Market Entry StrategiesRosemary Ndinda
There are numerous ways in which a company can enter a foreign market. There is not one market entry strategy that works for all international markets.
Certain strategies such as Direct exporting may be the most appropriate for some markets while in other markets you may need to set up a joint venture and license manufacturing in another.
There are several factors that influence choice of strategy, including, but not limited to, the degree of adaptation of your product required, tariff rates, marketing and logistical costs.Some of these factors may well increase your costs but it is expected that the increase in sales will offset these costs.
Organizations must be careful whilst deciding on an optimum strategy. A careful examination of the entry market, the factors abound will be beneficial in determining the best entry approach.
The following strategies are the main entry options available for organizations.
Direct exporting is selling directly into the market that the company has chosen. Initially, the company uses its own resources for this.Most companies however turn to agents and/or distributors to represent them further in that market once they have established a sales program.
Agents and distributors work closely with the companies in representing their interests. They become the face of the contracting company. It is therefore important that the company’s choice of agents and distributors is handled in much the same way they would hire a key staff person.
Several Multinationals such as P&G, Henkel, Beiersdorf have a direct exporting strategy to some countries in Africa coordinated and managed out of their hubs
Here are some of the advantages of direct exporting:
1) The Company’s potential profits are greater because intermediaries are eliminated.
2) Companies know their customers and have a greater degree of control over all aspects of the transaction.
3) The company’s customers know and feel more secure in doing business directly with it
4) The company has direct access to the customers responsible for selling their product and know whom to contact if something isn’t working.
5) The customers provide faster and more direct feedback to the company on the products performance in the marketplace.
While the advantages of direct exporting are real, in some cases companies may feel that the intermediary is worth the cost, due to factors such as;
1) It requires more time, energy and money investment than the company may be able to afford.
2) It requires a lot “people power” to cultivate a customer base.
3) Servicing the business is demanding and needs a lot of responsibility from every level of the organization.
4) Companies may not be able to respond to customer communications/ concerns as quickly as a local agent.
5) You have to handle all the logistics of the transaction.
6) Technological companies must be prepared to respond to technical questions and to provide on-site start-up training and ongoing support services.
Licensing is a relatively sophisticated arrangement where a firm transfers the rights to the use of a product or service to another firm. It involves a firm allowing another to use their intellectual property for a defined period
It is a particularly useful strategy if the purchaser of the license has a relatively large market share in the entry market.
Licenses can be for marketing or production. In production, firms licence if they have a proprietary product that can be manufactured easily at a foreign location
Licensing also has the following advantages:
1) A company is able to enter a market that has restrictions on foreign companies.
2) The licensing company benefits from the licensee company’s local market knowledge.
3) The company is able to gain a market stronghold very rapidly through the licensee
4) The licensing company’s capital is not tied up in foreign operations.
5) The licensing company has the option to expand into the market further by investing in the licensee company subsequently
6) The licensor company can move into several markets at one time
However, as with all forms of market entry, licensing does have some disadvantages:
1) Entry into the target market is limited to the licensee’s scale and capacity.
2) There has to be constant monitoring of the terms of the license over the lifetime of the agreement, enforcement might become necessary
3) There are cases where the licensee company has used the intellectual property provided to become a competitor company.
4) Intensive research and planning is necessary to identify the best licensee and develop a beneficial licensing agreement.
Companies that engage in licensing should consider the possibility of extending their market entry by moving into a joint venture with licensee companies.
Franchising is one of the methods a lot of companies use to expand rapidly. This mode of entry works well for firms that have a repeatable business model (e.g. food outlets) that can be easily transferred into other markets.
When considering using the franchise model, it is important two consider two important aspects;
1) The company’s business model should either be very unique or have strong brand recognition that can be utilized internationally
2) The company may be creating their future competition in their franchisee.
There are upsides and downsides to Franchising;
1) Expansion is faster since franchisees provide the labor and their sales provide the growth
2) Franchisees are motivated as they are responsible for their company’s success
3) Franchisees may be more skilled at growing the business and making profits than employees
4) The franchisor puts relatively little investment into new locations as this comes from the franchisee
5) Successful franchises can return high royalties
6) Consistent operations across the business generally means efficiency and higher quality standards
7) Franchisees are usually fully committed due to the investment they put in
The disadvantages of franchising are;
1) Franchisees cannot be managed as employees and they may sometimes have different goals to the franchisor
2) Franchisors earn royalties from sales. Franchisees earn money from profits. Achieving growth in the two isn’t always possible, and usually poses a potential conflict
3) Franchisees don’t always work together therefore there is a loss to any potential collective benefit
4) The upfront investment (time and money) required can be huge –pilot operations may be needed
5) A wrong franchisee can potentially ruin the reputation of the whole franchise
6) Sharing confidential information with franchisees is risky as they may use it to establish a competing business
Joint ventures are a form of partnership that involves the creation of a third independent company. It is the 1+1=3 process.
Two companies agree to work together in a particular market, either geographic or product, and create a third company to undertake this.
An example is Sony/Ericsson Cell Phone.
The advantages of a joint venture are;
1) New insights and expertise as a result of the forged partnership
Starting a joint venture poses the opportunity to gain new insights and expertise.
2) Forming a joint venture gives companies access to better resources, such as specialized staff and technology.
3) A joint venture is a temporary arrangement between the two companies. By definition, it is not a long-term commitment
4) Both parties to a joint venture share the risks and costs of the endeavor
5) In the timeline of divestiture and consolidation, a joint venture offers a creative way for companies to escape non-core businesses.
6) Gradually, firms are able to separate their business from the rest of the organization, and then later, sell it to the other parent company. Approximately 80% of all joint ventures end up in a sale, from one partner to the other.
7) The company’s chance of success is higher as they ride with renowned brands. As a result of this, their credibility vastly improves
8) Even though the forged partnership is only for a specific goal, this move will enable the companies involved to create long-lasting business relationships.
9) You get to save money by sharing advertising and marketing and other types of costs. Starting a joint venture is a great way to save money and/or split costs.
Some disadvantages of a joint venture are;
1) The objectives of a joint venture are not often fully clear and rarely communicated clearly to all people involved.
2) Sometimes flexibility is restricted in a joint venture. When that happens, participants have to focus on the joint venture, and their individual businesses may suffer in the process.
3) An equal pay may be possible, but it is unachievable for all the companies working together to share the same involvement and responsibilities.
Buying a Company (Acquisition)
In some markets buying an existing local company may be the most appropriate entry strategy.
It is common where the company being bought has a substantial market share, are a direct competitor. In some cases, due to government regulations this is the only option for the firm to enter the market.
It is certainly the costliest and determining the true value of a firm in a foreign market requires substantial due diligence. On the plus side this entry strategy will immediately provide the company with the status of being a local company. The company receives the benefits of local market knowledge, an established customer base and is treated by the local government as a local firm.
1) The main advantage of buying another business that is in the same segment is that companies can create economies of scale, which refers to the process of increasing production by lowering production costs. Once the said company takes on the second business, they can implement the same marketing and sales strategies for the new company, which lowers costs and helps to boost productivity.
2) Companies can broaden their target audience by tapping into the existing market that the company they bought has already attracted. This can also be beneficial, if you own a comic book store and then buy a store that sells regular books, because you now have a different audience that’s primed for cross-selling.
The disadvantages of acquisitions are;
1) Buying another business in the same industry is that you run the risk of being redundant. Unless the two companies have distinct geographical spheres and target audiences, a company may end up competing against the second business that you bought.
2) Culture and values that the other company is established on may clash with the culture and values of the company’s existing business, especially if the company chooses to retain the staff of the business that you acquire.
3) It is very likely that the company by buying another will increase their debt load, this can affect their expansion efforts in the future.
Piggybacking is a particularly unique way of entering the international arena.
For companies with interesting and unique products or service that they sell to large domestic firms that are currently involved in foreign markets, they may want to approach them to see if they can include their product or service in their inventory for international markets.
This greatly reduces their risk and costs because they are essentially selling domestically and the larger firm is marketing their product or service for them internationally.The company contracting the firm to carry its products is known as the Rider, whilst the other firm is the Carrier
The advantages of piggybacking are;
1) Riders can export conveniently without having to establish their own systems.
2) They can observe the carrier and benefit from its experience and take over export transactions in the future.
3) Piggyback marketing can be an easy and safe way for the company.
4) It also gives the possibility of cheap access to the product. The rider does not need to invest in research, development or testing.
The disadvantages of Piggy backing are;
1) A smaller company by agreeing to such a contract may lose control over the marketing of its own product.
2) Due to the unsuitable involvement of the carrier, companies may lose the opportunity to sell.
3) Piggybacking may be attractive for the carrier, but there may be problems with maintaining the quality and warranty.
4) Continuity of supplies may be a problem. When the foreign market carrier develops, the question arises whether the producer will increase production capacity.
Turnkey projects are particular to companies that provide services such as environmental consulting, architecture, construction and engineering.In these types of projects, the facility is built from the ground up and turned over to the client ready to go – turn the key and the plant is operational.
This is a very good way to enter foreign markets as the client is normally a government and often the project is being financed by an international financial agency such as the World Bank so the risk of not being paid is eliminated.
The advantages of this entry mode are;
1. Reduced total time during the contractual process by having just one process instead of two separate ones. This does not necessarily imply less construction time.
2. A seemingly “lower cost” when integrating “all” the elements under one provider.
3. Minimizing orders of change during the implementation of the project because the changes and adjustments fall under responsibility of the only contractor.
4. This is a practical solution for smaller projects, such as communications rooms or small computer rooms, these usually have a limited budget for the project.
5. Definitely, the main advantage of this service is the peace of mind the owner gets when it hands over full responsibility of the project to “only one contractor”, it is much easier for the owner to manage and communicate with one provider.
The greater responsibility assumed by the only supplier, ironically is what causes most of the disadvantages in this contractual model:
1. A higher cost is assumed due to the higher risk that comes with total responsibility, there is less information to prepare proposals and therefore bidders assume more risks. The typical way to counter the increased risk is by increasing the price.
2. There is a greater disparity when comparing offers, both economically, because each provider has different criteria for assessing the risk, as technically, because of the different assumptions and varied criteria when presenting solutions.
3. Usually designs are oversized due to lack of information available at the time when the offer is being prepared, several tolerance factors are taken into consideration when referring to the capacity of the equipment and are factored into the assumed risks, causing higher dimensions, because of this, higher price in the equipment are presented in the offer.
4. Despite the previous bullet, after winning the contract, these suppliers look for ways to save during the implementation, having detailed designs below defined standards and/or adding low quality materials or equipment at accepted technical specifications
5. Competition is restricted because typically only “the biggest competitors” are the ones that are able to assume the highest risks and the full responsibility of the project which implies, in general, the highest bidding offer
It is very important for any organization looking to venture into a new market, to examine all the factors relating to the entry, nature of business, resources, government and economic policies, in order to determine and use the most effective entry strategy.
The success of an organization in any new market is central to the entry strategy first and secondly the operational strategy. It is common for companies to shut down as soon as they get into markets. Therefore, market entry calls for meticulous strategic planning and careful execution.
Author; Rosemary Ndinda Ndivo, CEO, Solidlaunch Consulting