Market Entry

Three Basic Decisions  Which markets to enter?  When to enter these markets?  What scale and what nature should this entry have?

Enter Which Foreign Market(s)?  There are more than 200 countries – 191 are member-nations of the UN… (8/04)  Each country’s attractiveness as a market to a particular firm depends on: – The firm’s objectives – A balance of benefits, costs, and risks

Timing of entry: 1 st Mover Advantages  Preempt rivals; establish strong brand name; capture demand  Build sales volume; ride down experience curve ahead of competitors; cost advantage  Create switching costs; tie customers to 1st mover’s products  Establish social ties ahead of following foreign competitors

Timing of entry 1 st -mover disadvantages; Pioneering costs  Time spent to learn dos-don’ts may benefit competitors who can learn from 1st mover  1st mover who starts a new industry builds the infrastructure  1st mover “trains” customers for followers  Breaks through host country’s adjustment to “foreignness” issues – Regulations may change due to 1st mover’s entry – Followers benefit from 1st mover’s efforts/costs

Scale of entry  Level of resources – How much needed to commit for success? – What level can firm afford to commit? – 1st mover advantages and large scale linked – Small scale entry allows learning at low risk – Entry in small or large potential market may require the same level of initial resources  A strategic commitment is difficult to reverse – Has a long-term impact – Means that the resources cannot be used elsewhere

External or “arms-length” Modes of Entry Firm does business overseas without own assets and human resources in target market  Export – Sell “domestically” produced products abroad through local independent agents or directly to customers  Turnkey project: a firm sets up production plant facilities then local firm takes over – “Exporting firm” builds a facility overseas, starts it up, turns it over to host country owner, then departs – Examples: Oil firms, construction firms, manufacturers

External or “arms-length” Modes - Licensing  Licensor grants rights to licensee for – Intangible property use: patents, inventions, formulas, processes, designs, copyrights, trademarks – Specified period of time – Specified compensation  Licensee typically gives licensor – Quality assurance rights – Strategic brand control if licensee sells to consumers using the licensor’s brand name

External or “arms-length” Modes - Franchising, Alliances  Franchising – Franchisor, grants franchisee use of intangibles under the condition that franchisee follow strict rules of operating the business – Mode of operation is part of the brand image – Similarities to Licensing  International strategic alliances – Cooperative agreements between competitors from different countries (Chapter 12)

“Internal” Modes of Entry  These involve Foreign Direct Investment – Wholly owned subsidiaries Firms owned 100% by a company in a foreign country – International joint ventures Firms that are owned jointly by two or more otherwise independent firms; most IJVs are between two firms One (or more) parent firms are non-resident in the host market Foreign participation varies from majority owned, to 50% owned, to minority owned