The mode of entry in the international market is an important decision with large and long-term implications for an organization. Different companies use different modes of entries while going for international expansion. The different modes of entry are indirect exporting, direct exporting, licensing/ franchising, joint ventures, and direct investment. An organization’s commitment, risk, control, and profit potential increases as it moves from indirect exporting to direct investment.
Indirect exporting. Many companies enter into a foreign market by indirect exporting of its products. In indirect exporting, the company acts as a third-party supplier. It selects an importer in the foreign country and supplies the products as per the requirement of the importer. Indirect exporting is a price sensitive strategy as importers like to buy the products from the most economical suppliers. This mode of entry limits the growth possibilities as the company will always be dependent on other parties for the international business. Also, as the company is not in touch with the final consumers and other channel partners, the possibility of brand building to explore future possibility is minimum with this strategy.
Direct exporting. Direct exporting is a good strategy to explore a foreign market with low cost and minimum risk. In direct exporting, a company supplies its products to its customers in the foreign markets. Many textile companies in India, China, Bangladesh, and Vietnam usually adopt this method to supply their products to the retailers in the United States, Canada, Europe, and other parts of the world. Retailers such as Walmart, Ikea, Target, Zara, and Old Navy order manufacturing of their private labels from the suppliers in these low-cost countries. Many Indian pharmaceutical companies also follow direct-exporting strategy in doing business in the international markets. Direct exporting is also a price-sensitive business because retailers prefer to buy products from the low-cost suppliers. Here, the brand (usually a private label) is owned by the retailers and the supplier companies are not in touch with the final consumers so the possibility of brand building remains low in this case.
Licensing/Franchising. Many multinational companies with strong brand names and brand equity in the international markets prefer to enter the foreign markets through licensing/franchising arrangements. This moderates the company’s initial investment for expansion in the international markets. This also gives time to the company managers to understand consumer behavior and other marketing dynamics in the international market. Here, the selection of the local licensing/franchising partner is critical as it can have a significant impact on the brand image of the company in the international markets. Many companies like Disney, Mattel, Major League Baseball, and Hasbro conduct much of their business through licensing all over the globe. US-based pen maker Reynolds’ is doing its business in India through a licensee GM Pens International. This strategy can be used only by the companies having a strong brand equity in the international markets.
Joint ventures. Many companies prefer to enter the international markets through joint ventures with local partners, because of the local partner’s knowledge of the market. A local partner can also guide about the other marketing mix requirements such as product portfolio, pricing, distribution channel, and targeting of customers. Here also, selection of the local partner is critical, and companies usually select a partner with compatible business interests. Some examples of companies doing business abroad with this strategy are Walmart, which entered the Indian market through a joint venture with Bharti Enterprises. Renault entered Indian market by partnering with Mahindra and Honda entered the Indian market with a joint venture with Hero Group.
Direct investment. Direct investment is the most costly way of doing business abroad. A company needs to make massive investments in building the necessary infrastructure in terms marketing office, manufacturing facility, and human resources. Here, a company has complete control over its strategic decisions and operations. Direct investment by a company gives it control over its international distribution channel and relationships with the customers. However, ownership also carries responsibility, commitment, and associated risks of doing business in an international market. Channel decisions, once put in place, are often difficult to change. Hence, the selection and integration of foreign distribution channels can have an enormous impact on the success of a company’s international operations.
Source: Richard R. Still, Edward W. Cundliff, Normal A. P Govoni, Sandeep Puri (2017), Sales and Distribution Management: Decisions, Strategies, and Cases, Pearson; Sixth edition.