CHAPTER FOUR

FOREIGN MARKET ENTRY STRATEGIES

4.1. Analyzing International Marketing

Why Businesses Enter International Markets?

 The potential to increase your customer base and market share.

 Most attractive country/region outside the domestic market.

 To build a global brand and a global marketing company.

 To provide a hedge against the risks associated with only selling

into a single market.
 Proactive Market Entry Reactive Market Entry
 Competitive advantage  Competitive pressure & survival

 Profit advantage /sales profit  Overproduction

growth  Excess capacity

 Technological advantage  Declining domestic sales

 Exclusive information  Saturated domestic markets

 Economies of scale  Proximity to customers and ports

 Market size

 Low cost production & tax

benefits
 4.2. Selecting A Market Entry Mode
 Several decision criteria will influence the choice of entry mode.
 Three classes of decision criteria can be distinguished: internal (firm-

specific) criteria, external (environment-specific) criteria, and desired

mode characteristics.

Internal Factors External Factors

Firm size  Market Size and Growth
 Risk/ Demand and uncertainty
International experience
 Government Regulations
Product/service
(Openness)
Company Objectives
 Competitive Environment
Desired Mode Characteristics
 Local Infrastructure
•Need for Control
 Socio-cultural distance between
•Flexibility
home country and host country
•Risk averse
 Entry modes can be classified according to the degree of control
they offer to the entrant from low-control (e.g., indirect exporting,
licensing) to high-control modes (e.g., wholly owned subsidiary).

 However, entry modes that offer a large degree of control also

impose substantial resource commitments and huge amounts of
risk.

 Therefore, the entrant faces a tradeoff between the benefits of

increased control and the costs of resource commitment and risk.
4.3. Indirect and Direct Exporting Activities, Agents, Distributors,

Franchising, and Licensing

Exporting
 Exporting is a strategy in which a company, without any marketing or production
organization overseas, exports a product from its home base.
 Most companies start their international expansion by exporting.
 Exporting is best alternative for many small businesses.

4.3.1 Indirect Exporting

 Occurs when the exporting manufacturer uses independent organizations located in

the producer’s country to sell its products in the foreign market.

 It is the sale is like a domestic sale.
 Sales are viewed primarily as a means of disposing of surplus production.
 Adopted by a firm with minimal resources and limited expansion objectives to

devote to international expansion.

There are six main (independent organizations) entry modes of indirect
exporting:
1. Export buying agent(Export Commission House);
2. Broker;
3. Export management company/export house;
4. Trading company;
5. Piggyback
6. Consortia

1. Export Buying Agent (Export Commission House)

 is a representative of foreign buyers who is located in the exporter’s
home country.
 Offers services to the foreign buyers: such as identifying potential sellers
and negotiating prices.
 Acts in the interests of the buyer, it is the buyer that pays a commission.
 The export commission house essentially becomes a domestic
buyer.
 It scans the market for the particular merchandise it has been
requested to buy.
 It sends out specifications to manufacturers inviting bids.

2. Broker
 Another type of agent based in the home country is the
export/import broker.

 The chief function of a broker is to bring a buyer and a seller

together.

 Thus the broker is a specialist in performing the contractual

function, and does not actually handle the products sold or bought.
 Paid a commission (about 5 percent)

 Export brokers is that they may act as the agent for either the seller
or the buyer.

3. Export Management Company/Export House

 are specialist companies set up to act as the ‘export department’ for
a range of companies.
 Conducts business in the name of each manufacturer it represents.
 All correspondence with buyers and contracts are negotiated in the
name of the manufacturer, and all quotations and orders are subject
to confirmation by the manufacturer.
4. Trading Company
♠ are part of the historical legacy from colonial days

♠ Play a central role in such diverse areas as

♪ shipping, warehousing, finance, technology transfer,

planning resource development, construction and regional

development (e.g. turnkey projects- Can earn a return on

knowledge asset), insurance, consulting, real estate and

deal making in general (including facilitating investment

and joint ventures).

5. Piggybacking
♥ A strategy where by a firm’s new product uses the existing distribution
and logistics of another business.
♥ The company uses the overseas distribution network of another company
(local or foreign) for selling its goods in the foreign market.

♥ Piggyback exporting, in which one manufacturer (carrier) that has export

facilities and overseas channels of distribution handles the exporting of
another firm’s (rider) noncompeting but complementary products.

6. Consortia are groups of small or medium-sized organizations that

group together to market related, or sometimes unrelated products in
international markets.
4.3.2 Direct Exporting
♣ Occurs when a manufacturer or exporter sells directly to an importer or buyer

located in a foreign market area.

♣ Include export through foreign-based agents and distributors (independent

intermediaries).

Distinct differences

 Distributors, unlike agents, take title to the goods, finance the inventories and bear

the risk of their operations, whereas agents do not.

 Distributors are paid according to the difference between the buying and selling

prices rather than by commission (agents).

 Distributors are often appointed when after-sales service is required, as they are

more likely than agents to possess the necessary resources.

a. Distributors (importers)
 are the exclusive representatives of the company and are generally

the sole importers of the company’s product in their markets.

 Independent company that stocks the manufacturer’s product.

 It will have substantial freedom to choose own customers and

price.

 It profits from the difference between its selling price and its

buying price from the manufacturer.

b. Agents
♣ Exclusive, where the agent has exclusive rights to specified sales
territories;
♣ 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.

♣ It is independent company that sells 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 percent) paid by the

manufacturer on a pre-agreed basis.

 Export Advantages Disadvantages
Mode
Indirect  Limited commitment and  No control over marketing mix elements
exporting investment required. other than the product.
 High degree of market  Distribution chain may add costs, leaving
diversification. smaller profit to the producer.
 Minimal risk (market and  Lack of contact with the market (no
political). market knowledge acquired).
 No export experience required.  Limited product experience.
Direct  Access to local market experience  Little control over market price because of
exporting and contacts. tariffs and lack of distribution control.
(e.g.
 Shorter distribution chain  Some investment in sales organization
distributor
or agent) (compared to indirect exporting). required (contact from home base with
 Market knowledge acquired. distributors or agents).
 More control over marketing mix  Cultural differences, providing
(especially with agents). communication problems and information
 Local selling support and services filtering.
available.  Possible trade restrictions.
4.3.3 Licensing
♣ Licensing is a strategy of marketing where a firm charges a fee

and/or royalty for the use of its technology, brand and/or expertise.

♣ Licensing agreement is an arrangement wherein:

╚ the licensor gives something of value/assets (trademarks,

technology know-how, production processes, and patents)

╚ to the licensee in exchange for certain performance

and payments from the licensee.

Benefits

♪ A very profitable means for penetrating foreign markets.

♪ Low initial investment as the firm does not have to set up operation

facilities in the host country. The setting up of the operation

facilities is the responsibility of the licensee.

 Overcomes restrictive investment barriers.

 Develop business applications of intangible property.

Caveats (Disadvantage)

 The risk of not getting paid.

 Lack of control.

 Cross-border licensing may be difficult.

 The licensee may not be fully committed to the licensor’s product or

technology.

 Creating a competitor.
4.3.4 Franchising
# It is a contract between a parent company (franchisor) and
franchisee, that allows the franchisee to operate a business
developed by the franchisor in return for a fee and adherence to
franchise-wide policies and practices.

# This is an appropriate entry strategy when barriers to entry are low

yet the market is culturally distant in terms of consumer behavior or

retailing structures.
# It is an arrangement whereby the franchisor gives the franchisee the

right to use the franchisor’s trade names, trademarks, business

models, and/or know-how in a given territory for a specific time

period, normally 10 years.

# In exchange, the franchisor gets royalty payments and other fees.

# The package could include the marketing plan, operating manuals,

standards, training, and quality monitoring.

Franchising (seen from franchisor’s viewpoint) Advantages Disadvantages
 Greater degree of control  The search for competent franchisees can
compared to licensing. be expensive and time consuming.
 Low-risk, low-cost entry mode  Lack of full control over franchisee’s
(the franchisees are the ones operations.
investing in the necessary  Costs of creating and marketing a unique
equipment and know-how). package recognized internationally.
 Using highly motivated business  Costs of protecting goodwill and brand
contacts. name.
 Ability to develop new and  Problems with local legislation, including
distant international markets. transfers of money, payments of franchise
 Generating economies of scale. fees and government-imposed restrictions.
 Precursor to possible future  Opening up internal business knowledge
direct investment in foreign may create potential future competitor.
market.  Risk to the company’s international profile
and reputation if some franchisees
underperform.
 Licensing Vs. Franchising

Licensing Franchising
• The relationship between licensees  Franchisees can expect to have a

and the licensing company is looser. much closer relationship with their

• The licensee does not retain rights to parent company.

use the company’s trademark.  Franchisees retain rights to the
• The licensee is expected to establish
parent company’s trademark and
its own identity in the marketplace.
logo.
• Once the licensee launches the
 Franchisees can expect to pay
operation, the relationship with the
royalties on a go-forward basis.
licensing company is frequently

limited to purchasing products.

4.4 Direct Investment Activities, Wholly Owned Subsidiaries,
Mergers /Acquisitions/ and Joint Ventures
4.4.1 Direct Investment
 Foreign direct investment (FDI)- The market entry strategy in which

companies invest in or acquire plants equipment, or other assets outside the

home country.

 Helps to create or expand a long-term interest in an enterprise with

some degree of control.

 Portfolio investment in turn focuses on the purchase of stocks and bonds

internationally. Portfolio investment is of primary concern to the

international financial community.

Advantages
The firm could:

 Secure cost economies (cheaper labor or raw materials, foreign government

incentives, freight savings and so on).

 Gain a better image in the host country because it creates jobs.

 Develops a deeper relationship with government, customers, local

suppliers, and distributors, enabling it to adapt its products better to the

local marketing environment.

Disadvantages

 A firm exposes its large investment to risks such as blocked or devalued

currencies, worsening markets, or expropriation.

 The firm will find it expensive to reduce or close down its operations.
 4.4.2 Wholly Owned Subsidiaries
 The firm owns 100 percent of the subsidiary.

 Establishing a wholly owned subsidiary in a foreign market can be

done in two ways.

╚ The firm can either setup a new operation in that country or

╚ it can acquire an established firm or use that firm to

promote its products in the country’s market.

Advantages:

 No risk of losing technical competence to a competitor.

 Tight control over operations in different countries (i.e., using

profits from one country to support competitive attacks in another).

 Realize location and experience curve economies (as firms pursuing

global and transnational strategies try to do).

Disadvantages:

 Firms doing this must bear the full costs and risks of setting up

overseas operations.
4.4.3 Mergers/Acquisitions
 Merger is a transaction in which two firms with their home operations in

different countries agree to an integration of the companies on a relatively

equal basis.

• Take decision to combine their individual operations on a relatively

equal basis to create combined competitive advantage.

 Acquisition is a transaction in which an expanding firm buys either a

controlling interest or all of an existing company in a foreign country.

 The aim of the mergers and acquisitions is generally to create

synergy i.e. to create value that is more than the combined value of

the individual firms.

Acquisitions take many forms. According to Root (1987) acquisition may be:

 Horizontal (the product lines/A group of closely related product

items/, and markets of the acquired and acquiring firms are similar),

 Vertical (the acquired firm becomes supplier or customer of the

acquiring firm),

 Concentric (the acquired firm has the same market but different

technology, or the same technology but different markets from that

of the acquiring firm) or

 Conglomerate (the acquired firm is in a different industry from that

of the acquiring firm).

 Advantages Disadvantages
 Full control  Usually an expensive option.
 Rapid entry to new markets.  High risk (taking over companies
 Gaining quick access to: that are regarded as part of a
 Distribution channels; country’s heritage can raise
Acquisition

 A qualified labor force; considerable national resentment

 Existing management if it seems that they are being
experience; taken over by foreign interests).
 Local knowledge; Possible threats:
 Contacts with local market and  Lack of integration with existing
government; operation.
 Established brand names or  Communication and coordination
reputation. problems between acquired firm
and acquirer.
4.4.4 Joint Ventures
 A joint venture is a partnership between a domestic firm and a
foreign firm.
 Both partners invest money and share ownership and control of
partnership.
 Require a greater commitment from firms than licensing or the
various other exporting methods.
 The most typical joint venture is a 50/50 arrangement in which there
are two parties, each of which holds a 50 percent ownership stake
and contributes a team of managers to share operating control.
 Some firms however, have sought joint ventures in which they have
a majority share and thus tighter control.
Advantages
 Benefit from local partner’s knowledge.

 Shared costs/risks with partner.

 Reduced political risk.

 The firm is able to have significant input and control over the operation and

management of the joint venture.

Disadvantages
 Risk giving control of technology to partner.

 May not realize experience curve or location economies.

 Shared ownership can lead to conflict.

 They have more risk and less flexibility.

 The firm may lose competitive advantage as a result of imitation.
4.4.5 Contract Manufacturing

 Contract manufacturing is a joint venture that enables the firm to

have foreign sourcing (production) without making a final

commitment.

 If management may lack resources or be unwilling to invest equity

to establish and complete manufacturing and selling operations;

╚ Manufacturing is outsourced to an external partner,

specialized in production and production technology.

 Keeps the way open for implementing a long-term foreign

development policy when the time is right.

 Most important to the company with limited resources.

 Enables the firm to develop and control:

 R&D

 Distribution

 Sales and servicing of its products in international markets.

 While handing over responsibility for production to a local firm.

 Advantages Disadvantages
 Permits low-risk market entry.  Transfer of production know-how
(seen from the contractor’s viewpoint)  No local investment (cash, time and is difficult.
executive talent) with no risk of  Contract manufacture is only
nationalization or expropriation. possible when a satisfactory and
Contract Manufacturing

 Retention of control over R&D, reliable manufacturer can be

marketing and sales or after-sales found – not always an easy task.
service.  Extensive technical training will
 Avoids currency risks and financing often have to be given to the local
problems. manufacturer’s staff.
 A locally made image, which may  As a result, at the end of the
assist in sales, especially to contract, the subcontractor could
government or official bodies. become a formidable competitor.
 Entry into markets otherwise  Control over manufacturing
protected by tariffs or other barriers. quality is difficult to achieve
 Possible cost advantage if local costs despite the ultimate sanction of
(primarily labor costs) are lower. refusal to accept substandard
 Avoids intra-corporate transfer- goods.
pricing problems that can arise with  Possible supply limitation if the
a subsidiary. production is taking place in
developing countries.
 • Individual assignment:- write proposal on entry mode
• Suppose you are the owner of large organization and you decide to enter new
foreign market. Which country you want to enter? Why? Which entry mode you
will select? Why? Note:- consider the reality of Ethiopian and the country Which
you are enter environment
• Preliminary parts should be numbered by roman numbers whereas the main body
always numbered using Arabic number in which the introductory part numbered
1.
• The length of the proposal without annex is not more than 10 pages.
• Typing instructions should be as follow.
i. Set margins 1inch at the top, bottom and right side, and 1.25 at the left sides.
ii. One and a half spacing should be used for typing the entire text.
iii. The general text must be justified and typed in the Font style ‘Times New
Roman’ and Font size 12. Heading shall be typed in the Font style ‘Times New
Roman’, Font size 14, bold and aligned center
iv. Subheading should be typed in the Font style ‘Times New Roman’, Font size
12, bold and aligned left
v. Sub-subheading should be typed in the Font style ‘Times New Roman’, Font
size 12, italic bold and aligned left after one inch from edge
vi. Spacing between paragraphs shall be 10pt.