Strategies for Entering Foreign Markets

Strategies for Entering Foreign Markets Introduction In todays business world, globalization has a great impact on management decisions, processes and the culture of an organization. The most important external driving forces of an increasing internationalization are the openness to new markets due to liberalization and deregulation, further developments in technologies and logistics, as well as shorter product life cycles, and a homogenous consumer behavior whereas internally the strategic-focused attitude of companies represents an essential factor.  [1]  More and more companies do not only want to stay in a single market but aim to expand into foreign markets as well. Before entering a foreign market, a company has to decide not only on an appropriate entry strategy but also should consider the main steps of the market entry framework presented in the upcoming chapter. The following assignment provides a profound analysis of market entry strategies in the context of international marketing management. First of all, reasons to go international will be presented followed by a market entry framework in chapter 3. Further on, different methods of entry will be discussed stating advantages and disadvantages as well as giving examples of firms which successfully have implemented these strategies. In chapter 5, different timing strategy approaches will be introduced. Finally, a conclusion will be drawn from the preceding findings. Reasons for entering foreign markets There are a variety of reasons why companies decide to go abroad and expand their business operations. Organizations mainly engage in international businesses in order to establish competitive advantages and efficiently adapt to the ever-changing business environment. However, it is rarely the case that firms are just driven by one single factor. In the context of international marketing, proactive and reactive reasons or motivations can be differentiated. While proactive factors are stimulated by internal strategic change, reactive reasons result from environmental shifts.  [2]  Proactive reasons include growth in terms of revenue, sales and customer base, cost savings due to economies of scale or low-cost manufacturing, and reduction of dependency on a single national market as well as alternative sources of labor. Reasons which rather force the firms to expand to foreign countries and markets are described as reactive ones. For instance, domestic markets could be already satur ated or emerging competitors prevent firms from further increase its market shares and therefore, stay competitive.  [3]   Even though most companies highly profit from operating internationally, they are often faced with incalculable risks and challenges. Possible risks are primarily based on a lack of information regarding consumer preferences, unfamiliar business procedures and regulations, as well as human resources management.  [4]   Market Entry Framework A market entry strategy framework serves as a helpful management tool for firms aiming to enter a foreign market. It is highly recommended that companies follow these guidelines to better understand the process of internalization and to specify appropriate action steps for a firm. Generally speaking, the organization has to decide on the following questions: 1) What products or services should be offered abroad? 2) Where (countries, regions) should the market entry take place? 3) What entry strategy should be used to enter the foreign market? 4) How should be operated in the foreign market in terms of marketing programs?  [5]  As it is shown in the figure below, a conceptual framework consists of four main steps. After the decision has been made to enter a new market, a profound market assessment should be conducted. Regarding step 1, the company has to analyze its own resources and capabilities. A SWOT-analysis can help identifying the firms internal and external environment. An other key aspect is to evaluate legal and regulatory considerations as well as existing competitors and to deal with possible political risks and uncertainty. Due to different customer tastes and preferences in other countries and regions potential target groups have to be interviewed and analyzed in order to customize its products to their specific needs and wants. In step 2, the business environment should be closer examined, looking for business partnerships, testing market attractiveness and performing financial and entry barrier analyses to prevent early failure. Not until step 3 an entry mode is selected and implemented and further negotiations with business partners will be continued.  [6]  Critical factor is the entry strategy configuration, defined as the process of deciding on the best possible entry strategy mix.  [7]  Step 4 finally repre-sents the actual operation phase in which strategy and performances are aligned. This means satisfying the international clienteles needs by providing them with the desired products and services and setting adequate prices while remaining competitive. Ultimately, the company has to ensure that performance targets and strategic objectives will be accomplished as planned. Market Entry Strategies In the following the different market entry strategies will be described and advantages and disadvantages will be shown. Exporting Most companies operate within their country; however when they de ­cide to enter foreign territory most of the companies use export as their first approach to go international. Exporting means producing goods in one country and selling them in another country.  [8]  Some companies operate only in one niche market and are successful; however in most cases companies become successful by increasing brand awareness and business stability by entering new markets. Exchanging goods across boarders has grown to be a lot easier throughout the years and therefore exporting has become the simplest and most straightforward way to meet the need of a foreign country. However, when a company chooses exporting as their strategy there are several factors that have to be considered when determining whether to use a direct or indirect strategy. Such factors can be the size of the company, what product the company is going to sell, previous export experience and expertise and business conditi ons in the market the company wants to enter. Companies which have no experience in exporting can reach their foreign customers through intermediaries. This approach is called indirect exporting and is often used by first-time exporters.  [9]  Indirect exporting is when a firms sells its domestically produced goods in a foreign country through an intermediary.  [10]  Intermediaries also called middlemen is usually a firm or person that acts as a link between parties to a business deal. Using indirect exporting belongs to the least risky methods. Companies using this method have the smallest amount of commitment; however on the other hand receive the least profit. Direct exporting is one approach used by companies. A company usually handles its exports on their own and sells its products or services directly to the customers. This method gives the company much more control over their activities. It allows them to start at lower prices, be more competitive on the market as wel l as keep closer contact with clients. Also, using direct exporting gives the company higher returns in investments. The Boeing Company was very successful using this method and is now, not only the worlds largest aerospace company but the number one exporter in the US. On the other hand, the pitfalls for direct exporting are that, it is a lot more risky and they have to invest a lot more time to become familiar with the market.  [11]   Licensing Licensing is another common approach of global marketing. Many companies use this method by offering the right to a trademark, patent, trade secret or other similar valued item of intellectual property in return for a royalty or a fee.  [12]  One example is the company Marvel Entertainment Inc. Marvel has mad millions of dollars in licensing with their superheroes and intellectual property. Marvel has licensing agreements with the film industry, toy industry, computer game industry and many other areas. Spiderman, Hulk and many other characters are famous around the world and can be seen and played with.  [13]  Other specialized forms of licensing are contract manufacturing, management contracting and franchising.  [14]   Contract manufacturing is some sort of outsourcing. A German company for example contracts with the foreign company to produce the products they want to sell in the new market. While the contract manufacturer produces the products, the German company puts the companys brand name on the goods. In the computer and electronic field contract manufacturing is used a lot by companies such as IBM and Dell. Dell and IBM let their products produce by Taiwanese companies. The advantages for using this method are that the capital investment is relatively low; however on the other hand the company will not have full control.  [15]   Management contracting is similar to manufacturing contracting, just that the domestic company is not producing the products in a foreign country, but transfer parts of their management personnel to assist a foreign company for a definite time for a fee.  [16]  Management contracts are especially used in the hotel business. The Marriot or Carnival Hotels and Resorts use this method to enter new foreign markets. This method is also very popular in Asia and many developing countries which need the expertise from professional management. An advantage of managements contracting is the minimum risk for the company, due to low equity investment. Major disadvantages are that the company has to give up a big amount of control as well as flexibility.  [17]   McDonalds, Burger King, Starbucks all have one thing in common; they are world wide companies which use the franchise method in order to be serve people internationally. Franchising is a specialization of licensing and both are the most common used method by small and medium size companies. In a franchising agreement, the franchisor sells limited rights to use its brand name in return for a lump sum and share of the franchisees future profits.  [18]  The franchiser assists the franchisee on a continuing basis, through sale, promotion and training.  [19]  The advantages of franchising are that it is less risky and less costly. Franchising is the fast growing method for a market entry a firm whishing to expand globally. On the contrary, the franchisee has to be careful to make all the adjustments necessary. Issues concerning the transferability of products, brands and services should be considered. McDonalds for example had to make adoptions when entering the Indian market beca use of the different culture and lifestyle.  [20]   Joint Venture Joint venture occurs when an international company enters in to an agreement with a local partner to develop a new entity and assets for a finite time by contributing equity.  [21]  A Joint venture may be classified as majority, minority, or fifty-fifty ventures in regard to the equity share of the international company and may be started from the scratch or by the foreign partners acquisition of a partial ownership interests in an existing local company. In most cases, firms choose joint ventures over sole ventures as a result of the restrictive regulatory measures towards sole venture of the foreign investors by the host governments. In the other hand, a Joint venture can also bring positive benefits to the foreign partner through their local partners, because local partners have better knowledge of the host countrys environment and business practices as well as personal contacts with local suppliers, customers, banks and government officials, management, production and marketi ng skills, local prestige and other resources.  [22]  These benefits are the reason why most firms insist on joint venture in some countries like Japan even when a sole venture is open to them. The advantages of Joint ventures are 1) risk diversification and allocation of risks between the partners 2) sharing of resources 3) can be a means of reducing political and other investment risks 4) access to the distribution network. The disadvantages are 1) lack of management control 2) joint ventures negotiations are time consuming, requires a lot of contractual framework and long period of due-diligence3) lack of trust 4) risk of conflict as a result of cultural differences. Direct Investment Direct Investment can be divided into two parts 1) merger and acquision and 2) wholly owned subsidies. These kinds will be explained in the following. Merger and Acquisition: There are two primary mechanisms by which ownership and control of a corporation can change: Either another corporation or group of individuals can acquire the target firm, or the target firm can merge with another firm.  [23]  According to Brealey et al, a merger can be an added value only if the two companies are worth more together than apart.  [24]  There are three classifications of mergers: 1) Horizontal mergers: This is a type of merger where two firms producing similar goods or offering similar services are combined to form an entity. Examples are Vodafones acquisition of Mannesmann and Commerzbanks acquisition of Dresdner Bank. 2) Vertical Merger: is referred to as a combination of two companies in the same industry whose products are required at different stages of the production cycle. The buyers can integrate backwards. An example of forward integration merger is Walt Disneys acquisition of the ABC television network. In which Disney planne d to use ABC network to show recent movies to huge audiences, and an example of backward integration would be Fords acquisition of Rouge Steel Company to reduce risks associated with  the dependency on steel. 3) Conglomerate merger: occurs when companies in unrelated lines of businesses are combined to become an entity. The reason why companies decide to go into this type of merger is to diversify and reduce their exposure to industry specific risks. However, if a conglomerate becomes too large and diverse through acquisitions, the performance of the entire firm can wither. Quellen? Reasons for Mergers Acquisition Economic of scale and scope: Cost efficiency of high volume production are one of the privileges merged firms enjoy, which small firms can only dream about. Larger firms also tends to benefit from economies of scope, which are savings as a result of synergy effect in the marketing and distribution of different types of related products (e.g. computers and printers). Vertical Integration: As a means to improve its products or services, a company might decide to have the direct control of the inputs required to make its products. Similarly, another company might not be contented with the manner at which distribution of it products is conducted, so it might decide to take direct control of the distribution channels by acquiring a major distributive company. Expertise: In order to compete effectively and efficiently, firms often need expertise in particular fields. A more efficient approach may be to acquire the talents as an already functioning unit in an existing firm. Monopoly Gains: Merging with or acquiring a major competitor might enable a firm to reduce competition within the sphere of its operation. There is greater pricing power from reduced competition and higher market share, which could result in higher margin and operating income. Diversification: This is the very beneficial in the issue with conglomerate merger. These benefits are direct risk reduction and liquidity enhancement. Reasons for Merger and Acquisition are 1) to gain cost efficiency through Economic of scale and scope 2) to improve products or services through Vertical Integration 3) to become more competitive because expertise is required acquire talents 4) to get monopolistic advantages and at the same time reduce competitors  [25]  5) with Diversification reduces an investors exposure to firm-specific risk.  [26]   Wholly owned subsidies: Market entry through a wholly owned subsidiary consist of two distinctive strategies: it can be achieved through a Greenfield investment or through an acquisition. Greenfield investment is a form of direct entry mode whereby a parent firm extends its operation in a host country by constructing a new operational base from the scratch. It is remarkable for the complexity and the high cost of its development and implementation. For example, in order to establish successfully in a foreign market, it is expected of a firm to have an extensive knowledge and expertise of the new market, and for this to be possible, a reasonable help from the third parties such as local independent consultants are required, and their services are usually very expensive. The cost of its implementation makes Greenfield investment in a foreign market a very risky mode of market entrance. Acquisition in the other hand offers the fastest means of achieving market power. As explained above, this strategy requires buying a rival firm, distributor, supplier or a firm which is related or entirely unrelated to the acquiring firms industry, in order to gain access to core competencies and achieve a greater competitive advantage.  [27]  The fact that it is easier and more accurate to estimate the outcomes of an investment through an acquisition makes acquisition a less risky alternative in comparison to Greenfield investment. Timing strategies of market entry In this part timing strategies as a different kind of internationalization will be described. Timing strategies could be divided into two categories 1) strategies for market entry in a specific country, called country-specific timing strategies, and 2) strategies for market entry in more countries synchronous, called cross-border timing strategies.  [28]  Some important factors which should be analyzed before a timing-strategy can be chosen are competition in the market, technology, substitute, customer behavior and the market potential as well as market growth. If this is done a company can decide which timing strategy is useful to reach the companys goals.  [29]   Country-specific Timing Strategies A company has to clarify when they want to enter into a new market. Most times the decision for a strategy depends from the strategies of the competitors in the target market.  [30]  Now the first-mover as well as the follower strategy will be described and benefits and risk of each will be identified. First-mover Strategy: Companies those are first into the industry or nation. The advantages of the first-mover are mainly that the firm has a higher awareness level as well as more time for image building in the market. Additionally, the firm gain more and earlier experience which enables them to adapt itself earlier to changing market environmental. Moreover, the firm can recruit educated employees and build up intensive relationships with market entry. Disadvantages are the free-ride-effect, which described early followers who will benefit from the investments of the first-mover. Additionally, the high costs of exploitation of the target market and the high risk of failure.  [3 1]  As an example for a first mover strategy could be named apple. The iPhone, iPad and most of the other products from apple were innovative and the first products in the target industry or nation. Follower Strategy: Companies which follows the first mover or enter the market after it has become established. The advantages of the follower are mainly that the firm can avoid the mistakes of the first mover, have access to reliable information about the market, can profit from the investments of the first-mover hence, cost reduction for example for infrastructure or education of employees. Disadvantages are market entry barriers created by the first-mover, less experiences over the market situation, finding of suppliers and to gain the loyalty of potential customers.  [32]  As an example for followers Microsoft could be named. Microsoft offers a smart phone after the successful iPhone implementation of Apple. Cross-border timing strategies Cross-border timing strategies are the waterfall or sprinkler strategies.  [33]  The Waterfall strategy described a scenario in which a product or a service is gradually moved into the target market while the sprinkler strategy implements a product or service in several countries at the same time.  [34]  Advantages of the Waterfall strategy are that the expansion can take place in a systematic method. Hence resources are needed one-by-one and not at the same time to enter successful all the target market. Furthermore, the life cycle of some technologies or products can be extended and experience can be used for the next market entry. Additionally, it is a relative less risk strategy. Disadvantages of the waterfall strategy could be the long time period implementation. In fast moving markets this strategy might be too slowly.  [35]  Furthermore, the competitors will be warned so that they can build up more market entry barriers for example.  [36]  Examples for the wate rfall strategy are the metro group, which used the experiences of the last market entry when they open a new subsidiary in a new market  [37]  as well as Dell, Benetton and The Body Shop.  [38]  The Sprinkler strategy is has the contrary strengths and disadvantages as the waterfall strategy. Within a short time period the strategy were implemented in lots of target market. The sprinkler strategy generates first-mover advantage. It is a very functional strategy in hyper and time-based competition markets. Disadvantages are the high amount of resources required for entering and the risk of failure because of less knowledge or experiences of the different countries. Examples for the sprinkler approach are Microsoft with its Windows software and Gillette with its Sensor.  [39]   Conclusion In this assignment, the major importance of a well-thought-through selection of a market entry strategy has been shown and different types of entry modes have been presented and further analyzed. Market entry strategies can have a far-reaching impact on an organizations global strategy. Selecting the best entry strategy is a complex decision-making process and involves various considerations. The importance of which aspects should be taken into closer consideration can vary by the strategic goals of a company, by country, and even by industry. Which entry strategy to choose highly depends on various strategic factors like ease of exit, speed of entry, cultural distance, and competitive intensity. Under all conditions, there will be no ideal option. In all cases, methods of market entry should be adjusted to the organizations long-term strategies and goals and should be based on future ambitions as well as on current resources and capabilities. Companies do not only benefit from the advantages, but will also have to cope with disadvantages of a chosen entry strategy. Therefore, compromises often have to be made when going international. Ultimately, todays organizations will ha ve to remain flexible enough to incorporate the high degree of dynamism in an ever-changing business environment. II. Works Cited A: Books Ahlstrom. D./ Bruton, D.G. [International Management]  International Management Strategy and Culture in the  Emerging World, Student Edition, South-Western CENGAGE Learning, Mason 2010  Berk, J. / DeMarzo, P. [Finance]  Corporate Finance, Pearson, Boston, 2006 Berndt, R. / Altobelli, C. F. / Sander, M. [Marketing]  Internationales Marketing-Management, 4. 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It has not been presented elsewhere for grading. All sources have been indicated to the best of the writers ability. Ort, Datum Signature: Anja Chan Ort, Datum Signature: Annika Nienaber Ort, Datum Signature: Emmanuel Ofobeze Ort, Datum Signature: Jana Theresa Germeroth IV. Appendix Appendix 1 Waterfall Strategy  [40]   Appendix 2 Sprinkler Strategy  [41]