3.

MARKET SELECTION AND ENTRY STRATEGIES

Reasons for Entering International Markets

The objective of every firm for going international is to expand its business, searching new markets and
expand its customer base. Few important reasons are mentioned below:

• Growth & profitability

• Economies of scale

• Risk diversification

• Spreading R&D costs

• Resources and Ideas

• Employees

Modes of Entry into International Market

The decision on which market to enter and how to enter the selected market is of critical importance for
the company’s profit making and sustainable growth. Different firms select different modes of entry
based on the nature of the industry, company’s abilities and the conditions in the host country. Firms
contemplating expansion into international markets have several entry options. These generally include
exporting, licensing/ franchising, joint ventures (JVs) and wholly owned subsidiaries.

Exporting

Exporting is the simplest and most widely used mode of entering foreign markets. In a simple way,
Exporting is the process of sending or carrying of the goods abroad, especially for trade and sales. With
Export entry modes, a firm’s products are manufactured in the domestic market or a third country, and
then transferred to the host market via two broad options: indirect, and direct exporting.

Indirect Exporting

Indirect exporting is exporting the products either in their original form or in the modified form to a
foreign country through another domestic company. For Example various publishers in India including
Himalaya Publishing House sell their products, i.e. books to various exporters in India, which in turn
export these books to various foreign countries.

Direct Exporting

Direct exporting is selling the products in a foreign country directly through its distribution
arrangements or through a host country’s company. Although a direct exporting operation requires a
larger degree of expertise, this method of market entry does provide the company with a greater degree
of control over its distribution channels than would indirect exporting.

For example Baskin Robbins initially exported its ice-cream to Russia in 1990 and later opened 74 outlets
with Russian partners. Finally, in 1995, it established its ice-cream plant in Moscow.
Advantages

 "Selling goods and services to a market the company never had before boost sales and increases
revenues. Additional foreign sales over the long term, once export development costs have
been covered, increase overall profitability."
 "Most companies become competitive in the domestic market before they venture in the
international arena. Being competitive in the domestic market helps companies to acquire some
strategies that can help them in the international arena."
 "By going international companies will participate in the global market and gain a piece of their
share from the huge international marketplace."
 "Selling to multiple markets allows companies to diversify their business and spread their risk.
Companies will not be tied to the changes of the business cycle of domestic market or of one
specific country."

Disadvantages

 "It takes more time to develop extra markets, and the pay back periods are longer, the up-front
costs for developing new promotional materials, allocating personnel to travel and other
administrative costs associated to market the product can strain the meager financial resources
of small size companies."
 "When exporting, companies may need to modify their products to meet foreign country safety
and security codes, and other import restrictions. At a minimum, modification is often necessary
to satisfy the importing country’s labeling or packaging requirements."
 "Collections of payments using the methods that are available (open-account, prepayment,
consignment, documentary collection and letter of credit) are not only more time-consuming
than for domestic sales, but also more complicated. Thus, companies must carefully weigh the
financial risk involved in doing international transactions."
 "Finding information on foreign markets is unquestionably more difficult and time-consuming
than finding information and analyzing domestic markets. In less developed countries, for
example, reliable information on business practices, market characteristics, and cultural barriers
may be unavailable"

Licensing

In this mode of entry, the domestic manufacturer leases the right to use its intellectual property, i.e.,
technology, work methods, patents, copy rights, brand names, trademarks etc., to a manufacturer in a
foreign country for a fee. The manufacturer in the domestic country is called licensor and the
manufacturer in the foreign country is called licensee. The domestic company can select any
international location and enjoy the benefits without overburdening its financial, managerial and
ownership responsibilities. For example in order to gain access to US market, Asahi Breweries Ltd. of
Japan established a licensing agreement with the Canadian Molson Brewery in 1994. The deal required
Molson to manufacture Asahi Super Dry for distribution in all of North America (New York Times 1998.)

Advantages of Licensing

Licensing affords new international entrants with a number of advantages:

• Licensing is a rapid entry strategy, allowing almost instant access to the market with the right partners
lined up.

• Licensing is low risk in terms of assets and capital investment. The licensee will provide the majority of
the infrastructure in most situations.

• Localization is a complex issue legally, and licensing is a clean solution to most legal barriers to entry. •
Cultural and linguistic barriers are also significant challenges for international entries. Licensing provides
critical resources in this regard, as the licensee has local contacts, mastery of local language, and a deep
understanding of the local market

Disadvantages of Licensing

• Loss of control is a serious disadvantage in a licensing situation in regards to quality control.

Particularly relevant is the licensing of a brand name, as any quality control issue on behalf of the
licensee will impact the licensor’s parent brand.

• Depending on an international partner also creates inherent risks regarding the success of that firm.
Just like investing in an organization in the stock market, licensing requires due diligence regarding
which organization to partner with.

• Lower revenues due to relying on an external party are also a key disadvantage to this model. (Lower
risk, lower returns.)

Franchising

Franchising is a form of business by which the owner (franchisor) of a product, service or method
obtains distribution through affiliated dealers (franchisees). A franchising is the agreement or license
between two legally independent parties which gives:

• A person or group of people (franchisee) the right to market a product or service using the trademark
or trade name of another business (franchisor)

• The franchisee the right to market a product or service using the operating methods of the franchisor

• The franchisee the obligation to pay the franchisor fees for these rights

• The franchisor the obligation to provide rights and support to franchisees

Advantages of Franchising

• Owning a franchise allows you to go into business for yourself, but not by yourself.

• A franchise provides franchisees with a certain level of independence where they can operate their
business.

• A franchise provides an established product or service which may already enjoy widespread brand-
name recognition. This gives the franchisee the benefits of a pre-sold customer base which would
ordinarily take years to establish.

• A franchise increases your chances of business success because you are associating with proven
products and methods

Disadvantages of Franchising

• The franchisee is not completely independent. Franchisees are required to operate their businesses
according to the procedures and restrictions set forth by the franchisor in the franchisee agreement.
These restrictions usually include the products or services which can be offered, pricing and geographic
territory. For some people, this is the most serious disadvantage to becoming a franchisee.

• In addition to the initial franchise fee, franchisees must pay ongoing royalties and advertising fees.

• Franchisees must be careful to balance restrictions and support provided by the franchisor with their
own ability to manage their business.

Joint Venture

When two or more firms join together to create a new business entity, it is called a joint venture. In this
kind of agreement the companies share their core competencies and share the ownership.
Environmental factors like social, technological, economic and political environments may encourage
joint ventures. There are five common objectives in a joint venture:

• Market entry

Risk/reward sharing

• Technology sharing

• Joint product development

• Conforming to government regulations

For example in December, 2011, Microsoft Corporation and General Electric formed a joint venture
which is a health IT Company of its own kind. Their common objective was to improve patient
experience and the economics of health and wellness through providing the health systems with
required system wide data and intelligence. The joint venture, known as Caradigm, aims at combining
technology and clinical applications to transform it into intelligence which is usable by care providers.
The name Caradigm evolved from ‘care’• and ‘paradigm,’ because Microsoft and GE intended a
paradigm shift in the care delivery system.

Advantages of Joint Venture

• Since two or more firms join together to form a joint venture, there is availability of increased capital
and other resources.

• By engaging with a foreign collaborator, the products and services can be marketed in a foreign
country.

• One partner may have the new and improved technology but do not have the resources. Other
partner may have resources like capital but do not have the technology. In such causes joint venture can
fetch new and improved technology as well as great resources. By engaging a foreign partner, improved
foreign technology can be availed from its foreign collaborator.

• Use of existing marketing arrangements or existing distribution network of one of the party is possible.

Disadvantages of Joint Venture

• It takes time and efforts to form the right relationship.

• The objectives of each partner may differ. The objectives needs to be clearly defined and
communicated to everyone involved.

• Imbalance in the share of capital, expertise, investment etc., may cause friction in between the
partners.

• Difference in the culture and style of business lead to poor cooperation.

• Lack of assuming responsibility by the partners may lead the collapse of business.
Turnkey Operations

Turnkey operations are common in international business in supply, erection and commissioning of
plants. Turnkey operations are a type of collaborative arrangement in which one company contracts
with another to build complete, ready-to-operate facilities. Turnkey operations are generally done in the
areas of industrial equipment manufacturing and construction. The customer for a turnkey operation is
often a government agency.

Advantages of Turnkey Projects

• Turnkey projects are a way of earning great economic returns from the know-how required to
assemble and run a technologically complex process.

• Turnkey projects make sense in a country where the political and economic environment is such that a
longer term investment might expose the firm to unacceptable political and/or economic risk.

Disadvantages of Turnkey Projects

• By definition, the firm that enters into a turnkey deal will have no long-term interest in the foreign
country.

• The firm that enters into a turnkey project may create a competitor.

• If the firm’s process technology is a source of competitive advantage, then selling this technology
through a turnkey project is also selling competitive advantage to potential and/ or actual competitors.

Factors Affecting the Selection of International Market Entry Mode

External Factors:

i. Market Size:

Market size of the market is one of the key factors an international marketer has to keep in mind when
selecting an entry mode. Countries with a large market size justify the modes of entry with long-term
commitment requiring higher level of investment, such as wholly owned subsidiaries or equity
participation.

ii. Market Growth:

Most of the large, established markets, such as the US, Europe, and Japan, has more or less reached a
point of saturation for consumer goods such as automobiles, consumer electronics. Therefore, the
growth of markets in these countries is showing a declining trend. Therefore, from the perspective of
long-term growth, firms invest more resources in markets with high growth potential.

iii. Government Regulations:

The selection of a market entry mode is to a great extent affected by the legislative framework of the
overseas market. The governments of most of the Gulf countries have made it mandatory for foreign
firms to have a local partner. For example, the UAE is a lucrative market for Indian firms but most firms
operate there with a local partner.
iv. Level of Competition:

Presence of competitors and their level of involvement in an overseas market is another crucial factor in
deciding on an entry mode so as to effectively respond to competitive market forces. This is one of the
major reasons behind auto companies setting up their operations in India and other emerging markets
so as to effectively respond to global competition.

v. Physical Infrastructure

The level of development of physical infrastructure such as roads, railways, telecommunications,

financial institutions, and marketing channels is a pre-condition for a company to commit more
resources to an overseas market. The level of infrastructure development (both physical and
institutional) has been responsible for major investments in Singapore, Dubai, and Hong Kong. As a
result, these places have developed as international marketing hubs in the Asian region

Level of Risk

From the point of view of entry mode selection, a firm should evaluate the following risks:

Political Risk: Political instability and turmoil dissuades firms from committing more resources to a
market.

Economic Risk: Economic risk may arise due to volatility of exchange rates of the target market’s
currency, upheavals in balance of payments situations that may affect the cost of other inputs for
production, and marketing activities in foreign markets.

Operational Risk: In case the marketing system in an overseas country is similar to that of the firm’s
home country, the firm has a better understanding of operational problems in the foreign market in
question

Lower Cost of Production: It may also be one of the key factors in firms deciding to establish
manufacturing operations in foreign countries.

Internal Factors

i. Company Objectives: Companies operating in domestic markets with limited aspirations generally
enter foreign markets as a result of a reactive approach to international marketing opportunities. In such
cases, companies receive unsolicited orders from acquaintances, firms, and relatives based abroad, and
they attempt to fulfill these export orders

ii. Availability of Company Resources: Venturing into international markets needs substantial
commitment of financial and human resources and therefore choice of an entry mode depends upon
the financial strength of a firm. It may be observed that Indian firms with good financial strength have
entered international markets by way of wholly owned subsidiaries or equity participation.

iii. Level of Commitment: In view of the market potential, the willingness of the company to commit
resources in a particular market also determines the entry mode choice. Companies need to evaluate
various investment alternatives for allocating scarce resources. However, the commitment of resources
in a particular market also depends upon the way the company is willing to perceive and respond to
competitive forces.

iv. International Experience: A company well exposed to the dynamics of the international marketing
environment would be at ease when making a decision regarding entering into international markets
with a highly intensive mode of entry such as Joint ventures and wholly owned subsidiaries.