’d
A company seeks to enter a
market where wholly-
owned activities are
prohibited;
 It provides access to
markets protected by tariffs
or quotas; and
The firm lacks the capital
or personnel capabilities
to expand its international
activates.
Cont’d
The difficulties associated with joint ventures include.

– Loss of control over foreign operations
– Difficulty of coordination
– Loss of flexibility and confidentiality
C. Consortia.
• Consortia are similar to the joint venture and could be
classified as such except for two unique characteristics;
Cont’d
1. They typically involve a

large number of
participants: and
2. They frequently operate in
a country or market in
which none of the
participants is currently
07/03/2023 active. By: Zinabu Girma (MA) 50
D. Mergers and acquisitions
Merger
• The act of merging of two or more entities into one,
through a purchase or a pooling of interests.
• It may be the combination of two or more companies,
either by the creation of a new organization or by
absorption by one of the others.
Acquisition
• An acquisition is the purchase of one business or
company by another company or other business
entity.

Cont’d
• Consolidation occurs when two companies combine

together to form a new enterprise altogether, and neither
of the previous companies survives independently.
• Acquisition" usually refers to a purchase of a smaller firm
by a larger one. Sometimes, however, a smaller firm will
acquire management control of a larger and/or longer -
established company. This is known as a reverse takeover.

Distinction between mergers and acquisition
 When one company takes over another and

clearly establishes itself as the new owner,
the purchase is called an acquisition.
 From a legal point of view, the target
company ceases to exist, the buyer "swallows"
the business and the buyer's stock continues to
be traded.
Cont’d
• A merger happens when two firms agree to go

forward as a single new company rather than remain
separately owned and operated.
• This kind of action is more precisely referred to as a
"merger of equals". The firms are often of about the
same size. Both companies' stocks are surrendered
and new company stock is issued in its place.

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CHAPTER THREE

International markets entry decisions

By: Zinabu Girma (MA)

• Major decisions in international marketing

Exporting, franchising, and licensing, wholly owned

By: Zinabu Girma (MA)

• Most companies would prefer to remain domestic

1. Global firms offering better products or lower prices

3. The company needs a larger customer base to achieve

4. The company wants to reduce its dependence on any

5. The company's customers are going abroad and

07/03/2023 By: Zinabu Girma (MA) 6

07/03/2023 By: Zinabu Girma (MA) 8

• The company needs to define the marketing

 Generally speaking, it makes sense to operate in

Evaluating Potential markets: In general a

• That are low in market risk,

• In which it possesses a competitive advantage.

07/03/2023 By: Zinabu Girma (MA) 11

• Once a company decides to target a particular

• The best strategy will be the one which is situational

best, optimal in that it is often a satisfying strategy

which takes into consideration market competition,

perceived risk, and established corporate policy

with regard to forms of market entry.

07/03/2023 By: Zinabu Girma (MA) 13

 The principal modes of engagement are listed

07/03/2023 By: Zinabu Girma (MA) 16

07/03/2023 By: Zinabu Girma (MA) 17

• Is a strategy in which a company, without any

07/03/2023 By: Zinabu Girma (MA) 18

07/03/2023 By: Zinabu Girma (MA) 19

– Direct Exporting: the company sells to a customer in

• The firm does not have to develop an oversea sale force. It

• Their job normally is to bring foreign buyers into contact with

c). Cooperative Organization

• The cooperative organizations serve many producers with

• Are long-term, non equity associations between a

07/03/2023 By: Zinabu Girma (MA) 30

• Licensing is way in which the firm can establish local

• Arrangement where one party (the franchiser) grants

• Two important payments

• In franchising, the franchisee and the franchisor are

• Licensees do not get to have territorial rights from

07/03/2023 By: Zinabu Girma (MA) 38

• In management contracting, a local investor in a

• One specialized form of management contract is the

07/03/2023 By: Zinabu Girma (MA) 41

• International business a company would directly

A. Wholly –owned subsidiary

07/03/2023 By: Zinabu Girma (MA) 43

• A wholly-owned subsidiary is a company whose

• Wholly owned subsidiaries allow the parent company

• A joint venture is a partnership of two or more

07/03/2023 By: Zinabu Girma (MA) 46

A joint venture can be attractive to an international

07/03/2023 By: Zinabu Girma (MA) 47

The difficulties associated with joint ventures include.

1. They typically involve a

07/03/2023 By: Zinabu Girma (MA) 51

• Consolidation occurs when two companies combine

07/03/2023 By: Zinabu Girma (MA) 52