7.3 Market Entry Modes and Strategies
4 min read•august 7, 2024
Companies have various ways to enter foreign markets, from low-risk to high-commitment . Each mode offers different levels of control, resource commitment, and potential returns. Understanding these options helps firms choose the best entry strategy.
Market entry also involves crucial decisions on investment type, timing, and . Firms must weigh factors like , , and potential risks against the opportunities in each market to determine their optimal global expansion approach.
Market Entry Modes
Exporting and Licensing
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- Exporting involves selling goods or services produced in one country to customers in another country
- Can be direct exporting where the company sells directly to the end customer or indirect exporting where the company sells through an intermediary (distributor or agent)
- is a contractual agreement where a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee
- Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks
Franchising and Joint Ventures
- is a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business
- The franchisor will also often assist the franchisee to run the business on an ongoing basis
- Joint ventures involve establishing a firm that is jointly owned by two or more otherwise independent firms
- Typically, the local firm provides knowledge about the local market, while the foreign firm provides general business know-how and products
Wholly Owned Subsidiaries
- Wholly owned subsidiary is a company that is completely owned by another company
- Can be established through a greenfield venture, which involves constructing a subsidiary from the ground up in a foreign country (Honda building a new factory in the US)
- Alternatively, a wholly owned subsidiary can be acquired through the acquisition of an established firm in the target market (Tata Motors acquiring Jaguar)
- Allows for tight control and coordination of the subsidiary's operations, but requires a large capital investment and entails high risk
Investment Strategies
Greenfield Investments and Acquisitions
- involve establishing a new operation in a foreign country
- Entails constructing new production facilities from the ground up
- Mergers and involve acquiring an existing firm in a foreign country
- Can be a full acquisition where the acquirer buys 100% of the target or a partial acquisition where the acquirer buys a stake in the target
- Acquisitions provide rapid entry into a foreign market and access to an established customer base, but can be expensive and difficult to integrate into the acquirer's operations
Strategic Alliances
- are agreements between firms to cooperate in some way to achieve strategically significant objectives that are mutually beneficial
- Can involve cross-shareholding agreements where each firm takes a minority stake in the other to cement the relationship (GM and Isuzu)
- Other types include joint R&D projects, joint manufacturing, joint marketing, shared distribution, and cross-licensing of intellectual property
- Allow firms to share the costs and risks of new ventures, gain access to each other's resources and capabilities, and learn from each other
Entry Considerations
Born Global Firms and Market Entry Timing
- are companies that from inception seek to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries
- These firms often have innovative products or services that have a global market from day one (Skype, Uber)
- refers to when a firm should enter a foreign market
- First-mover advantages include the ability to preempt rivals and capture demand by establishing a strong brand name and locking in key suppliers and channels
- arise from the ability to free-ride on first-mover investments, avoid their mistakes, and exploit technological discontinuities
Entry Barriers and Risk Assessment
- Entry barriers are factors that make it costly for companies to enter a particular market
- Can be created by government policies (tariffs, regulations), economies of scale, product differentiation, capital requirements, switching costs, distribution access, and incumbency advantages
- Risk assessment involves evaluating the potential risks associated with entering a foreign market
- Types of risks include (war, terrorism, expropriation), (recessions, currency fluctuations), and competitive risk (reactions from local competitors)
- Firms need to carefully weigh the potential rewards of entering a market against these risks before making the decision to invest
Key Terms to Review (34)
Acquisitions: Acquisitions refer to the process where one company purchases another company to gain control over its assets, operations, and resources. This strategic move can provide firms with immediate access to new markets, technologies, or products, making it an attractive market entry strategy for many organizations looking to expand their footprint quickly and efficiently.
Born global firms: Born global firms are companies that, from their inception, seek to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. These firms typically enter international markets shortly after their establishment, leveraging innovations, technology, and unique value propositions to compete globally. Their strategies often involve various market entry modes that allow them to rapidly access foreign markets and respond to global demand.
C.K. Prahalad: C.K. Prahalad was a renowned management thinker and author best known for his work on core competencies and strategic management. His ideas emphasize the importance of leveraging unique capabilities to gain a competitive advantage in the marketplace. Prahalad argued that organizations should focus on their distinct strengths and align them with market opportunities, shaping both their strategies and approaches to entering new markets.
Cost Leadership: Cost leadership is a competitive strategy where a company aims to be the lowest cost producer in its industry, allowing it to offer products or services at lower prices than competitors. This strategy emphasizes operational efficiency, economies of scale, and cost minimization in every aspect of the business, leading to a stronger market position.
Cultural risk: Cultural risk refers to the potential for misunderstandings or conflicts that arise when a company enters a new market with a different cultural context. This risk can manifest through misalignment between corporate practices and local customs, leading to operational challenges, damaged reputations, or failure to connect with customers effectively. Companies must navigate these differences carefully to ensure successful market entry and long-term sustainability.
Differentiation Strategy: A differentiation strategy is a competitive approach that aims to provide unique products or services that stand out from competitors, often by enhancing quality, features, or brand image. This strategy allows a company to attract customers who are willing to pay a premium for perceived value, thereby creating a competitive advantage. By establishing clear distinctions in their offerings, businesses can better position themselves in the market and appeal to specific consumer preferences.
Economic Risk: Economic risk refers to the potential for financial loss or unfavorable outcomes resulting from changes in economic conditions, such as inflation, currency fluctuations, or shifts in market demand. This type of risk can significantly impact a company's profitability and overall financial health, especially when considering various market entry strategies and modes.
Entry Barriers: Entry barriers are obstacles that make it difficult for new competitors to enter a market. These barriers can protect established firms from new entrants and include factors like high startup costs, regulatory requirements, and brand loyalty among customers. Understanding entry barriers is crucial when analyzing market entry modes and strategies, as they significantly influence the competitive landscape and the feasibility of entering a specific market.
Exporting: Exporting is the process of selling goods and services produced in one country to customers in another country. This practice is a common method for businesses to enter foreign markets, increase sales, and expand their global footprint without the need for significant investment in local operations.
First-mover advantages: First-mover advantages refer to the competitive benefits that a company can gain by being the first to enter a new market or adopt a new product or service. This often includes establishing brand recognition, customer loyalty, and securing crucial resources before competitors arrive. These advantages can lead to a stronger market position and potentially higher long-term profits.
Franchising: Franchising is a business model where a franchisee is granted the right to operate a business using the trademark, brand, and business system of a franchisor in exchange for a fee or royalties. This model allows for rapid expansion of businesses while minimizing financial risk for the franchisor and providing support to the franchisee. Franchising connects to strategies for entering new markets and forming partnerships that leverage established brand recognition.
Global strategy: A global strategy is a plan that companies use to compete effectively in different international markets while integrating their operations across borders. It emphasizes standardization of products and marketing strategies to achieve economies of scale, and often involves making strategic decisions about how to manage resources, production, and distribution on a global scale. This approach helps companies capitalize on growth opportunities in various regions and leverage their strengths across different markets.
Greenfield Investments: Greenfield investments refer to a type of foreign direct investment where a company builds its operations in a new market from the ground up. This strategy allows firms to create new facilities and infrastructure, providing them with complete control over their operations and business practices. Unlike acquiring existing businesses, greenfield investments involve establishing a completely new presence in the foreign market, often leading to potential advantages such as tailored operations and brand new resources.
Joint Venture: A joint venture is a business arrangement where two or more parties agree to pool their resources for a specific project or business activity, sharing both profits and risks. This collaboration allows companies to leverage each other's strengths, such as technology, market knowledge, and financial resources, while minimizing the risks associated with entering new markets or launching new products. Joint ventures often provide a strategic advantage by enabling firms to access new markets and share costs, making them a popular choice for companies seeking growth and competitive positioning.
Late-mover advantages: Late-mover advantages refer to the benefits that companies can gain by entering a market after initial competitors have already established themselves. These advantages often include learning from the mistakes of early entrants, capitalizing on existing demand, and benefiting from improved technology and infrastructure that have developed over time. As a result, late movers can avoid some of the risks and uncertainties that early entrants face, allowing them to position themselves more effectively within the market.
Licensing: Licensing is a market entry strategy where a company (the licensor) grants permission to another company (the licensee) to use its intellectual property, such as patents, trademarks, or technology, in exchange for a fee or royalties. This approach allows companies to expand their market presence and access new geographical areas without bearing the full costs of establishing operations themselves. It often serves as a lower-risk alternative to direct investment in foreign markets, enabling quicker access to local markets and expertise.
Localization: Localization refers to the process of adapting a product or service to meet the specific needs and preferences of a particular market or region. This involves modifying various elements, such as language, cultural nuances, and regulatory requirements, to ensure that offerings resonate with local customers. Effective localization can significantly enhance market entry strategies by improving customer satisfaction and increasing competitive advantage.
Market Development: Market development is a growth strategy that involves expanding into new markets with existing products or services. This strategy focuses on finding new customer segments or geographic areas to increase sales and revenue, thereby enhancing overall business growth. By leveraging existing offerings, companies can reduce risks associated with product development while exploring new opportunities to engage different customer bases.
Market Entry Timing: Market entry timing refers to the strategic decision of when a company should enter a new market or geographical area to maximize its chances of success and profitability. This decision is crucial as it can influence a firm's competitive advantage, market share, and overall performance. Factors such as market readiness, competitive dynamics, economic conditions, and regulatory environments play a significant role in determining the optimal timing for entering a new market.
Market growth rate: Market growth rate refers to the percentage increase in a market's size or revenue over a specific period, usually measured annually. It indicates the potential for expansion and profitability within a market, helping businesses assess where to invest their resources. Understanding this rate is crucial for strategic planning, as it informs decisions about product development, resource allocation, and competitive positioning.
Market Penetration: Market penetration is a growth strategy that focuses on increasing sales of existing products in existing markets, aiming to capture a larger market share. This approach often involves competitive pricing, advertising, and promotions to attract new customers while retaining current ones. It is essential for companies looking to strengthen their competitive position and gain advantage in their industry without diversifying into new products or markets.
Market size: Market size refers to the total potential sales or revenue opportunity available within a specific market, typically measured in terms of volume (units sold) or value (monetary terms). Understanding market size is crucial for businesses as it helps them assess the potential for growth, make informed decisions about market entry strategies, and allocate resources effectively to capture a share of the market.
Michael Porter: Michael Porter is a renowned academic and thought leader known for his contributions to competitive strategy and the study of economic competition. He introduced key frameworks that have influenced how businesses analyze their competitive environment and develop strategies to achieve sustainable competitive advantages.
Multidomestic strategy: A multidomestic strategy is an approach where a company tailors its products, marketing, and operations to suit the specific needs and preferences of individual countries or regions. This strategy allows firms to respond effectively to local market conditions, cultural differences, and customer demands, leading to a more customized approach compared to global strategies. By focusing on local responsiveness, companies can enhance their competitiveness in diverse markets while also navigating regulatory and logistical challenges specific to each location.
PESTEL Analysis: PESTEL analysis is a strategic tool used to identify and analyze the external factors that can impact an organization's performance. It focuses on six categories: Political, Economic, Social, Technological, Environmental, and Legal factors. Understanding these elements helps businesses make informed decisions regarding market entry modes and strategies, allowing them to align their operations with the external environment effectively.
Political Risk: Political risk refers to the potential for losses or adverse effects on business operations and investments due to political changes or instability in a country. This can include changes in government policies, regulatory environments, social unrest, and geopolitical tensions that may impact a company's ability to operate effectively and profitably. Understanding political risk is crucial for businesses when choosing their market entry modes and strategies, as it directly influences decisions regarding investment and operational approaches in foreign markets.
Porter's Five Forces: Porter's Five Forces is a framework for analyzing the competitive dynamics within an industry, identifying the five key forces that shape competition and influence profitability. This model helps businesses understand the intensity of competition, the threat of new entrants, the bargaining power of suppliers and buyers, and the threat of substitute products, which are all critical for effective strategic planning.
Product Adaptation: Product adaptation is the process of modifying a product to meet the specific needs and preferences of different markets. This can involve changes in design, features, packaging, or marketing strategies to better align with local tastes, cultural norms, and regulations. It plays a crucial role in market entry strategies as businesses seek to effectively connect with diverse consumer bases and enhance their competitive advantage in various regions.
Risk Assessment: Risk assessment is the systematic process of identifying, analyzing, and evaluating potential risks that could negatively impact an organization or project. It plays a crucial role in decision-making by helping businesses understand the uncertainties in their environment, allowing them to develop strategies to mitigate or manage those risks effectively. Understanding risk assessment aids in recognizing both external and internal factors that could influence strategic planning and operational success.
Standardization: Standardization refers to the process of developing and implementing technical standards to ensure consistency, compatibility, and uniformity in products or services across different markets. It plays a crucial role in global strategy formulation and market entry modes, as it helps organizations leverage economies of scale, streamline operations, and enhance brand recognition in various international markets.
Strategic Alliances: Strategic alliances are formal agreements between two or more companies to collaborate on specific projects while maintaining their independence. These partnerships allow organizations to share resources, knowledge, and risks, often leading to increased competitiveness and access to new markets. Through strategic alliances, firms can leverage each other's strengths, facilitating innovation and growth in dynamic environments.
SWOT Analysis: SWOT Analysis is a strategic planning tool that helps organizations identify their Strengths, Weaknesses, Opportunities, and Threats related to competition or project planning. By evaluating these four aspects, businesses can develop strategies that leverage their strengths and opportunities while addressing weaknesses and mitigating threats.
Transnational strategy: A transnational strategy is a business approach that seeks to balance the benefits of global efficiency with local responsiveness. It allows companies to optimize their operations and resources on a global scale while also adapting to the specific needs and preferences of local markets. This strategy is essential for firms looking to compete effectively in diverse environments by leveraging both global integration and local adaptation.
Wholly owned subsidiaries: A wholly owned subsidiary is a company whose entire stock is owned by another company, known as the parent company. This structure allows the parent company to maintain complete control over its operations, management, and strategic decisions. Wholly owned subsidiaries are significant in market entry strategies, as they provide companies with the ability to directly enter new markets while fully integrating their operations.