Market entry strategies in foreign market


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Market entry strategies in foreign market

  1. 1. Market Entry Strategies There are a variety of ways in which a company can enter a foreign market. No one market entry strategy works for all international markets. Direct exporting may be the most appropriate strategy in one market while in another you may need to set up a joint venture and in another you may well license your manufacturing. There will be a number of factors that will influence your choice of strategy, including, but not limited to, tariff rates, the degree of adaptation of your product required, marketing and transportation costs. While these factors may well increase your costs it is expected the increase in sales will offset these costs. The following strategies are the main entry options open to you. Direct Exporting Direct exporting is selling directly into the market you have chosen using in the first instance you own resources. Many companies, once they have established a sales program turn to agents and/or distributors to represent them further in that market. Agents and distributors work closely with you in representing your interests. They become the face of your company and thus it is important that your choice of agents and distributors is handled in much the same way you would hire a key staff person. Licensing Licensing is a relatively sophisticated arrangement where a firm transfers the rights to the use of a product or service to another firm. It is a particularly useful strategy if the purchaser of the license has a relatively large market share in the market you want to enter. Licenses can be for marketing or production. licensing). Franchising Franchising is a typical North American process for rapid market expansion but it is gaining traction in other parts of the world. Franchising works well for firms that have a repeatable business model (eg. food outlets) that can be easily transferred into other markets. Two caveats are required when considering using the franchise model. The first is that your business model should either be very unique or have strong brand recognition that can be utilized internationally and secondly you may be creating your future competition in your franchisee. Partnering Partnering is almost a necessity when entering foreign markets and in some parts of the world (e.g. Asia) it may be required. Partnering can take a variety of forms from a simple comarketing arrangement to a sophisticated strategic alliance for manufacturing. Partnering is a particularly useful strategy in those markets where the culture, both business and social, is substantively different than your own as local partners bring local market knowledge, contacts and if chosen wisely customers.
  2. 2. Joint Ventures There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships.Such alliances often are favourable when: The partners' strategic goals converge while their competitive goals diverge The partners' size, market power, and resources are small compared to the Industry leaders Partners are able to learn from one another while limiting access to their own proprietary skills The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions. Potential problems include. Conflict over asymmetric new investments Mistrust over proprietary knowledge Performance ambiguity - how to split the pie Lack of parent firm support Cultural clashes If, how, and when to terminate the relationship Joint ventures have conflicting pressures to cooperate and compete: Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position. The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources. The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control. Joint ventures are a particular form of partnership that involves the creation of a third independently managed company. It is the 1+1=3 process. Two companies agree to work together in a particular market, either geographic or product, and create a third company to undertake this. Risks and profits are normally shared equally. The best example of a joint venture is Sony/Ericsson Cell Phone. Advantages International joint ventures allow for much faster and less costly access to foreign markets than can be achieved by purchasing an existing company in the jurisdiction or starting a new venture. IJVs provide quick access to channels of distribution, and they provide access for the nonresident partner to knowledge and know-how of the local marketplace, which substantially enhances the probability of success for the venture. The resident partner also often has
  3. 3. existing relationships with key suppliers and customers, and proficiency in the local language and customs. These benefits can be especially critical to a small or medium-sized business that does not have the capital, resources or expertise necessary to pursue the opportunity unless it is able to share the risks and the costs through an alliance such as an international joint venture. IJVs allow the partners to move quickly, cost effectively and with credibility (provided by the reputation of the resident partner) in the local marketplace. The parties to an IJV can also take advantage of complementary lines of business and synergies that may exist between the two companies. Disadvantages An international joint venture can result in a frustrating experience and ultimately a failure if it lacks adequate planning and strategy. Factors such as marketplace developments, technology issues, regulatory uncertainties and economic downturns can be difficult to anticipate and can have a debilitating impact on IJVs. By their nature (and like all partnerships), profits derived from an IJV are diluted because they are shared. Management issues can arise, in spite of having adequate mechanisms in place to resolve disputes, because of different management philosophies of the partners. The partners also may discover that they do not share expectations and are not flexible enough to change and accommodate the evolving needs of the business. Joint ventures are often difficult to capitalize as an entity, particularly in respect to debt, because they are finite in their duration and therefore lack permanence. Unless an IJV is adequately capitalized, its debt financing, if available at all, may have to be guaranteed, in whole or in part, by the joint venture partners, which can increase their level of risk in the venture. Another potential disadvantage of an IJV is the possibility of the creation of a competitor or a potential competitor in the form of one’s own joint venture partner. This can, as later discussed, be addressed by non-competition, non-solicitation and confidentiality provisions in the definitive joint venture agreement. Buying a Company In some markets buying an existing local company may be the most appropriate entry strategy. This may be because the company has substantial market share, are a direct competitor to you or due to government regulations this is the only option for your firm to enter the market. It is certainly the most costly and determining the true value of a firm in a foreign market will require substantial due diligence. On the plus side this entry strategy will immediately provide you the status of being a local company and you will receive the benefits of local market knowledge, an established customer base and be treated by the local government as a local firm.
  4. 4. Piggybacking Piggybacking is a particularly unique way of entering the international arena. If you have a particularly interesting and unique product or service that you sell to large domestic firms that are currently involved in foreign markets you may want to approach them to see if your product or service can be included in their inventory for international markets. This reduces your risk and costs because you are essentially selling domestically and the larger firm is marketing your product or service for you internationally. Turnkey Projects Turnkey projects are particular to companies that provide services such as environmental consulting, architecture, construction and engineering. A turnkey project is where the facility is built from the ground up and turned over to the client ready to go – turn the key and the plant is operational. This is a very good way to enter foreign markets as the client is normally a government and often the project is being financed by an international financial agency such as the World Bank so the risk of not being paid is eliminated. Turnkey contracts apply to a form of international operation, often involving large-scale complex projects, which may provide opportunities for smaller firms of the host country to serve as subcontractors and suppliers. In a turnkey contract, one client company contracts another company to build and deliver a ready-to-operate industrial plant or infrastructure facility, such as a power plant, a highway or a port, where the client can be a government agency. There are various reasons why turnkey contracts represent the preferred option for the client, as compared to other project implementation modalities, for example the client itself taking responsibility for the coordination and management of the project activities. Industrial or infrastructure projects are complex undertakings, the implementation of which involves the mobilization and articulation of many different disciplines and a variety of suppliers. These may include various engineering branches (mechanical, electrical, civil), the manufacturing and supply of equipment, management of the project implementation activities and commissioning and start-up operations. With a turnkey contract, the risks associated to possible delays, defective deliveries from different suppliers, cost overruns and performance failures are born by the turnkey contractor. The usual turnkey contractors are construction companies, industrial-equipment manufacturers and engineering and consulting firms who assemble and coordinate the other players and take responsibility for the overall project. The turnkey operations conducted in developing countries provide an opportunity for local firms to act as subcontractors in areas where local competencies may be available, for example selected engineering tasks, the manufacturing of non-proprietary Reasons for turnkey contracts
  5. 5. • The client lacks project management capabilities to implement complex projects. • The contractor takes responsibility for the coordination of the overall project. • The client avoids the risk of delays, cost overruns and performance failures. equipments and metal structures, civil works, etc. Furthermore, the linkage of local firms with international turnkey contractors will contribute to leveraging their capabilities and pave the way for their own internationalization. Some turnkey operations are also associated with or lead to management contracts. This could be the case when the client has the plant or the infrastructure facility built and commissioned under a turnkey contract but then needs to enter a management contract to acquire the skills for the operation and maintenance, at least until local capabilities can be built up and made available. Turnkey project service has below advantages: Easily handing of all your purchased products Quick delivery of all your goods together, including mould, machine and other product Clear responsibility of whole project and avoid the argue and disputes from different suppliers Fast reply and response of your doubt of whole project Easy QC control and product inspection Less cost for paying service and prompt after-sale service …… Greenfield Investments Greenfield investments require the greatest involvement in international business. A greenfield investment is where you buy the land, build the facility and operate the business on an ongoing basis in a foreign market. It is certainly the most costly and holds the highest risk but some markets may require you to undertake the cost and risk due to government regulations, transportation costs, and the ability to access technology or skilled labour.