Market Entry Strategies
Abstract
There are numerous marketing entry strategies and they all imply a level of degree of risk and that of international firm commitment as well. Generally the international strategy development implementation is a process that goes through several steps to achieve. The major starting point is indirect exporting and if there are satisfactory results then the associating local firms make more committing agreements. This study reviews important literature and provides a conceptual framework on the new market entry strategies. A proper investigation is done on the various strategies that are important in entering a new market and also analyses on some of the disadvantages of these strategies. The paper will also have a look at some of the factors that a firm should consider while entering a foreign market.
Literature
Entering a foreign or new market requires proper strategizing in order to survive in the market. It is clear that the international market has become a very competitive environment which requires proper skills and knowledge if a firm has to acquire a large market share and penetrate deeper in the market. Companies willing to enter into a new market should carry out a thorough marketing research on the environment in order to acquire a proper understanding of the . Whenever a company decides to go international, decisions on how to enter a market have to be made especially the degree at which the company intends to make their marketing commitment and involvement. For these decisions to be made a considerable study should be done and also an analysis of the company capabilities though market potential is not a process that is allowed always. There are so many companies whose growth in international marketing is influenced by a series of phased developments. The company goes on to change the tactics and strategy as they get more involved. In other cases company tend to enter into international market after a thorough research with fully developed long range plans.
The modes of international market entry are classified according to control levels, risk involvement and commitment of resource. A good example of this is the classification of market entry modes into two categories by Erramilli and Rao in the international operations and service firms study in United States. The two categories were based on the level of full control and shared control (Wholly owned operations and joint ventures). Other individuals such as Hwang and Kim classified them into three areas which were joint ventures, licensing and wholly owned subsidiaries. There is a belief that these methods give three different control levels and need different levels of resource commitment. For each mode of market entry there are advantages and disadvantages in terms of control, costs, risks, and returns. However, it is clear that the most used market entry strategies include sole venture, joint venture, licensing and exporting. All these levels are claimed to involve different levels of commitment of resources. The market can thus be divided into three categories on the basis of production location of the products. These categories include direct exporting, indirect exporting and foreign manufacturing.
It is clear that companies do not enter new market just because of psychic distance and available resources. Various markets can attract foreign companies and a certain entry mode. Generally the serving of a particular market by foreign firms, domestic firms or a combination of the two will also depend on the characteristics and objectives of the market. There are three major objectives that lead a company to consider entering a foreign market:
- Market Seeking
- Efficiency Seeking
- Resource Seeking
Market Seeking: A this stage the company seeks or is looking for a proper and effective market for its services and products. This can be caused by saturated market at home or otherwise if a company believes that it contains strong products to penetrate into deeper markets. This then gives the firm an opportunity to enter fast growing markets or large markets such as India and China.
Efficiency Seeking: This means that the firm’s intention is to enter a market or a country where they can gain efficiency in various ways such as other effects of infrastructure. Efficiency is an aspect that can also be achieved due to the common fact that a particular industry has groups into a place with an intention of creating infrastructure which is beneficial such as Silicon valley. Another example is also seen in Phillips and other companies of consumer electronic products which have invested in Malaysia and Singapore.
Resource Seeking: Firms with this idea enter the market as they try to access raw materials or other important inputs that can give reduction of costs and lowers the cost of operation.
More of the above strategies can be achieved in some markets. The strategies influence the decisions and locations of the company. Also, depending with the need and knowledge of control, most countries prefer increasing resource commitment and in other terms would or would not like to own their operation activities in new markets. Another major role at this point is played by the host governments due to the incentive or benefits they provide. There are some foreign governments which provide benefits on tax and this is through allowing foreign companies an exemption of paying tax for the first few years and others also give free loans to the companies.
Entry Strategies
There are various market entry strategies that a firm ought to consider before coming up with a clear decision on which market to join. These strategies are important to consider in order for the company to avoid making mistakes which would thus lead them to losses either in the short run or in the long run. Considering these strategies also is due to be able to manage the available resources of the company and allocate them to best affordable strategy. However, it is crucial to carry out a market research before making a last decision on the strategy to take while entering a new market of going international. This gives a firm or a company full knowledge on the various factors that may affect the entry. Some of these factors include:
Political factors: Different countries have different political policies which might affect a foreign business directly or indirectly. It is therefore very important for a firm that is going international or entering a new market to have full ideas on the markets political stabilities. The policies of the government can either favor the business or go against the business.
Social/Cultural factors: Different cultures have different norms and it is important to have a clear understanding of the norms before entering in the market. This will also give the firm an opportunity to know the dos and don’ts of the society and it will be easier for them to get along well with the society. This also gives the firm an opportunity to acquire large market share since the relations with the locals will have been established.
Economic factors: Economic stability is a very important factor for a firm to consider while entering a foreign market. Many businesses tend to fall due to economic instability. A firm should therefore clearly access the market in order to predict the future outcomes and to get the correct insight on economical issues.
Demographic factors: Each geographic segment has individuals of different ages and genders. The people are also under various income lines and this is a good area for affirm to consider while entering a good market.
Environmental factors: Environmental factors such as natural calamities, floods, earthquakes are also some of the factors that require a lot of consideration before one decides to enter a foreign market. There are countries which are frequently under attacks from these environmental calamities and it’s therefore important to strategize properly.
Foreign manufacturing
Foreign manufacturing is a market entry strategy that most companies would prefer if they are enable to supply their products or services from their sources of domestic production. The reason why this is so is due to high transportation costs for bulky products, product rendered non competitive due to quotas on imports and preference of government for local products which can thus prevent entry into foreign markets. Any of the conditions above may end up forcing a firm to manufacture their products in foreign markets so as to sell there. The other factors that can lead a firm to choosing foreign manufacturing is lower costs of production, public authorities economic incentives and the attractiveness and size of the market. Below is a diagram showing varied approaches which can be adapted to foreign manufacturing. There is an implication of different commitment level from the firm on each. Foreign manufacturing strategy has an advantage of reducing the transportation costs for bulky products.
Each implies a different level of commitment from the firm
Fig: Export Price Escalation in Different Channel Structures
Assembling
Assembling is known to be a compromise between foreign manufacturing and exporting. In this strategy of entering a new market, the company produces everything domestically or at least most of the products or ingredients and then ships them to various markets in the world or foreign markets where they are put together or assembled as finished products. The advantages of this strategy is that through CDK (Completely knocked down) shipping the company saves on the costs of transportation and also on the custom tariffs which in general are lower on equipment’s which are unassembled than on those which are finished. Another advantage this strategy has is providing employment to the locals and this facilitates the firm’s integration in the foreign market. A good example of a company using this strategy is Coca-Cola which ships the syrup to other foreign markets where now the local’s plants add water and put into containers.
Contract manufacturing
Contract manufacturing strategy is another one that is effective in entering a foreign market. Here, the products of the company are produced in the foreign market by producers locally whereby they have a contract with the firm. Since the contract only covers manufacturing, the market is then handled by firm’s sales subsidiaries which sustain the market control. The contract manufacturing strategy obviates the importance of costs of plant investment, custom tariffs and transportation costs and this gives the firm an advantage of advertising their products and services as locally produced or manufactured. Another advantage is that contract manufacturing allows the firm to avoid labor other issues rising from lack of familiarity with the local culture and economy. However, this strategy also has a disadvantage of loss of profit margin on activities of production mostly if the costs of labor are lower in the foreign market. Also this strategy displays a risk of technological knowhow transfer to a potential foreign competitor. However, the risk can be lessened where the marketing know-how and brand names are the major factors of success. Quality control is also another problem that frequently arises on this market entry strategy.
Licensing
While entering a foreign market licensing is claimed to be an effective strategy. This strategy has limited number of risks and it differs from a contract manufacturing strategy because it takes a longer term and contains more responsibilities for the producer locally. Licensing is almost the same to franchising and only differs whereby the franchising organization becomes more involved directly in the control and development of marketing programme. The international licensing firm is the one that gives trademarks rights, rights of patent and products processes and copy right know-how. In return then the licensee will:
- Market the products in his assigned territory
- Produce the licensors products
- Pay royalties to the licensor related to the products sales volume
The benefits of licensing are similar to those of franchising. Licensing strategies is normally welcomed by foreign public authorities since it allows new technology in the country which is also an added advantage. However, the disadvantage of this strategy while entering a new or foreign market is that there is a problem when it comes to controlling the licensee because of direct commitment absence from the international firm that grants the license. Also, once there is transfer of know-how after several years, there is a big risk that the foreign firm might begin to act independently on its own and thus leading the international firm to loose its market. It is therefore very important for a firm to consider these issues before taking a consideration of entering the market by licensing strategy in order to avoid such problems in the future
Joint ventures
Foreign joint ventures market entry strategy is known to be common with licensing. The key difference however is that in a joint venture the international company has a position of equity and also that of a management voice in the foreign firm. There is therefore a formation of partnership between the home country and host firms which generally results in creation of a third firm. This agreement is an advantage to the international firm since they get better operations control and get access to knowledge on the local market. The international firm also gets access to relationships network of the franchise and thus become less exposed towards the expropriation of risk and this is in regards to the partnership it has with the local firm. This is a well known and recognized type of agreement in international management. The major reason why it is very popular is due to the fact that it gives permission to avoid problems of control of different types of new market entry strategies. Also, local firm presence facilitates integration of the international firm in a foreign market or environment.
Direct investments
Direct investment is another strategy well recognized in entering a new market. In this strategy the international firm creates a direct investment in a unit of production in a foreign market. This is said to be the greatest commitment because it is 100% ownership. The international firm can also acquire facilities of wholly foreign production in two primary ways which consist of developing its own facilities from ground and making a direct acquisition in the host market. Foreign investment has various advantages for both the recipient and the investor. One of the major advantages is that it lets money to easily go to whatever business has the best predictions for growth globally. This is because the investors are seeking for the best returns aggressively for their money with little risk. This is a color blind motive which does not care about form of government or religion. However, there is a disadvantage of the strategy especially where some countries prevent the 100% ownership by the international firm and instead demand joint ventures or licensing strategies.
Summary
Entering a new market is in most cases considered a strategic move by many firms and companies. However, it is also a move that should be well planned and strategically measured in order to maintain long term existence in the market and make profits at the same time. Survival in a foreign market is rare and most companies give up early due to the competitive pressure and high costs. It is therefore important to consider certain factors such as cultural, social, economic and political factors of the market before venturing in. There are also various available strategies that a firm can use while entering a foreign market. These strategies include joint ventures, licensing, direct investment, foreign manufacturing and others. It is very important for a firm to totally carry out sufficient research of the foreign market for a proper understanding of the customers and their preferences. This gives the firm an opportunity to deliver the correct goods and services that will satisfy the customer’s needs and services. A proper marketing research should be carried out by those firms who want to enter a foreign market. This gives the firm a clear insight of the customers in the market and they get to have full knowledge of their needs and wants. The firm also gains knowledge on the competitors products and strategies and this helps in understanding on the proper markets to put in the market
Work Cited
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