INTERNATIONAL MARKET SELECTION AND ENTRY

1
Lecture 9

• INTERNATIONAL MARKET SELECTION AND ENTRY

2
International MarketSelection and Entry

• Learning Objectives
• Identify the different problems faced in
  selecting an overseas market, as between firms
  inexperienced and experienced in international
  business
• Assess the countrys attractiveness in terms of
  the potential, membership of trading blocs,
  competitive intensity and entry barriers
• Recognise the different available modes for
  entering an overseas market and the advantages
  and disadvantages of each and

3
Introduction

• Two of the most critical questions we need to
  ask when a firm is considering going off shore
• Which of the vast range of overseas markets
  should the firm enter?
• What mode should the involvement in the selected
  market take?

4
THE INTERNATIONAL MARKETING DECISION
Do we want to market overseas ?
Which countries?
How involved should we become?
Which mode of entry?
How do we configure the marketing mix?
How do we plan?
How do we organise?
How do we control?
5
Alternative Approaches to Market Selection

• Selecting an overseas market can impact on the
  other activities of the firm. This is because
  the outcome may influence the profitability of
  the firm, in its domestic as well as its
  overseas markets and its global reputation
• SO, WHICH MARKET TO ENTER?

6
Alternative Approaches to Market Selection

• There are various approaches to market selection
  and these have different implications for small
  and medium sized firms, as opposed to large
  firms. Approaches a firm might consider include
• Whether to enter overseas markets on an
  incremental basis, or to enter a number of
  overseas markets simultaneously.
• Whether to adopt a concentrated, focused
  approach, or if a diversified approach should be
  adopted.

7
Strategic Decision

• The decision which market to enter should form
  part of a companies overall strategy
• AND, should be
• Linked to resources and organisatioal competence
  and its relationship with its competitors
• ONE METHOD
• is to isolate those markets with the greatest
  potential

8
Screening for Market Selection

• WHY DO WE SCREEN?
• To enable the firm to arrive at a portfolio of
  attractiveness of the various overseas markets
• A screening approach

9
Analysing the Attractiveness of Individual Markets

• The purpose of screening is to enable the firm
  to arrive at a portfolio of attractive overseas
  markets.
• Two grids developed by the Australian Trade
  Commission compare the attractiveness of the
  overseas market with the competitiveness of the
  Australian firm in order to decide the merit of
  entering the specific overseas market.
• (refer p. 225 of text)

10
Screening Example
Page 225
11
A Screening Approach

• The grid approach, which involves analysis of
  each country is time consuming and may be beyond
  the management resources of many small and medium
  sized firms.
• An alternative approach might involve
  considering all markets in the world and then
  screening markets in relation to a succession of
  criteria. Unsuitable markets are progressively
  eliminated from consideration.

12
Market Selection in the New Millennium

• In the new millennium, it is increasingly likely
  that for the novice international firm and the
  experienced one, international market selection
  will be influenced by strategic objectives, such
  as
• Establishing a competitive position
• Transferring risk
• Rating market investment against profitability

13
Market Selection in the New Millennium
(continued)

• Walton and Ashill (2001) argued that there my be
  a need for change in the traditional patterns of
  international marketing selection to cater for a
  world that values..
• CHOICE, SPEED, INFORMATION,
  COLLABORATION, INCREASED CONSUMER
  VALUE DESIRE TO CAPITALISE ON
  E-COMMERCE
• They suggest that future international market
  selection will be influenced by the desire to
  select the right partner and the need to
  transfer risk to other markets in order to even
  out the exposure to risk between countries

14
Modes of Entering Foreign Markets

• Export based entry
• Manufacturing based entry
• Relationship based entry

15
MODES OF ENTRY INTO OVERSEAS MARKETS

• The modes of entry affects a firms entire
  marketing mix.
• Indirect exports sales to intermediary
  organisations at home which resell the product to
  overseas customers.
• Direct exports sales to customers overseas.
  Customers may be overseas intermediaries or
  end-users.
• Overseas manufacture own production operation
  overseas or a joint venture with a local
  producer.

16

• Decision to enter overseas markets made
• but which mode of entry?
• Exporting Overseas production
• Indirect Direct Licensing Contract
  Joint Wholly
• manufacture venture
  owned
• production
• Overseas to final user
• export agent
• via company branch offices
• Home based Buying Piggy-backing
• export managers offices

17
CRITERIA FOR SELECTING A MODE OF ENTRY

• 1. Firms marketing objectives
• production volume
• time scale - long/short term
• coverage of market segments
• 2. Firms size
• 3. Government encouragement or restrictions
• 4. Product quality requirements
• 5. Human resources requirements
• 6. Market information feedback
• 7. Learning curve requirements
• 8. Risks political or economic
• 9. Control needs

18
Export Based Entry

• Includes the following
• Indirect exporting
• Direct exporting
• Establishing a sales office in the overseas
  market
• Licensing
• Franchising

19
Export based entry (cont..)

• In-direct exporting
• Refers to the use of agencies in the home
  country to get the product into the foreign
  market. Uses.
• 1. export agents who take commission for
  exporting goods
• export merchants buy the goods from the
  manufacturer and export them
• 2. piggy backing the inexperienced
  exporter uses the facilities of an experienced
  one to enter an overseas market.
• Direct exporting
• The firm contacts the buyers overseas
  themselves. They establish their own export/
  sales organisation which does all the the
  marketing and identifies potential markets and
  completes its own documentation, shipping and
  planning.
• Involves a lot of commitment to resources BUT
  greater control over conditions of how, when sold

20
Export based entry (cont..)

• Establishing a sales office in the overseas
• The firm has greater control over what happens
  to the product in the market place. Control over
  selling and promotional work.
• Licensing
• A firm earns overseas income from its technical
  innovations, brand and corporate image overseas.
  Disadvantages limited return especially where
  the company does not fully develop the potential
  the market has to offer.
• Franchising
• The franchisor gives the franchisee the right to
  undertake business in a specified manner under
  the franchisors name in return for a royalty
  payment.
• Disadvantages the cost of renting sites, must
  be well managed, the franchisor can lay down
  guidelines with respect to how the service is run

21
Manufacturing Based Entry

• Often referred to as DFI Direct Foreign
  Investment. Includes
• Joint venture
• Acquisition
• Greenfield Operation

22
Joint Venture

• The most common form of DFI in Australian firms.
  Asian companies mandate that they should be
  involved and have a say in what goes on in their
  country.
• Example Cook Islands
• Advantages The local partner can ease access
  problems i.e. customs, reduce capital and
  resource commitment
• Disadvantages communication, management
  differences. May have a limited lifespan unless
  come to an agreed corporate mission

23
Acquisition

• Enter an overseas market and acquire an existing
  company. This method is adopted by multi-national
  firms that are cash rich
• Provides rapid entry and makes use of established
  distribution channels and the existing customer
  database
• Used in highly competitive industries where there
  may be barriers SO eliminate the barriers by
  buying the company

24
Greenfield Operation

• Where a firm decides to build its own
  manufacturing plant in an overseas country using
  its own funds.
• This is attractive if if there are NO suitable
  firms to acquire or the firm needs its own plant
  due to technical concerns
• Select most attractive sites in terms of labour
  costs, local taxes, land prices and transport

25
Relationship Based Entry

• Contract manufacturing
• Strategic alliances
• Counter trade

26
Contract manufacturing

• The firm contracts to a local manufacturer but
  retains control of the marketing of the product.
• WHY USED?
• Building ones own manufacturing facility is not
  an option
• Barriers to imports exist
• Low investment
• Quick way to access an
  overseas market
• No quality control
  necessary the product is
  already established

27
Strategic alliances

• Collaborations between firms in various
  countries to exchange or share some value
  creating activities
• Collaboration used when considered necessary to
  enter a market amongst those who would normally
  be considered your competitors
• Example Aviation industry. Star Alliance between
  United airlines, Air New Zealand etc involves
  providing information on routes, frequent flyer
  programmes etc
• Cooperation and Collaboration

28
Counter trade

• Linking if an import and an export transaction in
  a conditional manner which includes barter

29
Evaluation of Entry Modes

• When considering the modes of market entry, it
  is important to recognise that they involve a
  trade-off between
• 1.degree of control on the one hand and
• 2. commitment of resources on the other.
• This trade-off exists between forms of
  exporting.
• Indirect exporting resource commitment is
  minimal and control non-existent
• Direct exporting resource hungry, more control
  over how product is represented

30
RISKS AND CONTROL IN MARKET ENTRY
Control

Manufacturing Own subsidiary Acquisitions Assembly
Co-operation Strategies Joint
Ventures Strategic Alliances
Direct Exporting Distributors Agents Direct
Marketing (mail order) E-commerce Franchising /
Licensing Management Contracts
Indirect Exporting Piggy-backing Trading
companies Export Management companies

Risk
31
Theories of market entryDunnings Eclectic
Paradigm

• Research has been conducted on which factors
  cause firms to manufacture in an overseas country
  rather than export to it
• different countries have different factor
  endowments that could be mobile or immobile
  across national boundaries
• Dunnings Eclectic Paradigm- facts that
  influence entry modes there are 3
• Ownership
• Location
• Internalisation

32
Theories of market entry Williamsons
Transaction Cost Approach

• Argues that..the market entry selected should
  be that which maximises long-run efficiency
  measured in terms of the risk adjusted rate of
  return on investment.
• Williamsons transaction cost approach considers
  that the extent to which the chosen entry mode
  should provide control is a function of
• Transaction specific assets
• External uncertainty
• Internal uncertainty
• Free-riding potential

33
Information for Market Entry and Expansion

• Factors internal to the firm
• Factors external to the firm

34
Factors Internal to the Firm

• Management characteristics
• Firms characteristics
• Problems of competing in the domestic market
• Willingness to commit resources
• Nature of domestic market
• Ability to make the necessary resources available
• Extent to which products are high-tech
• Size of the firm

35
Factors External to the Firm

• Nature and attractiveness of the product category
• Potential of overseas market
• Government regulations and trade barriers
• Assistance from Government and other bodies

36
Approaches to Internationalisation

• Stages approaches
• Learning approaches
• Contingency approaches
• Network approaches

37
Stages Approaches

• The earliest group of theories to explain this
  process were the so called stages approaches
  firms started with the mode of entry which
  required the least commitments of resources, and
  with experience gradually increased their
  commitment of resources to international
  activities.

38
Stages Approach

• -   The earliset group of theories stages
  appraoches
• -  Firms started with the mode of entry which
  required the least commitment of resources to
  int. activities
• Studies listed page 242. argued that firms
  moved from
• awareness to intention to trial
• to evaluation to acceptance
• in terms of their
  relationship to exporting.

39
Learning Approaches

• The Learning Approaches theories recognize that
  internationalisation is a dynamic process. They
  focus more on evolutionary, sequential build up
  of foreign commitments over time and recognise
  the role that psychic distance can play in the
  process.

40
Learning Approaches

•  Internationalisation is a dynamic process
• Focuses on an evolutionary, sequential process
  over time
• Recognised the importance of psychic distance
  (remember from my last lecture on culture!)
• Example firms start their overseas involvement
  in nearby markets they are familiar with as they
  learn about the export market.

41
Contingency Approaches

• Theories of internationalisation are based on
  contingency theory, whereby the firm evaluates
  and responds to an opportunity as it occurs,
  regardless of whether the market is close in
  psychic distance terms or whether an advanced
  mode of entry is required.

42
Network approaches

•      Emphasised the role of linkages and
  relationships in the internationalisation process
•        Firms become involved in international
  activities by establishing linkages with networks
  in other countries
•        Description of the modes of entry in
  terms of the position established in overseas
  networks as
• International expansion entering a network
  overseas that is new to a firm
• International penetration building upon an
  already established position in an overseas
  network
• International integration coordinating the
  positions already occupied in networks in
  different countries

43
A holistic view of Internationalisation

• Fletcher looked at market entry modes in a
  broader way in an endeavour to consider what
  actually happens to firms when entering markets
  overseas as opposed to theories built around what
  firms should do.

44
A holistic view of Internationalisation


OUTWARD FORMS Export intermediary Export
agent Export direct Sales office
overseas Licensor overseas Franchisor
overseas FDI to supply
INWARD FORMS Import intermediary Buying
agent Import direct Buying office
overseas Licensee in Australia Franchisee in
Australia FDI to source
LINKED FORMS Strategic alliance Co-operative
Manufacturing Countertrade
45
SEE CHAPTERS 7 12 for more information
46

• Any Questions
• Please see me outside this lecture theatre
• CHEERS!

?