Eciding How To Enter The Market

Once a company decides to target a particular country, it has to determine the best mode of entry. Its broad choices are indirect exporting, direct exporting, licensing, joint ventures, and direct investment. These five market-entry strategies are shown in Figure 6-2. Each succeeding strategy involves more commitment, risk, control, and profit potential.

INDI EC E PO

The normal way to get involved in a foreign market is through export. Occasional exporting is a passive level of involvement in which the company exports from time to time, either on its own initiative or in response to unsolicited orders from abroad. Active exporting takes place when the company makes a commitment to expand its exports to a particular market. In either case, the company produces its goods in the home country and might or might not adapt them to the foreign market.

Companies typically start with indirect exporting—that is, they work through independent intermediaries to export their product. There are four types of intermediaries: Domestic-based export merchants buy the manufacturer's products and then sell them abroad. Domestic-based export agents seek and negotiate foreign purchases and are paid a commission. Included in this group are trading companies. Cooperative organizations carry on exporting activities on behalf of several producers and are partly under their administrative control. They are often used by producers of primary products such as fruits or nuts. Export-management companies agree to manage a company's export activities for a fee. Indirect export has two advantages. First, it involves less investment. The firm does not have to develop an export department, an overseas sales force, or a set of foreign contacts. Second, it involves less risk. Because internationalmarketing intermediaries bring know-how and services to the relationship, the seller will normally make fewer mistakes.

FIGURE

Five Modes of Entry into Foreign Markets part three

Developing

Marketing

Strategies

DI EC E PO

Companies eventually may decide to handle their own exports. The investment and risk are somewhat greater, but so is the potential return. University Games of Burlingame, California, has blossomed into a $50-million-per-year international company through careful entry into overseas ventures.

■ Ga Bob Moog, president and founder of University Games, says that his company's international sales strategy relies heavily on third-party distributors and has a fair degree of flexibility. "We identify the foreign markets we want to penetrate," says Moog, "and then form a business venture with a local distributor that will give us a large degree of control. In Australia, we expect to run a print of 5,000 board games. These we will manufacture in the United States. If we reach a run of 25,000 games, however, we would then establish a sub-contracting venture with a local manufacturer in Australia or New Zealand to print the games."13

A company can carry on direct exporting in several ways:

■ Domestic-based export department or division: Might evolve into a self-contained export department operating as a profit center.

Making Your Web Site Worldwide and Worldly Wise

Many companies that would never dream of launching an exporting initiative without careful planning are launching Web sites that are actually damaging their image with global customers. It may be something as seemingly innocuous as using address fields that don't allow for European postal codes or as major as not providing translation for a site you are aiming at Japanese customers. Here, then, is a list of do's and don'ts for creating an export-friendly Web site:

■ Be sure international customers can view your Web page at adequate speeds: In some countries, Internet access is still limited to 9,600 bps. It may help to have your Web site hosted or mirrored overseas.The closer your data is to your customers,the better able you are to ensure fast, reliable trans-mission.You should also consider setting up a text-only version. Rather than forcing overseas customers to wait for bandwidth-hogging graphics to download, design a parallel path of text-based information.

■ Make sure every customer in markets you are approaching can experience your Web site and order products in the language, custom, and culture with which he or she feels comfortable: Because every country is assigned a unique URL address,you can set up e-commerce software to autodetect an international customer the moment he or she logs on.Then you can automatically set up a dedicated country page,written in the language of that country. It's also possible to link your Web site to a currency conversion calculator and recalculate prices every day,every hour, or even with every transaction in the home currency of the visitor. Finally,for apparel

(continued)

part three

Developing

Marketing

Strategies investment banking operation. E-Trade's agreement with the Israeli firm is part of a strategy to form licensing agreements and international joint ventures in an effort to bring its brand of no-frills investing to people abroad. E-Trade has already created E-Trade Australia and has announced plans to form E-Trade Germany and E-Trade Central Europe.15

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

There are several variations on a licensing arrangement. Companies such as Hyatt and Marriot sell management contracts to owners of foreign hotels to manage these businesses for a fee. The management firm may even be given the option to purchase some share in the managed company within a stated period.

Another variation is contract manufacturing, in which the firm hires local manufacturers to produce the product. When Sears opened department stores in Mexico and Spain, it found qualified local manufacturers to produce many of its products. Contract manufacturing has the drawback of giving the company less control over the manufacturing process and the loss of potential profits on manufacturing. How ever, it offers a chance to start faster, with less risk and with the opportunity to form a partnership or buy out the local manufacturer later.

Finally, a company can enter a foreign market through franchising, which is a more complete form of licensing. The franchiser offers a complete brand concept and operating system. In return, the franchisee invests in and pays certain fees to the franchiser. McDonald's, KFC, and Avis have entered scores of countries by franchising their retail concepts.

Along with McDonald's, Kentucky Fried Chicken (KFC) was one of the first fast-food franchises to break into the semiclosed market of Japan.

■ KFC C a Although the initial reception in Japan was great, KFC still I had a number of obstacles to overcome. The Japanese were uncomfortable with the idea of fast food and franchising. They saw fast food as artificial, made by mechanical means, and unhealthy. KFC's ad agency in Japan, McCann-Erickson Japan, knew that it had to build trust in the KFC brand and flew to Kentucky to do it. There it filmed the most authentic version of Colonel Sanders's beginnings possible. To show the philosophy of KFC—the southern hospitality, old American tradition, and authentic home cooking— the agency first created the quintessential southern mother. With "My Old Kentucky Home" by Stephen Foster playing in the background, the commercial showed Colonel Sanders' mother making and feeding her grandchildren KFC chicken made with 11 secret spices. It conjured up scenes of good home cookin' from the deep American South delivered straight to the Japanese people. In the end, the Japanese people could not get enough of this special American chicken made with 11 spices. The campaign was hugely successful, and in less than 8 years KFC expanded its presence from 400 locations to more than 1,000. Many Japanese now know "My Old Kentucky Home" by heart.16

JOIN EN E

Foreign investors may join with local investors to create a joint venture company in which they share ownership and control. For instance:17

■ Coca-Cola and Nestlé joined forces to develop the international market for "ready to drink" tea and coffee, which currently sell in significant amounts only in Japan.

■ Procter & Gamble formed a joint venture with its Italian arch-rival Fater to cover babies' bottoms in the United Kingdom and Italy.

■ Whirlpool took a 53 percent stake in the Dutch electronics group Philips's white-goods business to leapfrog into the European market.

Forming 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. Even corporate giants need joint ventures to crack the toughest markets. When it wanted to enter China's ice cream market, Unilever joined forces with Sumstar, a state-owned Chinese investment company. The venture's general manager says Sumstar's help with the formidable Chinese bureaucracy was crucial in getting a high-tech ice cream plant up and running in just 12 months.18

Joint ownership has certain drawbacks. The partners might disagree over investment, marketing, or other policies. One partner might want to reinvest earnings for growth, and the other partner might want to declare more dividends. The failure of the joint venture between AT&T and Olivetti was due to the companies' inability to agree on strategy. Furthermore, joint ownership can prevent a multinational company from carrying out specific manufacturing and marketing policies on a worldwide basis.

(continued)

companies, don't forget to include size conversion tables so overseas customers can figure out sizes.

■ Avoid alphanumeric fields in forms, and make address fields internationally meaningful: It sounds like a tiny detail, but people do get annoyed when registration or order forms refuse to recognize punctuation such as accents. Also, address fields should accommodate international postal codes.Most countries don't have a postal counterpart to a state, so don't require every visitor to the site to specify one.

■ Provide enough information about your company, and make contact information prominent: The portion of a Web site that provides company information is typically one of the most frequently visited areas.Providing as much detail as possible about your company's strengths is a good way to establish credibility, which is particularly critical for a small business that is unknown overseas.Also, don't bury contact information—names,tele-phone numbers,or fax numbers— deep within the site. Make it as clear and visible as possible.

■ Don't leave site development to the technicians: Involve your marketing people so you can ensure that your site is consistent with the image you want to project.You may even want to have your Web site vetted by an overseas rep or supplier to make sure it appeals to the foreign market you wish to reach.

Sources: Eric J.Adams,"Electronic Commerce Goes

Global," World Trade, April 1998, pp. 90-92;

Roberta Maynard, "Creating an Export-Friendly

Site,"Nation's Business, December 1997, p.51;J.D.

Mosely-Matchett,"Remember; It's the World Wide

Web,"Marketing News, January 20,1997, p. 16.

chapter 12

Designing Global Market Offerings

DI EC IN E MEN

The ultimate form of foreign involvement is direct ownership of foreign-based assembly or manufacturing facilities. The foreign company can buy part or full interest in a local company or build its own facilities. If the foreign market appears large enough, foreign production facilities offer distinct advantages. First, the firm secures cost economies in the form of cheaper labor or raw materials, foreign-government investment incentives, and freight savings. Second, the firm strengthens its image in the host country because it creates jobs. Third, the firm develops a deeper relationship with government, customers, local suppliers, and distributors, enabling it to adapt its products better to the local environment. Fourth, the firm retains full control over its investment and therefore can develop manufacturing and marketing policies that serve its long-term international objectives. Fifth, the firm assures itself access to the market in case the host country starts insisting that locally purchased goods have domestic content. Here is how one firm uses local relationships to advantage in its overseas plants.

■ CPC I a a CPC, manufacturer of such well-known food brands as Hellmann's Mayonnaise and the Knorr's line of soups, prefers full-scale overseas manufacturing to either foreign product assembly or exporting. So far, the company manufactures in 62 of the 110 countries in which it markets its products. CPC uses local personnel and managers almost exclusively when operating overseas, particularly people who understand the markets and who can compete effectively within them. CPC also hands off marketing to local managers, figuring that they know their own markets and how to compete there better than the folks back at the Englewood Cliffs, New Jersey, headquarters do.19

The main disadvantage of direct investment is that the firm exposes a large investment to risks such as blocked or devalued currencies, worsening markets, or expropriation. The firm will find it expensive to reduce or close down its operations, because the host country might require substantial severance pay to the employees.

HE IN E NALI A ION P OCE

Most countries lament that too few of their companies participate in foreign trade. This keeps the country from earning sufficient foreign exchange to pay for needed imports. Many governments sponsor aggressive export-promotion programs to get their companies to export. These programs require a deep understanding of how companies become internationalized.

Johanson and Wiedersheim-Paul have studied the internationalization process among Swedish companies.20 They see firms moving through four stages:

1. No regular export activities

2. Export via independent representatives (agents)

3. Establishment of one or more sales subsidiaries

4. Establishment of production facilities abroad

The first task is to get companies to move from stage 1 to stage 2. This move is helped by studying how firms make their first export decisions.21 Most firms work with an independent agent and enter a nearby or similar country. A company then engages further agents to enter additional countries. Later, it establishes an export department to manage its agent relationships. Still later, the company replaces its agents with its own sales subsidiaries in its larger export markets. This increases the company's investment and risk but also its earning potential. To manage these subsidiaries, the part three company replaces the export department with an international department. If certain

Developing markets continue to be large and stable, or if the host country insists on local pro

Marketing duction, the company takes the next step of locating production facilities in those

Strategies markets, representing a still larger commitment and still larger potential earnings. By this time, the company is operating as a multinational company and engaged in optimizing its global sourcing, financing, manufacturing, and marketing.

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