Strategic Options for New Market Entry – an Overview
Richard Adam – Jan. 2013, www.trendtransfer.asia/news
Choosing the correct market entry strategy is critical to your long-term success. Most small
companies use the direct exporting strategy by engaging an agent or distributor but there
are a number of options for you to examine and these are discussed below in order of least
costly and least control to most expensive and most control.
There are seven distinct market entry strategies for you to consider. The most appropriate
one is determined by market potential, your degree of international expertise and
experience and the resources that you can commit to entering your chosen international
market. The strategy that you choose is also determined to a certain extent by the country
you have chosen to enter as discussed in the section on market research.
Exporting
Direct exporting is that the market entry strategy chosen by most small companies. The
reason for this is quite straightforward. Direct exporting is the most basic entry into
international markets. Direct exporting involves the use of agents or distributors. It is
important to understand the difference between an agent and a distributor. An agent works
on your behalf to sell your product into the country market you have chosen, for a
commission. A distributor buys your product and then resells it in the market at a mark-up.
In other words an agent is your salesperson and a distributor is your customer. When
deciding on either an agent or a distributor it is important to remember that your final price
in the market will be higher than if you just sold it directly in the market. Another drawback
to direct exporting is that, because the firm makes few if any marketing investments in the
new country, market share may be below potential.
Licensing
Licensing, as a market entry strategy, is best used by those companies that have a
component of intellectual property in their product although it can be used by any type of
company depending on what they are wanting to license. You can license technology, a
manufacturing process or the rights to market your product. While licensing can be
complicated and intricate and as such it is important to have legal assistance in developing a
licensing agreement, there are three distinct components of all licensing agreements. The
first is that the agreement must be for a certain period of time that is negotiated by the
licensor and the licensee. The more technologically advanced your product is and the degree
of intellectual property buried in your product the shorter the time period of the license as
advances in technology have changed the curve of the product life cycle. The second
component of any licensing agreement revolves around the price of the agreement. The
price is composed of two factors; the purchase price and the percentage you as the licensor
will receive for each unit sold over the term of the agreement. The third component is that
the agreement needs to be for a specific technology, manufacturing process or marketing
activity.
Franchising
Franchising is becoming a more popular market entry strategy given the world wide
branding of various products as a result of the internet. International franchise agreements
are the same as domestic ones with the obvious exception that they must meet the
commercial laws of the country you are franchising too. Franchising is not a strongly
recommended market entry strategy if you do not have solid brand recognition in your own
country or your product is culturally based. Franchising presents a couple of distinct issues
for small firms using this strategy to gain market access. The first is that you are potentially
creating your own competition by teaching the franchisee how to operate your type of
business in their market. The second is that franchises often require a fair degree of handson management and this can be difficult and costly particularly when your franchise(s) are
long distances away.
Joint Ventures/Partnerships/Strategic Alliances
Perhaps the most appropriate and valuable strategy for entering a foreign market is to work
with a local partner, if you can find a good one. Local partners provide “on the ground”
knowledge and this can be immensely important in foreign markets.
However, there are different types of “partners” and each need to be evaluated depending
on your firm’s particular requirements and capabilities. Partner selection, whichever mode
you use, is critical. At the very least they should have the same type of corporate vision as
your firm, have a strong market presence in their own country and provide your firm with
skills and expertise that you do not already have. In short they need to complement you.
Joint Ventures
Joint ventures, or JV’s, as they are commonly referred to is the most sophisticated of the
partnership trio. A JV is the formation of a third independent company owned, but not
necessarily, managed by the partners. It is an independent corporate entity on its own. The
most famous JV is the one between Sony and Ericsson with the creation of Sony/Ericcson
Cell Phones. The Sony/Ericsson JV is a classic example of this type of partnership. Both
companies brought an expertise to the partnership; Sony marketing, Ericsson manufacturing.
Rather than compete in an already competitive market, the cell phone market, they decided
to join forces using their complementary advantages. JV’s require a financial, time and
resources commitment.
Partnerships
Partnerships can be formal or informal. An informal arrangement is one where your firm
agrees with a local firm to work together to market or produce your product or service. A
formal partnership is when you have a legal agreement to market or produce your service or
product with detailed objectives and targets defined.
Partnerships require a long term commitment and thus should not be rushed into.
Undertake detailed due diligence of potential partners to ensure they are the right “fit” for
your firm.
Strategic Alliances
Strategic alliances are simply a business-to-business collaboration. Strategic alliances can be
formed for all a range of purposes from joint marketing to joint production to collaborative
design or distribution. The value in them is that you do not have to engage in a formal
agreement, commit to a long term contract and they provide you with immediate market
access and knowledge.
Foreign Direct Investment
Foreign direct investment (FDI) is when a firm either purchases a local firm of builds its
operations “from scratch” in the foreign market by setting up an office or factory. In short
you become a local firm by doing this and have the advantage of being treated as a local
company, having complete control of your operations and there is a shorter curve in learning
about the local market. However, you will need to make the largest investment in accessing
the market if this is the strategy you choose. Over and above your own company capability
to take on this resource commitment you need to be fully aware of how the government of
the country views foreign direct investment. Undertaking political risk analysis should be a
key component of your market research.
Within the gambit of FDI you can merge with a local company, acquire a local company
outright or undertake a greenfield investment which is building a firm from the ground up.
Turnkey Projects
Turnkey projects are as the name implies. You build something, a factory, a hydro facility, a
pulp mill to start up condition and hand over the “key” to the owner. Turnkey projects have
become a popular market entry strategy for firms that have a particular expertise that can
be transferred. Engineering firms are very likely candidates to use the turnkey project option
as a market entry strategy. The firm uses the knowledge and expertise it has gained in its
domestic market to sell to a buyer in another country. Often the buyer is a government and
is often financed or paid for with assistance from an international aid agency such as the
World Bank. It is important to market the appropriate type of turnkey project which will be
defined by the level of economic development, culture, legal environment and degree of
infrastructure in the target market.
Piggybacking
Piggybacking is the process of supplying a good or service to a larger company in your
domestic market that will then in turn sell its finished product internationally. While
piggybacking may not provide you with direct entry into a foreign market it does allow you
to expand your sales to the international market without having to accept the risk or the
cost of establishing a foreign market presence.
It is of course an option to provide an input, be a supplier, to a foreign firm in an
international market. Large international firms, such as IKEA, are constantly looking for
product suppliers. This “market entry” strategy is somewhat different as you are not
marketing within a certain country but to large international firms. They always have strict
quality and quantity requirements that you will need to meet so capacity issues for small
firms will be an issue that will need to be addressed before you pursue this avenue.