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Market entry strategy

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    Market entry strategy Market entry strategy Document Transcript

    • Market Entry StrategyThe market entry strategy framework encompasses several services that are put together to helpour customers to enter a new market. These services can be delivered separately depending onyour needs and stage in the internationalisation process.With our proven market entry strategy framework, we assess whether you should enter a marketor not, why, and how.The strategic framework comprises 4 phases that focus on specific issues of the market entry:- Market assessment- Business case development- Implementation roadmap- Go liveAfter each phase, based on the deliverables produced, the client will decide whether or not theentry in the new market must be pursued.Each assignment begins with a “start up” aimed at developing a complete understanding of theclient organization, products and processes, as well as a finalising and initiating the project.Each element within the strategic framework will deliver strategic reports for the project sponsorand management board.
    • Market Entry Strategy FrameworkClick on the image to get more information on each phase of the entry strategy frameworkMarket assessmentThe market assessment is done using a mix of primary and secondary research with internal andexternal sources. It provides the elements for a first Go/No Go decision point and the basedocuments of the business case development phase.Some of the key questions we tend to answer with the market assessment are:In the regulatory assessment:- What are the regulations associated with the business?What are the licenses required and forwhich business model?- What are the limitations of those licenses (geography, renewal, etc…)?- What are the costs associated with those licenses?- What is the application process, requirements and timing?- What are the available structures to enter the market (JV, WOFE…)?In the customer assessment:- What customer segments exist, and what are their relative sizes?- What are the customers’ needs and purchase behaviors? Today and in the future?- What customer needs are not currently satisfied by the market?- Which segments should client target?- What new opportunities exist?- What are the key purchasing criteria?- What influences the purchase?
    • In the competitive assessment:- How large is the market? Size in 5 years – 10 years?- Are there noticeable trends?- What are the impediments to market growth? What are the issues in the market?- What are the potential barriers to entry?Who are the key current and potential competitors?- What is their overall strategy?- Which segments do they target?- What product categories do they offer?- What distribution channels do they use?- What are their core strengths and weaknesses?In the distribution/channel assessment:- Who are the potential channel partners? What is their overall strategy?- What is their channel coverage and quality?- Which segments do they target?- What product categories do they offer?- What is their regional presence?- What are their core strengths and weaknesses?- Are there other available distribution channels? Call centers?In the internal company assessment:Is the client well positioned to enter the market? Does it need a partner?What are the critical success factors to enter the market?What are the capabilities that client need to acquire? How?What organizational changes will be necessary to support BD?What are the marketing & sales capabilities?Business case developmentThis phase is the formalization of the information collected in phase I. This must be done inclose collaboration with the client, since assumptions need to be validated to produce coherentfigures in the financial analysis.The following sections of the analysis are used to assess:- The attractiveness of the market- The difficulties to enter in the market and the capabilities the client has to overcome them- The potential partners that could facilitate the entryThe business case then gives the financial figures related to the opportunity and allows to make afinal decision regarding the use of a partner or not (comparison of sales achievement with orwithout a partner).Market AttractivenessThe findings of phase I are matched against a set of criteria that determine the attractiveness ofthe market. These criteria depend on the situation of the client and are identified together with
    • him.Some of the attractiveness criteria are, for example:- Market size- Growth potential- Expected profitability- Meeting basic customer need- Unmet customer needsEase of EntryAs for the market attractiveness, the findings of phase I are matched against a set of criteria.The ease of entry step concentrates on the barriers that may impede a successful entry in themarket.Some of the ease of entry criteria are, for example:- Regulatory requirements- Regulatory support- Investments needed- Availability of qualified personnel- Cost comparison with alternatives- Present competition- Potential competition- Regional presence requiredPartner Selection & AnalysisFinding partners may be needed to develop a business in a foreign country due to internalcapabilities, financial constraint, time to market, business model, etc. As over 50% of alliancesfail to reach stated objectives, the selection of the right partner becomes a critical step towardmaximising value.Following a thorough understanding of your strategy (objectives), your operations (businessmodel, key processes, capabilities), and your culture (values, behaviours, organizationalpractices), we identify with you the selection criteria meeting your needs. Then we start ourresearch to compile a list of possible candidates that we match with the selection criteria. Ourassessment is done based on desk research, databases, and telephone interviews with experts,officials as well as with the candidates themselves. The short-listed candidates undergo a duediligence that covers usually the following topics: basic company information, experience ininternational business, management background, organization, corporate culture, reputation, andfinancial assessment. The result of this step is a short list of candidates, ready for discussion andnegotiations.Ability to executeUsing the criteria defined in the previous sections, we compare the capabilities to execute theentry strategy of the client Vs partner(s). The result is the identification of the areas ofimprovements for the company and where the client needs to train or get trained by a possiblepartner.Economic Analysis / Business Case
    • The economic analysis section aims at determining the economic value of potential entryscenarios. These scenarios are identified jointly with the client before being assessedeconomically. To ensure the quality of the business case, the client has to provide and validate apart of the assumptions linked to his operations.implementation roadmapA good strategy without an implementation roadmap can result in disasters.Within the implementation roadmap phase, we negotiate the cooperation with the potentialpartners and establish an agreement framework. This agreement will cover the structure of thecooperation as well as the roles and responsibilities of the parties.We also develop a strategic plan for the entry in the market and a detailed workplan (entry planblueprint) to implement the strategy. The purpose of these plans is to ensure that the strategy willproduce success in the long run.The blueprint answer key questions related to the entry strategy:- What is required to implement the potential strategies?- What barriers must be removed?What organizational changes may be required?- What are the roles and responsibilities of people?- What are the timing and resource requirements for implementing the strategies?- What are the major barriers and risks in implementing the strategies?- How can we overcome the barriers?- How can we mitigate the risks?- What are the alternatives?Go LiveOnce the client is entering the market, we can support him in:- Developing his organizational structure and manage the changes related to the implementationof a new organization;- Developing a Human Resource strategy, assessing the employees, recruiting the key elementsto develop the company;- Establishing the governance rules of the company;- Developing a system of key performance indicators to monitor, measure and rewardperformance;- Acting as business development managers;- Training the staff
    • Market entry strategies
    • Market entry strategiesThere are numerous market entry strategies that a business can adopt when setting up offshore.Each has differing levels of risk, legal obligation, advantages and disadvantages. Following is anoverview of factors that should be considered when assessing the options.Local officeUnder this simple form of foreign direct investment the exporter establishes a local presencethrough a representative or branch office, rents office space and hires staff (could be just oneperson). Advantages Disadvantages • Greater control of marketing and distribution • Direct contact with customers • Improved credibility in market place with customers • Access to local venture capital • Cost of establishing an office is higher than using an agent and/or distributor • Do not have a local partner with contacts and expertise as in a joint ventureStrategic alliancesIf your company is interested in going beyond the simple export of goods and services, licensing,joint ventures (JV) and offshore operations should be explored. While direct exporting may bea profitable method of market entry for some businesses, licensing manufacturing rights to yourproduct to a foreign company or setting up a foreign manufacturing JV may be viablealternatives. Strategic alliance partners are often identified through bankers, accountants,business consultants, industry associations and networks, and government contacts. Austrade can
    • ENTRY METHODSIntroductionIn today’s global economy, what is the best way for a company to go global, go beyondits shores and enter untested territories on foreign shores? What is the safest way? Whatis the most profitable way? What is the most practical way? These are some of thequestions every company has to answer when it makes globalization as its goal. These arealso the issues that every company has to tackle when it puts its strategy to enter a newmarket.In this article, we have short listed a few entry methods that are most often used.Along with these strategies are the brief descriptions, the advantages and thedisadvantages associated with them. Entry methods or strategies can be broadly classifiedinto two categories:1) Strategic alliances2) Standalone entriesIn many cases, no company would like to share businesses or profits that itvisualizes or expects in any markets. Often, companies are forced to form strategicalliances while entering new markets, or for that matter to continue servicing its currentmarkets. This is the result of just one cause – inadequacy, inadequacy related to differentresources required to successfully service the markets and derive profits from it. Some ofthe important inadequacies that force a company to consider or even welcome an allianceare: Capital / capability to take risk Knowledge/experience about technology Knowledge/experience about the market Knowledge/experience about the environmentThe nature of the strategic alliance usually depends on what complimentaryresources the foreign company is looking for in its local partner. Strategic alliances canbe broken down into the following types:1) Joint Ventures2) Contract Manufacturing3) Licensing4) Franchising5) ExportingStandalone entries are done by companies which perceive themselves to haveadequate capability in taking capital risk and are ready to gain the knowledge associatedwith the new markets over time. Companies that enter new markets on their own have torealize and accept the risk in not depending on others to gain experience about the newmarkets.Joint VentureThe term ‘Joint Venture’ applies to those strategic alliances where there is equityparticipation from both the foreign entrant and the local collaborator. The equity
    • participation can be of different ratios, ranging from a minority stake, equal stake to acontrolling stake or a more predominant majority stake. From the perspective of theforeign entrant, a joint venture has the following advantages: Decrease the capital risk involved. Leverage the local company’s facilities, in manufacturing, distribution andretailing. Leverage the local company’s managerial capability in the local environment. Leverage the local company’s contacts with the government to get greensignals.Many companies avoid having joint venture due to the complexity involved incoordinating policies, decisions and execution with a different company. There areinstances when companies which have the ability to take the risk involved in entering anew market still enter into joint venture. This is often a result of the policies laid out bygovernments in many emerging markets. For example, China has a policy whereinforeign companies have to enter joint collaboration with state owned companies to evenset up shop there. As in India, the government has policies which prevent foreigncompanies from having full ownership in certain industries. In such cases, foreigncompanies end up having to enter into joint venture to take advantage of the low cost ofmanufacturing and the large size of the markets. Still, the disadvantages or hurdles staywhich a foreign company has to deal with to make its venture successful. Some ofdisadvantages of joint venture are: Difference in culture. Difference in managerial styles. Differences in the motivation behind the participation. Communication problems. Selection of the right partner.Other than the above stated hurdles, there are also risks associated with enteringin joint venture. One of the risks is the complication at the time of exit, i.e. when aforeign entrant decides to leave the market and hence, the joint venture. A veryimportant aspect of an entry strategy is to have an exit strategy also. The nature of thisentry method often results in a very complicated exit strategy and this is not even underthe complete control of the foreign company. The second major risk is associated withthe safety of a company’s intellectual property (IP). It is definitely more difficult tocontrol the access to one’s technology when one is not the only entity in charge.Furthermore, the theft of IP by the local partner is also an issue to deal with, especially incountries rife with piracy, like China. This probably explains why the majority ofcompanies which enter markets where wholly owned subsidiaries are allowed, prefer thatroute over joint venture.Contract ManufacturingContract manufacturing has a limited role as an entry strategy and is more often used as acompliment to other entry strategies. It is used in conjunction with strategies like whollyowned subsidiaries or franchising. Contract Manufacturing is also often used when acompany enters a new market and has an activity that is required but is not a core nor isproprietary in nature, like the manufacturing of clothes, or simple goods like clothingirons and other consumer goods. In most of the industries where contract manufacturingis resorted to, the core activities of the company lie more in marketing and research and
    • development rather than in manufacturing. Below are the lists of advantages anddisadvantages in resorting to contract manufacturing as an entry method.Advantages: Less capital required. Low managerial risk. Focus on core activities. Less complicated exit problems. Less complicated division of responsibility.Disadvantages: Chance for a lack of control on certain product parameters. Differences in quality standards. Scalability of problems. Selection of vendors.A company that seeks to employ contract manufacturing as an entry method needsto carefully select its contract manufactures/vendors. A wrong decision regarding theselection of a vendor can result in a bull whip effect along its supply chain in its newmarket. Such an outcome could result in a very negative initial experience for thecompany’s customers as well as for the company itself.LicensingLicensing is a common method of international market entry for companies with adistinctive and legally protected asset, which is a key differentiating element in theirmarketing offer. It involves a contractual arrangement whereby a company licenses therights to certain technological know-how, design, patents, trademarks and intellectualproperty to a foreign company in return for royalties or other kinds of payment. Forexample, Disneys mode of entry in Japan had been licensing. Because little investmenton the part of the licensor is required, licensing has the potential to provide a very largeROI. However, because the licensee produces and markets the product, potential returnsfrom manufacturing and marketing activities may be lost.Here are several conditions where licensing is favorable over other entry methods: Import and investment barriers. Legal protection possible in target environment. Low sales potential in target country. Large cultural distance. Licensee lacks ability to become a competitor.Licensing offers businesses many advantages, such as rapid entry into foreignmarkets and virtually no capital requirements to establish manufacturing operationsabroad. Returns are usually realized more quickly than for manufacturing ventures. Theother major advantage of licensing is that, despite the low level of local involvementrequired of the international licensor, the business is essentially local and is in the shapeof the local business that holds the license. As a result, import barriers such as regulationor tariffs do not apply.On the other hand, the disadvantages of licensing are that control over use ofassets may be lost over manufacturing and marketing. The licensee usually has to obtainapproval from the international vendor for product design and specification. This isbecause the licensee is not a representative of the international vendor and, compared to adistributor or franchisee, is much more of an independent business that licenses only one
    • specific and closely defined aspect of the marketing offer. Perhaps, the most importantdisadvantage of licensing is to run the risk of creating future local competitors. This isparticularly true in technology businesses, in which a design or process is licensed to alocal business, thus revealing “secrets,” in the shape of intellectual property that wouldotherwise not be available to that local business. In the worst case scenario, the locallicensee can end up breaking away from the international licensor and quite deliberatelystealing or imitating the technology. Even in a best case scenario, the local licensee willcertainly benefit from accelerated learning related to the technology or product category.Participation in international markets via licensing is therefore best suited to firms with acontinuous stream of technological innovation because those corporations will be able tomove on to new products or services that retain a competitive advantage over “imitator”ex-licensees.Licensing to a foreign company requires a carefully crafted licensing agreement.A great care must be taken to protect trademarks and intellectual property. One way tohelp ensure that intellectual property is protected is to secure proper patent and trademarkregistration. In the interim before a patent is filed, a potential licensee will be asked tosign a confidentiality and non-disclosure agreement barring the licensee frommanufacturing the product itself, or having it manufactured through third parties. Also,such agreements should not be in violation of laws in the host country because rules onlicensing vary from country to country.FranchisingFranchising is one of the entry modes that has been widely used as a rapid method ofinternational expansion, most notably by fast food chains, consumer service businessessuch as hotel or car rental, and business services. A franchise is an ongoing businessrelationship where one party (the franchisor) grants to another (the franchisee) the rightto distribute goods or services using the franchisor’s brand and system in exchange for afee. Franchising enables rapid market expansion using the intellectual property of thefranchisor, and the capital and enthusiasm of a network of owner operators. Moresophisticated franchise arrangements specify a precise business format under which thefranchisee is expected to carry on business and ensuring a common customer experiencethroughout the network such as McDonald’s.Some of the common, but not essential, features of franchised businesses are asfollows: Group purchasing arrangements. An exclusive territory for each franchisee. Group advertising programs. Initial and ongoing training and support from the franchisor. Assistance from the franchisor with equipment specification, site selection andpremises fit-out and signage.Franchising is suitable for replication of a business model or format, such as afast-food retail format and menu. Since the business format and the operating models andguidelines are fixed, franchising is limited in its ability to adapt, a key consideration inemploying this entry mode when entering new country-markets. There are two argumentsto counter this. First, the major franchisers are increasingly demonstrating an ability toadapt their offering to suit local tastes. McDonald’s, for example, is far from being aglobal seller of American-style burgers, but it offers considerably different menus in
    • different countries and even different regions of countries. In such cases, the format andperhaps the brand is internationally consistent, but certain customer-facing elements suchas service personnel or individual menu choices can be tailored to local tastes. Secondly,it must be recognized that there are product-markets in which customer tastes are quitesimilar across countries. It is also important to note that in such businesses, the localservice personnel are a vital differentiating factor, and these will obviously still be localin orientation even if they operate within an internationally consistent business format.The main drawback of franchising is the difficulty of adapting the franchised assetor brand to local market tastes. A key indicator that franchising carries this constraint isthe fact that marketing budgets at local levels are usually restricted to short-termpromotions rather than market development. This is consistent with the concept thatfranchising is a rapid replication strategy. For example, Weight Watchers is a highlysuccessful dieting business that franchises its programs to operators of local clubs andgroups of people motivated to lose weight and maintain their new lighter shape. Itsexpansion into Mexico, which was the result of an opportunistic network initiative by amember of the U.S. executives’ network, encountered some cultural differences. In someparts of the country, the attitude still prevailed that being overweight was not bad becauseit indicated sufficient affluence to eat well. In addition, Mexican consumers were far lessnutritionally aware than their northern counterparts, who encountered extensivenutritional information on all food products by law. Clearly, market developmentrequired heavy local investment in market education to establish the dieting club concept.ExportingExporting is one of the methods that organizations can use to enter foreign markets. Inthis entry method, products produced in one country are marketed in another countrythrough marketing and distribution channels. Thus, it requires a significant investment inmarketing strategies. In reality, exporting is the most traditional and well-establishedform of operating in foreign markets. It can be further categorized into direct or indirectexport.Direct Export: the organization uses an agent, distributor, or overseas subsidiary,or acts via a Government agency. Usually, companies export through local agents ordistributors mainly because they have local knowledge that is important in conducting thebusiness; they speak the language, understand the local business, and know who thecustomers are and how to reach them.Indirect Export: products are exported through trading companies (common forcommodities like cotton and cocoa), export management companies, piggybacking andcounter-trade. The main advantage of indirect exporting is that the manufacturer/exporterdoes not need too much expertise and can count on trading companies and/or exportmanagement companies’ knowledge. In the counter-trade method there are two separatecontracts involved, one for the delivery and payment for the goods supplied and the otherfor the purchase and payment for the goods imported. The seller, in fact, accepts productsand services from the importing country in partial or total payment for his exports. Thismethod is suited for situations where competition is low and currency exchange isdifficult.Another option for exporters is to sell products direct to foreign end-users. Thisoption does not incur intermediary costs and exporters have higher control over price andprofits. However, it is more practical for markets where potential buyers are limited in
    • number or easily identified and reached. Mail order sales and web-based B2C and B2Bsales are the most common forms of selling direct to end-users.Additionally, there is a distinction from passive and aggressive exporters. The lastrelies heavily in marketing strategies to build awareness and sell its products to foreignmarkets. In contrast, passive exporters wait for foreign orders, basically not makingadditional efforts to generate sales/export.As an entry method, exporting has several advantages. Comparing to othermethods, exporting is fairly simple and with low costs/investments and risks.Consequently, it is usually the first entry method used by organizations in order to obtainknowledge of the foreign market. According to the exporting results, companies canfurther decide on entering the market using another method such as acquisitions, jointventures, licensing, etc. Other advantages of exporting are increased utilization of thedomestic plant, thus using idle capacity and reducing unit costs through economies ofscale. Exporting also helps in diversifying markets, which reduces the company’sexposure to domestic demand instability.On the other hand, the disadvantages of exporting include high transport costs,trade barriers, tariffs, and problems with local agents. In addition, exporters have lowercontrol of distribution and local agents, face the risk of exchange rate fluctuations, andare subject to custom duties and taxes in the importing counties. Although exporting costsare relatively low compared with the other entry methods, to enter and develop thesemarkets exporters usually incur costs to gain exposure, set up sales and distributionnetworks, and attract customers. Furthermore, products might need to be modified orredesigned, including packaging, in order to meet local requirements or customerpreferences. Similarly, linguistic, demographic and environmental differences demandspecial attention to ensure exporting success.Wholly Owned SubsidiariesMany organizations prefer to establish their presence in foreign markets with 100%ownership through wholly owned subsidiaries. Under this method, organizations obtaingreater control over operations and higher profits since there is no ownership splitagreement. However, such entry method requires large investments and faces higherrisks, especially in the political, legal and economical arenas. There are two approachesfor the wholly owned subsidiaries entry method; one is through acquisition and the otherthrough greenfield investments.Greenfield investment means using funds to build an entirely new facility. Eventhough such approach entails full control and no risk of cultural conflicts, its costs areextremely high, and returns on investment are obtained in the long-run due to the extentof time required to build the facility, start operations, and attain economies of scale andthe experience-curve.In contrast, acquisition allows organizations to get to the foreign market faster.Organizations taking the acquisition approach use its funds to buy existing facilities andoperations. This is done by acquiring the equity of the firm that previously owned thefacility.Acquisition as an entry method is preferable in the following situations: When speed of entry is important for the business’ success. When barriers to entry (i.e. high economies of scale of local competitors) canbe overcome by acquisition of a firm in the industry targeted.
    • When the entering firm lacks competencies important in the new businessarea.Since the organization buys an existing firm, it can take advantage of wellestablishedbrands and existing economies of scale to increase its competitiveness in thenew market. However, in order to be successful, the organization must properly identifypotential companies in the targeted market and conduct a thorough evaluation of the to-beacquired company. The evaluation process should prevent the organization ofoverestimating the economic benefits of the acquisition, as well as underestimating itscosts. After the acquisition, the success depends on how well the integration of bothorganizations is done. Synergy is essential in this case. Besides high investments andhigh risks, most acquisitions difficulties arise from the complexity of integrating differingcorporate cultures, which can generate many unforeseen problems.ReferencesAngulo, M., Ondarts, D., Puentes, E., and Wood S. 1995. Talk to Me: Expansion in theRussian Telecommunications Market. Fuqua School of Business: 124-129.Desai, M.A., Foley, C.F., and Hines Jr., J.R. Venture Out Alone. Harvard BusinessReview: 22.Ahrend, R. Foreign Direct Investment into Russia – Pain without Gain? A Survey ofForeign Direct Investors. The European Commission: 26-33.Westin, P. Foreign Direct Investments in Russia. The European Commission: 36-43.Kvint, V. 1994. Don’t Give Up on Russia. Harvard Business Review: 62-74.Goldman, M I, Rooy, J.V, Harkin, R.R., Nicandros, C.S., Topp, K.M., Yergin, D. andGustafson, T. 1994. The Russian Investment Dilemma. Harvard Business Review: 3-10.Buckley, P.J., and Casson, M.C. 1998. Analyzing Foreign Market Entry Strategies:Extending the Internationalization Approach. Journal of International Business Studies:539-561.Yip, G.S. 1982. Gateways to Entry. Harvard Business Review: 85-91.http://www.austrade.gov.au/australia/layout/0,,0_S2-1_4-2_-3_-4_-5_-6_-7_,00.html