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INTERNATIONAL MARKET SELECTION AND ENTRY

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Title: INTERNATIONAL MARKET SELECTION AND ENTRY


1
Lecture 9
  • INTERNATIONAL MARKET SELECTION AND ENTRY

2
International MarketSelection and Entry
  • Learning Objectives
  • Identify the different problems faced in
    selecting an overseas market, as between firms
    inexperienced and experienced in international
    business
  • Assess the countrys attractiveness in terms of
    the potential, membership of trading blocs,
    competitive intensity and entry barriers
  • Recognise the different available modes for
    entering an overseas market and the advantages
    and disadvantages of each and

3
Introduction
  • Two of the most critical questions we need to
    ask when a firm is considering going off shore
  • Which of the vast range of overseas markets
    should the firm enter?
  • What mode should the involvement in the selected
    market take?

4
THE INTERNATIONAL MARKETING DECISION
Do we want to market overseas ?
Which countries?
How involved should we become?
Which mode of entry?
How do we configure the marketing mix?
How do we plan?
How do we organise?
How do we control?
5
Alternative Approaches to Market Selection
  • Selecting an overseas market can impact on the
    other activities of the firm. This is because
    the outcome may influence the profitability of
    the firm, in its domestic as well as its
    overseas markets and its global reputation
  • SO, WHICH MARKET TO ENTER?

6
Alternative Approaches to Market Selection
  • There are various approaches to market selection
    and these have different implications for small
    and medium sized firms, as opposed to large
    firms. Approaches a firm might consider include
  • Whether to enter overseas markets on an
    incremental basis, or to enter a number of
    overseas markets simultaneously.
  • Whether to adopt a concentrated, focused
    approach, or if a diversified approach should be
    adopted.

7
Strategic Decision
  • The decision which market to enter should form
    part of a companies overall strategy
  • AND, should be
  • Linked to resources and organisatioal competence
    and its relationship with its competitors
  • ONE METHOD
  • is to isolate those markets with the greatest
    potential

8
Screening for Market Selection
  • WHY DO WE SCREEN?
  • To enable the firm to arrive at a portfolio of
    attractiveness of the various overseas markets
  • A screening approach

9
Analysing the Attractiveness of Individual Markets
  • The purpose of screening is to enable the firm
    to arrive at a portfolio of attractive overseas
    markets.
  • Two grids developed by the Australian Trade
    Commission compare the attractiveness of the
    overseas market with the competitiveness of the
    Australian firm in order to decide the merit of
    entering the specific overseas market.
  • (refer p. 225 of text)

10
Screening Example
Page 225
11
A Screening Approach
  • The grid approach, which involves analysis of
    each country is time consuming and may be beyond
    the management resources of many small and medium
    sized firms.
  • An alternative approach might involve
    considering all markets in the world and then
    screening markets in relation to a succession of
    criteria. Unsuitable markets are progressively
    eliminated from consideration.

12
Market Selection in the New Millennium
  • In the new millennium, it is increasingly likely
    that for the novice international firm and the
    experienced one, international market selection
    will be influenced by strategic objectives, such
    as
  • Establishing a competitive position
  • Transferring risk
  • Rating market investment against profitability

13
Market Selection in the New Millennium
(continued)
  • Walton and Ashill (2001) argued that there my be
    a need for change in the traditional patterns of
    international marketing selection to cater for a
    world that values..
  • CHOICE, SPEED, INFORMATION,
    COLLABORATION, INCREASED CONSUMER
    VALUE DESIRE TO CAPITALISE ON
    E-COMMERCE
  • They suggest that future international market
    selection will be influenced by the desire to
    select the right partner and the need to
    transfer risk to other markets in order to even
    out the exposure to risk between countries

14
Modes of Entering Foreign Markets
  • Export based entry
  • Manufacturing based entry
  • Relationship based entry

15
MODES OF ENTRY INTO OVERSEAS MARKETS
  • The modes of entry affects a firms entire
    marketing mix.
  • Indirect exports sales to intermediary
    organisations at home which resell the product to
    overseas customers.
  • Direct exports sales to customers overseas.
    Customers may be overseas intermediaries or
    end-users.
  • Overseas manufacture own production operation
    overseas or a joint venture with a local
    producer.

16
  • Decision to enter overseas markets made
  • but which mode of entry?
  • Exporting Overseas production
  • Indirect Direct Licensing Contract
    Joint Wholly
  • manufacture venture
    owned
  • production
  • Overseas to final user
  • export agent
  • via company branch offices
  • Home based Buying Piggy-backing
  • export managers offices

17
CRITERIA FOR SELECTING A MODE OF ENTRY
  • 1. Firms marketing objectives
  • production volume
  • time scale - long/short term
  • coverage of market segments
  • 2. Firms size
  • 3. Government encouragement or restrictions
  • 4. Product quality requirements
  • 5. Human resources requirements
  • 6. Market information feedback
  • 7. Learning curve requirements
  • 8. Risks political or economic
  • 9. Control needs

18
Export Based Entry
  • Includes the following
  • Indirect exporting
  • Direct exporting
  • Establishing a sales office in the overseas
    market
  • Licensing
  • Franchising

19
Export based entry (cont..)
  • In-direct exporting
  • Refers to the use of agencies in the home
    country to get the product into the foreign
    market. Uses.
  • 1. export agents who take commission for
    exporting goods
  • export merchants buy the goods from the
    manufacturer and export them
  • 2. piggy backing the inexperienced
    exporter uses the facilities of an experienced
    one to enter an overseas market.
  • Direct exporting
  • The firm contacts the buyers overseas
    themselves. They establish their own export/
    sales organisation which does all the the
    marketing and identifies potential markets and
    completes its own documentation, shipping and
    planning.
  • Involves a lot of commitment to resources BUT
    greater control over conditions of how, when sold

20
Export based entry (cont..)
  • Establishing a sales office in the overseas
  • The firm has greater control over what happens
    to the product in the market place. Control over
    selling and promotional work.
  • Licensing
  • A firm earns overseas income from its technical
    innovations, brand and corporate image overseas.
    Disadvantages limited return especially where
    the company does not fully develop the potential
    the market has to offer.
  • Franchising
  • The franchisor gives the franchisee the right to
    undertake business in a specified manner under
    the franchisors name in return for a royalty
    payment.
  • Disadvantages the cost of renting sites, must
    be well managed, the franchisor can lay down
    guidelines with respect to how the service is run

21
Manufacturing Based Entry
  • Often referred to as DFI Direct Foreign
    Investment. Includes
  • Joint venture
  • Acquisition
  • Greenfield Operation

22
Joint Venture
  • The most common form of DFI in Australian firms.
    Asian companies mandate that they should be
    involved and have a say in what goes on in their
    country.
  • Example Cook Islands
  • Advantages The local partner can ease access
    problems i.e. customs, reduce capital and
    resource commitment
  • Disadvantages communication, management
    differences. May have a limited lifespan unless
    come to an agreed corporate mission

23
Acquisition
  • Enter an overseas market and acquire an existing
    company. This method is adopted by multi-national
    firms that are cash rich
  • Provides rapid entry and makes use of established
    distribution channels and the existing customer
    database
  • Used in highly competitive industries where there
    may be barriers SO eliminate the barriers by
    buying the company

24
Greenfield Operation
  • Where a firm decides to build its own
    manufacturing plant in an overseas country using
    its own funds.
  • This is attractive if if there are NO suitable
    firms to acquire or the firm needs its own plant
    due to technical concerns
  • Select most attractive sites in terms of labour
    costs, local taxes, land prices and transport

25
Relationship Based Entry
  • Contract manufacturing
  • Strategic alliances
  • Counter trade

26
Contract manufacturing
  • The firm contracts to a local manufacturer but
    retains control of the marketing of the product.
  • WHY USED?
  • Building ones own manufacturing facility is not
    an option
  • Barriers to imports exist
  • Low investment
  • Quick way to access an
    overseas market
  • No quality control
    necessary the product is
    already established

27
Strategic alliances
  • Collaborations between firms in various
    countries to exchange or share some value
    creating activities
  • Collaboration used when considered necessary to
    enter a market amongst those who would normally
    be considered your competitors
  • Example Aviation industry. Star Alliance between
    United airlines, Air New Zealand etc involves
    providing information on routes, frequent flyer
    programmes etc
  • Cooperation and Collaboration

28
Counter trade
  • Linking if an import and an export transaction in
    a conditional manner which includes barter

29
Evaluation of Entry Modes
  • When considering the modes of market entry, it
    is important to recognise that they involve a
    trade-off between
  • 1.degree of control on the one hand and
  • 2. commitment of resources on the other.
  • This trade-off exists between forms of
    exporting.
  • Indirect exporting resource commitment is
    minimal and control non-existent
  • Direct exporting resource hungry, more control
    over how product is represented

30
RISKS AND CONTROL IN MARKET ENTRY
Control

Manufacturing Own subsidiary Acquisitions Assembly
Co-operation Strategies Joint
Ventures Strategic Alliances
Direct Exporting Distributors Agents Direct
Marketing (mail order) E-commerce Franchising /
Licensing Management Contracts
Indirect Exporting Piggy-backing Trading
companies Export Management companies

Risk
31
Theories of market entryDunnings Eclectic
Paradigm
  • Research has been conducted on which factors
    cause firms to manufacture in an overseas country
    rather than export to it
  • different countries have different factor
    endowments that could be mobile or immobile
    across national boundaries
  • Dunnings Eclectic Paradigm- facts that
    influence entry modes there are 3
  • Ownership
  • Location
  • Internalisation

32
Theories of market entry Williamsons
Transaction Cost Approach
  • Argues that..the market entry selected should
    be that which maximises long-run efficiency
    measured in terms of the risk adjusted rate of
    return on investment.
  • Williamsons transaction cost approach considers
    that the extent to which the chosen entry mode
    should provide control is a function of
  • Transaction specific assets
  • External uncertainty
  • Internal uncertainty
  • Free-riding potential

33
Information for Market Entry and Expansion
  • Factors internal to the firm
  • Factors external to the firm

34
Factors Internal to the Firm
  • Management characteristics
  • Firms characteristics
  • Problems of competing in the domestic market
  • Willingness to commit resources
  • Nature of domestic market
  • Ability to make the necessary resources available
  • Extent to which products are high-tech
  • Size of the firm

35
Factors External to the Firm
  • Nature and attractiveness of the product category
  • Potential of overseas market
  • Government regulations and trade barriers
  • Assistance from Government and other bodies

36
Approaches to Internationalisation
  • Stages approaches
  • Learning approaches
  • Contingency approaches
  • Network approaches

37
Stages Approaches
  • The earliest group of theories to explain this
    process were the so called stages approaches
    firms started with the mode of entry which
    required the least commitments of resources, and
    with experience gradually increased their
    commitment of resources to international
    activities.

38
Stages Approach
  • -   The earliset group of theories stages
    appraoches
  • -  Firms started with the mode of entry which
    required the least commitment of resources to
    int. activities
  • Studies listed page 242. argued that firms
    moved from
  • awareness to intention to trial
  • to evaluation to acceptance
  • in terms of their
    relationship to exporting.

39
Learning Approaches
  • The Learning Approaches theories recognize that
    internationalisation is a dynamic process. They
    focus more on evolutionary, sequential build up
    of foreign commitments over time and recognise
    the role that psychic distance can play in the
    process.

40
Learning Approaches
  •  Internationalisation is a dynamic process
  • Focuses on an evolutionary, sequential process
    over time
  • Recognised the importance of psychic distance
    (remember from my last lecture on culture!)
  • Example firms start their overseas involvement
    in nearby markets they are familiar with as they
    learn about the export market.

41
Contingency Approaches
  • Theories of internationalisation are based on
    contingency theory, whereby the firm evaluates
    and responds to an opportunity as it occurs,
    regardless of whether the market is close in
    psychic distance terms or whether an advanced
    mode of entry is required.

42
Network approaches
  •      Emphasised the role of linkages and
    relationships in the internationalisation process
  •        Firms become involved in international
    activities by establishing linkages with networks
    in other countries
  •        Description of the modes of entry in
    terms of the position established in overseas
    networks as
  • International expansion entering a network
    overseas that is new to a firm
  • International penetration building upon an
    already established position in an overseas
    network
  • International integration coordinating the
    positions already occupied in networks in
    different countries

43
A holistic view of Internationalisation
  • Fletcher looked at market entry modes in a
    broader way in an endeavour to consider what
    actually happens to firms when entering markets
    overseas as opposed to theories built around what
    firms should do.

44
A holistic view of Internationalisation


OUTWARD FORMS Export intermediary Export
agent Export direct Sales office
overseas Licensor overseas Franchisor
overseas FDI to supply
INWARD FORMS Import intermediary Buying
agent Import direct Buying office
overseas Licensee in Australia Franchisee in
Australia FDI to source
LINKED FORMS Strategic alliance Co-operative
Manufacturing Countertrade
45
SEE CHAPTERS 7 12 for more information
46
  • Any Questions
  • Please see me outside this lecture theatre
  • CHEERS!

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