Deciding How to Enter the Market

Once a company decides to target a particular country, it must choose the best mode of entry with its brands. Its broad choices are indirect exporting, direct exporting, licensing, joint ventures, and direct investment, shown in Figure 8.2. Each succeeding strategy entails more commitment, risk, control, and profit potential.

1. INDIRECT AND DIRECT EXPORT

Companies typically start with export, specifically indirect exporting—that is, they work through independent intermediaries. Domestic-based export merchants buy the manufacturer’s products and then sell them abroad. Domestic-based export agents, including trading companies, seek and negotiate foreign purchases for a commis­sion. Cooperative organizations conduct exporting activities for several producers—often of primary products such as fruits or nuts—and are partly under their administrative control. Export-management companies agree to manage a company’s export activities for a fee.

Indirect export has two advantages. First, there is less investment: The firm doesn’t have to develop an export department, an overseas sales force, or a set of international contacts. Second, there’s less risk: Because inter­national marketing intermediaries bring know-how and services to the relationship, the seller will make fewer mistakes.

Companies may eventually decide to handle their own exports. The investment and risk are somewhat greater, but so is the potential return. Direct exporting happens in several ways:

  • Domestic-based export department or division. A purely service function may evolve into a self- contained export department operating as its own profit center.
  • Overseas sales branch or subsidiary. The sales branch handles sales and distribution and perhaps warehous­ing and promotion as well. It often serves as a display and customer service center.
  • Traveling export sales representatives. Home-based sales representatives travel abroad to find business.
  • Foreign-based distributors or agents. These third parties can hold limited or exclusive rights to represent the company in that country.

Many companies use direct or indirect exporting to “test the waters” before building a plant and manufacturing their product overseas. A company does not necessarily have to attend international trade shows if it can effectively use the Internet to attract new customers overseas, support existing customers who live abroad, source from inter­national suppliers, and build global brand awareness.

Successful companies adapt their Web sites to provide country-specific content and services to their highest- potential international markets, ideally in the local language. Finding free information about trade and exporting has never been easier. Here are some places to start a search:

Many states’ export-promotion offices also have online resources and allow businesses to link to their sites.

2. LICENSING

Licensing is a simple way to engage in international marketing. The licensor issues a license to a foreign company to use a manufacturing process, trademark, patent, trade secret, or other item of value for a fee or royalty. The licensor gains entry at little risk; the licensee gains production expertise or a well-known product or brand name.

The licensor, however, has less control over the licensee than over its own production and sales facilities. If the licensee is very successful, the firm has given up profits, and if and when the contract ends, it might find it has created a competitor. To prevent this, the licensor usually supplies some proprietary product ingredients or com­ponents (as Coca-Cola does). But the best strategy is to lead in innovation so the licensee will continue to depend on the licensor.

Licensing arrangements vary. Companies such as Hyatt and Marriott sell management contracts to owners of foreign hotels to manage these businesses for a fee. The management firm may have the option to purchase some share in the managed company within a stated period.

In contract manufacturing, the firm hires local manufacturers to produce the product. Volkswagen has a contract agreement with the GAZ Group through 2019, whereby GAZ will build the Volkswagen Jetta, Skoda Octavia, and Skoda Yeti models in Nizhny Novgorod for the Russian market, with planned production volume of 110,000 vehicles per year.46 Toshiba, Hitachi, and other Japanese television manufacturers use contract manufac­turing to service the Eastern European market.47

Contract manufacturing reduces the company’s control over the process and risks loss of potential profits. However, it offers a chance to start faster, with the opportu­nity to partner with or buy out the local manufacturer later.

Finally, a company can enter a foreign market through franchising, a more com­plete form of licensing. The franchisor offers a complete brand concept and operat­ing system. In return, the franchisee invests in and pays certain fees to the franchisor. Quick-service operators like McDonald’s, Subway, and Burger King have franchised all over the world, as have service and retail companies such as 7-Eleven, Hertz, and Best Western Hotels.48

3. JOINT VENTURES

Historically, foreign investors have often joined local investors in a joint venture company in which they share ownership and control. To reach more geographic and technological markets and to diversify its investments and risk, GE Capital—GE’s re­tail lending arm—views joint ventures as one of its “most powerful strategic tools.” It has formed joint ventures with financial institutions in South Korea, Spain, Turkey, and elsewhere.49 Emerging markets, especially large, complex countries such as China and India, see much joint venture action.

A joint venture may be necessary or desirable for economic or political reasons. The foreign firm might lack the financial, physical, or managerial resources to un­dertake the venture alone, or the foreign government might require joint ownership as a condition for entry. Joint ownership has drawbacks. The partners might disagree over investment, marketing, or other policies. One might want to reinvest earnings for growth, the other to declare more dividends. Joint ownership can also prevent a multinational company from carrying out specific manufacturing and marketing policies on a worldwide basis.

The value of a partnership can extend far beyond increased sales or access to dis­tribution. Good partners share “brand values” that help maintain brand consistency across markets. For example, McDonald’s fierce commitment to product and service standardization is one reason its retail outlets are so similar around the world. McDonald’s handpicks its global partners one by one to find “compulsive achievers” who will put forth the desired effort.

4. DIRECT INVESTMENT

The ultimate form of foreign involvement is direct ownership: The foreign company can buy part or full interest in a local company or build its own manufacturing or service facilities. Cisco had no presence in India before 2005, but it has already opened a second headquarters in Bangalore to take advantage of opportunities in India and other locations such as Dubai.50

If the market is large enough, direct investment offers distinct advantages. First, the firm secures cost econo­mies through cheaper labor or raw materials, government incentives, and freight savings. Second, the firm strengthens its image in the host country because it creates jobs. Third, the firm deepens its relationship with the government, customers, local suppliers, and distributors, enabling it to better adapt its products to the local envi­ronment. Fourth, the firm retains full control over its investment and can develop manufacturing and marketing policies that serve its long-term international objectives. Fifth, the firm ensures its access to the market in case the host country insists that locally purchased goods must have domestic content.

The main disadvantage of direct investment is that the firm exposes a large investment to risks like blocked or devalued currencies, worsening markets, or expropriation. If the host country requires high severance pay for local employees, reducing or closing operations can be expensive.

5. ACQUISITION

Rather than bringing their brands into certain countries, many companies choose to acquire local brands for their brand portfolio. Strong local brands can tap into consumer sentiment in a way international brands may find difficult. A good example of a company assembling a collection of “local jewels” is SABMiller.51

SABMILLER From its isolated origins as the dominant brewery in South Africa, SABMiller now has a pres­ence in 75 different countries all over the world, thanks to a series of acquisitions including its 2002 purchase of Miller Brewing in the United States for $5.6 billion. The company is the world’s second-largest beer maker, producing such well-known brands as Grolsch, Miller Lite, Peroni, Pilsner Urquell, South Africa’s Castle Lager, and Australia’s Victoria Bitter. Its global strategy, however, is in stark contrast to that of its main competitor. Anheuser-Busch InBev’s strategy with Budweiser is to sell the brand all over the world, positioned as “The American Dream in a Bottle.” SABMiller calls itself “the most local of global brewers” and believes the key to global success is pushing local brands that appeal to a home country’s customs, attitudes, and traditions. The company relies on sociologists, anthropologists, and historians to find the right way to create “local intimacy” and also employs 10 analysts whose sole responsibility is segmentation re­search in different markets. Peru’s Cusquena brand “pays tribute to the elite standard of Inca craftsmanship.” Romania’s Timisoreana brand taps into its own 18th-century roots. In Ghana and other parts of Africa, cloudy Chibuku beer is priced at only 58o a liter to compete with home brews. When research revealed that many beer drinkers in Poland felt “no one takes us seriously,” SABMiller launched a campaign for its Tyskie brand featuring foreigners lauding the brew and the Polish people.

Source: Kotler Philip T., Keller Kevin Lane (2015), Marketing Management, Pearson; 15th Edition.

2 thoughts on “Deciding How to Enter the Market

  1. graliontorile says:

    Enjoyed reading this, very good stuff, thankyou. “What the United States does best is to understand itself. What it does worst is understand others.” by Carlos Fuentes.

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