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 companys products into
a new foreign market.

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

Entry mode
decision

Transactionspecific factors
External factors

Internal factors affecting market entry

mode decision
Product

Product
complexity

Product
differentiation
advantage

International
experience

Entry mode
decision

Firm
size

Desired mode characteristics affecting

market entry mode decision
Risk
averse

Control
Entry mode
decision
Flexibility

Transaction-specific factors affecting

market entry mode decision
Tacit nature of
know-how
Entry mode
decision
Opportunistic
behavior
Transaction
costs

External factors affecting market entry

mode decision
Entry mode
decision

Socio-cultural
distance

Number of
export
intermediaries

Country risk/
demand
uncertainty
Market size/
growth

Direct/
indirect
trade barriers

Intensity of
competition

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

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).

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

Direct entry modes

Export via distributors

Export via agents

Distributor is an independent
company that stocks the
manufacturers 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.

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.

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 exporters
products
Government preference for national suppliers

Benettons 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.

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.c om/

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McDonalds is among the best known

global franchise businesses

Source: http://www.mcdonalds.com/

Interdependence between franchisorfranchisee

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 development

Production

Upstream

Downstream

3
1

Upstream

Research
and development

Sales
and services

Marketing

Downstream

Production

Marketing

Sales
and services

Source: Sourc e: 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

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