1. Lecture Five Foreign Market Entry Modes
Dr Joanna Pokorska

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

3. 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

5. 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)

6. 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)

7. 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

8. 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

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

10. 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

11. Indirect exporting cont’d
Export Agents
Trading Companies
Piggybacking

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. Direct & Indirect Franchising

19. 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

21. 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

22. 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

23. 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

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

25. Foreign Direct Investment
Acquisition
Greenfield
investment

26. 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

27. 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

28. Mode decision: Risk vs. Ownership & Control

30. 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:

31. Mode decisions: Considerations

32. 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