Lecture Five Foreign Market Entry Modes Dr Joanna Pokorska

Reading Hollensen (2011): Chapters 9-12 Four articles on the reading list

Lecture Objectives To review the different types of foreign market entry modes Discuss advantages and disadvantages Compare the different levels of control and risk Discuss stages of market entry Discuss key considerations in making entry mode decisions

Market entry Arguably “the most significant international marketing decision [most companies] are likely to take is how they should enter new markets, as the commitments that they make will affect every aspect of their business for many years ahead” (Doole & Lowe, 1999)

Determining Market Entry Strategy The most significant international marketing decision Commitment of resources in every aspects over a long period of time It signifies the company’s attitude and ambition in international markets It determines the competitive position of the company Degree of control over the entire product/service offer, distribution, and profitability (repatriation)

Market Entry Modes Criteria for Selection The company objectives and expectations relating to the size and value of anticipated business The size and financial resources of the company Existing foreign market involvement The skills, abilities and attitudes of the company management towards international marketing The nature and power of the competition within the market

Market Entry Modes Criteria for Selection The nature of existing and anticipated tariff and non-tariff barriers The nature of the product itself, particularly any areas of competitive advantage, such as trademark or patent protection The timing of the move in relation to the market and competitive situation

Exporting Indirect Exporting through an intermediary located in the exporter’s home country Direct Exporting through an intermediary located in a foreign market

Indirect exporting Domestic Purchasing Foreign organisation purchases the product Not advisable for the long-term Export Management Company Handle all aspects of export operations May specialise by area, product or consumer type May carry competitor products

Indirect exporting cont’d Export Agents Trading Companies Piggybacking

Indirect exporting cont’d Advantages Limited commitment & investment Market diversification is possible Minimal risk Disadvantages Lack of control over marketing mix Lack of market contact Added costs because of distribution chain

Direct Exporting Distributors Agents Normally pays for the goods Some market risk is removed Suppliers can focus of fewer core activities Agents Local knowledge and experience Relative low cost Low control Early sales

Direct Exporting cont’d Advantages Access to local market experience Shorter distribution chain Greater control Disadvantages Lots to do Little control over market price Some investment in sales organisation

Licensing A contractual agreement whereby one company (the licensor) makes an asset available to another company (the licensee) in exchange for royalties, license fees, or some other form of compensation Patent Trade secret Brand name Product formulations

Licensing cont’d Disadvantages Advantages Leverage local knowledge of licensee Commercial and political risks absorbed by licensee Allows resources to be concentrated in more lucrative markets Adds to firm’s manufacturing capacity Enables firms to enter several markets quickly Disadvantages Licensee may become competitor Lack of control over licensee operations Uncertainty of licensee’s marketing capabilities and product quality Licensee may exploit company resources Returns may be lost

Franchising A situation under which a parent company (the franchiser) grants another independent entity (the franchisee) the right to do business in a specified manner The franchisee benefits from the reduced risk of implementing a proven concept Reasons for global franchising are market potential, financial gain, and saturated domestic markets Can be direct or indirect

Direct & Indirect Franchising

Franchising cont’d Advantages Greater degree of control Low risk, low cost entry mode Precursor to FDI Disadvantages Free riding Costs of protecting brand name Problems with local legislation Underperforming franchisees

Joint Venture Entry strategy for a single target country in which the partners share ownership of a newly created business entity Equity participation may vary Can be successful if partners share the same goals and if one partner accepts primary responsibility for operational matters

Joint Ventures cont’d Advantages Disadvantages Reduced risk Share skills and resources May be the only way to enter market given barriers to entry Disadvantages Incompatible objectives Potential for conflict among partners Must share rewards as well as risks Cultural differences

Strategic Alliances An alliance involving two or more global firms in which each partner brings a particular skill or resource to relationship Technology swap R & D exchanges Distribution relationships

Joint ventures and strategic alliances Parent firm A B Joint venture C Equity alliance: Parent firm A B Non-equity alliance: Contracts

Foreign Direct Investment Acquisition Greenfield investment

Acquisitions Advantages Rapid entry Immediate market share Gain quick access to: Distribution channels Labour Local knowledge & contacts Government might allow entry only via acquisitions Disadvantages Attractive firms may not be available for purchase High risk Lack of integration

Wholly Owned Subsidiary Operations fully owned by a foreign parent firm (may involve marketing, assembly, or full-scale integrated production operations) Profit, greater control, able to leverage experience More easily integrated into firm’s global network Requires substantial expertise, management time, and financial resources

Mode decision: Risk vs. Ownership & Control

Mode Decision: Production and Distribution Indirect Exports Licensing Licensing Other entity Joint Ventures Distribution by Own company Direct Exports FDI Home Market Target Market Production in:

Mode decisions: Considerations

Traditional Internationalisation Stages Indirect Exporting, Licensing, or Franchising STAGE 2 Direct Exporting STAGE 4 Local Assembly STAGE 5 Full-Scale Foreign Production STAGE 3 Exporting, with Foreign Sales Subsidiary Domestic Sales