LECTURE 4

MARKET ENTRY STRATEGIES

Learning Objectives

• Factors influencing the choice of entry mode

• Export modes
• Intermediate entry modes
• Hierarchical modes

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The Five-Stage Decision Model in Global Marketing

The decision whether to internationalize

Deciding which markets to enter

Market entry strategies

Designing the global marketing programme

Implementing and coordinating the global marketing programme

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Classification of Market Entry Modes

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Different Market Entry Modes in Consumer Market

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Factors Affecting the Foreign Market Entry Mode Decision in
A Specific Country

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Internal Factors

Firm Size
• Increasing resources availability provides the basis for increased international
involvement over time
• Hence, export entry modes maybe more suitable for SMEs

International Experience
• International experience of managers and the firm favors direct investment in the form
of wholly owned subsidiaries
Product / Service
• Product with high value / weight ratio (eg expensive watches) – direct exporting
• High complexity products favors hierarchical modes
• For services, if production and consumption occur simultaneously – hierarchical mode
• Highly differentiated products allow a firm to charge higher price in a foreign market –
hierarchical modes
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External Factors

Sociocultural distance between home country and host country

• The greater the perceived distance between the home and host country in terms of
culture, economic systems and business practices, the firm will favour joint venture
agreements or even low-risk entry modes like agents or an importer
Country risk / demand uncertainty
• When country risk is high, firms will favour entry modes that involve relatively low
resource commitments, i.e. export modes
Market size and growth
• The larger the country and the size of its market, and the higher the growth rate, the
more likely management consider establishing a wholly owned sales subsidiary or
to participate in a majority-owned joint venture

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External Factors

Direct and indirect trade barriers

• Tariffs or quotas on the import of foreign goods and components favour the
establishment of local production or assembly operations (hierarchical modes)
• Similarly, product and trade regulations and customs formalities encourage modes
involving local companies
Intensity of competition
• The greater the intensity of competition in the host market, the more the firm will
favour entry modes (export modes) that involve low resource commitments
Small number of relevant intermediaries available
• This will favour the use of hierarchical modes in order to reduce the scope for
opportunistic behaviour

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Desired Mode Characteristics
Risk-averse
• If decision-makers are risk-averse they will prefer export modes or licensing (an
intermediate mode)
• A joint venture also provides a way of sharing risk, financial exposure and the cost
of establishing local distribution networks and hiring local personnel
Control
• Control is often closely linked to the level of resource commitment. Wholly owned
subsidiaries (hierarchical mode) provide the most control, but also require a
substantial commitment of resources
Flexibility
• The hierarchical modes (involving substantial equity investment) are the least
flexible and most difficult to change in the short run
• Export modes provide the company with higher flexibility, because the company can
terminate an agent contract on a relatively short time horizon 10
Transaction-Specific Factors

Tacit nature of know-how

• The greater the tacit component of firm-specific know-how (ie difficult to articulate
and express in words), the more a firm will favour hierarchical modes

Opportunistic behavior
• The export intermediary may manipulate information or invoices in order to obtain
lower prices or higher payment from the producer
• As a consequence, high control modes (eg own foreign company) may be preferred

Transaction cost
• The “friction” between buyer and seller; ex ante costs + ex post costs
• If transaction costs are high, then the firm will seek internalization of activities

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Zara Uses Different Entry Modes
• Hierarchical mode (direct investment) used in most European
countries (85% of stores) – markets characterized by high
growth potential and relatively low sociocultural distance (low
country risk) between Spain and the target market
• The intermediate modes are mainly used in countries where
the sociocultural distance is relatively high:
• Joint ventures – Used in large, competitive markets where
it is difficult to acquire property to set up retail outlets or
where there are other kinds of obstacles that require
cooperation with a local company (eg in India, Zara went into
a JV with the Indian conglomerate, Tata Group)
• Franchising - Used in high-risk countries that are
socioculturally distant or have small markets with a low sales
forecast, such as Kuwait, Andorra, Puerto Rico, Panama and
the Philippines
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A/ Export Modes

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A1/ Indirect Export

• The manufacturing firm does not take direct care of exporting activities

• Instead, another domestic company, such as an export house or trading company,

performs these activities
• Advantages
• Limited commitment and investment required
• Minimal risk
• No export experience required

• Disadvantages
• No control over marketing mix elements other than the product
• Lack of contact with the market (no market knowledge acquired)

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A2/ Direct Export

• The producing firm takes care of exporting activities and is in direct contact with the
first intermediary in the foreign target market
• The firm is typically involved in handling documentation, physical delivery and
pricing policies, with the product being sold to agents and distributors
• Distributors (importers) – Independent companies that stock the manufacturer’s
product. They will have substantial freedom to choose their own customers and
price. They profit from the difference between their selling price and the buying price
from the manufacturer
• Agents – An independent company that sells on to customers on behalf of the
manufacturer (exporter). Usually it will not see or stock the product. It profits from a
commission (typically 5 – 10 per cent) paid by the manufacturer on a pre-agreed
basis
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A2/ Direct Export

• Advantages
• Access to local market experience and contact with potential customers
• Market knowledge acquired
• More control over marketing mix

• Disadvantages
• Little control over market price
• Cultural differences, providing communication problems and information filtering

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A3/ Cooperative Export

• This involves collaborative agreements with other firms (export marketing groups)
concerning the performance of exporting functions
• Export marketing groups are frequently found among SMEs attempting to enter
export markets for the first time
• Advantages
• Shared costs and risks of internationalization
• Provide a complete product line to the customer

• Disadvantages
• Risk of unbalanced relationships (different objectives)

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B/ Intermediate Entry Modes

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B1/ Contract Manufacturing
• Manufacturing is outsourced to an external partner

• Eg IKEA relies heavily on a contractual network of

small overseas manufacturers
• Advantages
• Permit low-risk market entry
• Offer substantial flexibility

• Disadvantages
• Control over manufacturing quality is difficult to
achieve
• Hard to find a satisfactory and reliable
manufacturer

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B2/ Licensing
• The licensor gives a right to the licensee against payment, e.g. a right to
manufacture a certain product based on a patent against some agreed royalty
• The Walt Disney Company is the world’s largest licensor. In fiscal year 2019, its
global retail sales of licensed product reached US$54.7 billion

• Advantages
• Requires little capital investment
• New products can be exploited rapidly

• Disadvantages
• Lack of control over licensee operations
• Quality control of the product is difficult
• The company may make more money by manufacturing own products

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B3/ Franchising
• The franchisor gives a right to the franchisee
against payment, e.g. a right to use a total
business concept/system, including use of
trademarks (brands), against some agreed royalty
• Franchising is especially well suited to service
and people-intensive economic activities that
require a large number of geographically
dispersed outlets serving local markets
• International business format franchising is a
market entry mode that involves a relationship
between the entrant (the franchisor) and a host
https://about.ikea.com/en/about-us/the-ikea-
country entity, in which the former transfers, under franchise-system
contract, a business package (or format) that it
has developed and owns, to the latter 21
B3/ Franchising
• Advantages
• Greater degree of control compared with
licensing
• Low-risk, low cost entry mode
• Ability to develop new and instant international
markets relatively quickly and on a larger scale

• Disadvantages
• Lack of full control over franchisee’s operations
• Opening up internal business knowledge may
create potential future competitor
• Risk to the company’s international profile and
reputation if some franchisees underperform

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How Licensing and
Franchising Differ

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B4/ Joint Ventures / Strategic Alliances
• A joint venture or a strategic alliance is a
partnership between two or more parties. In
international joint ventures these parties will be
based in different countries
• Three principal objectives in forming a joint venture:
entering new markets / reducing manufacturing
costs / developing and diffusing technology
• Eg Starbucks entered the Indian market in October
2012 through a 50/50 Joint Venture with Tata Global
Beverages and currently operates over 200 stores.
Starbucks stores are operated by the joint venture,
TATA Starbucks Private Limited, and branded as
Starbucks Coffee — “A Tata Alliance”
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B4/ Joint Ventures / Strategic Alliances
• Advantages
• Access to expertise and contacts in local markets
• Reduced market and political risk
• Overcomes host government restrictions
• Shared risk of failure
• Less costly than acquisitions

• Disadvantages
• Objectives of partners may be incompatible,
resulting in conflicts
• Contributions to joint venture can become
disproportionate
• Loss of control over foreign operations
• Loss of flexibility and confidentiality
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C/ Hierarchical Modes
• The firm completely owns and
controls the foreign entry mode /
organization

• The degree of control that head

office can exert on the subsidiary will
depend on how many and which
value chain functions can be
transferred to the market

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Establishing Wholly Owned Subsidiaries – Acquisition or Greenfield

• In deciding to establish wholly owned

operations in a country, a firm can either:
• Acquire an existing company – eg
Walmart acquired Seiyu in Japan

• Build its own operations from scratch

(greenfield investment) – Carrefour
entered Japan in 2001

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Acquisition
• Acquisition enables rapid entry and often provides access to distribution
channels, an existing customer base and, in some cases, established brand
names or corporate reputations
• Particularly advantageous for a firm with limited international management
expertise, or little familiarity with the local market
• In saturated markets, the industry is highly competitive or there are substantial
entry barriers, and therefore there is little room for a new entrant. In these
circumstances, acquisitions may be the only feasible way of establishing a
base in the host country

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Greenfield Investment
• The difficulties encountered with acquisitions may lead firms to prefer to
establish operations from the ground up, especially where production logistics
is a key industry success factor, and where no appropriate acquisition targets
are available or they are too costly
• Further motives for greenfield investment can also include incentives offered
by the host country
• Greenfield investment can also avoid the problems of trying to change the
traditional practices of an established company. A new facility means a fresh
start and an opportunity for the international company to shape the local firm
to its own image and requirements

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Discussion – Mode of Entry for Bubble Tea

Suggest the best mode of entry for a

new Taiwan Bubble Tea brand to enter
the Hong Kong market by referring to
the different factors affecting the foreign
market entry mode decisions

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