Making the ‘‘right’’ entry decisions heavily impacts the company’s performance in global markets.
Entry decisions heavily influence the firm’s other marketing mix decisions. Several interlocking decisions need to be made. The firm must decide on:
- The target product/market
- The corporate objectives for these target markets
- The mode of entry
- The time of entry
- A marketing mix plan
- A control system to monitor the performance in the entered market.
Target market Selection
A crucial step in developing a global expansion strategy is the selection of potential target markets. Companies adopt many different approaches to pick target markets.
To identify market opportunities for a given product (or service) the international marketer usually starts off with a large pool of candidate countries (say, all central European countries). To narrow down this pool of countries, the company will typically do a preliminary screening, whose goal is to minimize the mistakes of ignoring countries that offer viable opportunities for your product, and minimize the mistakes wasting time on countries that offer no or little potential.
Step 1: Indicator selection and data collection – First, the company needs to identify a set of socioeconomic and political indicators it believes are critical. A company might also decide to enter a particular country that is considered as a trendsetter in the industry.
Typically countries that do well on one indicator like market size rate poorly on other indicators e.g. market growth. Therefore the company needs to combine its information to establish an overall measure of market attractiveness for these candidate markets.
Step 2: Determine the importance of country indicators – It’s where the company determines the importance weights of each of the different country indicators identified in the previous step. One common method is the ‘‘constant-sum’’ allocation technique, where it allocates 100 points across the set of indicators according to their importance in achieving the company’s goals (e.g., market share).The more critical the indicator, the higher the number of points it is assigned. The total number of points should add up to 100.
Step 3: Rate the countries in the pool on each indicator – Here, each country in the pool is assigned a score on each of the indicators. For instance, you could use a 10- point scale (0 meaning very unfavorable; 100 meaning very favorable). The better the country does on a particular indicator, the higher the score.
Step 4: Compute overall score for each country – The final step is to derive an overall score for each prospect country. The weights are the importance weights that were assigned to the indicators in the second step. Countries with the highest overall scores are the ones that are most attractive.
Decision Criteria for Mode of Entry
Several decision criteria influence the choice of entry mode. There are two classes of decision criteria that can be distinguished: internal (firm-specific) criteria and external (environment-specific) criteria.
- Company Objectives – Corporate objectives are a key influence in choosing entry modes. Firms that have limited aspirations will typically prefer entry options that entail a minimum amount of commitment (e.g., licensing). Proactive companies with ambitious strategic objectives, on the other hand, will usually pick entry modes that give them the flexibility and control they need to achieve their goals.
- Need for Control – Most MNCs would like to possess a certain amount of control over their foreign operations. Control may be desirable for any element of the marketing mix plan: positioning, pricing, advertising, the way the product is distributed, and so forth. Caterpillar, for instance, prefers to stay in complete control of its overseas operations to protect its proprietary know-how. For that reason, Caterpillar avoids joint ventures. The smaller the commitment, the lower the control.
- Internal Resources, Assets and Capabilities – Companies with tight resources (human and/or financial) or limited assets are constrained to low-commitment entry modes such as exporting and licensing that are not too demanding on their resources. Internal competencies also influence the choice-of-entry strategy. When the firm lacks certain skills that are critical for the success of its global expansion strategy, it can try to fill the gap by forming a strategic alliance.
Flexibility – An entry mode that looks very appealing today is not necessarily attractive 5 or 10 years down the road. The host country environment changes constantly. New market segments emerge. Local customers become more demanding or more price conscious. Their preferences may change over time. Local competitors become more sophisticated. To cope with these environmental changes, global players need a certain amount of flexibility. The flexibility offered by the different entry mode alternatives varies a great deal. Given their very nature, contractual arrangements like joint ventures or licensing tend to provide very little flexibility. When major exit barriers exist, wholly owned subsidiaries are hard to divest and, therefore offer very little flexibility compared to other entry alternatives.
- Market Size and Growth – In many instances, the key determinant of entry choice decisions is the size of the market. Large markets justify major resource commitments in the form of joint ventures or wholly owned subsidiaries.
- Risk – Risk relates to the instability in the political and economic environment that may impact the company’s business prospects. The greater the risk factor, the less eager companies are to make major resource commitments to the country (or region) concerned. Note that level of country risk changes over time. Many companies opt to start their presence with a liaison office in markets that are high-risk but, at the same time, look very appealing because of their size or growth potential. A liaison office functions as a low-cost listening post to gather market intelligence and establish contacts with potential distributors and/ or clients.
- Government Regulations (Openness) – Government regulations are also a major consideration in entry mode choices. In score of countries, government regulations heavily constrain the set of available options. Example is the regulation of the airline industry in the United States: airlines are classified as ‘‘strategic assets’’ and as a result foreign airlines cannot acquire majority ownership of U.S. carriers. Trade barriers of all different kinds restrict the entry choice decision. In the car industry, local content requirements in countries such as France and Italy played a major role behind the decision of Japanese carmakers like Toyota and Nissan to build up a local manufacturing presence in Europe.
Competitive Environment – The nature of the competitive situation in the local market is another driver. The dominance of Kellogg Co. as a global player in the ready to eat cereal market was a key motivation for the creation in the early 1990s of Cereal Partners Worldwide, a joint venture between Nestle and General Mills. The partnership gained some market share (compared to the combined share of Nestle and General Mills prior to the linkup) in some of the markets, though mostly at the expense of lesser players like Quaker Oats and Ralston Purina. By the same token, the acquisition by SABMiller, one of the world’s largest beer brewers, of Colombia-based
Cultural Distance – Cultural distance between countries also has an impact on entry mode choice decisions. Opinions about the nature of the relationship differ. Some argue that through higher percentages of equity ownership, MNCs are able to bridge differences in cultural values and institutions. Others note that by relying on joint ventures instead of wholly owned subsidiaries MNCs are able to lower their risk exposure in culturally distant markets.
Local Infrastructure – The physical infrastructure of a market refers to the country’s distribution system, transportation network and communication system. The poorer the local infrastructure, the more reluctant the company is to commit major resources (monetary or human).
Platform countries that can be used to gather intelligence and establish a network, Examples include Singapore and Hong Kong.
Emerging countries in which the major goal is to build up an initial presence, for instance, via a liaison office. Vietnam and the Philippines are examples.
Growth countries offer early mover advantages that often push companies to build a significant presence to capitalize on future market opportunities as in China and India.
Maturing and established countries like South Korea, Taiwan and Japan. These countries have far fewer growth prospects than the other types of markets. Often local competitors are well entrenched. On the other hand, these markets have a sizable middle class and solid infrastructure. The prime task here is to look for ways to further develop the market via strategic alliances, major investments or acquisitions of local or smaller foreign players.
Exporting and importing
Exporting is the process of selling goods or services produced in one country to other countries. Exporting is a strategy in which a company, without any marketing or production organization overseas, exports a product from its home base. Often, the exported product is fundamentally the same as the one marketed in the home market. The main advantage of an exporting strategy is the ease in implementing the strategy.
- Indirect export means that products are carried abroad by other agents and the firm doesn’t have special activity connected with international market, because the sale abroad is treated like the domestic one. For these reasons it is difficult to say that it is an internationalization strategy.
- Direct exporting, the firm becomes directly involved in marketing its products in foreign markets. This is very likely the most common overseas entry approach for small firms. Many companies employ this entry strategy when they first become involved with international business and may continue to use it on a more or less permanent basis.
- Risks are minimal because the company simply exports its excess production capacity when it receives orders
- Low initial investment
- Reach customers quickly
- Complete control over production
- Benefit of learning for future expansion
- Potential costs of trade barriers, in terms of transportation cost and Tariffs and quotas
- Foregoes potential location economies
Difficult to respond to customer needs well since the product cannot be customized to accommodate their interests.
- The exporting strategy functions poorly when the company’s home country currency is strong.
When Is Export Appropriate?
- Low trade barriers
- Home location has cost advantage
Customization is not crucial