International market entry strategies PDF

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LECTURE 6: week 24

International market entry strategies (QUESTION 3) “The development of a market entry strategy depends on market factors and available production facilities, personnel and financial resources” (Muhlbacher, Leihs & Dahringer, 2006). There is no one universal market entry strategy that works in all cases. It is for the marketer to identify the relevant options and then apply their own selection criteria to identify the most effective option for their company. For the majority of companies, the most significant international marketing decision they are likely to take is how they should enter new markets. But first, we will look at the link to market entry strategies to the strategic marketing process.

1. Strategic marketing process

Global firms are confronting a complex international market by adopting and adapting a variety of market entry arrangements. In many ways the selection of the market entry is as important as the selection of the market opportunity and the marketplace. The selection of partners will be influenced by levels of complementary activity, financial strength, marketing competences and capacity in manufacturing and logistics. The management of the alliance also requires time and effort, as the partners will be pursuing different strategic goals, operating in different cultures and applying different views on profitability and distribution of profits. Market entry methods may also be different for different markets within the same firm. As an alternative to organic growth, market entry strategies based on direct investment and alliances can accelerate market share and in some overseas markets may be the only option for market entry. The alliances are complex structures, and organisations in their own right, and demand attention and a balance of competitiveness and cooperation from the partners.

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2. The alternative market entry methods Criteria for Selecting Appropriate Market Entry Method – – – – – – – –

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 with the market 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

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3. Indirect exporting Domestic Purchasing – – – –

Foreign organization purchases the product for export to another country Gives access to and limited knowledge of the international market Little control over choice of markets entered For longer term, need a more proactive approach

Export Management Companies / Export Houses – – –

Specialist companies act as the export department for a range of companies Help SMEs to initiate/develop/maintain international sales Deal with documentation, government regulation

Piggybacking – – –

An established international distribution network of one manufacturer used to carry products of a second Particularly good for firms from developing countries Often poorly considered terms and conditions

Trading Companies – –

Their extensive operations and controls enable operation in more difficult trading areas Manage countertrade activities

4. Direct exporting

LECTURE 6: week 24 Factors for success in exporting – – – – – –

Commitment of the firm’s management Exporting approach emphasizing the skills base Good marketing and information communication system Production capacity & capability, product superiority, competitive pricing Effective market research Effective national export policy

Agents – – – –

Financial strength of the agents Their contacts with potential customers The nature and extent of their responsibilities to other organizations Their premises, equipment and resources (including sales representatives)

Achieving a satisfactory manufacturer–agent relationship – – – – –

Allocate time and resources to find a suitable agent Ensure that both understand what each expects of the other Ensure that the agent is motivated to improve performance Provide adequate support on a continuing basis Ensure that there is sufficient advice and information transfer in both directions

Reasons for setting up overseas manufacture and service operations Product: avoiding problems, e.g. perishability Services: Dependant for success on local intellectual property, knowledge & sensitivity Costs of transporting and warehousing Tariff barriers and quotas Government regulations, e.g. local investment Market: Local manufacture viewed favourably by market? Government contacts Market information feedback International culture in firm Local manufacture: faster response and just-in-time delivery Lower labour cost

5. Foreign manufacturing strategies without direct investment Licensing – – – –

Develop a clear policy and plan Allocate licensing responsibility to a senior manager Select licensees carefully Draft the agreement carefully to include duration, royalties, trade secrets, quality control and performance measures

LECTURE 6: week 24 – – – – –

Supply the critical ingredients Obtain equity in the licensee Limit the product and territorial coverage Retain patents, trademarks, copyrights Be an important part of the licensee’s business

6. Foreign manufacturing strategies with direct investment Reasons for investment in local operations – – – – – – – – –

To gain new business: local production demonstrates strong commitment To defend existing business To move with an established customer To save costs: e.g. labour, raw materials and transport To avoid government restrictions Absolute control High return on investment Quicker decision-making process Process Better management of the value chain

Disadvantages  High Risk  High cost  Unfavourable legal environment in some emerging and developing markets Direct Investment/Manufacturing  Own subsidiary: Greenfield Brownfield Acquisition Overseas production/manufacturing An organisation may be prompted to consider overseas production for the following reasons: • Product benefits e.g. longer shelf life and promotion of the use of local ingredients. • Services. Market entry may be dependent on local market intelligence, intermediaries and trade tariff management. • Transport and storage. Products with a high transportation costs e.g. automobiles, white goods etc. may be manufactured or assembled locally for a lower cost. For example Toyota (www.toyota.com) and Nissan (www.nissanglobal.com) both built plants directly in the UK. • Tariffs and quotas. Limits on imports may make local manufacture the only practical option for volume sales.

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Government regulations. In certain countries access to their markets is dependent on local investment e.g. Eastern Europe. Local market attitudes. Customers may look more favourable on products and services created in their own country. In some Middle Eastern countries there may be a bias against American imports and implied lifestyles and values. Government contracts. Access to profitable government contracts may be facilitated by having a local presence. Information. External surveys of the market may be unreliable. A strong local presence improves the volume and quality of local feedback. International culture. Local presence demonstrates an international outlook and commitment. Delivery. On the spot facilities can support a more efficient supply chain and create opportunities for just-in-time stock management services. Labour costs. Local manufacture and distribution may access lower labour costs. Provided there are local training and quality processes in place the cost advantage can be significant. For example James Dyson, the UK electrical appliance manufacturer decided to move his manufacturing base to South East Asia to benefit from high skilled labour at low cost.

Foreign manufacturing strategies As an international marketer penetrates a local market there can be pressures and attractions moving them to expand their presence and commitment to the local market. These include: *To gain new business by demonstrating commitment and long term presence. This can entice companies to change suppliers to the new entrant. *To defend existing business, as exported goods reach tariff ceilings and future sales become more vulnerable to locally produced competitive products. *To move with an established customer. Component suppliers and service providers may follow their key clients into foreign markets to retain their existing business. *To save costs through accessing lower labour, raw materials and distribution costs. *To avoid government regulations that may restrict or prevent the import of certain foreign goods. Most multi-national companies have a presence in their major overseas markets for all or some of the above reasons. The drivers and the methods selected will be based on a country by country basis to reflect the significant variances in individual overseas markets. The models that can be used to make the direct investment include: Assembly. In this model the foreign owned operation may only be assembling components made by the manufacturer in the domestic market. Tariffs on components are normally lower than the finished product. Final assembly manufacturing processes can be engineered and supported by technology to enable a low to medium skill workforce to assemble to required quality standards. This can lead to debates around the long term value to the host country of gaining low skill jobs, but the high level operations being retained in the domestic market. Wholly owned subsidiary

LECTURE 6: week 24 This is the option requiring the highest level of financial commitment. As the subsidiary is wholly owned it becomes a full “hands-on” management responsibility with implications for management time and resources. It can generate business in stable markets with low risk of economic or political change. For example Intel has set up a wholly owned subsidiary called “Basis Science” to market wrist-worn health tracking devices. (www.bit-tech.net). Exit strategies would be required as moving out of the market can be costly and damaging to reputation. Company acquisitions and mergers There can be opportunities to invest in established businesses by way of takeover or merger. The advantage is that the risk to potential investors is reduced, as the local companies have established markets, visibility of competitors, established supply chains and reliable financial histories. An example is the case of “Absolut” vodka in Sweden. The company was privatised in 1917 in an attempt to control alcohol abuse. Under government control it performed well in Sweden and in international markets. When a change of government led to the releasing of state owned assets “Absolut” was acquired by the French drinks company, Pernod Ricard who have expanded the brand internationally (adapted from Doole & Lowe, 2012). Apart from governments releasing state assets, private companies can withdraw from certain markets or rationalise their international portfolio, making establishing business available for acquisition. After the Gulf of Mexico oil spill, BP sold off assets in many countries to meet the clean-up costs. Company acquisitions may appear to offer a safe route to an established market but there may be ancillary issues around the reputation of the brand and the history of the previous management. The new owner may also be taking on a demotivated workforce or resentment from the local population about a “foreign” investor taking over their popular brand.

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7. Cooperative strategies Strategic alliances – – – – – – –

Insufficient resources Pace of innovation and market diffusion High research and development costs Concentration of firms in mature industries Government cooperation Self-protection Market access...