Establishing Market Entry Mode: Chapter 18

Establishing Market Entry Mode: Chapter 18
Establishing Market Entry Mode: Chapter 18

Once a company has decided to market in a foreign country, it must determine the best mode of entry. Its choices are exporting joint venturing and direct investment. As we can see, each succeeding strategy involves more commitment and risk, but also more control and potential profits. Importing The simplest way to enter a foreign market is through exporting. The company may passively export its surpluses from time to time, or it may make an active commitment to expand exports to a particular market. In either case, the company produces all its goods in its home country. It may or may not modify them for the export market. Exporting involves the least change in the company's product lines, organization, investments, or mission.

Indirect Exporting

Companies typically start with indirect exporting, working through independent home-based international marketing intermediaries. Indirect exporting involves

less investment because the firm does not require an overseas sales force or a set of contacts. It also involves less risk. These home-based intermediaries - export merchants or agents, co-operative organizations, government export agencies, and export-management companies - bring know-how and services to the relationship, so the seller normally makes fewer mistakes.

Direct Exporting

Sellers may eventually move into direct exporting, whereby they handle their own exports. The investment and risk are somewhat greater in this strategy, but so is the potential return. A company can conduct direct exporting in several ways. It can set up a domestic export department that carries out export activities. Or it can set up an overseas sales branch that handles sales, distribution, and perhaps a promotion. The sales branch gives the seller more presence and program control in the foreign market and often serves as a display center and customer service center. Or the company can send home-based salespeople abroad at certain times in order to find business. Finally, the company can do its exporting either through foreign-based distributors that buy and own the goods or through foreign-based agents that sell the goods on behalf of the company in exchange for an agreed fee or commission.



Joint Venturing

A second method of entering a foreign market is joint venturing — joining with foreign companies to produce or market the products or services. Joint venturing differs from exporting in that the company joins with a partner to sell or market abroad. It differs from direct investment in that an association is formed with someone in a foreign country. There are four types of joint ventures: licensing, contract manufacturing, management contracting, and joint ownership.


Licensing is a simple way for a manufacturer to enter international marketing. The company enters into an agreement with a licensee in the foreign market. For a fee or royalty, the licensee buys the right to use the company's manufacturing process, trademark, patent, trade secret, or another item of value. The company thus gains entry into the market at little risk; the licensee gains product-ion expertise or a well-known product or brand name without having to start from scratch.

Coca-Cola markets internationally by licensing bottlers around the world and supplying them with the syrup needed to produce the product. Tokyo Disneyland is owned and operated by Oriental Land Company under license from the Walt Disney Company. Licensing has potential disadvantages, however. The firm has less control over the licensee than it would over its own production facilities. Furthermore, if the licensee is very successful, the firm has given up these profits, and if and when the contract ends, it may find it has created a competitor.

Contract Manufacturing

Another option is contract manufacturing. The company contracts with manufacturers in the foreign market to produce its product or provide its services. Many western firms have used this mode for entering Taiwanese and South Korean markets. The drawbacks of contract manufacturing are the decreased control over the manufacturing process and the loss of potential profits on manufacturing. The benefits are the chance to start faster, with less risk, and the later opportunity either to form a partnership with or to buy out the local manufacturer.


Management Contracting

Under management contracting, the domestic firm supplies management know-how to a foreign company that supplies the capital. The domestic firm exports management services rather than products. Hilton uses this arrangement in managing hotels around the world. Management contracting is a low-risk method of getting into a foreign market, and it yields income from the beginning. The arrangement is even more attractive if the contracting firm has the option to buy a share in the managed company later on. The arrangement is not sensible, however, if the company can put its scarce management talent to better uses or if it can make greater profits by undertaking the whole venture. Management contracting also prevents the company from setting up its own operations for a period of time. contract manufacturing A joint venture in which a company contracts with manufacturers in a foreign market to produce the product. management contracting A joint venture in which the domestic firm supplies the management know-how to a foreign company that supplies the capital; the domestic firm exports management services rather than products.

Joint Ownership

Joint-ownership ventures consist of one company joining forces with foreign investors to create a local business in which they share joint ownership and control. A company may buy an interest in a local firm, or the two parties may form a new business venture. Joint ownership may be needed for economic or political reasons. A foreign government may require joint ownership as a condition for entry. Or the firm may lack the financial, physical, or managerial resources to undertake the venture alone. British Telecom's joint venture with MCI, America's number two long-distance carrier, is a case in point. Similarly, France Tel6com and Deutsche Bundespost Telekom joined forces with Sprint, the third-largest US long-distance telephone company, which paved the way for the two European telephone operators into the deregulated US market, as well as expanding the collaborators' opportunity to run a global telecommunications network. Joint ownership has certain drawbacks. The partners may disagree over investment, marketing, or other policies. To enjoy partnership benefits, collaborators must clarify their expectations and objectives and work hard to secure a win-win outcome for all parties concerned.

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Direct Investment

The biggest involvement in a foreign market comes through direct investment - the development of foreign-based assembly or manufacturing facilities. If a company has gained experience in exporting, and if the foreign market is large enough, foreign production facilities offer many advantages: 1. The firm may have lower costs in the form of cheaper labor or raw materials, foreign government investment incentives, and freight savings. 2. The firm may improve its image in the host country because it creates jobs. 3. Generally, a firm develops a deeper relationship with the government, customers, local suppliers. and distributors, allowing it to adapt its products better to the local market. 4. Finally, the firm keeps full control over the investment and therefore can develop manufacturing and marketing policies that serve its long-term international objectives. The main disadvantage of direct investment is that the firm faces many risks, such as restricted or devalued currencies, declining markets, or government takeovers. In some cases, a firm has no choice but to accept these risks if it wants to operate in the host country. There are therefore direct and indirect ways of entering a foreign market. The important point is to note that entry mode decisions are dependent on market conditions and die firm's product characteristics, objectives and capabilities. The British construction machinery maker JCB initially faced severe problems in the French market. It recognized that these stemmed from using manufacturers' agents (that Is, independent intermediaries) which sold the product but did not provide the service support needed for competitive success in this market. Fortunately, it responded in time. It set up a company-owned, full-service distribution network and was rewarded with a large increase in market share and healthy profits. To summarize, there are three alternative routes for entering foreign markets. It is useful to note that these are not mutually exclusive options. Neither should a linear progression - from engaging in exporting, through setting up joint ventures to direct investment - be assumed. Firms seeking to market goods and services in a foreign market should evaluate the alternative modes of entry and decide upon the most cost-effective path that would ensure long-term performance in that market.



A locating Necessary Resources

To build successfully a strong market position in a foreign country, the firm must be prepared to allocate necessary resources to the planned expansion. Building a strong brand image and channel networks is a difficult and highly expensive undertaking for any company. The investment needed to achieve international brand recognition, even in Europe alone, is enormous. When the Japanese firm Canon launched its first photocopier in the United States, it spent $15 million on TV advertising, a third of its K & D budget for the year. It has been calculated that creating 20 percent brand awareness across Japan, the United States, and West Germany cost $1 billion. The ratio between investment in product development, manufacturing or service delivery, and worldwide marketing is often 1:10:100. Too many companies get this ratio reversed, and so often underestimate the costs of doing business abroad. This, together with their expectation of early high returns on investment, which are often unlikely, explains why firms all too readily withdraw from foreign markets before establishing a firm market presence.15 Exploiting international marketing opportunities also requires a strong commitment from the company. It took European dairy products producers a good 20 years to build up a market for their products in Japan, A lack of commitment to a foreign market is a significant reason for poor exporting performance."' In emerging markets, such as China and Russia, many international firms have learned that it is a long haul as they battle against the myriad problems in their markets. Rec.-ill, too, the preview ease highlighting McDonald's fight to build a presence in the South African market. The costs of prising open new foreign markets are generally high. Successful companies expect not only to invest huge sums of money in marketing and distribution but also to set realistic timescales for achieving market objectives. Britain's Inchcape, one of Coca-Cola's bottlers, invested over £77 million in opening three plants in Russia in the late 1990s. It does not expect to be making money yet. The costs are higher and the timing of getting things done is longer than anticipated. Take construction - local builders are used to building walls a meter thick but lack the speed of western firms. Then mere is distribution. In a Russian winter, Coca-Cola will freeze on the back of the lorry. It means having to use heated trucks and railway wagons, and the state of the roads means that a lorry can take a week to complete a 1,000-kilometer journey. Then there is the bureaucracy, which dampens the pace when even minor work has to be secured from a multitude of local, regional, and national departments. The demonstrable commitment to the foreign market cannot be overstated. It must come from the senior levels of management and be communicated throughout the company. Target customers in foreign countries must also be convinced that this commitment is lasting. Buyers of capital goods or expensive durable items feel more secure and happier adopting a brand that is here to stay and enjoys strong service and after-sales support.

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