MG5561 International Marketing: Modes of Market Entry

1. International Marketing Entry Methods

Part A: 

The report gives an overview of international marketing. As put forward by Chartered Institute of Marketing, marketing refers to the management process accountable for anticipation, identification, and the satisfaction of requirements of the customers in a lucrative manner. According to Kotler and Gertner (2002), marketing refers to the management of markets for bringing in exchanges and relationships for the creation of the value and the satisfaction of the wants and needs. International marketing is the application of marketing principles in two or more countries by the companies present overseas and across the national borders. International marketing is dependent on extension of the strategy for local marketing strategy of a company with special focus on the aspects of targeting, marketing and international decisions on a global scale. The report is however a discussion on the international marketing modes of entry. The strategy of market entry refers to the planned method of the delivery of goods and services to a newer target market and ensuring distribution there. The report focuses on the discussion of advantage and disadvantages of direct, export and the indirect modes of entry into the market. The report also tries to explain how the global strategic alliances differ from the traditional entry modes. The report also explains how marketing environment of the targeted countries and the international marketing strategy of a company influence the modes of the market entry.

Discussion:

The Advantages and the Disadvantages of Export, Direct and Indirect Modes of Market Entry

The export mode of entry refers to the marketing and sale of goods produced domestically in a different country (Bai, Krishna and Ma 2017). Export selling involves the selling of the same product at same price using same promotional tool at a different location. On the other hand, export marketing ensures tailoring marketing mix to the international customers. For export marketing, it is necessary to understand the environment of the target market, undertake identification and market research of the market potential and ensure the decision concerning the pricing, product design, advertising and communication and the distribution channels.

The  organizational export activities goes like that if a firm expresses unwillingness for export then will not fill up an export order which is unwanted. A firm however represents an export seller when it takes up an unnecessary export order but do not pursue it (Artopoulos, Friel and Hallak 2013). Some firms undertake exploring feasibility of the export by undertaking export to more than one market on trial basis. In fact, export refers to the well established and the traditional means of reaching the foreign markets. As exports do not involve production of goods in target country, there is no requirement of investment in production facilities. All cost associated with export takes the form of the marketing expenses. The export mode of entry requires coordination amongst the four players that includes the exporter, importer, transport provider and the government.

Exporting can be either direct or indirect. In the direct export mode of entry, the company sells a product directly to the customer of another country (El-Gohary et al. 2013). In other words, in this mode of entry the firm work with foreign market or customers with an opportunity of developing a relationship. The figure represented below portrays a direct mode of entry:

Figure 1: Direct Export Entry Mode

Source: By Author

The indirect export mode of entry is when a company sell to the buyer of the home country who finally exports the product (Gubik and Karajz 2014). Thus, the indirect export takes place when a firm interacts with the international business through an intermediary. Here the exporting takes place through the presence of various exporters who are home based for instance, export agents of manufacturers, export merchants, international firms and the export commission agents.

Figure 2: Indirect Mode of Entry

Source: (McCann2013)

The advantages of export as a mode of entry include (Masso and Vahter 2015):

• Leads to lower financial exposure
• Market entry represents a gradual process
• Helps in gathering information about the local market
• Enables avoiding any restrictions on the foreign market

The disadvantages of export as mode of entry include:

In terms of logistics:

1. Arrangement of transportation
2. Determination of the transport rate

iii. Handling of the documentation

1. Obtaining of the financial information
2. Distribution of coordination and packaging
3. Obtaining of the insurance

In terms of legal procedure:

1. Presence of government red tape
2. Liability of product

iii. Problem of licensing

1. Problems of duty/ customs
2. Problem related to contracts
3. Agreements of the agent/ distributor

In terms of servicing exports:

1. Provide availability of the parts
2. Provide necessary repair service

iii. Provide warehousing and technical advice

In terms of sales promotion:

1. Availability of advertising facilities
2. Providing sales effort

iii. Providing suitable marketing information

In terms of the intelligence in the foreign market:

1. Restrictions of trade
2. Presence of overseas competition

iii. Challenges of locating markets

The biggest exporters of the world are shown in the following table:

Rank	Country	US Dollars ($)
1	China	$2,057,000,000,000
2	United States	$1,564,000,000,000
3	Germany	$1,460,000,000,000
4	Japan	$773,900,000,000
5	France	$567,100,000,000
6	South  Korea	$552,600,000,000
7	Netherlands	$538,500,000,000
8	Russia	$529,600,000,000
9	Italy	$478,900,000,000
10	United Kingdom	$474,600,000,000

Figure 3: Exporters in Terms of Ranking

Source: (Rotunno, Vézina and Wang 2013)

Difference of Global Strategic Alliance from Traditional Modes of Market Entry

A global strategic alliance refers to business relationship between two or more companies who cooperate based on the mutual need and share the risk of achieving common objective (Albers, Wohlgezogen and Zajac 2016). The two companies pursuing a strategic alliance remain independent. The types of strategic alliance include joint ventures, affiliate marketing, outsourcing, product and technology licensing, franchising, distributor and research and development. Although the global strategic alliance puts forward a means for shoring up the weakness and enhances competitive strength, however, it lacks in not only the legal partnership entity but also the agency or the corporate partner relationship.

Figure 4: Nature of the Global Strategic Partnership

Source: (Frynas and Mellahi 2015)

The nature of global strategic partnerships also differentiates it from the traditional modes of entry (Raman et al. 2013). This is because here the participant remains independent subsequent to the formation of allowance. Besides the participants also shares benefits of alliance thereby having a control over the performance of the assigned task. Here the participant also contributes to the products, technology, and the strategic key areas. Thus, the global strategic alliance offers better opportunities for the rapid expansion into the newer markets, ensure access to the newer technology and ensures efficient marketing and production cost that differentiates it from the traditional entry modes (Hitt et al. 2016).

The five attributes to the global strategic partnerships includes:

• Development of joint longer term strategy by two or more firms
• Presence of reciprocal relationship
• Partners have global efforts and vision
• The relationship remains organized along the horizontal lines
• While competing in the markets uncovered by alliance, the participants retain ideological and national identities.

The global strategic alliance usually takes place when a particular company possesses the wish of either edging into related business or a newer geographic market especially the one where government imposes prohibition of the imports for protecting the domestic industry (Lin and Darnall 2015). Alliances usually formed between corporations based on the home country for a definite period. The purpose of an alliance lies in sharing of the ownership of new venture and maximizing competitive advantages within the combined territories. The price of global strategic alliance has equitable share amongst corporations and represents one of the least expensive means in forming a partnership. A global strategic alliance is suitable for the expansion of the core business and utilizes the existent geographic markets.

There are certain advantages of the global strategic alliance that differentiates it from the traditional modes of entry. Some of these advantages include:

• Getting instant access to the market or speeds up the entry into the newer market
• Exploiting newer opportunities for strengthening the position of a firm in the market where it has a foothold already
• Leads to the  increase of the sales and gain of newer  skills and technology
• Development of newer product by maintaining a profit and sharing of the fixed cost and the resources
• Leads to enlarging the distribution channel and thereby broadening the political and the business contact base
• Ensuring the gain of greater knowledge related to the international culture and the customs.
• Helps in enhancing the image of the firm in the world’s marketplace

However, some of the success factors of the global strategic allowance includes, mission, strategy, culture, governance, management and organization. The mission of the successful global strategic partnerships lies in the creation of a win-win situation where the participants pursue objectives based on the mutual need or advantage (Raza-Ullah, Bengtsson and Kock 2014). When a company establishes separate global strategic partnerships with varied partners, a strategy is thought up front for avoiding conflicts. The global strategic alliance follows governance where the consensus and the discussions are part of the norms and viewed as equal. The strategic partners should have a personal chemistry and innovative designs and structure as organization for offsetting complexity across the multi-country management. The global strategic alliance must follow a management where advanced identification of the potentially divisive issue and establishment of clear, unitary lines are necessary for generating commitment by all partners.

Part B

Influence of the market environment of targeted countries on the mode of market entry

The market environment of the targeted countries has an influence the modes of entry. It is the external and the internal factors of the targeted countries that have an influence on the choice of the entry mode. The external factors include the market factors, the production factors and the environmental factors while the internal factors represent the product and the commitment or resource factors. The description of each of the factors is mentioned below (Brouthers 2013):

External Factors:

Market Factors of the Targeted Countries

• Market Size: The size of the market in the targeted countries acts as an influence on the mode of entry. The targeted countries with smaller markets prefer entry modes having a lower breakeven volume of sales. While targeted countries with higher potential of sales prefers the entry mode with a higher breakeven volume of sales.
• Competitive Structure:The market structure of the targeted countries may be oligopolistic consisting of only few firms, monopolistic consisting of only single firm or atomistic also known as perfectly competitive. Thus, the size, number, quality of the competitive firm within a specific target market influences the ability of the company in successfully entering and competing in a profitable manner. Economic and demographic data at the country level remains widely available while the competitive data is difficult to find especially when the players represent the subsidiaries of the multinational corporations.
• Market Infrastructure:The quality and the availability of the local infrastructure for marketing influence the mode of entry in the targeted countries. In this case, when the distributors or the goods agents remain tied with the other firms then undertaking export through subsidiary or branch remains a suitable option.  

Production Factors of the Targeted Countries

Quantity, quality, cost of the raw materials, energy and labour of the targeted countries along with the cost related to the economic infrastructure like communication and transformation have a higher influence on the decision of the entry mode.

Environmental Factors of the Targeted Countries

The environmental factor of the targeted countries that influences the mode of entry includes socio cultural, economic and the political character of the targeted countries. The description of which are as follows (Hernández and Nieto 2015):

• Government Regulations and Policies: The tariffs, quotas and restrictions imposed by the government have an influence on the modes of entry. For instance, countries like China favour joint venture and discourage the sole venture. On a similar note, foreign investment is encouraged by tax holiday incentives.
• Geographic Distance:The distance of the targeted countries also influences the modes of entry due to higher cost structure. However, knockdown shipment helps in reducing the sustainable cost of transport and thereby encouraging assembly operations in the target country.
• Economic System:The performance and the size of the economy influence the decision on the mode of entry. This includes the dynamics of the economy of the targeted countries determined by the rate of the investment, Gross National Product (GNP) growth rate; state of employment and personal income the targeted countries.
• Cultural Distance:The values, social structure, ways of life and the language of the targeted countries act as a deciding factor for the modes of entry. Companies first make an entry into a country that is similar to the home country.

Internal Factors:

Factors related to Products 

• Higher Product Differentiation:This relates to the higher level of price discretion where the product not only absorbs higher unit cost of transportation along with higher import duties (Fong et al. 2014). The situation however influences the modes of entry thereby ensuring export of the product to the targeted markets. The lower level of product differentiation however favors local production.
• Services related to Pre or Post Purchase:Products in the service incentive category might not be able to find suitable services in the targeted countries thereby influencing the modes of market entry.
• Technology based Products: The presence or absence of the specific technology in the targeted countries also influences the modes of entry.

Commitment and Resource Factors

The abundance of the resources of the country in terms of capital, management, technology, marketing and productions skill will have a greater modes of entry compared to the countries having smaller commitment of the resources (Laufs and Schwens 2014).

.Influence of the International Marketing Strategy of the Company on Modes of Market Entry

The internationalization represents a dynamic concept through which the firm increases their indirect and direct influence on the international transactions (Kowalski 2014). The motives behind internationalization are either proactive or reactive motives. The proactive motives refer to the stimuli that encourage a firm to willingly enter the overseas market and thereby initiate the process. It happens when the firm is targeting at exploiting either the market possibilities or the unique competencies. On the other hand, the reactive motives force a firm in going overseas. These represent either the threats or pressure in the foreign and the home market. The internationalization of firms is explained with the help of the Uppsala model where the model helps in identifying that the process of internationalization has four sequential stages that include (Vahlne and Johanson 2013):

Stage 1:  This stage involves no regular activities of export

Stage 2: This stage involves export through independent representatives

Stage 3: This stage involves the establishment of a subsidiary for foreign sales

Stage 4: This stage involves manufacturing or production units

A firm follows any of the three models of international marketing strategy that helps it in deciding the modes of entry. The first model represents the concept of domestic market extension where the foreign market is simply the extensions of domestic market that follows domestic marketing mix. The second model represents the multi domestic concept where each country is unique having its unique marketing mix. The third model is the concept of the global market where a group of countries have a standard market strategy with necessary adaptation wherever required. A firm either undertakes investment, contractual and export as the key modes of market entry. The contractual entry mode includes various arrangements like franchising, licensing, management contracts, non-equity joint ventures, turnkey contracts and the arrangements of coproduction. The investment mode of entry includes joint ventures, start up investment and the joint ventures. The essay puts forward a detailed elaboration on the different modes of entry:

A firm undertakes export marketing when there is an understanding of the target market environment and proper identification of the market potential. Export marketing also represents the mode of entry when decisions are concerned regarding pricing, product design, communication and advertising and distribution channels (Zeriti et al., 2014). Licensing represents a contractual agreement when the asset of a particular company is shared with another country in exchange of license fees and other loyalties. This advantageous of this mode of entry ensures additional profitability with little investment, puts forward the method of quotas, circumventing tariffs and export barriers, attractive return on investment and  lower implementation cost. This mode of entry has certain limitations like lack of control and limitation in participation. Based on the international strategy of a company a firm can undertake special licensing arrangements that include contract manufacturing and franchising (Aulakh, Jiang and Li 2013). Contract manufacturing takes place when a company put forwards technical specifications to the subcontractor or the local manufacture. Franchising on the other hand represents a contract between the parent company the franchisor and the franchise allowing the later to operate a business taken up by the franchisor in exchange of fee  and policy adherance (Dant and Grünhagen 2014). For example, McDonalds have 22, 571 franchises in close to 110 countries and Domino’s pizza have close to 3038 franchises in close to 55 countries. Investment can also be a mode of entry, which can takes the form of joint ventures, outright acquisition and majority or minority equity shares. For instance, IKEA spent close to $2 billion in Russia for its affordable house ware and furniture. A joint venture is a partnership where each of the partners shares responsibility of a newly formed business (Sun and Lee 2013). Some of the examples of joint venture include Toyota and General Motors. It is the only mode of market entry to overcome barriers to the market entry and also allows for sharing of risk. However, joint ventures may be challenging as it may lead to lack of coordination and conflict among the partners.  

Conclusion:

To conclude, one can say that an international market mode of entry represents a channel that enables the human skills, management, technology, product of a firm from entering foreign market. Choice of the entry mode represents a key strategic decision of the firms with an intention of carrying out overseas business. The international companies have innumerable number of entry models and the one chosen depends on factors that include capital, risk, local, control, environmental factors, strategy and knowledge. The digitalization and increased globalization is making the Uppsala model redundant over time. Nonetheless, the modes of entry will help in determining the strategy for marketing.

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