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Market Entry Strategies
Citation preview
1
Market Entry Strategies - Deciding How to Enter the Markets
MBA Outreach CENTRUM - Intake 7
Barbara Knup
3 November 2014
Learning objectives (Chapter 9)
– Identify and classify different market entry modes
– Explore different approaches to the choice of entry mode
– Identify the factors to consider when choosing a market entry strategy
Entry mode is an institutional arrangement necessary for the entry of a company’s products into a new foreign market.
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Types of entry modes
Export – 100% externalizing,
low risk, high flexibility, low control
Intermediate – shared control and risk,
split ownership
Hierarchical – 100% internalizing,
high risk, low flexibility, high control
Strategy rule is the rule for choosing a mode of entry based upon selecting the mode that maximizes the profit contribution over the strategic planning period subject to (a) the availability of company resources, (b) risk and (c) non-profit objectives.
Factors affecting foreign market entry mode decision
Internal factors
Desired mode
characteristics
Transaction-
specific factors
External factors
Entry mode
decision
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Internal factors affecting market entry mode decision
Firm
size
International
experience
Product
complexity
Product
differentiation
advantage
Entry mode
decision
Product
Desired mode characteristics affecting market entry mode decision
Flexibility
Control
Risk
averse
Entry mode
decision
Transaction-specific factors affecting market entry mode decision
Tacit nature of
know-how
Opportunistic
behaviorTransaction
costs
Entry mode
decision
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External factors affecting market entry mode decision
Socio-cultural
distance
Country risk/
demand
uncertainty
Market size/
growth
Direct/
indirect
trade barriers
Entry mode
decision
Intensity of
competition
Number of
export
intermediaries
All factors affecting decision
Entry modes in the Chinese market: A case study
– What factors do companies consider when determining the best form of operation to use when entering the Chinese market?
– What have been the challenges and opportunities for foreign companies in establishing collaborative arrangements?
– How have Chinese government policies and attitudes towards foreign businesses evolved? How have the changes affected foreign companies’ forms of operations?
Requires web access
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Learning objectives (Chapter 10)
– Distinguish between indirect, direct, and cooperative export modes
– Describe the two main entry modes of direct exporting
– Discuss the advantages and disadvantages of the main export modes
– Discuss how manufacturers can influence intermediaries to be effective marketing partners
Major Types of Exporting
Indirect export
Direct export
Cooperative export
(export marketing groups)
Indirect export modes
The manufacturer uses independent export organizations located in its own country (or a third country).
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Direct export modes
The manufacturer sells directly to an importer, agent or distributor located in the foreign market.
Indirect export modes
– Sale is like a domestic sale
– Most appropriate for firms with limited international expansion objectives
– Appropriate for firms using international sales as a means of disposing of surplus production
Indirect entry modes
Export buying agent
Broker
Export management company
Trading company
Piggyback
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Direct entry modes
Export via distributors
Export via agents
Distributor is an independent company that stocks the manufacturer’s product, but has substantial freedom to choose its own customers and price.
Agent is an independent company that sells on to customers on behalf of the manufacturer, does not stock the product, and earns profits from commission paid by the manufacturers.
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Functions of export marketing groups
– Exporting in the name of the association
– Consolidating freight, negotiating rates, and chartering ships
– Performing market research
– Appointing selling agents abroad
– Obtaining credit information and collecting debts
– Setting prices for export
– Allowing uniform contracts and terms of sale
– Allowing cooperative bids and sales negotiation
Learning objectives (Chapter 11)
– Describe and understand the main intermediate entry modes
– Discuss the advantages and disadvantages of the main intermediate entry modes
– Explain the different stages in joint-venture formation
– Explore the reasons for the ‘divorce’ of the two parents in a joint-venture constellation
– Explore different ways of managing a joint venture/strategic alliance
Contract manufacturing is the term used to refer to manufacturing which is outsourced to an external partner, one that specializes in production and production technology.
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Factors encouraging foreign market production
– Desirability of being close to foreign customers
– Foreign production costs are low
– Transportation costs may render heavy products non-competitive
– Tariffs can prevent entry of an exporter’s products
– Government preference for national suppliers
Benetton’s use of contract manufacturing
Benetton relies upon a contractual network of small overseas manufacturers
Licensing refers to the exchange of rights, such as manufacturing rights, to another in exchange for payment.
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Rights that may be offered in a licensing agreement
– Patent covering a product or process
– Manufacturing know-how not subject to a patent
– Technical advice and assistance
– Marketing advice and assistance
– Use of a trademark/trade name
Motives for licensing out
– Licensor firm will remain technologically superior in its product development
– Licensor is too small to have financial, managerial or marketing expertise for overseas investment
– Product is at end of product life cycle in advanced countries but stretching product life cycle is possible in less developed countries
– Opportunity for profit on key components
– Government regulations may restrict foreign direct investment or, if political risks are high, licensing may be only realistic entry mode
– Constraints may be imposed on imports
Life cycle benefits of licensing
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Franchising refers to the exchange of rights between a franchisor and franchisee, such as the right to use a total business concept including use of trade marks, against some agreed royalty.
Types of Franchising
Product and
trade name
franchising
Business
format
‘package’
franchising
Business format ‘packages’
Trade marks/ trade names/ designs
Patents and copyrights
Business know-how/ trade secrets
Geographic exclusivity
Store design
Market research
Location selection
Source: http://www.kabooki.com/
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McDonald’s is among the best known global franchise businesses
Source: http://www.mcdonalds.com/
Interdependence between franchisor-franchisee
Franchisor benefits
– Fast growth
– Capital infusion
– Income stream
– Community goodwill
Franchisee benefits
– Trademark strength
– Technical advice
– Support services
– Marketing resources
– Advertising
Joint venture refers to an equity partnership between two or more partners.
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Reasons for using joint ventures
– Complementary technology or management skills can lead to new opportunities
– Firms with partners in host countries can increase speed of market entry
– Less developed countries may restrict foreign ownership
– Costs of global operations in R&D and production can be shared
Joint ventures
Parent
firm
A
Parent
firm
B
Joint venture C
Strategic alliances
Parent
firm
A
Parent
firm
B
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Types of value chain partnerships
– Upstream-based collaboration
– Downstream-based collaboration
– Upstream/downstream-based collaboration
Collaboration possibilities in the value chain
Research
and developmentProduction Marketing
Sales
and services
Upstream Downstream
Research
and developmentProduction Marketing
Sales
and services
Upstream Downstream
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Source: Source: Adapted from Lorange and Roos, 1995, p. 16.
Principle objectives for forming a joint venture
Entering
new markets
Reducing
manufacturing
costs
Developing
and
diffusing
technology
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Factors to consider during the cost/benefit analysis
– Financial commitment
– Synergy
– Management commitment
– Risk reduction
– Control
– Long-run market penetration
Sources of potential conflict
– Diverging goals
– Double management
– Repatriation of profits
– Mixing cultures
– Shared equity
– Developing trust
– Providing an exit strategy
Marriott: A case study
– What could be the main motives for Marriott in using franchising, compared to other entry modes and operation forms?
– Identify several major categories of segmentation used by Marriott. For each, relate specific examples of hotel services tailored to various target markets.
Requires web access