CHAPTER 3

Market entry strategies

3.1 Country Analysis and International Entry
• Before doing business in a foreign country, it is good idea to
undertake an analysis of the environment in the country
concerned.
• Country analysis may take many forms and a wide range of
organizations provide general and sometimes specialized
information on countries.
• These include government departments, international
institutions such as the UN, World Economic Forum, banks and
leading newspapers which produce country profiles and surveys,
and a variety of consultants and online services which offer
analysis of what is often termed ‘country risk’.
4. General Product Data and Other Development
Indicators - A variety of data can be used to
give an indication of the standard of living in a
country. This may include product data such as
the number of passenger vehicles, television
sets, telephones, or internet connections per
1,000 inhabitants or human development
indicators such as life expectancy, the
occurrence of particular diseases, or the literacy
rate of the population.
5. Risk Factors – The potential risks involved in entering
a foreign country vary greatly with the country
concerned. Political risks may include wars, civil
unrest, terrorism, and changes in government policy or
the law. Economic risks range from exchange rate
exposure to the risk of non-payment or financial
instability.
• Generally , Before doing any business internationally
through sourcing, exporting, investing, or a
combination of these strategies, the company must look
at conditions in the potential country to analyze what
the advantages, disadvantages, and costs will be and
whether it is worth the risk.
 3.3. Market entry modes/approach
1. Exporting
• Exporting is the most traditional and well established form of
operating in foreign markets. Exporting can be defined as
marketing of goods produced in one country sold into
another. Whilst no direct manufacturing is required in an
overseas country, significant investments in marketing are
required.
Exporting can be direct or indirect
a. Direct exporting– when a firm sells its goods to a foreign market
without any intermediary. The goods can be sold to a foreign
purchaser in the local market but shipped out of the country.
b. Indirect exporting –involves the use of independent distributors
or the company’s overseas sales office. Exporting of goods and
services through various home based exporters.
•Exporting of goods and services through various
home-based exporters
– Manufacturers’ export agents
• sell for manufacturer
– Export commission agents
• buy for overseas customers
– Export merchants
• purchase and sell for own accounts
– International firms
• use the goods overseas
 Indirect exporting
• Disadvantages
– Commission to export agents, commission to agents,
export merchants
– Foreign business can be lost if exporters decide to change
their sources and supply
– Firm gains little experience from transactions

Advantage of Direct exporting

- high profit b/se no intermediaries
- greater degree of control overall aspects of transaction
- To know who is its customers
• Before choosing which type of international market entry
strategy to choose marketers has to know the advantages and
disadvantages of the different entry strategies. Accordingly,
the following are the advantages and disadvantages of
exporting.
• The advantages of exporting are:
• Manufacturing is home based thus, exporting is less risky than
overseas based/reduce the potential risk of operating overseas
• Exporting gives an opportunity to "learn" overseas markets before
investing by building manufacturing plants.
• However, high transportation costs=low profit , trade barriers (like
tariff, quota), difficult when home currency is strong and
weaknesses of foreign distributors are major problems
(disadvantages).
2. Licensing
• This is a type of international trade entry
type which is made by giving a foreign
manufacturer the right to use your
( licensee ) patent, production technology,
process or product in return for the
payment of a royalty = fee by the
manufacturer (licensor)
A contractual arrangement: one firm sells access
to its patents, trade secrets, or technology to
another
Generally, licensing / certifying gives the following
advantages:
• quick spreading out (entry) when capital is scarce
• allowing host country to gain technology and
create jobs
• Good way to start in foreign operations with very
low risk
The disadvantages of licensing
• limited form of participation in the foreign market
= licensee poor performance
• potential returns from marketing and
manufacturing may be lost
to the licensor= very low profit
• licensor develops know-how gradually and so
licence is short lived
• Licensees become competitors in the long run.
• difficulty in terminating licensing agreement
 3. franchising :
• franchising is a strategic alliance between groups of
people who have specific relationships and responsibilities
with a common goal to dominate markets, i.e., to get and
keep more customers than their competitors.
• It is a method for distributing products and services that
satisfy customer needs.
• Form of licensing in which one firm contracts with
another to operate a certain type of business under an
established name according to specific rules
• It is a contract b/n a brand owner(the franchisor) and another
party (franchisee) to use a brand ,but also to obtain products ,
services and support from the franchisor . While using brand the
franchisee pay part of his turnover or profit to franchisor.
• 3 d/f kinds of franchise :-
-product franchise- an outlet for a particular product ex. Coca
cola, the ford motor company
-system franchise – authorized to conduct a business according
to a system developed by the franchisor ex. America Idol
-process or manufacture franchise- franchisor supplies a critical
ingredent or know- how for a production process. Ex.
McDonald
The difference b/n agent and distributor
Ownership of goods
- Agents do not take ownership of goods
- An agent represents the supplier as a
manufacturer or service provider in the
foreign market
- Distributors purchase goods and resells them
to consumers. They provide service and after
sell services
Joint Ventures:
– is a partnership between two or more participating companies
that have joined forces to create a separate legal entity.
– Cooperative effort among two or more organizations that share
common interest in business enterprise
• corporate entity formed by international company and local
owners
• corporate entity formed by two international companies for the
purpose of doing business in a third market
• a corporate entity formed by a government
Four factors are associated with a JV:
• Joint Venture is established as separate legal entities
• They acknowledge the purpose by the partners to share in the
management of the JV.
• They are partnership between legally incorporated entities such as
companies, governments, not between individuals.
• Equity positions are held by each of the partners.
 3. Foreign Direct Investment
• After companies gain experience outside the home
country via exporting or licensing and joint ventures
they wanted to participate in global market.
• The desire for control and ownership of operations
outside the home country drives the decision to invest.
• Foreign direct investment (FDI) figures record
investment flows as companies invest in or acquire
plant, equipment, or other assets outside the home
country.
• By definition, direct investment believes that the
investor has control or significant influence over the
investment, as opposed to portfolio.
• FDI refers to a domestic firm (your firm) actually
investing in and owning a foreign subsidiary or division .
Usually firms invest directly in a foreign country after
they ‘test’ one of the above three entry modes.
The advantages of this strategy include:
• Cost savings once the foreign division is established.
• Better understanding of host country market conditions
• However, FDI involves the following disadvantages
• High costs of establishing the foreign division and
• High risks associated with economic and political system
of the host country government. Example – confiscation.
 Management Contracts
• It’s a system where a management company agrees to
manage some or all functions of another company’s
operation in return for management fees, a share of the
profits, and sometimes an option to purchase stock in the
company at a given price.
• Arrangement by which one firm provides management in all or
specific areas to another firm
• It often permits participation in a foreign venture without
capital risk or investment and is a major tool for maintaining
managerial control in situations where government requires
nationals to own a majority of stock interest.
• It is widely evidenced in services sector, e.g. hotel industry,
private hospital management where administration is contracted.