Alternative Market-Entry Strategies

Alternative Market-Entry Strategies
 A company has four different modes of foreign

market entry from which to select: exporting,
contractual agreements, strategic alliances, and
direct foreign investment
 The amount of equity required by the company to
use different modes affects the risk, return, and
control that it will have in each mode
12-1
Exporting
 Exporting accounts for some 10 percent of global
economic activity.
 Exporting can be either direct or indirect:
• With direct exporting , the company sells to a customer in
another country
• With indirect exporting usually means that the company
sells to a buyer (importer or distributor) in the home
country, which in turn exports the product
12-2
Exporting
 The Internet
• The Internet is becoming increasingly important as a
foreign market entry method
• Should not be overlooked as an alternative market entry
strategy by the small or large company
 Direct Sales
• A direct sales force may be required particularly for high-
technology and big ticket industrial products
• It may mean establishing an office with local and/or
expatriate managers and staff, depending of course on the
size of the market and potential sales revenues.
12-3
Contractual Agreements
 Contractual agreements are long-term, non equity
associations between a company and another in a
foreign market.
 Contractual agreements generally involve the
transfer of technology, processes, trademarks,
and/or human skills. In short, they serve as a means
of transfer of knowledge rather than equity.
12-4
Contractual Agreements
 Contractual agreements are long-term, non equity
associations between a company and another in a
foreign market
 Contractual agreements involve the transfer of
technology, processes, trademarks, and/or human
skills.
 They serve as a means of transfer of knowledge
rather than equity
12-5
Contractual Agreements: Licensing
 Licensing is a means of establishing in foreign markets
without large capital outlays
 Includes patent rights, trademark rights, and the rights to use
technological processes
12-6
Contractual Agreements: Licensing
 Advantages  Risks
• capital is scarce • choosing the wrong partner
• import restrictions forbid • quality and other production
other means of entry problems
• a country is sensitive to • payment problems
foreign ownership or • contract enforcement and
• patents and trademarks must • loss of marketing control
be protected against
cancellation for nonuse.
12-7
Contractual Agreements: Franchising
 Franchising is a rapidly growing form of licensing
 The franchiser provides a standard package of products,
systems, and management services, and the franchisee
provides market knowledge, capital, and personal
involvement in management
 The combination of skills permits flexibility in dealing with
local market conditions and yet provides the parent firm
with a reasonable degree of control.
 The franchiser can follow through on marketing of the
products to the point of final sale
 It is an important form of vertical market integration
12-8
Contractual Agreements: Franchising
 The franchise system provides an effective blending of skill
centralization and operational decentralization
 In spite of the economic downturn, franchising is still
expected to be the fastest growing market-entry strategy
 Franchises were often among the first types of foreign retail
business to open in the emerging market economies of
eastern Europe, the former republics of Russia, and China
 The franchising system combines the knowledge of the
franchiser with the local knowledge and entrepreneurial
spirit of the franchisee
12-9
Strategic International Alliances (SIAs)
 A strategic international alliance (SIA) is a business relationship
established by two or more companies to cooperate out of mutual
need and to share risk in achieving a common objective
 Strategic international alliances are sought as a way to shore up
weaknesses and increase competitive strengths; complementarity is
key.
 Firms enter into SIAs for several reasons:
• opportunities for rapid expansion into new markets
• access to new technology
• more efficient production and innovation
• reduced marketing costs
• strategic competitive moves and
• access to additional sources of products and capital.
12-10
Strategic International Alliances:
International Joint Ventures (IJVs)
 A joint venture is different from other types of strategic
alliances or collaborative relationships in that a joint venture
is a partnership of two or more participating companies that
have joined forces to create a separate legal entity.
 Four characteristics define joint ventures:
• JVs are established, separate, legal entities
• they acknowledge intent by the partners to share in the
management of the JV
• they are partnerships between legally incorporated entities and
not between individuals and
• equity positions are held by each of the partners
12-11
Direct Foreign Investment
 Direct foreign investment is direct investment within
a foreign country
 Companies may invest locally to:
• capitalize on low cost labor
• avoid high import taxes
• reduce the high costs of transportation to market
• gain access to raw materials and technology or
• as a means of gaining market entry
 Firms may either invest in or buy local companies or
establish new operations facilities
12-12
Direct Foreign Investment
 Several factors have been found to influence the
structure and performance of direct investments:
• timing—first movers have advantages but are more risky
• the growing complexity and contingencies of contracts
• transaction cost structures
• technology and knowledge transfer
• degree of product differentiation
• the previous experiences and cultural diversity of acquired
firms
• advertising and reputation barriers
12-13

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Alternative Market-Entry Strategies

 A company has four different modes of foreign

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