PP 6 Market Entry Strategies Flashcards
Stage 1: Some Preliminary Research -
Know your Organization
Know your Product
Know your Home Market
Pick your Target Market
Be Aware of the Self-Reference Criterion (SRC)
Redesign the “Value Proposition”
Stage 1: The Domestic Evaluation - Know your Organization
Know your Organization: The ‘SW’ of SWOT (in combination with your values and Mission Statement).
Know your Organization:
- Overinvesting in an international expansion leaves the home market (which is financing the entire venture) open to international competition.
- Does your Executive’s management style (in terms of Mission and Vision statements) support an international expansion?
- Be aware of the ‘Self-Reference Criterion (SRC): Your culturally-based perceptions will bias the evaluation process unless you are aware of their influence.
Stage 1: The Domestic Evaluation - Know your Products
Know your Products: In regard to each of your products or product lines:
What is their Life Cycle position?
Which products are evolving or are ‘stalled’?
Which seem to have international appeal?
Which are generating the income that supports your international project; is that market protected?
Stage 2: The Global Evaluation
The first round of segmentation focuses on identifying the ideal countries to enter.
–> The most significant issue at this stage is political stability (which accounts for approximately 80% of the ‘known’ variables).
The second round of segmentation focuses on the market potential of the identified countries.
The research variables related to the second round of segmentation include:
Secondary data: climate, consumer types, available segment data, estimated demand, current competition.
Primary data: specific research, segmentation, targeting and positioning to estimate market potential, risk and profits.
A research issue: Have you done research to the point of ‘diminishing returns’?
Also based on the second round of segmentation, build the ‘value proposition’ as follows:
Describe your current marketing mix (the 4Ps) from your home country’s cultural perspective.
Re-define that marketing mix based on the target’s cultural preferences.
Adjust the mix to suit; a function of standardization vs customization.
Stage 3: Entry Mode
Exporting (Indirect, Direct or Internet)
Export Selling:
involves selling the same product, at the same price, using the same promotional tools for each individual target audience and location.
Export Selling as an approach may work for:
(i) unique products with little or no international competition,
(ii) products that use global recognition (such as industrial equipment or airplanes).
Export Marketing:
the 4P’s are customized for each target audience.
Requirements for Export Marketing
- Research to develop a basic understanding of the target market.
- Market research to estimate the potential size of the market (which may cross borders to access similar segments).
- Decisions concerning redesigning the 4Ps (including additional costs related to taxes, duties and logistics costs).
- An economic justification for all required changes.
- A Risk Assessment.
After the research effort has selected a potential market, there is no substitute for a personal visit to begin the development of an actual marketing program. A market visit will:
- Confirm (or contradict) market assumptions.
- Gather the additional data necessary for the decision.
- Introduce international distributors and possibly develop a marketing plan in cooperation with a local agent or distributor.
A good starting point would be through a trade show or a government-sponsored trade mission.
The Evolution of an Organization’s Plan
Global research has shown that a business’s exporting activities are a developmental process; an evolution that can be divided into distinct stages.
The Evolution of an Organization’s Plan - Part 1
The firm advertises domestically. It has turned down international orders because it doesn’t know how to manage them.
The Evolution of an Organization’s Plan - Part 2
The firm fills unsolicited export orders but still doesn’t advertise internationally. There are no staff assigned to international marketing. [Moving beyond this stage requires management’s attitude (and confidence level) toward exporting to shift; this is the first step towards an international perspective.]
The Evolution of an Organization’s Plan - Part 3
Based on the number of international orders being received, the firm decides to ‘sample’ one international market by focusing on the country that is requesting the most orders. [The degree of management commitment determines the success of this stage.]
The Evolution of an Organization’s Plan - Part 4
As international order increase, the firm assigns staff to international activities and becomes an experienced exporter to one or more markets.
The Evolution of an Organization’s Plan - Part 5
The firm expands from a single country to a regional focus (based on similar segmentation).
The Evolution of an Organization’s Plan - Part 6
The firm moves from a regional to global perspective (with a consistent focus on its target segment).
Beyond exporting:
The firm opens a manufacturing facility closer to the new market.
The firm closes the original factory in the home country; the off-shore facility now serves the home market.
Potential Export Problems: Logistics
Legal Procedures
Arranging Transportation
Transport Rate Determination
Handling Documentation
Obtaining Financial Information
Distribution/ Coordination
Packaging
Government Red Tape
Product Liability
Licensing
Customs/Duty
Contract
Agent/Distributor Agreements
Obtaining Insurance
Government Programs that Support Exports
- Tax Incentives
- Subsidies
- Governmental Assistance
- Free Trade Zones
Tax Incentives:
examples include varying degrees of tax exemption or tax deferral on export income, accelerated depreciation of export-related assets, and preferential tax treatment of overseas market development activities (which all support domestic employment).
Subsidies:
these are typically direct or indirect financial support for exporting producers. Subsidies distort trade patterns when subsidized producers compete in world markets.
The result; eventually, all affected countries offer the same subsidies; this will eliminate competition and maintain pricing at an artificially high level.
Governmental Assistance:
companies will access government information concerning the location of markets and credit risks. Essentially, they are transferring their research costs to the taxpayer.
Free Trade Zones:
geographic regions operating under a trade agreement will simplify customs procedures and reduce cross-border regulations.
Governmental Actions to Discourage Imports
Tariffs: rules, rates, regulations.
Nontariff barriers:
–> Quotas: a government-imposed limit on the number of units that can be imported.
–> Discriminatory procurement policies: example; minimum local-content laws.
–> Discriminatory exchange rate policies: a country will keep its currency at an artificially low value to create a competitive price advantage for its domestic businesses in world markets.
–> Restrictive customs procedures: administrative rules designed to make compliance difficult and expensive.
–> Restrictive administrative & technical regulations: antidumping, safety, health, pollution regulations, packaging requirements being applied to only imports, not domestic products.
Export Participants
Agents, brokers, distributors, forwarders, merchants.
Foreign purchasing agents
Export brokers
Export merchants
Export management companies
Export distributor
Export commission representative
Freight forwarders
Manufacturer’s export representatives
International Distribution Alternatives
Analysis of Home Country and Foreign Country - see Power Point Slide 28
Customs Duties
Ad valorem duty, Specific duty and Compound or mixed duties
Ad valorem duty:
Expressed as percentage of value of goods.
Specific duty:
Expressed as a specific amount of currency per unit of weight, volume, length, or other unit of measurement.
Compound or mixed duties:
A combination of the above or the addition of any variables that will give an advantage to domestic producers. Example: Genetically Modified Organisms (GMO) import restrictions would protect domestic producers (even if they produce GMO products).
Other Duties and Import Charges
Dumping duties
Variable import levies:
Countervailing duties:
Temporary Surcharges:
Dumping duties:
applied to imported products that are also manufactured or grown in the importing (target) country.
–> These charges are often equal or exceeding the dumping margin.
–> This is usually a political decision, not an economic decision.
Countervailing duties:
subsidies designed to offset supportive duties from the source country.
Temporary Surcharges:
designed to protect local industries.
–> Although called ‘temporary’, they are usually permanent (subject to political changes).
Variable import levies:
applied to imported agricultural and community products.
–> They are designed to raise prices which allows domestic producers to sell at a higher profit margin.
Global Sourcing - Some factors for Executive to consider before using global sources:
- The sources should reflect the values of company’s Mission Statement (i.e.: a ‘public relations’ issue) or accept the ‘public relations’ consequences.
- Concentrating several sources into one country provides for an economy of scale (from a logistics perspective), but increases political risk.
- Leverage the firm’s knowledge and contacts.
- Research and product development can be shared, but never share a business’s ‘core competency’; that decision will create competitors.
Factors that Affect Sourcing
Management’s vision - two extreme perspectives
Factor costs and logistics:
Customer’s expectations:
Country infrastructure issues:
Political risk:
Exchange rates and convertibility of local money:
Management’s vision - two extreme perspectives:
–> Keep manufacturing at home to maintain quality control.
–> Contract everything.
Factor costs and logistics:
this issue involves costs and savings related to: labour outsourcing savings vs. cost of land, initial outlay, shipping and duties.
–> If the product doesn’t have labour-intensive costs (because of automation), taxes and shipping costs may overrule the decision to source off-shore.
Customer’s expectations:
Call Centers are sometimes moved back to the home country to solve language barriers.
Country infrastructure issues:
These problems relate to physical (shipping) and virtual (electronic data and currency interchange) reliability and security issues.
Political risk:
(i) protectionist laws, (ii) stability.
Exchange rates and convertibility of local money:
a country with an undervalued currency will attract international business.
Degree of Involvement in Mode of Entry
Low Involvement/Low Cost = Exporting, Licensing, Contract Manufacturing, Joint Venture, Equity Stake or Acquisition = High Involvement/High Cost
Exporting
Indirect via domestic (home) distributors
Or
Direct to customers or distributors abroad
Contractual Agreements
Contract Manufacturing
or
Licensing
or
Franchising
International Alliances
Strategic International Alliances
or
International joint ventures
Foreign Direct Investment
Sales Office
or
M&A
or
Greenfield
The selected strategy will be determined by:
The Executive’s Vision.
The Executive’s attitude toward Risk.
The Executive’s tolerance for maintaining or releasing control.
Available investment capital.
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.
That asset is typically a:
- Patent
- Manufacturing secret
- Product formulation
- Brand name
Advantages to Licensing
- Provides additional profitability with little initial investment (low cost to implement; attractive ROI).
- Provides a method to avoid tariffs, quotas and other export barriers.
- The control of marketing variables can be maintained or delegated.
Specifically, a contract can be written that states: - The Licensee cannot alter some (or any) of the 4Ps, or
- The Licensee has the authority to adapt products to local tastes.
Disadvantages to Licensing
- Limited participation/control: the licensor is not directly involved in the licensee’s marketing program (subject to contractual restrictions).
- A new competitor: the licensee modifies the technology to create a new product (or sells the same product under a new name).
- Licensee may exploit company resources.
To limit these disadvantages, the Licensee agreements should have cross-technology agreements to share developments that would otherwise create a competitive advantage for one party.
Special Licensing Arrangements - Contract Manufacturing
the Company provides technical specifications to a subcontractor or local manufacturer. The agreement allows:
- The company to maintain control of Research/Development.
- The contractors to accept responsibility for manufacturing.
Contract Manufacturing Advantages:
- Limited financial/managerial commitment.
- Quick entry into target countries.
Contract Manufacturing Disadvantages:
- Loss of quality control.
- Shared confidential ‘trade secrets’.
Special Licensing Arrangements - Franchising
A contract between a parent company (franchisor) and a franchisee that allows the franchisee to operate a business developed by the franchisor.
- Its key feature; it allows market expansion at a rate that is far beyond the financial capabilities of the parent organization.
- Most franchises have very restrictive contracts. For example: (i) the products cannot be modified from their original design (common for technology applications), or (ii) the products can be modified to suit the local market (common for clothing and food), but only with permission.
Franchising Questions
How tough is the local competition? Will local consumers buy your product? (This question addresses established market dominance).
Will the government’s legal system protect your trademark and franchiser rights?
Can your profits be brought home?
Can you buy your supplies locally? Who has final approval of a local supplier selection?
Is commercial space available and are rents affordable?
Investment - FDI
Foreign Direct Investment (FDI): Unlike exporting (which has no international financial commitment) and licensing (which has no ‘asset’ investment), FDI is the commitment of funds toward physical assets such as a factory, sales organizations, or R&D commitments. Some common models include:
Joint ventures
Minority or majority equity stakes
Outright acquisition
Global Strategic Alliance
Joint Venture
This is an entry strategy for a single target country (or a single project) in which the partners share ownership of a newly-created business entity.
The intent is to build on each partner’s strengths by sharing: technology, geographic advantage, physical size. For example:
–> Two automobile companies partner to enter a new sector.
–> Two businesses combine their resources to meet the requirements of a business opportunity’s ‘Request for Proposal’.
Joint Venture Advantages
Allows for risk sharing; financial and political.
Provides access to a new environment.
Provides an opportunity to combine the strengths of partners (which may be the only way to enter the market).
Joint Venture Disadvantages
Requires more investment than exporting or licensing.
Must share rewards as well as risks.
Potential for conflict among partners.
The Partner who learns your internal processes becomes a stronger competitor. Example: Korean vs. American car companies.
Investment via Foreign Direct Investment
Taking an ‘Equity’ position:
Start-up of new operations: Greenfield investment:
Merger with an existing enterprise:
Acquisition of an existing enterprise:
Taking an ‘Equity’ position:
Minority < 50%; minimal cost, but no control.
Majority > 50%; substantial cost, but gives control.
Full ownership = 100%; greenfield or acquisition.
Start-up of new operations: Greenfield investment:
Full control, full risk, full access to profits.
Merger with an existing enterprise:
Immediate access to a local reputation (in regard to market share, financial support, political protection).
Acquisition of an existing enterprise:
Advantages: (i) an immediate ‘presence’, (ii) no ‘partner’ issues, (iii) sometimes less expensive than greenfield (after considering the value of a developed market share).
Disadvantages: (i) integrating the new company into your current organizational structure, (ii) adjusting the acquisition’s internal ‘culture’ to the new parent’s expectations, (iii) government restrictions on foreign ownership.
Global Strategic Partnerships - Some of the common references include:
–> Collaborative agreements.
–> Strategic alliances and Strategic international alliances.
–> Global strategic partnerships.
The Attributes of Global Strategic Partnerships
Participants are still competitors outside of the alliance, but a properly-designed agreement will limit most competitive conflicts due to different products, services, or geographic regions.
Each Participant must teach its staff the boundaries of sharing information or technology.
Participants make ongoing improvements to technology. They also share benefits, risks, profits and control. But each Participant will protect any exclusive trade secrets.
This is a horizontal relationship; it is not ‘vertical integration’.
Success Factors of Alliances
Mission Statement: creates win-win situations and recognizes a mutual need or advantage.
Strategic Plan: this is something that needs to be defined at the beginning (and adjusted as required).
Governance: an equal level of influence.
Culture: has the ‘Corporate Culture’ been researched and understood? For example, several equal partners will result in a new culture, but one dominant member will force minority players to adapt.
Organization: a detailed hierarchy is developed to define the multi-country management structure (who makes decisions?). Clear lines of authority will need to be established and accepted by both parties.
Market Expansion Strategies
Companies must decide to expand by:
1. Concentrating on only a few countries with: (i) a narrow market focus or (ii) a multi-market focus.
2. Taking a global perspective with: (iii) a focus on a specific market in each country or (iv) expand into multiple segments with multiple products (usually through acquisition).
4 options for Market Expansion
- Narrow Focus (Country and Market Concentration)
- Country Focus (Country Concentration & Market Diversification)
- Country Diversification (Country Diversification & Market Concentration)
- Global Diversification (Country and Market Diversification)
Strategy 1: Country and Market Concentration.
This is the starting point for most companies. The company will use research and segmentation to find the identical segment in a new country (or a few countries).
Strategy 2: Country Concentration and Segment Diversification.
This strategy will have a company expand its product offering to include new segments (based on market research) but stay within a few countries. Example: an EU-based business stays within Europe to leverage its market knowledge to introduce new products.
Strategy 3: Country Diversification and Market Concentration.
This strategy will have a company expand into several new countries, but (based on market research) search for the segments that are already proven to be interested in their products.
Strategy 4: Country and Segment Diversification.
This is a global corporate strategy. Using mergers and acquisitions, the company diversifies into various business units to serve multiple segments. Outsourcing of individual parts to access inexpensive labour is a key component of this strategy.
The Evolution of Partnership Dependency
- Outsourcing of labour-intensive individual parts manufacturing to access inexpensive labour.
- Outsourcing of low-value component module assembly to access inexpensive labour.
- Outsourcing of higher-value component module assembly to access inexpensive labour.
- Manufacturing skills and technology moved abroad.
- Quality control, precision manufacturing moved abroad.
- Core skills (manufacturing secrets, in-house developed processes, R&D) moved abroad.
- Your partner is now your competitor.
Stage 4: The Promotion Strategy
Waterfall Strategy: the firm pours all of its available resources into one or a select few markets.
–> A waterfall strategy may be the best option if local competition is strong, or the target market is particularly attractive (i.e.: time sensitive; a ‘first-mover’ advantage) and the firm wants to establish a leadership position.
–> Issue; if there are multiple parts to this plan, are there time or sequence issues that need to be coordinated?
Sprinkler Strategy:
spreading the company’s resources in order to gain small market entry points across as many markets as possible.
–> A sprinkler strategy will be a better option when the reverse conditions apply; minimal competition, no specific area is more attractive than others, no time-sensitive advantage.
–> Cross-market opportunities – can the strategy be extended across national borders to similar segments (to leverage economies of scale)?
Waterfall Strategy:
the firm pours all of its available resources into one or a select few markets.
Stage 5: The Tactical Plan; 4Ps & Logistics (Product)
Product:
Positioning
Branding
Styling & Features
Packaging & Labelling
Services & Warranty
Standards
Stage 5: The Tactical Plan; 4Ps & Logistics (Price)
Price:
Price Level
Penetration vs Skimming
Discounts
Stage 5: The Tactical Plan; 4Ps & Logistics (Place
Place:
Channels
Scope
Logistics
Stage 5: The Tactical Plan; 4Ps & Logistics (Promotion)
Promotion:
Advertising
Personal Selling
Sales Promotion
Publicity and PR
To Summarize
Export Selling vs Export Marketing
The Evolution of an Organization’s Plan
Duties and Import Charges
Global Sourcing
Licensing, Investment and Strategic Alliances
Market Expansion and Promotion Strategies
