Global Market Entry Modes
A crucial step in developing a global expansion strategy is the selection of potential target
markets. companies adopt many different approaches to pick target markets. to identify market
opportunities for a given product/services, the international marketer usually starts off with a
pool of candidate countries and narrow down this pool which also known as preliminary
screening. This is minimize the mistakes of ignoring countries that offer viable opportunities for
the product and wasting time on countries that offer no or little potential. Those countries that
make the grade are scrutinized further to determine the final set of target countries. Steps involve
where a firm can employ for the initial screening process (exhibit 1) include:Exhibit 1
Sometimes, the company may desire to week out countries that do not meet a cut-off criteria that
are of paramount importance to the company. Eg. Wrigley, the US chewing gum maker was not
interested in Latin America until recently because of many of the local governments imposed
ownership restrictions. In that case, the four-step procedure should be done only for the countries
that stay in the pool.
Other methods include screening the target markets. eg by developing screening methodology
that incorporates multiple objectives a firm could have (instead of just one), resource constrains
and its market expansion strategy. Over the time companies sometimes must fine-tune their
market selection strategy. The following exhibit 3 shows the market opportunity matrix for the
Asia-Pacific division of Henkel German conglomerate (multinational company). The shaded area
highlights the countries that look most promising from Henkel’s perspective.
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Exhibit 3
Opportunity matrix for Henkel in Asia Pacific
Choosing the mode of entry
Several decision criteria will influence the choice of entry mode. Roughly speaking, two classes
of decision criteria can be distinguished: internal (firm-specific) criteria and external
(environment-specific) criteria. 1st consider the major external criteria:Market size and growth.
In many instance, the key determine of entry choice decisions is the size of the market. Large
markets justify major resource commitments in the form of joint ventures or wholly owned
subsidiaries. Market potential can relate to the current size of the market. Yet, future market
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potential as measured via the growth rate is often more critical especially when the target
markets include emerging markets.
Risk
Risk relates to the instability in the political and economic environment that may impact the
company’s business prospects. Generally speaking, the greater the risk factor, the less eager
companies are to make major resource commitments to the country or region concerned.
Obviously, the level of country risk changes over time. Eg. MetLife the insurance company
opened a liaison office in Shanghai and Beijing while it was waiting for permission from the
Chinese government to start operations. A liaison office functions as a low-cost listening post to
gather market intelligence and establish contacts with potential distributors and/or clients.
Government Regulation (openness)
Government regulations are also a major consideration in entry mode choices. Good example is
the regulation of the airline industry in US: airlines are classified as ‘strategic assets’ and as a
result a foreign airlines cannot acquire majority ownership of US carriers. Trade barriers of all
different kinds restrict the entry choice decision. In car industry, local content requirements in
countries such as France and Italy played a major role behind the decision of Japanese carmakers
like Toyota and Nissan to build up a local manufacturing presence in Europe.
Competitive Environment
Competitive situation in the local market is another driver. Eg. the dominance of Kellogg Co. as
a global player in the ready-to-eat cereal market was a key motivation for the creation in the
early 1990s of Cereal Partners Worldwide, a joint-venture between Nestle and General Mills.
The partnership gained some market share (compared to the combined share of Nestle and
General Mills prior to this linkup) in some of the markets.
Local Infrastructure
The physical infrastructure of a market refers to the country distribution system, transportation
network and communication system. The poorer the local infrastructure, the more reluctant the
company is to commit major resources (monetary or human).
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The combination all these factors determines the overall market attractiveness of the countries
being considered. Market can classified in 5 types of country based on their respective market
attractiveness.

Platform – can be used to gather intelligence and establish network.

Emerging countries – major goal is to build up an initial presence eg. liaison office

Growth countries – offer early mover advantages that often push companies to build
significant presence to capitalize on future market opportunities.

Maturing and establishing countries – looking for ways to develop the market via
strategic alliance, major investments or acquisitions of a local supplier or smaller foreign
players.
Different type of countries require different expansion paths although deviations cannot be
ruled out. See exhibit 4
Exhibit 4
Entry Modes & Market Development
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The key internal criteria are:
Company objectives – key influence in choosing entry modes. Eg. firm that have limited
aspirations will typically prefer entry options that entail a minimum amount of
commitment (eg. licensing).

Need for control – most MNCs prefer to possess a certain amount of control over their
foreign operations. Eg on any elements of the marketing mix plan i.e. the 4Ps.

Internal Resources, Assets and Capabilities – company with tight resources or limited
assets are constrained to low-commitment entry modes such as exporting and licensing
that are not too demanding on their resources. If firm is reluctant to commit resources, it
could miss the boat by sacrificing major market opportunities. Internal competencies also
influence the choice of entry strategy. When the firm lack certain skills that are critical
for the success of its global expansion strategy, it can try to fill the gap by forming a
strategic alliance.

Flexibility –an entry mode that looks very appealing today may not necessarily attractive
in 5 or 10 years down the road. The host country environment changes constantly. New
segments emerged. Local customers become more demanding or more price conscious.
Their preference may change over time. Local competitor become more sophisticated.
Therefore, to cope with these unexpected environmental changes, global players may
need a certain amount of flexibility
The different entry modes can be classified according to the degree of control they offer to
the entrant which vary from low-control to high-control. When deciding on the modes of
entry, it is vital that entrants considers the benefits that come with increased control as well
as the costs of resource commitment and risk involved with it.
Modes of Entry into international market
There are several different modes of market entry that are available for consideration by
businesses that intend to venture into a foreign country market. A mode of entry into an
international market is the channel which firm organization employs to gain entry to a new
international market.
Exporting
There are direct and indirect approaches to exporting to other nations. Direct exporting is
straightforward. Direct exporting occurs when a company sells its products directly to
buyers in a target market. Essentially the organization makes a commitment to market
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overseas on its own behalf. This gives it greater control over its brand and operations overseas,
over and above indirect exporting.
On the other hand, if firm were to employ a home country agency (i.e. an exporting company
from firm’s country – which handles exporting on their behalf) to get their product into an
overseas market then you would be exporting indirectly. Indirect Exporting occurs when a
company sells its products to intermediaries who then resell to buyers in a target market. The
choice of an intermediary depends on many factors, including the ratio of the exporter’s
international sales to its total sales, the company’s available resources and the growth rate of the
target market. Examples of indirect exporting include:

Piggybacking whereby firm new product uses the existing distribution and logistics of
another business.

Export Management Houses (EMHs) that act as a bolt on export department for firm
company. In other words, they export products on behalf of an indirect exporter. Here, they
operates contractually either as an agent (being paid via commissions based on the value of
sales) or as a distributor (taking ownership of the merchandise and earning a profit from its
resale).

Export Trading companies - refers to a company that provides services to indirect exporters
in addition to activities directly related to clients’ exporting activities. The Export Trading
companies assists its clients by providing import, export and countertrade services;
developing and expanding distribution channels; providing storage facilities; financing
trading and investment projects and even manufacturing product.
Licensing
Companies sometimes grant other firms the right to use an asset that is essential to the
production of a finished product. Licensing is a contractual entry mode in which a company that
owns intangible property (the licensor) grants another firm (the licensee) the right to use that
property for a specific period of time. Licensors typically received royalty payments based on a
percentage of the licensee’s sales revenue generated by the licensed property. The licensors
might also receive a one-time fee to cover the cost of transferring the property to the licensee.
Commonly licensed intangible property include patents, copyrights, special formulas and
designs, trade-marks and brand names. Thus, licensing often involves granting companies the
right to use process technologies inherent to the production of a particular good. For example,
Hitachi, of Japan, licensed technology to be used in the recycling of plastic from Duales System
Deutschland of Germany.
An exclusive license grants a company the exclusive rights to produce and market a property or
products made from that property, in a specific geographic region. The region can be the
licensee’s home country or can extend to worldwide market. A nonexeclusive license grants a
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company the right to use a property but does not grant it sole access to a market. A licensor can
grant several or more companies the right to use a property in the same region.
Cross licensing occurs when companies use licensing agreements to exchange intangible
property with one another. Example Fujitsu of Japan signed a 5-year cross licensing agreement
with Texas Instrument of USA. The agreement allowed each company to use the other’s
technology in the product of its own goods – thus lowering research & development costs. The
very extensive arrangement covered all but a few semiconductor patents owned by each
company. Because asset values are seldom exactly equal, cross licensing also typically involves
royalty payments from one party to the other.
Benefits

Profitable, less demanding on resources, overcome import barriers, gain access to markets,
lower exposure to political or economic instabilities, can rapidly amortize (payoff) R & D
expenditure.
Challenges


Lack of enthusiasm on the part of the licensee will greatly limit the sales potential of the
licensed product. Although licensing agreement involves trademark, further risk such as
misguided moves made by the licensee tarnish the trademark covered by the agreement.
Other risk include the risk of not getting paid, failure to produce in a timely manner or
desired volume or loss of control of the marketing of the product
Franchising
Franchising involves the organization (franchiser) providing branding, concepts, expertise, and
in fact most facets that are needed to operate in an overseas market, to the franchisee. It is a
contractual entry mode in which one company (franchiser) supplies another (the franchisee) with
intangible property and other assistance over an extended period. The franchisee has the right of
using the franchiser’s business concept and product trade names in exchange for royalty payment
and other fees.
The package could include the marketing plan, operating manuals, standards, training and quality
monitoring. To snap up opportunities in foreign markets, the method of choice is often master
franchising. With this system, the franchisor gives a master franchise to a local entrepreneur,
who will in turn sell local franchises within his territory. The territory could be a certain region
within a country or a group of countries. Usually the master franchise holder agrees to establish a
certain number of outlets over a given time horizon. For example McDonald, Starbuck
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Benefits

Companies can capitalize on winning business formula by expanding overseas, minimal
investment, limited political risks, profits make the franchisee motivated, local knowledge
can be secured and used.
Limitation


It may be cumbersome to manage a large number of franchisees in a variety of national
markets. major concern is that the project quality and promotional messages among
franchisees will not be consistent from one market to another
Franchisees can experience a loss of organizational flexibility in franchising agreements.
Franchise contracts can restrict their strategic and tactical options and they may even be
forced to promote products owned by the franchiser’s other division
Turnkey Contract
When one company designs, contructs and test a production facility for a client, the agreememnt
is called a turnkey (build-operate-transfer) project. The term Turnkey project is derived from the
understanding that the client, who normally pays a flat fee for the project is expected to do
nothing more than simply ‘turn a key’ to get the facility operating. The company awarded a
turnkey project completely prepares the facility for its client. Turnkey contracts are major
strategies to build large plants. Turnkey project transfer special process technologies or
production-facility designs to the client. They typically involved the construction of power
plants, airports, seaports, telecommunication systems and petrochemical facilities that are then
turned over to the client.
Benefits


Permit firms to specialize in their core competencies and to exploit opportunities that they
could not undertake alone
The turnkey project allow government to obtain designs for infrastructure projects from the
world’s leading companies.
Limitation

The company may be awarded a project for political reasons rather than for technological
know-how. This is because the turnkey project has high monetary value and awarded by
government agencies, the process of awarding can be highly politized.
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
Turnkey projects can create future competitors. For instance a newly created local competitor
could become a major supplier in its own domestic market and perhaps even in other markets
where the suppliers operate.
Joint Ventures (JV)
Under certain circumstances, companies prefer to share ownership of an operation rather than
take complete ownership. A separate company that is created and jointly owned by 2 or more
independent entities to achieve a common business objective is called joint venture. Joint venture
can be privately owned companies, government agencies or government-owned companies.
Joint Ventures tend to be equity-based i.e. a new company is set up with parties owning a
proportion of the new business. It allows the foreign company to share equity and other resources
with other partners to establish a new entity in the target country. There are many reasons why
companies set up Joint Ventures to assist them to enter a new international market:



Access to technology, core competences or management skills. For example, Honda’s
relationship with Rover in the 1980′s.
To gain entry to a foreign market. For example, any business wishing to enter China needs to
source local Chinese partners.
Access to distribution channels, manufacturing and R&D are most common forms of Joint
Venture.
A joint venture can be either cooperative in nature (which focus on collaboration and does not
involve equity investments or equity based). Eg. one partner might contribute manufacturing
technology whereas the other partner provides access to distribution channels – eg. CISCO JV
with IBM, KPMG.
Note:
Equity Invesments - Money that is invested in a firm by its owner(s) or holder(s) of common stock (ordinary shares)
but which is not returned in the normal course of the business. Investors recover it only when they sell their
shareholdings to other investors, or when the assets of the firm are liquidated and proceeds distributed among them
after satisfying the firm's obligations
Equity Based - Involves raising capital in proportion to the equity stakes
Benefits

The return potential can be substantial, more control can be achieved, synergy effects such as
sharing of resources in terms of land, raw materials, expertise on the local environment,
access to a distribution network, personal contacts with suppliers, relations with government
officials. Eg. Sony Erricsson tie-up combined Erricsson’s technology prowess and strong link
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to wireless operators with Sony’s marketing skills and expertise in consumer electronics.
Each partner gain improving their limitations/weakness for profitable growth.
Limitation

Building future competitor is a danger, low productivity can result from low labour cost
situations, lack of trust and mutual conflicts turn numerous international JV into a marriage
from hell! Refer Exhibit 5
Exhibit 5
Conflicting objectives in Chinese JV
Management Contracts
Under the stipulations of a management contract, one company supplies another with managerial
expertise for a specific period of time. The supplier of expertise is normally compensated with
either a lump-sum payment or a continuing fee based on sales volume. Such contracts are
commonly found in the public utilities sectors of developed and emerging markets. 2 types of
knowledge can be transferred through management contracts – the specialized knowledge of
technical managers and business-management skills of general managers.
Benefits
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
Firm can award a management contract to another company and thereby exploit an
international business opportunity without having to place a great deal of its own physical
assets at risks. Financial capital can then be reserved for other promising investment projects
that would otherwise not be funded.

Government can award companies management contracts to operate and upgrade public
utilities, particularly when a nation is short of investment financing.

Government use management contracts to develop the skills of local workers and managers.
Limitation

Although management contracts reduce the exposure of physical assets in another contry, the
same is not true for the supplier’s personnel; political or social turmoil can threaten
managers’ lives

Suppliers of expertise may end up nurturing a formidable new competitor in the local market.
After learning how to conduct certain operations, the part that had originally needed
assistance may be capable of competing on its own. Firms must weigh the financial returns
from a management contract against the potential future problems caused by a newly
launched competitors.
Wholly owned subsidiaries
A wholly owned subsidiary is a facility entirely owned and controlled by a single parent
company. Companies can establish a wholly owned subsidiary either by forming a new company
and constructing entirely new facilities (such as factories, offices and equipment) or by
purchasing an existing company and internalizing its facilities. Whether an international
subsidiary is purchased or newly created depends to a large extent on its proposed operational
subsidiary is purchased or newly created depends to a large extent on its proposed operations.
When a parent company designs a subsidiary to manufacture the latest high-tech products, it
typically must build new facilities. The major drawback of creation from the ground up is the
time it takes to construct new facilities, hire and train employees and launch production.
Conversely, finding an existing local company capable of performing marketing and sales will be
easier because special technologies are typically not needed. By purchasing the existing
marketing and sales operations of an existing firm in the target market, the parent can have the
subsidiary operating relatively quickly. Buying an existing companys operations in the target
market is a particularly good strategy when the company to be acquired has a valuable
trademark, brand name or process technology.
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Benefits

Full control of their business operation, full profits go to the company, full owned enterprise
allows the foreign investor to manage and control its own processes and tasks in terms of
marketing, production, logistics and sourcing decisions.

A wholly owned subsidiary is a good mode entry when a company wants to coordinate the
activities of all its national subsidiaries. Companies using global strategies view each of their
national market as one part of an interconnected global market. Thus, the ability to exercise
complete control over a wholly owned subsidiary makes this entry mode attractive to
companies that are pursuing global strategies.
Challenges

Potential full loss responsibility where parent company will have to carry the full burden of
possible losses. Developing a foreign presence without the support of a 3rd party is also very
demanding on the firm’s resources.

Other risk such as market-related risks, political risks, economic risks (currency devaluation)
, cultural threats in terms of cultural and economic sovereignty of the host country may
occur.
Strategic alliances
Sometimes companies who are willing to cooperate with one another do not want to go so far as
to create a separate, jointly owned company. A relationship whereby 2 or more entities cooperate
(but do not form a separate company) to achieve the strategic goal of each is called a strategic
alliance. Strategic alliances are regarded as being a coalition of two or more organizations to
achieve strategically significant goals that are mutual beneficial. Some of the key drivers that
support the formation of strategic alliances include:1. Defend the leadership position
2. Catch-up with the market leader when then one of the partners do no have the leadership
position.
3. Remain in business for survival
4. Restructure to revitalize the businee
For global strategic alliances to be successful, businesses need to consider the following factors.
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1. Alliances between strong and weak partners seldom work
2. Autonomy and flexibility
3. Equal ownership
4. Commitment and support of the top of the parent’s organization
5. Alliances that are related (in terms of products, markets and/or technology)
6. Have similar culture, asset size and venturing experiencing levels.
7. Shared vision on the goals and mutual benefits are critical
Timing of entry
International market entry decisions also cover the timing of entry question. When should the
firm enter a foreign market? Numerous firms have been burnt badly by entering markets too
early. Eg. Ikea’s first foray in Japan in 1974 was a complete disaster. The Swedish furniture
retailer hastily withdrew from Japan after realizing that Japanese consumers were not ready for
the concept of self-assembly and preferred high quality over low prices. Ikea re-entered Japan in
late 2005 but this time offering assembly services and home delivery.
Some of the key factors affecting the decision of the most appropriate timing of entry include:
The level of international experience

Larger firm size

Broader scope of products and services

Market knowledge – knowing the competitors had already entered the market

Cultural similarities

Various economic attractiveness variables where countries with wealthier consumers, larger
economies, more developed infrastructure and more easily accessible consumers are likely to
be entered earlier.
Exit Strategies
It is not uncommon that business choose to exit their foreign markets, but these decision are
always taken only after extensive considerations. Some of the reasons supporting the decision to
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
Sustained losses

Difficulty in cracking the market

Volatility

Premature entry

Ethical reasons

Intense competition

Resource reallocation
Benefits

Companies use strategic alliance to share the cost of an international investment project for
example many firms are developing new products that not only integrate the latest
technologies but also shorten the life spans of existing projects. In turn, the shorter life span
is reducing the number of years during which a company can recoup its investments. Thus,
many companies are cooperating to share the costs of developing new products.

Companies use strategic alliances to tap into competitors’ specific strengths. Some alliances
formed between internet portals and technology companies are designed to do just that.

Companies turn to strategic alliance to gain access to a partner’s channels of distribution in a
target market. Other firm uses them to reduce exposure to the same kind of risks from which
joint ventures provide protection.
Limitations

Strategic alliance can create a future local or even global competitor. Partner might be suing
the alliance to test a market and prepare the launch of a wholly owned subsidiary. By
declining to cooperate with others in the area of its core competiency, a company can reduce
the likelihhod of creating a competitor that would threaten its main area of business.

A company can insist on contractual clauses that constrain partners from competing against it
with certain products or in certain geographical regions. Companies are also careful to
protect special research programs, production technique and marketing techniques that are
not committed to the alliance.
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