Channels To Market
Entering International Markets
Modern companies need to plan for growth and survival in the globalized world of business competition. Some will choose to conduct business from home taking on competitors in the safety of their domestic market. Other companies will decide to go international operating from both domestic and foreign markets.
In order to do this the latter will have to make use of entry strategies to sustain their presence in foreign market. An entry strategy is a process of deciding on the direction of a company’s international business by combining reason with empirical knowledge.
The entry-strategy time frame will be an average of 3 to 5 years. Yet once operations in a foreign market begin, the manager may decide to revise entry strategy decisions.
A foreign market entry strategy is an international business plan, its aim is to lay down:
• Objectives
• Resources
• Policies
These will guide a company’s international business long enough to achieve sustainable growth in world markets.
Managers need to tailor an entry strategy for each product or foreign market. Cultural differences in foreign markets mean that a single entry strategy would not necessarily function in another setting. Different products and different markets will inevitably draw different responses.
If dealing with many foreign markets, the logistics of devising a different entry strategy for each is a daunting task. Clusters of similar country markets can be identified which can be entered with a similar strategy.
Commonly used entry strategies
Most managers enter foreign markets through exporting. By using an indirect channel (e.g. an export management company), a manufacturer can begin exporting with low start up costs; it allows him to tests the result of his product in a low-risk experimental fashion. Yet indirect exporting leads to an inevitable lack of control over his foreign sales. After initial exposure into the foreign market more ambitious managers will prefer using a direct export channel.
1. Direct export channels
Agents
Definition: An individual or legal entity authorized to act on behalf of another individual or legal entity (the principal). An agent’s authorized actions will bind the principal. A sales representative, for example, is an agent of the seller.
A foreign agent is an independent middleman representing the manufacturer in the foreign market. He sells the product on a commission basis. The manufacturer will receive orders from his agent and ship directly to his foreign buyer.
Agent channels have lower start up costs and are commonly used for early export entry.
Distributors
Definition: An agent who sells directly for a supplier and maintains an inventory of the supplier’s products.
A foreign distributor buys the manufacturer’s product for resale to middlemen or final buyers. He has more functions than an agent (maintaining inventories providing after-sales services) and assumes the ownership risk. He obtains a profit margin on resale of the product.
An agent or a distributor?
• Determine their profit contribution by estimating their respective sales and costs
• Also consider control, risk and other channel specifications
• Monitor channel performance to know if you need to change your channel arrangements
Choosing a foreign agent/ distributor
• Draw up an agent/ distributor profile list listing all their desired qualities in that particular foreign market
• After desk research, personally interview the best prospects
• Draw up a written contract with your foreign representative putting special emphasis on exclusive rights, the resolution of dispute and contract termination
• Remember ‘your line is only as good as your foreign representative’ and invest the necessary time and effort in finding the appropriate candidate and on building an efficient ‘export channel team’
Subsidiary/ Branch channels
Subsidiary
Definition: any organisation more than 50 per cent of whose voting stock is owned by another firm. Wholly owned subsidiaries is where a firm owns 100 per cent of the stock, it can set up a new operation in that country known as a green-field venture or it can acquire an established firm in that host nation and use that firm to promote it’s products
Branch
Definition: a local office, shop or group that is part of a larger organisation with a main office elsewhere.
Requires the manufacturer to establish their own sales operation in the target country. This channel type provides more control over the foreign marketing plan than the agent/ distributor option, yet it has higher fixed costs.
2. Joint Ventures
Definition:
1. A combination of two or more individuals or legal entities who undertake together a transaction for mutual gain or to engage in a commercial enterprise together with mutual sharing of profits and losses.
2. A form of business partnership involving joint management and the sharing of risks and profits as between enterprises based in different countries. If joint ownership of capital is involved, the partnership is known as an equity joint venture.
Advantages:
• Combined resources can exploit a target market more effectively
• May be the only investment opportunity if host governments prohibit sole ventures (commonly developing or communist countries)
• The local partner reduces the foreign partner’s investment to risk exposure
• Attractive to foreign companies with little experience in foreign ventures
• The local partner contributes his knowledge of local customs, business environment and important contacts e.g. with customers and suppliers
Disadvantages:
• Can lead to a loss of control over foreign operations
• The interests of local partners must be accommodated
• Can be obstacles to the creation of global marketing and production systems
Choosing the right partner
• Determine what you want the joint venture to accomplish
• How does the venture fit with your overall international business strategy
• Find out the objectives of your local partner and the resources he could bring
Tips for a successful joint venture
• Negotiate ownership shares, dividend policy, management issues, dispute settlement etc.
• Build a strong business relationship supporting the common venture
• You may wish to learn the language/ cultural habits of your foreign partner to strengthen your business relationship
3. Contractual entry modes
Licensing
Definition: The transfer of industrial property rights, patents, trademarks or proprietary know-how from a licensor in one country to a licensee in a second country.
For manufacturer’s wanting an aggressive foreign-market entry strategy licensing is not the best option. Only when export or investment entry is not feasible do they consider it. Small manufacturers are more prone to using licensing as an entry mode since it offers a low-commitment entry mode. Licensing can be combined with other entry modes and it’s most popular form is licensing/ equity mixes allowing the manufacturer to benefit from the growth of the licensee firm.
Advantages:
• The circumvention of import restrictions and transportation costs, since only intangible property rights and technology are transferred
• It requires no fixed investments by the manufacturer
• Licensing arrangements are exposed to less political risks than foreign investments
Disadvantages:
• No quality control is maintained over the licensed product
• No control over the licensee’s volume of production or marketing strategy
• The licensed product’s market performance depends on the licensee
• A lower size of returns is obtained compared to export or investment e.g. royalty rates rarely exceed 5 per cent of the licensee’s net sales
Opportunity costs:
• The creation of a competitor in third markets or a manufacturer’s home market
• The exclusivity of a licensing agreement prevents the licensor from marketing the product in the licensee country even if he is failing to exploit market opportunity
Franchising
Definition: to authorize others to use a company’s name and sell its goods.
Franchising is different than conventional licensing since: the franchisor licenses a business system to an independent franchisee in a foreign country. He carries on the business under its trade name and in accordance with the franchise agreement, reproducing the products or services of the franchisor in the foreign country.
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Choosing the right entry mode
Managers must decide on the correct entry mode for a particular product/ country, this is done by following on of three rules:
1. The Naive rule - whereby managers use the same entry mode for exporting to all their target countries, by far the riskiest option since managers can end up using an inappropriate entry mode for a particular foreign country or forsake promising foreign markets
2. The Pragmatic rule - whereby managers start by assessing export entry and change their entry strategy accordingly, this saves time and effort yet ultimately fails to bring managers to the appropriate mode
3. The Strategy rule - whereby managers use right entry mode as a key to the success of their foreign entry strategy, making systematic comparisons of all entry modes. It is the most complicated method yet results in better entry decisions
Entering International Markets
Modern companies need to plan for growth and survival in the globalized world of business competition. Some will choose to conduct business from home taking on competitors in the safety of their domestic market. Other companies will decide to go international operating from both domestic and foreign markets.
In order to do this the latter will have to make use of entry strategies to sustain their presence in foreign market. An entry strategy is a process of deciding on the direction of a company’s international business by combining reason with empirical knowledge.
The entry-strategy time frame will be an average of 3 to 5 years. Yet once operations in a foreign market begin, the manager may decide to revise entry strategy decisions.
A foreign market entry strategy is an international business plan, its aim is to lay down:
• Objectives
• Resources
• Policies
These will guide a company’s international business long enough to achieve sustainable growth in world markets.
Managers need to tailor an entry strategy for each product or foreign market. Cultural differences in foreign markets mean that a single entry strategy would not necessarily function in another setting. Different products and different markets will inevitably draw different responses.
If dealing with many foreign markets, the logistics of devising a different entry strategy for each is a daunting task. Clusters of similar country markets can be identified which can be entered with a similar strategy.
Commonly used entry strategies
Most managers enter foreign markets through exporting. By using an indirect channel (e.g. an export management company), a manufacturer can begin exporting with low start up costs; it allows him to tests the result of his product in a low-risk experimental fashion. Yet indirect exporting leads to an inevitable lack of control over his foreign sales. After initial exposure into the foreign market more ambitious managers will prefer using a direct export channel.
1. Direct export channels
Agents
Definition: An individual or legal entity authorized to act on behalf of another individual or legal entity (the principal). An agent’s authorized actions will bind the principal. A sales representative, for example, is an agent of the seller.
A foreign agent is an independent middleman representing the manufacturer in the foreign market. He sells the product on a commission basis. The manufacturer will receive orders from his agent and ship directly to his foreign buyer.
Agent channels have lower start up costs and are commonly used for early export entry.
Distributors
Definition: An agent who sells directly for a supplier and maintains an inventory of the supplier’s products.
A foreign distributor buys the manufacturer’s product for resale to middlemen or final buyers. He has more functions than an agent (maintaining inventories providing after-sales services) and assumes the ownership risk. He obtains a profit margin on resale of the product.
An agent or a distributor?
• Determine their profit contribution by estimating their respective sales and costs
• Also consider control, risk and other channel specifications
• Monitor channel performance to know if you need to change your channel arrangements
Choosing a foreign agent/ distributor
• Draw up an agent/ distributor profile list listing all their desired qualities in that particular foreign market
• After desk research, personally interview the best prospects
• Draw up a written contract with your foreign representative putting special emphasis on exclusive rights, the resolution of dispute and contract termination
• Remember ‘your line is only as good as your foreign representative’ and invest the necessary time and effort in finding the appropriate candidate and on building an efficient ‘export channel team’
Subsidiary/ Branch channels
Subsidiary
Definition: any organisation more than 50 per cent of whose voting stock is owned by another firm. Wholly owned subsidiaries is where a firm owns 100 per cent of the stock, it can set up a new operation in that country known as a green-field venture or it can acquire an established firm in that host nation and use that firm to promote it’s products
Branch
Definition: a local office, shop or group that is part of a larger organisation with a main office elsewhere.
Requires the manufacturer to establish their own sales operation in the target country. This channel type provides more control over the foreign marketing plan than the agent/ distributor option, yet it has higher fixed costs.
2. Joint Ventures
Definition:
1. A combination of two or more individuals or legal entities who undertake together a transaction for mutual gain or to engage in a commercial enterprise together with mutual sharing of profits and losses.
2. A form of business partnership involving joint management and the sharing of risks and profits as between enterprises based in different countries. If joint ownership of capital is involved, the partnership is known as an equity joint venture.
Advantages:
• Combined resources can exploit a target market more effectively
• May be the only investment opportunity if host governments prohibit sole ventures (commonly developing or communist countries)
• The local partner reduces the foreign partner’s investment to risk exposure
• Attractive to foreign companies with little experience in foreign ventures
• The local partner contributes his knowledge of local customs, business environment and important contacts e.g. with customers and suppliers
Disadvantages:
• Can lead to a loss of control over foreign operations
• The interests of local partners must be accommodated
• Can be obstacles to the creation of global marketing and production systems
Choosing the right partner
• Determine what you want the joint venture to accomplish
• How does the venture fit with your overall international business strategy
• Find out the objectives of your local partner and the resources he could bring
Tips for a successful joint venture
• Negotiate ownership shares, dividend policy, management issues, dispute settlement etc.
• Build a strong business relationship supporting the common venture
• You may wish to learn the language/ cultural habits of your foreign partner to strengthen your business relationship
3. Contractual entry modes
Licensing
Definition: The transfer of industrial property rights, patents, trademarks or proprietary know-how from a licensor in one country to a licensee in a second country.
For manufacturer’s wanting an aggressive foreign-market entry strategy licensing is not the best option. Only when export or investment entry is not feasible do they consider it. Small manufacturers are more prone to using licensing as an entry mode since it offers a low-commitment entry mode. Licensing can be combined with other entry modes and it’s most popular form is licensing/ equity mixes allowing the manufacturer to benefit from the growth of the licensee firm.
Advantages:
• The circumvention of import restrictions and transportation costs, since only intangible property rights and technology are transferred
• It requires no fixed investments by the manufacturer
• Licensing arrangements are exposed to less political risks than foreign investments
Disadvantages:
• No quality control is maintained over the licensed product
• No control over the licensee’s volume of production or marketing strategy
• The licensed product’s market performance depends on the licensee
• A lower size of returns is obtained compared to export or investment e.g. royalty rates rarely exceed 5 per cent of the licensee’s net sales
Opportunity costs:
• The creation of a competitor in third markets or a manufacturer’s home market
• The exclusivity of a licensing agreement prevents the licensor from marketing the product in the licensee country even if he is failing to exploit market opportunity
Franchising
Definition: to authorize others to use a company’s name and sell its goods.
Franchising is different than conventional licensing since: the franchisor licenses a business system to an independent franchisee in a foreign country. He carries on the business under its trade name and in accordance with the franchise agreement, reproducing the products or services of the franchisor in the foreign country.
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Choosing the right entry mode
Managers must decide on the correct entry mode for a particular product/ country, this is done by following on of three rules:
1. The Naive rule - whereby managers use the same entry mode for exporting to all their target countries, by far the riskiest option since managers can end up using an inappropriate entry mode for a particular foreign country or forsake promising foreign markets
2. The Pragmatic rule - whereby managers start by assessing export entry and change their entry strategy accordingly, this saves time and effort yet ultimately fails to bring managers to the appropriate mode
3. The Strategy rule - whereby managers use right entry mode as a key to the success of their foreign entry strategy, making systematic comparisons of all entry modes. It is the most complicated method yet results in better entry decisions
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