Strategies for Analyzing and
Entering Foreign Markets
Steps involved in analyzing and
entering foreign market
• To successfully increase market share, profits
and revenue, firms must follow three steps:
– Assess alternative markets
– Assessing or evaluating costs, benefits and risks.
– Selecting the mode of entry
Steps involved in analyzing and
entering foreign market
1. Assessing alternative foreign markets:
In assessing alternative foreign markets, a firm
must consider a variety of factors, including–
–
–
–
Evaluating
Evaluating
Evaluating
Evaluating
market potential
levels of competition
legal and political environment
socio-cultural influences
Steps involved in analyzing and
entering foreign market
2. Evaluating costs, benefits and risks: The next step
in foreign market assessment is a careful evaluation of
the costs, benefits and risks associated with doing
business in foreign market.
– Costs: There are two types of costs. Direct and
Opportunity costs.
– Benefits:
•
Expected sales and profits from the market
• Lower acquisition and manufacturing costs
• Access to new technology
• The opportunity to achieve synergy with other
operations etc.
Steps involved in analyzing and
entering foreign market
– Risks:
• Exchange rate fluctuations
• War
• Terrorism
• Government seizure of property etc.
Steps involved in analyzing and entering
foreign market
3. Choosing a mode of entry:
Exporting
Decision Factors:
Ownership advantages
Location advantages
Internalization advantages
Other factors
Need for control
Resource availability
Global strategy
International
Licensing
International
Franchising
Specialized Modes
Foreign Direct
Investment
Steps involved in analyzing and entering
foreign market
• Exporting to Foreign Markets:
Exporting is the process of sending goods and services
from one country to another for use or sale there. It
is the most simplest mode of internationalizing a
domestic business.
Exporting to Foreign Markets
Advantages
•Relatively low financial
exposure
•Permit gradual market
entry
•Acquire knowledge
about local market
•Avoid restrictions on
foreign investment
Disadvantages
•Vulnerability to tariffs
and NTBs
•Logistical complexities
•Potential conflicts with
distributors
Forms of Exporting
• Indirect exporting
• Direct exporting
• Intracorporate transfers
Figure 12.2
Forms of Exporting
©2004 Prentice Hall
12-10
International Licensing
• Licensing is an agreement between two partieslicensor and licensee, by which the licensor (owner)
permits the licensee( user) to use its intellectual property
like- patent, trademark etc for production or distribution
of goods in return of a fee or commission.
LICENSOR
•Leases the right to use
its intellectual property
•Earns new revenues with
relatively low investment
LICENSEE
•Uses the intellectual
property to create
products for local sale
•Pays a royalty back to
the licensor
International Licensing
Advantages
•Low financial risks
•Low-cost way to assess
market potential
•Avoid tariffs, NTBs,
restrictions on foreign
investment
•Licensee provides
knowledge of local
markets
Disadvantages
•Limited market
opportunities/ profits
•Dependence on
licensee
•Potential conflicts with
licensee
•Possibility of creating
future competitor
International Franchising
• Franchising is an agreement between two partiesfranchisor and franchisee by which the franchisor
allows the franchisee to operate an enterprise using
an intellectual property like-patent, trademark in
return for a fee and keeping a reasonable amount of
control in the hands of franchisor.
International Franchising
Advantages
•Low financial risks
•Low-cost way to assess
market potential
•Avoid tariffs, NTBs,
restrictions on foreign
investment
•Maintain more control than
with licensing
•Franchisee provides
knowledge of local market
Disadvantages
•Limited market
opportunities/ profits
•Dependence on
franchisee
•Potential conflicts with
franchisee
•Possibility of creating
future competitor
Specialized entry modes
• Contract Manufacturing: It is used by firms, both
large and small, that outsource most or all of their
manufacturing needs to other companies. This strategy
reduces the financial and human resources firms need to
devote to the physical production of their products.
Contract Manufacturing
Advantages
•Low financial risks
•Minimize resources
devoted to
manufacturing
•Focus firm’s resources
on other elements of
the value chain
Disadvantages
•Reduced control (may
affect quality, delivery
schedules, etc.)
•Reduce learning
potential
•Potential public
relations problems
Management Contract
• It is a contract based on which firms in one
country render management expertise to the
firms of another.
• It is an arrangement in which one company
provides personnel to perform general or
specialized management function for another.
Management Contract
Advantages
•Focus firm’s resources
on its area of contracts
•Minimal financial
exposure
Disadvantages
•Potential returns
limited by contract
expertise
•May unintentionally
transfer proprietary
knowledge and
techniques to
contracte.
Turnkey Project
• Companies pay fees for engineering services
that are often handled by turnkey operations
such as construction.
• It is a project which is constructed by a foreign
authority in exchange of fees and is handed over
to the local authority when they are ready to
begin operation.
Turnkey project
Advantages
•Focus firm’s resources
on its area of expertise
•Avoid all long-term
operational risks
Disadvantages
•Financial risks
oCost over runs
•Construction risks
oDelays
oProblems with
suppliers
Foreign Direct Investment
• Building new facilities (the greenfield strategy)
• Buying existing assets in a foreign country
(acquisition strategy)
• Participating in a joint venture
FDI
Advantages
•High profit potential
•Maintain control over
operations
•Acquire knowledge of
local market
•Avoid tariffs and NTBs
Disadvantages
•High financial and
managerial investments
•Higher exposure to
political risk
•Vulnerability to
restrictions on foreign
investment
•Greater managerial
complexity