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FOREIGN MARKET ENTRY

Explanation and processes

The business world of today calls for expanding sales and profits in order to achieve ever-increasing earnings.  Business owners and managers must look for any available opportunities to keep their market share and expand into new markets.  What happens when their local market becomes saturated?  The savvy leader is inclined to search abroad for any and all potential new markets for their product or service.  New markets offer the possibility of increasing total revenue and/or decreasing the costs of goods sold, thereby increasing profits.  Entering new markets may also allow a company to follow its existing customers abroad, attack competitors in their home markets, guarantee a continued supply of raw materials, acquire technology or ingenuity, diversify geographically, or satisfy the stockholder’s desire to expand.

In many cases, with many companies, it is survival. There simply isn’t enough domestic demand to keep many firms in business, without going overseas.

Once management has made the decision to expand and has determined the target market or markets, the next question is obviously, “how”.  Selecting a mode for entering or expanding in a foreign market is one of the most crucial strategic decisions that can be made by a company.  Weighing all factors and choosing the proper mode of entry can result in huge competitive advantages, while making a poor decision can lead to the demise of the company. 

Often, international people without the knowledge base or the necessary contacts are tasked with “going international.” 99% of the time, they will fail.

Foreign market penetration can be done by a variety of different methods; each possibility should be assessed before the process begins. 

Following is a comprehensive list of various modes of entry that can be utilized when entering or expanding in a foreign market.

1. ACQUISITIONS: purchasing an existing company.

PROS:

1) Established market

2) Skilled workers available (often not found through normal employee search)

3) Licenses are “grandfathered” in

4) Goodwill

5) Technology, clients, and vendors are instantly acquired

6) Negotiations usually take place on top level, target handles licensing and compliance

7) Instant branding

8) Reduction of competition

9) Increased knowledge base

CONS:

1) Hidden surprises?

2) Which employees are politically connected, and with whom?

3) “Favors” and concessions are assumed

4) Bad will

5) Technology often outmoded, vendors usually chosen for reasons besides merit

6) In many nations, employment continuance becomes conditional for the deal

7) Branding often not part of HQ’s ideals

8) Often expensive, and time consuming to complete an acquisition

9) Blending of corporate cultures

10) Necessity to train local management, and HQ’s management

11) Potential tax and legal problems

Things to consider:

2. GREENFIELD INVESTMENT:  a project that starts with bare ground and builds up from there.  Coca Cola, McDonalds, and Starbucks are great examples of American companies that have invested in Greenfield projects around the world. 

PROS: 

1) Economies of scale and scope in production, marketing, finance, research and development, transportation, and purchasing. 

2) Greater control in all aspects

3) Best long term strategy

4) commitment to market

5) Vendor financing often available

6) Work with authorities from the beginning

7) Control over your brand

8) Control over staff

9) Press opportunities

CONS:

1) Higher expense,

2) Competition in these markets can be difficult to overcome,

3) Entry into these markets can take years to happen. 

4) Barriers to entry can be costly

5) Governmental regulations may put these multinational enterprises at a disadvantage in the short term.

3.  LICENSING: a contractual arrangement whereby a company transfers via a license, the right to distribute or manufacture a product or service to a foreign country or to use any type of expertise which may include some or all of the following: patents, trademarks, company name, technology/technological know-how, design, and/or business methods. The licensee pays a fee and/or percentage of sales in exchange for the rights. 

ADVANTAGEOUS WHEN: import and investment barriers exist, when legal protection is possible in the target environment, when there is otherwise, a low sales potential in target country or a large cultural distance is present.

PROS: 

1) Quick and easy entry into foreign markets: allows a company to 'jump' border and tariff barriers. 

2) With lower capital requirements.

3) Potential for a large ROI; returns are realized fairly quickly. 

4) Risks are very low with this mode of market entry:  You can enter with an established product; avoid most “uncontrollable” risks, and have fewer financial and legal risks. 

CONS: 

1) Control by the licensee is low,

2) The licensee may become a competitor,

3) Intellectual property may be lost,

4) License period is usually limited;

5) Poor management of quality, for example, can damage brand reputation in other license territories. 

A. Technology Licensing: when a licensor's patents, trademarks, service marks, copyrights, trade secrets, or other intellectual property may be sold or made available to a licensee for compensation that is negotiated in advance between the parties.

PROS: 

1) Can provide ‘reverse flow’ of technology in which the original licensor shares in technical improvements developed by the licensee;

2) Licensee is able to use the intangible property and receive technical assistance.

CONS

1) Can yield loss of control over technology and

2)  Loss of intellectual property;

3) Control over the technology is weakened because it has been transferred to an unaffiliated firm.

B.  Franchising: a very efficient model for distributing goods and services.  In this type of licensing agreement, control over the operations is granted to the franchisee in exchange for some type of payment and for the promise to abide by the terms of the contract.

PROS

1) Market entry with less financial, legal, and political risks; working with proven product

2) Economies of scale by ordering with owner and other franchisees.

3) Partners can come to the new market and see the business up close, first hand.

CONS

1) The licensor has little direct control;

2) Licensee has lower profits than if owned business or exported own goods.  

4.  FOREIGN DIRECT INVESTMENT: The direct ownership of facilities in the target country.  It may be made through the acquisition of an existing entity or the establishment of a new enterprise.  There is a high degree of commitment and high level of resources.  Japanese automobile manufacturers are well known for their use of wholly owned subsidiaries in the USA

ADVANTAGEOUS WHEN: there are import barriers; there is a small cultural distance; assets cannot be fairly priced; there are high sales potential; low political risk exists.

PROS

1) Provides high degree of control in the operations;

2) The ability to better know the consumers and competitive environment (a direct presence). 

3) Provides jobs in target country. Governments will help you!

4)  Provides the scale economies and efficiencies of production when across several markets;

5) Benefit of the comparative advantage of different economies such as the supply of labor or raw materials;

6) Has value of technology ownership (minimizes technology spillovers); considered an “insider”. 

CONS:

1) Higher risks; this entry strategy has the highest capital and management costs; 

2) Greater difficulty in managing local resources.

3) The largest array of uncontrollable factors affects the foreign direct investor including currency and exchange risks, performance requirement risks, discriminatory tax, and licensing requirements, to name a few.

5.  JOINT VENTURES: a cooperative between two or more organizations that share a common interest in a business enterprise or undertaking; is a popular mode for quick entry. 

A.     Example of International Company and Local Owners:  General Mills teamed up with Nestlé to form Cereal Partners Worldwide in an effort to compete against Kellogg in the European cereal market. 

General Mills brought strong cereal brand names, technology and expertise to the table while Nestlé brought European manufacturing facilities and a strong distribution system.  Each separate company had something different to offer and the resulting combination allowed the joint venture to flourish.

As shown in the example, the local company, Nestlé, had existing business infrastructure in the proposed market and, therefore, had knowledge of the customs and tastes of the people.  This advantage allowed General Mills to enter the market more quickly than if it had chosen to build a manufacturing facility from scratch.  Some other advantages of such a joint venture include gained political contacts, lower tax rates on profits, fewer inspections and less government interference in daily operations, greater assurance of continuous electricity supplies, more local infrastructure such as roads and utilities and easier access to government controlled raw materials and supplies.

  Joint ventures, like any other mode of entry, come with some associated drawbacks.  Loss of effective management control can be a major disadvantage of the joint venture with a local owner.  It is common for developing nations to require that the local owner hold majority ownership of a joint venture.  In this instance, it is obvious that the local owner will have a greater say in business decisions and their lack of expertise could result in reduced profits, increased operating costs, inferior product quality, exposure to product liability or even environmental litigation and fines.  Shared profits are another huge disadvantage of the joint venture.  Neither General Mills nor Nestlé gets to keep all of the profits of Cereal Partners Worldwide.  Finally, the loss of intellectual property is a drawback that should be considered before entering a joint venture with a local owner.  As a result of forming Cereal Partners Worldwide, Nestlé now knows much more about producing the General Mills line than they did before the agreement.  The pros and cons must be weighed before any joint venture should be established.

B.     Example of Two International Companies Joining for Business in a Third Market: Ford and

Volkswagen teamed up in 1987 to form Autolatina in an effort to sell cars in South America. Autolatina produced vehicles that were based on Ford and Volkswagen designs but marketed through each respective manufacturer’s distribution channels.  The advantages of such an agreement include the increased resources and expertise gained by each participant as well as the shared risk between the companies.

The obvious drawback of this type of joint venture is that neither company may have an existing foothold in the third market.  In this regard, the process may be similar to starting a business from the ground up, which is extremely costly and time consuming. The remaining disadvantages are similar to other types of joint ventures in that both companies will lose some management control, some profits, and some intellectual property during the agreement.

C.  Example of an International Company and a Government Entity:  this is a lesser-used mode of joint venture.  This type of agreement has been used extensively by the various states of the former Soviet Union.  Tengizchevroil is a joint venture between Chevron and Kazakhstan to produce, refine, and transport oil for both domestic use and sale abroad.  The oil is located in Kazakhstan and Chevron has the expertise and equipment to run the entire operation.

           The advantages for Chevron include a virtually unhindered access to the market, ease of licensing and tax benefits.  The advantages for Kazakhstan are just as obvious.  The former Soviet republic gets expert production of its oil, newly created jobs, and profits.

           The disadvantages to Chevron include the hardships in dealing with the unstable political, economical, and legal framework; the difficulty in accessing the pipeline for transport, and the extremely high and uncertain export taxes on oil leaving Kazakhstan.  Chevron might also have to deal with a government that is not concerned with profit.  In other words, Kazakhstan may not care about keeping production high so long as oil is being produced.

D.              Example of Two or More International Companies for a Limited Duration Project:  a very popular mode.  This mode can be demonstrated best by considering a construction project in Turkey.  Bechtel Group established a joint venture with Enka Insaat va Sanayi to construct the 229-kilometer Ankara-Gerede Highway in Turkey.  The agreement outlined the duties of each respective company in regard to financing, project management, procurement, hiring, design, subcontracting, and administration.

      The advantages of this type of joint venture again include shared risk and expertise and increased resources.  An excellent by-product of this agreement is the upgraded skill level of the countrymen as a result of the work.  The Ankara-Gerede Highway project employed nearly 6,000 Turkish workers, some of which arrived not knowing how to drive a car and left as expert operators of multimillion-dollar equipment.

      The major drawbacks are similar to other joint ventures along the lines of shared profits, loss of complete control, and potential loss of intellectual property.

6.  EXPORTING

      A.  DIRECT:  selling a product or service directly to a foreign firm by the home-country firm. Costs and prices may be lowest if production occurs in only a few locations around the world and the efficiently produced goods are exported to most markets.  Pharmaceutical and clothing companies use this mode frequently for globalizing. 

1.      Sales Representatives/Paid by seller: foreign-based representatives who work on a salary/retainer plus incentive basis to locate buyers for a company’s products.

2.      Distributors/Agents: purchase merchandise directly from the home-country firm to re-sell at a profit.

3.      Direct Sales to End-User: A manufacturer of medical equipment, for example, may be able      to sell directly to hospitals. Other major end-users include foreign governments, schools, businesses and individual consumers.

ADVANTAGEOUS WHEN: there is limited sales potential in target country; little product adaptation is required; distribution channels are close to plants; there are high target-country production costs; there are liberal import policies; high political risk exists. 

PROS

1) No investment in foreign production facilities is required;

2) Maintain more control; minimized risk and investment; speedy entry;

3) Maximize economies of scale; to prevent competitors from gaining ‘first-mover’ advantages in new markets;

4) Sell excess production capacity;

5) Gain information about foreign competition;

6) Stabilize seasonal market fluctuations;

7) Reduces dependence on existing markets.

CONS

1) More expensive due to tariffs, marketing expenses, transport costs;

2) Sometimes difficult to coordinate the cooperation of exporter, importer, transport provider, and government;

3) Limited access to local information; company viewed as “outsider”;

4) Need to develop customer base and logistics of moving the goods overseas;

5) May be difficult to overcome trade barriers;

6) May lose control over product's pricing and marketing;

7) Task of finding customers.

    B.  Indirect: selling goods and services through various types of intermediaries.

      1. Foreign agents are hired by companies for representation in overseas markets as the agent has knowledge of business practices, language, laws, and culture. There are different types of agents who perform a number of functions.   The one you choose to hire is based upon how much you want the agent to do for you and how much you are willing to pay.

PROS: 

1)      Agents can help identify customers for your products and market your goods to them;

2)      uncover other opportunities/markets for your product;

3)      translate and act as interpreter in business dealings in the foreign country;

4)      validate translation of your publicity materials;

5)      Assist with local travel and/or living arrangements;

6)      provide guidance with local government regulations.

CONS: 

1)      Agents often work for other businesses…and truly work for the BUYER, not the seller

2)      Agents prioritize their clients based on product, incentives and/or base pay. 

3)      There are no guarantees the agents will make inroads in terms of market share with your product. 

2. Export Management Company (EMC) functions as an "off-site" export sales department, representing your product along with various other non-competitive manufacturers. The EMC searches for business for your company and usually provides the following services: market research and development of marketing strategy; locating new, and utilizing existing foreign distributors or sales representatives to put your product into the foreign market. Functions as an overseas distribution channel or wholesaler. Takes ownership of the goods and operates on a commission basis.

PROS: 

1)      Faster entry into the overseas market in terms of first recorded sales;

2)      better focus on exporting because most firms give priority to their domestic problems;

3)      lower out-of-pocket expenses;

4)      an opportunity to study the methods and potential of exporting; expertise in dealing with the special details involved in exporting, as well as its strategies.

CONS: 

1) NO control of the export strategies and quality control of after-sales service;

2) can create competition from the EMC’s/ETC’s other products (might be more profitable and easier to sell)

3) Reluctance of some foreign buyers to deal with a third-party intermediary;

4) Added costs and higher selling prices because of gross profit margin requirements of the EMC/ETC, unless the economies of scale can be used to off-set this factor. 

3. Piggyback Exporting: when a company, which already has an export distribution system in place, is allowed to sell another company's product in addition to its own. A good advantage is that the requisite logistics associated with selling abroad are borne by the exporting company.

PROS: 

1)      International experience not required;

2)      Fast entry to the international market;

3)      Little to no increased financial commitment; generally low risk.

CONS: 

1)      Low control by the exporting business;

2)      Possible choice of wrong market, wrong distributor;

3)      Inadequate market feedback;

4)      Potentially lower sales;

5)      Higher risk in general.

6)      Brand erosion

7.      E-COMMERCE: using inter-networked computers to create and transform business relationships. Applications provide business solutions that improve the quality of goods and services, increase the speed of service delivery, and reduce the cost of business operations. A new methodology of doing business in three focal areas:   *Business-to-business    *Business-to-consumer     *Intra-business

     

It is most commonly associated with buying and selling information, products, and services via the Internet, but it is also used to transfer and share information within organizations through intranets to improve decision-making and eliminate duplication of effort. The new paradigm of E-Commerce is built not just on transactions but also on building, sustaining, and improving relationships, both existing and potential.  Companies like Dell Computer, Toys-R-Us, Ebay and Yahoo have found E-Commerce a viable business model.  With an estimated $50 billion expected in E-Commerce in 2002, this type of business relationship is here to stay.

PROS: 

1) Quick, easy way to increase market share; if correct marketing methodologies are employed

2) Easy way to gain a “presence” in international markets;

3) After capital costs paid off, productivity, and therefore, profits increase;

4) Enables greater economies of scale.

CONS

1) Hardware and software are essential, and these are big expenses;

2) Distribution must be very efficient;

3) Website needs constant updates, which leads to extra labor, training, and retraining costs.

4) True costs of Ebusiness difficult to calculate

5) Much less trust than “click and brick” entities

8.  WHOLLY OWNED SUBSIDIARY (WOS):  entails a direct investment in the target country.  Wholly owned operations are subsidiaries in another nation in which the parent company has full ownership and sole responsibility for the management of the operation. Eastman Kodak has WOSs in many countries.

ADVANTAGEOUS WHEN: risks of investing in a particular foreign market are low, maximum    operational control is desired; when host governments have open trade and investment policies.

PROS: 

1)      Highest level of control;

2)      Lowest technology risk;

3)      High performance;

4)      Best long term strategy, possible exception of Greenfield entry

CONS:

1) High investment risk;

2) High resource commitment;

3) Generally higher tax rates on profits;

4) More regulated; government interference in daily operations;

5) Lots of planning required,

6) Slow entry;

7) May have more difficulty accessing local government-controlled raw materials and supplies. 

8) Some countries feel exploited with this type of method.

9.  CONTRACT MANUFACTURING:  a firm contracts with a local manufacturer to produce its products to the firm’s specifications.  An example of this is when Gates Rubber licensed one of its belt technologies to General Tire’s Chilean plant.  General Tire produced part of its output with Gates’ label.  Or the case of Peace Frogs T-shirts who exports T-shirts directly to some countries, but in Spain per capita income is lower, competition from domestic producers is stronger, and tariffs are high, so they license a Barcelona-based company the rights to manufacture their product.

ADVANTAGEOUS WHEN: risks of investing in a foreign country are high, when there are stringent import barriers, when high political risks exist, lack of raw materials at home.

PROS

1) Frequently importation of like products is halted but the firm contracting manufacturing would earn a royalty on the now locally produced product, would have belts made to their specifications without the expense of investing in production facilities, and competition of other importers would be eliminated;

2) Generates employment and foreign exchange for the host county. 

3) Usually easy access to entry as host country knows laws, politics, customs, etc.; can begin to build a relationship with the host country.

CONS

1) Could lose control of quality; possible low quality workers;

2) Not in control of pricing or marketing;

3) No equity in the subcontractor.

4) Your competition may be a customer!

10. MANAGEMENT CONTRACT:  when one firm provides management in all or specific areas for another firm, in exchange for a fee.  Hilton Hotels, for example, provides management services for non-owned overseas hotels that use the Hilton name.  In return, Hilton probably earns a fee that is a percentage of sales and, more importantly, gains brand recognition.  Similarly, Delta Airlines also provides management services to foreign airlines in exchange for a fee.

PROS:      

1) Entry to the market is rather simple. 

2) Using business experience to help similar companies in other countries is easy to set up, operate, and collect on. 

3) It also allows the experienced company an opportunity to research the market for other modes of entry.

CONS:

1) Lack of profit; a percentage of sales are not typically the largest margin possible when operating a business. 

2) The foreign company will gain much insight into the business procedures of the expert company.

3) Detrimental to the expert company in the long run if the foreign firm ever becomes a competitor.

A.  Turn-key Project can also be a form of contract management. This is when aspects of a business are contracted and then run for a specified amount of time until the purchaser takes over.  Aspects of the project can be coordinated from inception through completion. These processes can include technology, design, construction, or providing expertise in a particular area.

11.  STRATEGIC ALLIANCES:  An often-overlooked mode of entry is the strategic alliance.  This is typically a business relationship where similar companies combine efforts to get a better price on materials, perform research and development, collaborate on marketing or distribution, or even seek new business.  A good example of a strategic alliance took place in 1997 between Intel, Motorola, and Advanced Micro Devices.  The three separate corporations formed a not-for-profit company called Extreme Ultraviolet in order to collaborate on research and development.

       Strategic alliances aim to achieve advantages of scale, scope and speed, increase market penetration, increase competitiveness, enhance product development, develop new business opportunities and markets, increase exports and reduce costs.

      The main drawback of any strategic alliance is the potential for the alliance to be taken over by one of the partners.  Since the partners are most often competitors, there is always a chance that the alliance will break up in the end.

Entering or expanding in a foreign market can obviously be accomplished through a wide variety of different options.  A mode of entry should be selected only after analyzing each alternative and comparing it to others. 

1)      The quantity of resource commitment required,

2)      The amount of control and

3)      The level of technology risk

Are the three basic differentiating characteristics between the modes of entry. 

In general, exporting requires the least amount of resources and allows for the lowest level of control.  Wholly owned subsidiaries, on the other hand, require the most resources but allow for the most control.  As far as technology risk is concerned, exporting is the least risky while licensing is generally the most risky.  It is apparent that not every mode of entry will work for every situation.  A company looking to enter a foreign market should look at the experiences of other companies in similar markets to try and gain some insight as to the best alternative.  During the process and additionally, after the choice of entry has been made, the company should definitely enlist the help of a professional such as an international marketer to insure the best possible strategy is carried out. The most control is usually what is sought, however, control can be expensive.

The Process:

Mode of entry (MOE) should be carefully determined. The determinants are:

The Host Firm’s

The Market’s

1. The issues should be discussed strategically. It is best to set aside some days with visiting expertise to uncover means for market entry, and begin to understand the risk factors and budgeting process.

                                                                                                                                               

Time Needed: 5-10 business days

Format: Interactive seminar with all parties involved

Costs:

2. Once a MOE has been picked, research should be undertaken to confirm the company’s decision. Project team for research selected

Time Needed: Dependant on firm’s commitment. Can be 2 weeks -2 years

Format: Secondary research performed by outside firm or in-house. Primary research (interviewing locally) performed by professional firm

Costs:

3. Budget should be created to complete the research stage of the project

4. Once research has backed the MOE, legal, tax, and regulatory advice may be necessary

5. Depending on MOE, direct sales research, partner approach, acquisition evaluations, or distribution channel research should be committed. If Greenfield site, budgeting team needs to be established.

6. Budget should be augmented based on information gained

7. Project team (inside and outside) should be chosen; work divided

8. Site analysis in new market to begin

9. Market distribution courted

10. Final decision (and budget created) on MOE undertaken

11. Full costs understood

12. Market entry team selected

13. Market entry team trained

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