Chapter three-market
entry decision
Indicators of International Marketing
Opportunity
1. Existing
Demand in Foreign Countries:
§ Existing
demand refers to the current market demand for certain
products or services in foreign countries.
§ The indicators of existing demand include local
shortages of goods, substantial imports of specific products, or higher prices
charged for those goods in local markets.
2. Latent
Demand and International Marketing Opportunity:
§ Latent
demand exists when there is a need or want for certain
products or services in a foreign market, but they are currently unavailable or
underserved.
§ This can be due to technological limitations, lack
of suitable products, or government restrictions on imports.
3. Incipient
Demand:
§ Incipient
demand refers to emerging demand for certain products or
services in foreign markets.
§ These markets are characterized by early signals of
high market growth expected in the near future.
§ Incipient
demand is often identified by analyzing recent growth rates
and consumption patterns of specific products.
Target market selection
Step 1: Indicator
Selection and Data Collection
Step 2: Determine
the Importance of Country Indicators
Step 3: Rate
the Countries on Each Indicator
Step 4: Compute
Overall Score for Each Country
Factors affecting mode of entry
External criteria
1. Market
Size and Growth:
§ Large markets with significant growth potential
often justify major investments and resource commitments, such as joint
ventures or wholly-owned subsidiaries.
2.
Risk: The
level of risk associated with a particular market is an important
consideration.
§ This includes political and economic instability
that may impact the business prospects of a company.
§ Higher risk levels may make companies hesitant to
commit significant resources to a market.
3.
Government Regulations (Openness):
§ Certain countries may have restrictions or
regulations that limit the available options for market entry.
§ Trade barriers and ownership restrictions are
examples of government regulations that affect entry mode decisions.
4. Competitive
Environment:
§ The selection of an entry mode can be influenced by
factors such as the intensity of competition, market saturation, and the
presence of strong local competitors..
§ Companies need to assess their ability to compete
effectively in the local market.
5. Cultural
Distance:
§ Higher cultural distance may lead to challenges in
understanding consumer preferences, market dynamics, and business practices.
§ Companies may choose entry modes, such as joint
ventures, to bridge cultural gaps or reduce risk exposure.
6. Local
Infrastructure:
§ The quality of the local infrastructure, including
the distribution system, transportation network, and communication facilities,
is an important consideration.
§ Poor infrastructure may pose challenges in terms of
logistics, supply chain management, and operational efficiency, which can
impact the choice of entry mode.
Internal environment
1.
Company Objectives:
§ Companies with limited aspirations may prefer entry
options that require minimal commitment, such as licensing.
§ Proactive companies with ambitious objectives may
choose entry modes that provide full control, such as wholly-owned
subsidiaries.
2. Need
for Control:
§ The level of control desired is often correlated
with the amount of resource commitment.
ü Companies willing to make substantial resource
commitments may opt for higher-control entry modes,
ü While those with smaller commitments may accept
lower levels of control.
3. Internal
Resources, Assets, and Capabilities:
§ The availability of internal resources, assets, and
capabilities influences the choice of entry mode.
§ Companies with limited resources or assets may opt
for low-commitment entry modes like exporting or licensing.
4.
Flexibility: The
need for flexibility is an important consideration in entry mode decisions.
§ Different entry modes offer varying degrees of
flexibility, with contractual arrangements like joint ventures or licensing
providing less flexibility compared to wholly-owned subsidiaries.
Mode of entry
1.
Exporting is a common mode of entry into foreign markets,
especially for small businesses and companies in the early stages of
international expansion.
§ It involves selling goods produced in the home
market to customers in foreign markets.
§ Exporting offers several advantages, such as
relatively low resource commitment and reduced risk compared to other entry
modes.
A.
Indirect Exporting: In
this approach, companies work through independent intermediaries to export
their products. There are four types of intermediaries:
Ø Domestic-based
export merchant: Buys the manufacturer's products and sells them
abroad.
Ø Domestic-based
export agent: Seeks and negotiates foreign purchases on behalf of
the company and earns a commission.
Ø Cooperative
organization: Conducts exporting activities on behalf of multiple
producers and is partially under their administrative control.
Ø Export
Management Company: Manages a company's export activities for a fee.
Advantages of indirect exporting are
lower investment requirements and reduced risk.
B.
Direct Exporting: Companies
may eventually choose to handle their own exports, which involves greater
investment and risk. Direct exporting methods include:
Ø Domestic-based
export department or division: An export sales manager
handles the selling and seeks market assistance as needed.
§ This department can evolve into a self-contained
export department that performs all export activities and operates as a profit
center.
Ø Overseas
sales branch or subsidiary: Establishing a sales branch in a foreign market
allows the company to have a greater presence and control.
§ The sales branch handles sales, distribution,
warehousing, promotion, and customer service.
Ø Traveling
export sales representation: Home-based sales
representatives are sent abroad to find business opportunities.
Ø Foreign-based
distributors or agents: Hiring distributors or agents in foreign markets to
sell the company's goods.
§ They may have exclusive rights or limited rights to
represent the manufacturer.
2.
Licensing involves the licensor (the company that owns
intellectual property) granting a foreign company the right to use its
manufacturing process, trademark, patent, or other valuable assets in exchange
for a fee or royalty.
Ø The licensor gains access to the foreign market with
minimal risk, while the licensee gains production expertise, a well-known
product or brand, without having to start from scratch.
Forms of Licensing Arrangements:
Ø Management
Contract: The licensor sells a management contract to foreign
owners of hotels, airports, hospitals, or other organizations to manage their
businesses for a fee.
§ It is a low-risk method that generates income from
the beginning and prevents competition with clients.
Ø Contract
Manufacturing: The licensor engages local manufacturers to produce
the product.
§ While it gives the licensor less control over the
manufacturing process and potential profits, it offers a faster start, reduced
risk, and potential for a partnership or acquisition of the local manufacturer.
Ø Franchising: A
more comprehensive form of licensing, where the franchisor provides a
franchisee with a complete brand concept and operating system.
§ The franchisee invests in and pays fees to the
franchisor in return.
3.
Joint Venture: Foreign
investors collaborate with local investors to create a joint venture, sharing
ownership and control.
Ø Joint ventures may be necessary due to economic or
political reasons, such as lack of resources or government requirements.
Ø However, disagreements between partners over
investment and marketing policies can occur.
4.
Foreign Direct Investment (FDI): FDI
is the highest level of foreign involvement, where a company directly owns
assembly or manufacturing facilities in a foreign country.
Ø This can involve buying part or full interest in a
local company or establishing its own facilities.
Ø FDI offers advantages such as cost economies,
improved image in the host country, stronger relationships with stakeholders,
and better adaptation to the local market.
Ø However, it exposes the company to risks such as
currency fluctuations, market downturns, and potential difficulties in reducing
or closing operations.
5. Wholly
owned subsidiary
§ Wholly
owned subsidiaries are a type of entry mode where a company owns 100%
of the subsidiary.
§ There are two main approaches to establishing a
wholly owned subsidiary in a foreign market:
ü Setting up new operation
ü Acquisition
6. Merger
and acquisition
§ Merger: is
a business combination where two or more companies agree to combine their
operations and assets to form a new entity.
§ An
acquisition occurs when one company acquires or purchases the
majority or the entire ownership stake of another company.
Criteria for selecting a market entry
mode:
ü Speed of Market Entry:
ü Costs:
ü Flexibility:
ü Risk Factors:
ü Investment Payback Period:
ü Long-Term Profit Objectives: