Entry Modes

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Entering International MarketsIntroduction:Once the firm has decided to establish itself in the global market, the marketing manager has to study and analyse the various options available and select the most suitable one.

The selection of the entry mode is one of the most significant decisions, as it involves commitment of resources with long-term financial and structural implications.

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The concept of IM entry• Mode of entry may be defined as “an institutional

mechanism by which a firm makes its products or services available to consumers in international markets”.

• Root (1994) defines the market entry strategy for IM as “a comprehensive plan which sets forth the objectives, goals, resources and policies that guide a company’s international business operations over a future period long enough to achieve sustainable growth in world markets”.

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International Market Entry• In order to succeed in international markets,

the decision to select an appropriate entry mode id crucial and integral part of a firm’s international marketing strategy.

• The mode of entry varies from low-commitment indirect exports to high commitment wholly owned subsidiaries in foreign markets depending upon the following criteria:

- The ability and willingness of the firm to commit resources

- The firm’s desire to have a level of control over international operations

- The level of risk the firm is willing to take

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Entry ModesThere are various modes of entry available to a firm

to enter international market.A firm may have a production facility in its home

country or locate it in a foreign country. It has to choose the alternative most suited to its needs and requirements.

Production in Home CountrySelling goods and services produced in the

home country to overseas customers is the most common form of international marketing activity.

Production in the home country requires relatively lower levels of commitment of resources and minimum risk for entering international markets.

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I. Production in Home countryModes:I: Exports – Indirect, Direct, Complementary (Piggybacking)II: Providing offshore services

Export:In case of exports as a mode of entry, production is

carried out in home country and finished goods are shipped to the overseas markets for sale.

Although exporting is a low-risk mode of entry, which requires minimum foreign market operational experience, it generates the lowest level of profit.

Bilkey and Tesar have identified the some stages in the export development process

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Export Development ProcessS1: Firm is not interested in exporting; ignores

unsolicited businessS2: Firm supplies unsolicited business; does

not examine the feasibility of active exportingS3: Firm actively examines the feasibility of

exportingS4: Firm exports on experimental basis to a

country of close business distanceS5: Firm becomes an experienced exporter to

that countryS6: Firm explores feasibility exporting to

countries with greater business distance.

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Indirect ExportsWhen a firm does not have much exposure to

foreign markets, and has limited resources to invest in export development, indirect exporting is a recommended strategy for entering international markets.

Indirect export can be defined as the process of selling products to an export intermediary in the company’s home country who would in turn sell the products in overseas markets.

Indirect export may occur by way of:- Selling to a foreign firm or a buying agent in

the home country and- Exporting through a merchant intermediary,

i.e., an export house, a trading house.

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Indirect export – cont…Trading houses are service companies, which

provide an exporting firm with the agility and flexibility needed to operate simultaneously in multiple markets and in handling more than one line of merchandise.

Functions carried out by trading houses:- Market selection and market research- Customer identification and evaluation- Commercial and technical negotiations- Vendor development- Product/packaging adaptation and

technology up gradation- Financial arrangements including securing

credit

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Functions of trading house- cont...- Imports, particularly of items required for export

production- Counter- trading- Provide protection against export risks, including

insurance- Ensure timely payments- Export documentation and shipping- Manage crisis and disasters- Deal with claims- After-sales service and spare parts availability- Project exports, consortia and tender business- Create distribution networks abroad- Foster special relations with the government

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Advantages of using a merchant exporter- Firms mainly operating in domestic markets

with limited volumes for export- Since a merchant exporter consolidates

shipment, he may get more competitive price for exports

- A merchant exporter often takes care of various risks associated with exports, such as commercial risk, transit risk and credit risk etc.,

- Savings in operational cost per unit- Manufacturer’s capital is not blocked- A merchant exporter has better negotiating

capability

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Direct ExportIntroduction:- In direct exports a firm’s products are sold

directly to importers in overseas markets- Direct exporting is far more complex than

indirect as a firm has to carry out its own market research, select markets, identify buyers, establish contacts, handle documentation and transportation, and decide on the marketing mix for different overseas markets.

- Direct export does not mean selling products directly to the end users.

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Direct exporting – cont…- Direct exports are accomplished through

foreign-based independent market intermediaries such as agents and distributors

• Agents generally work on a commission basis, do not take title to the goods, and assume no risks or responsibilities.

• An agent represents the exporting company in the given market and find wholesalers and retailers for its products.

• Agents may be i) Exclusive, ii) Semi-exclusive and iii) Non-exclusive

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Direct Export- kinds of Agents• An exclusive agent has exclusive rights to

sell the company’s products in the specified sales territories.

• A semi-exclusive agent handles exporters’ goods along with other companies’ non-competing goods, and

• A non – exclusive agents handles a wide variety of goods including competing products

A overseas distributor is a foreign-based merchant who buys the products on his own account and resells them to wholesalers and retailers to make profit.

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Advantages of Direct Exports• As no intermediary is involved, the exporter gets

more profit• Eliminates the possibility of receiving lower prices

from the merchant exporter• Over a period of time, the firm involved directly in

exports develops in-house skills for export operations

• It establishes its own rapport / brand image in the foreign market

• The exporting firm gain knowledge about markets, competitors and competing products.

Disadvantages: Higher commitment of resources and higher risk exposure.

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Complementary Exporting - PiggybackingIn case of piggybacking exports, overseas distribution

channels of another firm are used by the company to make its product available in the overseas market.

Piggyback export provides immediate access to the well-developed distribution channels of another company.

In this arrangements, the exporting company, know as ‘rider’ and the foreign company which has established distribution network in the foreign market known as ‘carrier’

The carrier either acts as an agent for a commission or as an independent distributor by buying the products outright.

This arrangements made for products from unrelated companies that are complementary but not competitive.

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Providing offshore servicesA company based in one country can provide

offshore services to overseas clients with the help of information and telecommunication technology.

The business process outsourcing (BPO) includes such activities as maintenance of accounts, audit sales, telemarketing, managing human resource databases, logistics and handling customer complaints.

Slowdown of the global economy has forced transnational corporations to seek innovative ways to slash costs.

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Reasons for the outsourcingIndustry Drivers:- New forms of emerging global competition- Obsolete contracting approaches- Changing success criteria- Innovation becoming a differentiatorIT Drivers:- Competitive pressure to improve service levels- Enhanced IT effectiveness- Supplementary IT resources- Shortened implementation timeBusiness Drivers:- Focus on core competencies- Alignment of IT strategy with business goals- Improvement in overall competitiveness- Cost savings

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Scope of offshore services

I. Insurance: Claim processing, call centersII. Banking and Finance: Loan Processing, call

centersIII. Airlines: Revenue accounting, call centersIV. Telecom: Billing, customer relations and call

centersV. Automotive: Engineering and design,

accountsVI. Other Sectors: Transportation, direct

manufacturing, manufacturing utilities etc.,

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II. Production in a Foreign CountryIntroduction: Exporting is more suitable when the home

currency is weak.As the currency of the home country

strengthens, it makes sense to relocate the production facilities in more cost effective locations with weak currencies besides production efficiency.

For Example: Japanese companies have shifted their manufacturing facilities to other countries with weaker currencies.

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Contractual Entry ModesA company may enter international

markets using the synergistic effect of a partner firm and make use of its resources.

This is mutually beneficial for both the domestic and the international firm as it provides them access to new technology and markets.

Firms having high-tech manufacturing facilities but no access to foreign markets may use a foreign partner.

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Types of Entry ModesContractual Entry Modes• International Licensing• International Franchising• Overseas Turnkey Projects• International Management Contracts• International Strategic Alliance• International Contract ManufacturingInvestment Entry Modes• Assembly or Mixing in Overseas Markets• Wholly Owned Foreign Subsidiaries• International Joint Ventures

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Factors affecting the selection of entry mode

External Factors- Market Size- Market Growth- Government Regulations- Level of Competition- Physical Infrastructure- Level of Risk- Political, Economic,

Operational- Production and Shipping Costs

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Factors affecting the selection of entry mode

Internal Factors- Company Objectives- Availability of Company Resources- Level of Commitment- International Experience- Flexibility

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International LicensingMeaning: The process by which a domestic

company allows a foreign company to use its intellectual property, such as patents, trade marks, copy right, process technology, design and specific business skills for a compensation called royalty.

Licensee functions:- Production of the licenser’s products covered

by rights- Marketing these products in the assigned

territory- Paying royalty to the licenser for using the

intellectual property.

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Benefits of International Licensing

• Facilitates rapid penetration• Provides access to markets with high levels of tariff

and non-tariff barriers• Reduces political and economic risk• Helps the licenser to rapidly expand• Helps in curtailing the duplicate products’ marketLimitations- Lack of commitment on the part of the licensee

may adversely affect the brand image- It may restrict the licenser’s own marketing

activities in those countries- The firm may unknowingly create a potential

competitor in the market

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International FranchisingMeaning: The transfer of intellectual property

and other assistance over an extended period of time with greater control compared to licensing.

The home company, known as the franchiser, an overseas company known as franchisee.

Franchising is also a form of licensing wherein transfer of intellectual property rights takes place. But the two processes are different from each other in a number of ways.

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Overseas Turnkey ProjectsCompanies with core competencies in

setting up composite plants and manufacturing and engineering facilities such as dams, bridges, etc., can utilize their technical expertise to enter international market.

Here, the firm conceptualizes, designs, installs, constructs, and carries out preliminary testing of a production facility or engineering structure for the overseas client organisation.

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Types of turnkey projectsBuilt and Transfer (BT): The firm

conceptualizes, designs, builds, carries out primary testing, and transfers the project to the owner.

Built, Operate and Transfer (BOT): The exporting firm not only builds the project but also manages it for a contracted period before transferring it to the foreign owner.

Built, Operate , Own (BOO): The exporting firm is expected to buy the project once it has been built, which results in foreign direct investment after a certain time period.

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International Management Contracts• In IMC a company provides its technical and

managerial expertise for a specific duration to an overseas firm.

• IMC are used in a variety of business activities, such as managing hotels, catering services, operation of power plants etc.

• A IMC is a feasible option when a company provides superior technical and managerial skills to an overseas company that needs such assistance to remain competitive in the market or to improve its productivity.

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International Strategic AllianceISA refers to the relationship between two

or more firms that cooperate each other to achieve common strategic goals.

Due to increased competitive pressures, most firms prefer to focus on their core competencies rather than spreading themselves too thin.

Therefore, the scope for international strategic alliances is on the rise.

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Benefits of Strategic AllianceThey encourage cooperation with

competitors to make use of their specific strengths.

The cost of investment for international market entry is shared

They give access to the distribution channels of the partner firm.

Limitationso Difference of opinion and conflicts with an

alliance partnero The alliance partners, which are capable may

become future competitors.

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International Contract ManufacturingUnder ICM the manufacturing operations of an

international firm are carried out at offshore locations on a contractual basis.

The international firm takes care of marketing whereas the contracted manufacturer limits itself to production activities.

A number of global companies outsource their manufacturing activities to low-cost locations.

Contract manufacturing has also been used as a strategic tool for economic development in a number of countries like korea, Taiwan etc.

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Advantages of ICM A firm with a competitive edge in international

marketing may concentrate its resources on marketing

The international marketer need not invest its resources in manufacturing

The manufacturing operations can be done at competitive cost –effective locations

Since the exit cost of contract manufacturing is very low, the company have an opportunity to change contract manufactures so as to improve quality and cost competitiveness.

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Investment Entry Modes Assembly or Mixing in Overseas Markets:

In order to avoid the high cost of shipping and high import tariffs, counter non-tariff barriers for import and to take advantage of cheap labour a company exports various components and assembles them overseas.

In case of medicines and food products, the equivalent of assembling is mixing the ingredients while importing from the home country.

Most of the Japanese automobile companies entered the European market by establishing their assembling operations in Europe to overcome import barriers.

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International Joint VenturesA joint venture involves more than two

firms in equity participation.In joint venture, the two or more

companies involved provide a complementary competitive advantage for the formation of a new company.

Thus, in joint ventures the participating firms contribute their complementary expertise and resources.

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International Joint VenturesBasic Reasons- To overcome foreign investment barriers

especially in developing and least developed countries

- To manage emerging new opportunities with complementary technology

- To overcome operational barriers- To achieve competitive advantage in

global operations with low investment.

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Wholly owned foreign subsidiariesIn order to have complete control and ownership of

international operations, a firm opts for foreign direct investment to own foreign operations.

Major benefits• It helps in overcoming the import barriers such as

high tariff and quota restrictions• It gets benefit of the incentives provided by the host

government in foreign markets• It may help a domestic firm to spread its risks over

various markets• It avoids conflicts with overseas partners• It pays the way for domestic companies to become

transnational.

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Ways of setting wholly owned subsidiary

A. Acquisition:In this arrangement a domestic company

can acquire a foreign company and all its resources in a foreign market.

It provides speedy access to the resources of a foreign company

The opportunistic joint venture often ends with acquisition of the weaker firm by the stronger partner

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Ways of setting wholly owned subsidiaryB. Greenfield operationsA firm creates the production and marketing

facilities on its own from scratch. Greenfield operations are preferred as an entry mode in international markets under the following situations.

• For smaller firms with limited financial resources creating their own facilities is a more viable option

• Firms that develop their own facilities have the option of selecting the location on the basis of their own screening creiteria.