During the last few decades, globalization has increased competition amongst firms and has triggered the willingness of most domestic companies to enter into foreign markets. Large, middle sized and small companies are using different ways to reach to their targeted market segments, increase returns, and ensure growth (Goldman & Nieuwenhuizen, 2006). Different approaches offer these companies varied opportunities to adapt modes necessary in the foreign markets and in finding new distribution and supply chain channels.
Choosing a foreign market entry strategy involve considerations of costs, alignment of the strategy to company’s objectives, time element, and foreign market environment and structure, amongst other elements. Effective international strategic entry policy enables a company to compete in foreign markets and in achieving its fundamental objective (Lymbersky, 2008). Developing a strategy for a single market may work in most foreign markets. International strategy, just like any other strategy, is an ongoing process, and as such the strategy adopted requires a continuous update. Following are some of the commonly used foreign entry strategies. Of critical consideration is that not every strategy work for every company, and as such companies should be objective on the strategy chosen (John & Allen, 1998).
This is considered as the most cotemporary foreign entry strategy used by most manufacturing companies. It is the marketing and trade of products between countries. Using exporting as an entry does not require manufacturing in the foreign country; however, significant marketing is required in the foreign market. Exporting may be either passive or aggressive; the former requires that the exporter acts on orders from foreign markets while the latter involves developing marketing policies that provide a picture of what the company intends to do in the foreign market (Drabner, 2003). Aggressive exporters define their goals, plans, and strategies including their products, pricing, distribution, promotion, and research strategies.
The advantages of exporting as an entry strategy to foreign markets include less risk of manufacturing abroad as al the processing is done locally. The strategy gives an opportunity for the exporters to learn about the foreign markets before investing (Goldman & Nieuwenhuizen, 2006). It also reduces uncertainties of operating abroad such as inflation, political influences, and expectations from foreign governments. Its main disadvantage is that the exporters lack control over their products as the importers have power and control over what they need and amounts required.
Exporting methods may be direct or indirect. In direct exporting the exporting firm uses agents, distributors, oversea government, or overseas subsidiaries. Indirect exporting methods include use of contracts to operate in foreign markets, credit acceptance, exporting of expertise, ad use of commissioning that acts as motivation.
This is a subsidiary approach of exporting. It is a form of barter trade between foreign markets except that it circumvents import quotas (Peter & Mark, 1998). Competition implies intense investment in marketing, and as such organizations may expand operations where competition is less intense. Countertrade is used to stimulate domestic industries or where the supply of raw materials is short.
Countertrading takes different forms; contracts that involve delivery and payment of goods supplied and purchased, and payments of imported goods (John & Allen, 1998). One of this method’s shortcomings is the marketability of products of trade. It is also difficult to set prices and quality of service in the target markets using countertrade.
EXPORT PROCESSING ZONE
This is a zone within a country exempted from duties and tax for processing or re-processing goods for export. This entry strategy benefits the host country through transfer of skills, and flow of goods in and out of the country. The foreign company accesses available resources such a raw material and labor at a cheaper cost compared to costs in their domestic markets (Lavin & Cohan, 2011). It is a strategy used by most international companies to enter into markets in developing economies as the developing economy provides labor reducing unemployment levels, whilst the company produces the goods and exports them without duty.
This is a form of partnership that involves creating a third independent company managed differently. Two companies consent to work together in a targeted market, and form a third company to undertake the operations in the foreign market (Tallman, 2007). Risks and benefits are shared by the two companies equally. An example is the joint venture between Sony and Ericson cell phone.
Joint ventures are advantaged from the sharing of risks and benefits that combine local in-depth ability and knowledge of the foreign partner who has technology and market know-how of the foreign market. Partnering of the companies promotes finance synergy of the companies. However, a joint venture may be limited if the partners lack full control of managing the third company. It is also difficult to withdraw and recover capital, and partners may lack consensus from different views on expected benefits and sharing policies.
This strategy works for companies that use same production models such as food outlets that can be transferred to other markets (Drabner, 2003). McDonalds is among the companies that have used this strategy in entering many foreign markets. Two conditions apply for this strategy: first, the business should have a unique method of production and strong brand recognition utilizable at the international level, and secondly the model should be applicable for future competition.
When entering foreign markets partnering is almost a necessity, and in some markets as Asia it is a requirement. Partnering takes different forms; from a simple co-marketing agreement to a complex strategic alliance. It is a useful strategy where markets, cultures, and business of the partners is substantively different. The partners share local market knowledge, contacts of the customers, and policies deemed to be useful in acquiring of market shares in the foreign market.
This involves a firm in one country agreeing to permit a company in a targeted foreign market to use its processing, manufacturing, skills, and trademark in the foreign country. An example is the Coca Cola Company that offers licenses to overseas countries to operate and manufacture the products in the foreign markets. The strategy involves minor involvement and fewer expenses as compared to other strategies such as franchising. The only cost incurred is on signing of the agreement and enhancing implementation of the policies.
Licensing is recommended for foreign operations as it open doors to low risk relationships of manufacturing. It links the parent (licensor) and the receiving company implying maximum synergy in marketing efforts. In licensing capital is not held in the foreign market as the parent company continues its operations, and, therefore, it acts as a method of company growth (Goldman & Nieuwenhuizen, 2006). It also provides options of taking over royalties of stock unlike other strategies that are limited to the parent company’s license or trademark.
Its limitations however, include limited participations of the licensee as the party can only be involved in matters of its specified product, trademark, and process. Returns of marketing and manufacturing are at risk as the licensee may fail to deliver according to the terms specified. Licensing also exposes the technological know-how or operations of the licensor, and as thus the licensee may take advantage and take over the operations by opening a similar company with similar operations but with different products.
This involves using services of organizations thought to have high levels of expertise in exporting skills. Companies having an interest in a product or service and intend to sell the product in large companies may approach the large companies so that the product may be included in the large company’s inventory. This strategy reduces the risks and costs of marketing and entering in foreign markets as the product is essentially sold to the large company domestically (Charles, 2008). The acquiring company does the marketing of the acquired product as it markets its products on the international front. The limitation is that the product may not realize expected profits as the income generated is shared with the acquiring company.
BUYING A COMPANY
In some foreign markets buying an existing local company may be the most apposite entry strategy. This may be driven by government regulations in the foreign market as the only way to enter in the market or if the acquiring company has a substantial market share in the company based in a foreign economy (Lavin & Cohan, 2011). Buying a company in a foreign market is an expensive entry strategy and determining the true value of the company in a foreign market requires diligence. This entry strategy, however, provides the acquiring company the status of a local company in the foreign market, an established market and customer base, and treatment as a local firm by the local government.
This involves buying of land, setting up a facility, and operating business in a foreign land. It is an expensive strategy as the costs of setting up a business in a foreign land may not be equal as setting it up locally. It holds a high risk as it requires proper understanding of costs and risks from government regulations, transport, and access to available technology, supply chain management, and foreign expertise. However, these costs may be realizable as the company grows in the foreign land relative to other approaches of foreign entry as it is considered as a local business in the foreign land.
Organizations using this strategy provide services that range from environmental consultancy, construction and engineering, or architecture (Charles, 2008). Such a project involves setting up of a facility and turning it over to the client for operation. The method is appropriate for entry in foreign markets where the client is the government or the projects receive finances from international agencies such as the World Bank.
Organizations face a number of strategy alternatives when making decisions on foreign market operations. Each of these strategies have to be weighted in terms of costs, distance, risks, competitive intensity, size and growth rate of the foreign market, and product characteristics. Entering into a foreign market may be a risky and expensive venture if the appropriate strategy is not implemented. The timing of entry is also crucial when choosing the strategy as some strategies work well when the market is on boom while others work during recess.
Charles, H. (2008). International Business: Competing in the Global Market Place. Strategic direction, Vol. 24, No 9.
Drabner, T. (2003). Market entry strategies and their applicability to SMEs - The winding road to foreign business. Munich: GRIN Verlag GmbH.Bottom of Form
Goldman, G., & Nieuwenhuizen, C. (2006). Strategy: Sustaining competitive advantage in a globalised context. Cape Town: Juta.
John, R., & Allen, M. (1998). Global business strategy. London [u.a.: Thomson
Lavin, F. L., & Cohan, P. S. (2011). Export now: Five keys to entering new markets. Singapore: John Wiley & Sons, (Asia. Bottom of Form
Lymbersky, C. (2008). Market entry strategies: Text, cases and readings in market entry management. Hamburg: Management Laboratory Press.Bottom of Form
Peter, J., B. & Mark, C., C. (1998). Analyzing Foreign Market Entry Strategies: Extending the Internalization Approach. Journal of International Business Studies, Vol. 29, No. 3. Pp 539-561.
Tallman, S. B. (2007). A new generation in international strategic management. Cheltenham, UK: Edward Elgar.