Chapter 12

Market Entry

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Three Basic Decisions

• Which markets to enter?• When to enter these markets?• What scale and what nature should this entry have?

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Enter Which Foreign Market(s)?

• There are more than 200 countries

- 191 are member-nations of the UN… (8/04)

• Each country’s attractiveness as a market to a

particular firm depends on:

- The firm’s objectives

- A balance of benefits, costs, and risks

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Timing of entry: First Mover Advantages

• Preempt rivals; establish strong brand name; capture demand• Build sales volume; ride down experience curve

ahead of competitors; cost advantage• Create switching costs; tie customers to 1st mover’s

products• Establish social ties ahead of following foreign

competitors

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Timing of entry First-mover disadvantages; Pioneering

costs

• Time spent to learn dos-don’ts may benefit competitors who can learn from 1st mover• 1st mover who starts a new industry builds the

infrastructure• 1st mover “trains” customers for followers• Breaks through host country’s adjustment to

“foreignness” issues- Regulations may change due to 1st mover’s entry- Followers benefit from 1st mover’s efforts/costs

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Scale of entry

• Level of resources- How much needed to commit for success?- What level can firm afford to commit?- 1st mover advantages and large scale linked- Small scale entry allows learning at low risk- Entry in small or large potential market may

require the same level of initial resources• A strategic commitment is difficult to reverse- Has a long-term impact- Means that the resources cannot be used

elsewhere

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External or “arms-length” Modes of Entry

Firm does business overseas without own assets and human resources in target market

•Export

- Sell “domestically” produced products abroad through local independent agents or directly to customers

•Turnkey project: a firm sets up production plant facilities then local firm takes over

- “Exporting firm” builds a facility overseas, starts it up, turns it over to host country owner, then departs

- Examples: Oil firms, construction firms, manufacturers

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External or “arms-length” Modes -Licensing

• Licensor grants rights to licensee for

- Intangible property use: patents, inventions, formulas,

processes, designs, copyrights, trademarks

- Specified period of time

- Specified compensation

• Licensee typically gives licensor

- Quality assurance rights

- Strategic brand control if licensee sells to consumers

using the licensor’s brand name

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External or “arms-length” Modes - Franchising, Alliances

• Franchising- Franchisor, grants franchisee use of intangibles

under the condition that franchisee follow strict rules of operating the business-Mode of operation is part of the brand image- Similarities to Licensing

• International strategic alliances- Cooperative agreements between competitors

from different countries (Chapter 12)

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“Internal” Modes of Entry

• These involve Foreign Direct Investment- Wholly owned subsidiaries• Firms owned 100% by a company in a foreign

country- International joint ventures• Firms that are owned jointly by two or more

otherwise independent firms; most IJVs are between two firms• One (or more) parent firms are non-resident in the

host market• Foreign participation varies from majority owned,

to 50% owned, to minority owned

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Entry Mode Advantage DisadvantageWhollyownedsubsidiaries

Enables global strategiccoordination

Protects technology Realizes (potentially) location

and experience economies

High costs and risks Requires overseas

management skills May be slower to implement

InternationalJointVentures

Gives access to local partner'sknowledge

Allows sharing of developmentcosts and risks

May be more politicallyacceptable than 100% foreignownership

Allows foreign parent dodeploy resources across morenational markets at once

Loss of control overtechnology and managerialknow-how

May impede globalcoordination

May make realization oflocation and experienceeconomies more difficult

Sharing of profit "pie"

InternationalStrategicAlliances

Similar to international jointventures

May be more difficult tomanage than internationaljoint ventures

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Entry Mode Advantage DisadvantageFranchising Low financial risk

Relatively lowdevelopment costs

Lack of direct control over quality Successful international franchising

requires considerable start-up andongoing presence overseas (cost)

Is likely to impede, make globalcoordination costlier than ownership

Growth may be slower dependingon franchisee's intentions

Sharing of profit "pie" Possible loss of know-how to

potential competitorLicensing Similar to franchising

Fewer "maintenance"costs than franchising

Similar to franchising

Exporting Ability to realizeexperience curveeconomies

Transport costs Trade barriers Motivation of local agents a

challenge