ENTRY AND EXPANSION STRATEGIES

Identifying Foreign Markets Selection of market is very important because the firm will succeed only if it is marketing the right product to the right market. Selection of the right market minimizes the risk and avoids wastage of time and effort, increasing the chances of success. It is better to concentrate on a few fruitful markets rather than spread over thinly.

Classification of world market

I. Warren J. Keegan has classified World Market on the Basis of Stages of Demand
1. Existing market 2. Latent markets 3. Incipient markets

Existing Markets
Consumer needs are know and are already being met by some products. The market opportunities can be assessed by estimating the consumption rate and the share of imports in the current consumption.

Latent Markets
There are potential customers. As no one has offered a product to fulfill the latent need there is no existing market

Incipient Markets
These markets do not exist in the present. Conditions and trends can be identified that point towards the emergence of future needs and preferences for products and services that will create a latent market, which if supplied will become an existing market

II

Classification on the Basis of

Stages of Development

1.

Industrial economies

2.

More developed developing countries Raw material exporting economies

Subsistence economies

3.
4.

Industrial Economies
They devote their resources to production of sophisticated and high technology products They have an acute shortage of labour and thus tend to import labour-intensive products like electronics, light engineering goods, spares and components, decorative articles etc. They are particular about keeping the country pollution free They are willing to provide technology to set up production and processing units in developing countries These countries lay more emphasis on research and development The major Industrial economies are- USA, UK, France, Japan and Germany.

More Developed Developing Countries

These countries would like to update technology They would like to import machinery and equipment to set up new manufacturing facilities They are also interested in setting up joint ventures in other countries They include Brazil, Mexico, Hong Kong, India etc.

Raw Material Exporting Economies

These countries export oil and other natural resources. They have inadequate infrastructure and therefore they need various types of products like consumer durables, food products, transport equipment, service facilities etc. They are interested in importing Turnkey projects. This category includes countries in the Gulf area and those in Africa and Latin America.

Subsistence Economies
These countries need equipment to exploit their untapped resources. They also need the infrastructure facilities like railways, roads, buildings, transport equipment, power generation equipment, transmission line towers, etc. They provide a lot of scope for Turnkey projects like housing, schools, hospitals etc.

Decision Criteria for International Business

Political risk Market access Costs considerations Shipping consideration Country infrastructure Foreign Exchange

Selecting Foreign Markets

Selection should be based on a number of criteria: market-related characteristics cost-related aspects the regulatory framework tariffs, duties & non-tariff trade barriers the importance of these selection criteria depends upon the industry & the markets taken into account

Market Selection Criteria

1.

2. 3. 4.
5. 6. 7.

Market Potential Market Access Shipping Cost & Time Appraising Level & Quality of Competition Service Product Fit Exchange rate, availability & convertibility of local money

Critical Questions for a Product-Market Profile: The 9 Ws

1.Who buys our product? 2.Who does not buy our product? 3.What need or function does our product serve? 4.What problem does our product solve? 5.What are customers currently buying to satisfy the need and/or solve the problem for which our product is targeted? 6.What price are they paying for the products they are currently buying? 7.When is our product purchased? 8.Where is our product purchased? 9.Why is our product purchased?

A Multi-Stage Selection Process

Approx. 150 countries

Markets which drop out due to restrictions (must criteria)

Source: adapted from D.J.G. Schneider, and R.U. Mller, Datenbankgesttzte Marktselektion: Eine methodische Basis fr Internationalisierungs-strategien, Stuttgart, 1989

Markets which are filtered out based on a first set of selection criteria Markets which are filtered out based on a second set of selection criteria Potential foreign target markets

Visiting the Potential Market

Visiting the market is essential after assessment and selection of potential market(s) Goals: to confirm (or contradict) assumptions regarding market potential to gather additional (primary) data to develop a marketing plan in cooperation with the local agent or distributor

Alternative channels available are1) International Marketing Middlemen: -Export Merchants -Export/Trading houses -Trading companies (both Export & Import) -Export Drop shipper -Agents/Brokers

2)Co-operative Organizations:
- Piggyback marketing -Exporting combinations

3) Direct Exporting channels

-Importer -Wholesalers -Distributor -Retailer

-Government department
-Customers

-State Buying Organisation

-Joint Venture/Licensing -Industrial Buyer

A) PRODUCTION IN HOME COUNTRY - EXPORT

Direct Exporter
Importer Customer Wholesaler Retailer Foreign Distributor Agent Government Depts. Overseas Marketing Subsidiary

Indirect Exporter
Trading Company Export Merchants Export/Trading House Agents/Brokers Other modes

B) FOREIGN PRODUCTION
Licensing Franchising Joint Venture Manufacturing Management Contract Assembly Operations Turnkey Operations Acquisitions Strategic Alliance
Global Strategic Partnership Keiretsu Beyond Strategic Alliance

EXPORTING
This method involves production of goods and services in the home country followed by distribution in the foreign country. It is commonly adopted by countries entering into foreign market for the first time. The risks involved are minimum as the company simply exports its excess production as and when it receives orders. It is the most common mode of overseas entry. But lack of international marketing activities and lack of product modifications makes the companys marketing strategy inflexible and ineffective. Example- GM exports cars from America.

Exporting
Direct market representation via wholesalers or retailers or directly to the consumers Independent representation independent distributor Piggyback marketing distribution through another distributors channel

Exporting: A Developmental Process

Stages of the firm 1.Firm is unwilling to export. 2. Firm fills unsolicited export orders (export seller). 3. Firm explores the feasibility of exporting (may bypass stage 2). 4. Firm exports to one or more markets on a trial basis. 5. Firm is an experienced exporter to one or more markets. 6. Firm pursues country or region focused marketing. 7. Firm evaluates the global market potential. All markets, domestic & international, are regarded as equally worthy of consideration.

Export-Related Problems

Logistics Legal procedure Servicing exports Sales promotion Foreign market intelligence

Licensing
Licensing is a contractual arrangement whereby one company (licensor) makes an asset available to another company (licensee) in exchange for royalties, license fees or other form of compensation

Licensing cont.
When the company wants to protect its patents and trade mark rights, it licenses the production of its products in the foreign market to another company in return for a fixed royalty. The owner of the brand name gets free advertising for his products/trademark. This is done when The markets are developing very fast Export barriers have been put up Capital is scarce Import restrictions discourage direct entry Country is sensitive to foreign ownership Transportation costs are very high as compared to the product value Example Coca Cola has licensed its brand name to more than 200 licensees in more than 30 countries, Disneyland has

licensed Tokyo Disneyland in Japan

Disadvantages of Licensing
By granting a license to a foreign company, the manufacturer is producing a competitor who is gaining technological and product knowledge. At some time the licensee may refuse to renew the contract and he may use the acquired knowledge to his own profit. Another problem is when the licensee performs poorly, it may bring the reputation of the product down on worldwide basis. Licensing may damage a products image psychologically (even if the product is good), because people prefer imported goods whereas the licensed goods are produced within the country. Example Revlon, etc. Over licensing dilutes the value of the product, example, Pierre Cardin has licensed 800 products.

Franchising
A form of licensing
The company permits its name, logo, cultural design and operations to be used in establishing a new firm or store.

Joint Ventures
A joint venture is a partnership at corporate level When a company does not possess the capacity to analyse and handle a particular market, it enters into a JV Company run by two or more partner firms Risk is shared and different value chain strengths are combined Influence depends on degree of ownership Good opportunity to build on local know-how JV finds greater acceptance by local authorities Example TOYSRUS and Amazon.com have entered in a JV to form TOYSRUS.com, an on-line toy store.

The main reasons for sharing the control of the market areTo protect oneself from political and economic risk When the company does not possess competent personnel to handle foreign market When it is short of capital When a company feels that it would be to their mutual advantage to enter in JV because of specific resources possessed by the other partner like distribution network, knowledge of culture etc. When wholly owned activities are not allowed by the foreign government.

MANUFACTURING
When a company moves along its lifecycle, it develops an international orientation. This motivates it to invest in foreign market and develop its own manufacturing and marketing system within that market. Many multinationals are entering India by this mode and taking advantage and a competitive edge over other companies who export to this country. Example- Nestle has manufacturing units in India.

Advantages of manufacturingReduction of additional costs involved in foreign marketing No duties on products produced within the foreign country Transportation cost is minimized Advantage of low labour cost in some countries Access to raw material.

MANAGEMENT CONTRACT
A company may not possess the managerial or technical talent and therefore may not be in a position to exploit its assets. In such a situation the company may sign a Management Contract with a foreign company to manage the assets till it has resources or technology required for managing the assets. ExampleForeign companies taking Management Contract to manage hotels in Middle East, Egypt etc.

Assembly means the fitting or joining together of fabricated components. The methods used to join or fit together solid components may be welding, soldering, gluing, laminating, sewing etc. In this strategy, parts or components are produced in various countries in order to gain each countrys comparative advantage. The capital intensive parts may be produced in advanced nations and the labour intensive assemblies may be produced where labour is abundant and labour costs are low. Example- Manufacturers of consumer electronics, video games, calculators, PCs etc. in Hongkong, Taiwan and other countries.

ASSEMBLY OPERATIONS

TURNKEY OPERATIONS
This is an agreement by the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyers personnel, who will be trained by the seller This term is generally used in fast food franchising The franchiser agrees to select the store site, build the store, equip it, train the franchisee and his employees and also sometimes arrange finances Such large scale projects include fast food industry, steel mills, cement, fertilizer and chemical plants and those related to advanced technologies and telecommunication Example- Dominos, McDonald, Pizza Hut.

Wholly-owned Subsidiaries/Acquisition
Direct investment through acquisition is considered when a manufacturer wants to enter a foreign market rapidly and retain maximum control Although every government welcomes foreign investment that starts an enterprise as it increases employment etc., but generally this means that the domestic ownership has been replaced This is perceived as exploitation or a blow to national pride Due to this sensitive nature, there are a number of legal hurdles in Acquisition Example- Procter and Gamble acquired RichardsonVicks.

Wholly-owned Subsidiaries/Acquisition Cont Represents the most extensive engagement abroad Subsidiary is either established through the creation of a new facility or the acquisition of an existing firm Company has complete decision power & control Investor achieves greater flexibility In many countries majority or 100% ownership by foreign companies is forbidden

Entry mode
Contract manufacturing Indirect exporting Licensing Management contracting Direct exporting Joint ownership

Risk
Low Low Low Low Medium Medium

Control
Low Medium Medium Medium High Medium

Profit potential
Low Low Low Medium Medium High

Direct investment

High

High

High

STATEGIC ALLIANCE
Strategic Alliance has been receiving a great deal of attention as large multinational firms find it necessary to identify strategic partners to penetrate a market. SA may be the result of mergers, acquisitions, joint venture, licensing agreement, partially or wholly owned subsidiaries etc. SA is a contractual agreement whereby two or more partners agree to co-operate with each other and utilize each others resources and expertise to achieve rapid global market penetration. Example- General Motors and Toyota.

DEMANDS ON STRATEGIC ALLIANCES

Competitive collaborations offer significant advantages Characteristics: Participants remain independent following to the formation of the alliance Participants share the benefits of the alliance as well as control over the performance of assigned tasks Participants make ongoing contributions in technology, products and other key strategic areas

GLOBAL STRATEGIC PARTNERSHIP Two or more companies develop a joint long-term strategy The relationship is reciprocal Vision & efforts are truly global Transfer of resources between partners Partner must know their core strength and be able to defend their position When in new markets, partners must retain identities Example- Intel and Hewlett-Packard(HP).

Four Principles of GSPs

1. Partners are still in competition with each other 2. Some conflict is to be expected 3. Must understand where cooperation ends & competitive compromise begins 4. Learning from partners is critical

Inter-business alliance or enterprise group, where different companies or company groups are intertwined Operates in a broad spectrum of markets Keiretsu executives sit on each other`s boards & share information Foreign competitors interpret keiretsu relations as cartels which dominate the market and restrict competition The most famous keiretsu are Mitsui and Mitsubishi

Co-operative Strategies in Japan: KEIRETSU

BEYOND STRATEGIC ALLIANCES

Information, communication technologies and globalisation have fostered new forms of strategic alliances: Relationship enterprise Groups of firms in different industries will be held together by common goals that encourages them to act like a single firm Virtual corporation Multiple co-operations which are employed only when needed

PRODUCTION ABROAD
Ownership and Control
100 % Ownership & Strategic Alliances

Ownership

Equity Joint Ventures

Licensing 0 0

Franchising Control

Management Contracts 100 %

MARKET EXPANSION STRATEGIES

Narrow focus: concentrated markets/concentrated countries Country focus: diverse markets/concentrated countries Country diversification: concentrated markets/diverse countries Global diversification: diverse markets/diverse countries

Summary
The choice of potential foreign markets must be based on a thorough evaluation of criteria which influence the potential success abroad; eg market potential, market access, or product fit. Once the potential foreign market is selected, a company has to decide how to enter this market. Companies can choose among a wide range of alternatives, when participating in foreign markets Ownership requires substantial resources, but offers full control Co-operative strategies include global strategic partner-ships, the Japanese keiretsu or the virtual enterprise.