Chapter Three

International Market entry decisions.

Introduction
 The decisions to enter an export trade market should be

taken after careful analysis of the advantages and

disadvantages involved. The decision involves both internal
and external analysis. This is called the analysis of
international marketing.
 There are steps to be followed to get organized for

exporting activities.
 Assessing the company’s resource for export involvement

I. Internal company assessment

It is the first to be assessed. The decision to export or not should

rest on an analysis of the company’s readiness to export and

the product’s readiness for the targeted export destination. Below is a

list of factors to be considered to achieve this analysis.

 Top management commitment

 Adequate managerial and qualified staff resources

 Sufficient production capacity (includes factory space,

warehousing, machinery, and accessibility of raw materials to

 Cont…
 Adequate financial resources to purchase capital equipment,

spare parts, raw materials as well as working capital.

 Ability to produce and adapt products with real export

potential using cost- effective methods.

 Ability to provide after-sales services in the importing country,

if required.
 It is a prerequisite to have skilled and experienced personnel to

handle the various aspects of export marketing.

 Identifying international marketing entry decisions

 External analysis

 It involves which foreign markets to enter, when to enter them and

on what scale. When a firm that wishes to enter a foreign market,
it has several options, including exporting, licensing or franchising
to host country firms, setting up a joint venture with a host country
firm, or setting up a wholly owned subsidiary in the host country to
serve that market. Each of these options has its advantages and each
has its disadvantages. Let’s discuss the 3 types of decisions below:
 1. Which Foreign Markets to enter?

 The choice of foreign markets will depend on their long run

profit potential.
 Favorable markets are politically stable, developed and
developing nations with free market systems and relatively low
inflation rates and private sector debt.
 Less desirable markets are politically unstable, developing
nations with mixed or command economies, or
developing nations with excessive levels of borrowing.
 2. Timing of the entry/when to enter?

 Once attractive markets are identified, the firm must consider the
timing of entry. Entry is early when the firm enters a foreign
market before other foreign firms, which can share first mover
advantage and disadvantage. Entry is late when the firm enters the
market after firms have already established themselves in the
market.

 First mover advantages are the advantages associated with

entering a market early. First mover advantages include:

A) The ability to preempt rivals and capture demand

 Cont…

B)The ability to build up sales volume in that country

C) Gain a cost advantage over later entrants

D) The ability to create switching costs that tie customers into products

or services making it difficult for later entrants to win business.

 First mover disadvantages are disadvantages associated with entering

a foreign market before other international marketers. First mover

disadvantages include:

Pioneering costs - arise when the foreign business system is so different

from that in a firm’s home market that the firm must devote considerable

time, effort and expense to learning the rules of the game.

 Cont…

 Pioneering costs include: the costs of business failure if the firm,

due to its ignorance of the foreign environment, makes some
major mistakes, the costs of promoting and establishing a product
offering, including the cost of educating.

3. Scale of Entry
 After choosing which market to enter and the timing of entry,
firms need to decide on the scale of market entry.
 Entering a foreign market on a significant scale is a major
strategic commitment that changes the competitive playing field.
 3.2. Selecting a market Entry Mode

 Once a firm has decided to enter a foreign market, the question

arises as to the best mode of entry.
 There are six different ways to enter an international market.
 These includes: exporting, turnkey projects, licensing,
franchising, establishing joint ventures with a host country firm,
setting up a new wholly owned subsidiary in the host country.
 Each entry mode has advantage and disadvantages.
 Managers need to consider these carefully when deciding which
to use.
 1. Exporting
 Exporting is the marketing and direct sales of a domestically
made product in a foreign country.
 It does not require foreign investment in production facilities.
 Exporting is a common first step in the international
expansion process for many manufacturing firms.
 Later, many firms switch to another mode to serve the foreign
market.
 It has its own advantages and disadvantages.
Cont…
Advantages of exporting
 It avoids the costs of establishing manufacturing
operations in the host country.
 It helps the firm to achieve experience curve and
location economies because it gives an opportunity to
learn overseas markets before investing.
 Speed of entry because of its use of existing facilities.
 Cont…
Generally, exporting is unattractive because:

 There may be lower-cost manufacturing locations. Exporting from

the firm’s home base may not be appropriate if there are lower-
cost locations for manufacturing the product abroad.

 Thus, particularly for firms pursuing global or transnational

strategies, it may be preferable for value creation and export to
the rest of the world from that location.

 High transport costs and tariffs can make it uneconomical,

particularly for bulk products.
 Cont…

There are two types of exporting:

 Direct exporting: Export marketing is undertaken directly by the
manufacturer. Direct exports represent the most basic mode of
exporting, capitalizing on economics of scale in production
concentrated in the home country and affording better control over
distribution.
 Indirect exporting: The manufacturer exporter exports the goods
through intermediaries. An indirect export is the process of exporting
through domestically based export intermediaries. The exporter has no
control over its products in the foreign market.
 2. Foreign Direct Investment

 Foreign direct investments (FDI) in wholly owned manufacturing

subsidiaries are considered by global firms for many reasons.
 It is done for acquiring raw materials, operate at lower
manufacturing cost, for avoiding tariff barriers and satisfy local
content requirements, and for penetrating the local market.
 Manufacturing of FDI is very beneficial for market penetration.

 It helps in local production means price escalation caused by

transport costs, local turnover cost custom duty fee can be
either nullified or can be reduced.
 3. Turnkey Operation

 A turnkey project refers to a project in which clients pay

contractors to design and construct new facilities and train
personnel.
 It is the contract under which a firm agrees to fully design, construct and
equip manufacturing and service facility and turn the project over to the
purchaser when it is ready for operation
 A turnkey project is way for a foreign company to export its process and
technology to other countries by building a plant in that country.
 Industrial companies that specialize in complex production
technologies normally use turnkey projects as an entry strategy.
 Cont…
 One of the major advantages of turnkey projects is the possibility

for a company to establish a plant and earn profits in a foreign

country especially in which foreign direct investment opportunities
are limited and lack of expertise in a specific area exists.

 Potential disadvantages of a turnkey project for a company

include risk of revealing companies secrets to rivals, and takeover

of their plant by the host country.
 4. Wholly Owned Subsidiaries (WOS)

 A wholly-owned subsidiary is a business that is completely

owned by another entity, parent company.

 A wholly owned subsidiary includes two types of strategies:

Greenfield investment and Acquisitions.

 Greenfield investment is the establishment of a new wholly

owned subsidiary. It is often complex and potentially costly, but it
is able to full control to the firm and has the most potential to
provide above average return.
 Cont…
 Greenfield investment is high risk due to the costs of

establishing a new business in a new country. A firm may need to

acquire knowledge and expertise of the existing market by third

parties, such consultant, competitors, or business partners.

 This entry strategy takes much time due to the need of

establishing new operations, distribution networks, and the

necessity to learn and implement appropriate marketing

strategies to compete with rivals in a new market.

 Cont…
 Acquisitions: is acquiring or purchasing an existing venture.
 Acquisition is lower risk than Greenfield investment because
of the outcomes of an acquisition can be estimated more
easily and accurately.
 In overall, acquisition is attractive if there are well established
firms already in operations or competitors want to enter the
region.
 Acquisition has been increasing because it is a way to achieve
greater market power
 5. Joint venture
A joint venture is any kind of cooperative arrangement between
two or more independent companies which leads to the establishment
of a third entity organizationally separate from the “parent” companies.
 Besides operating to reduce political and economic risk, joint ventures
provide a less risky way to enter markets with regards to legal and
cultural issues than would be the case in an acquisition of an existing
company.
 Two companies contributing complementary expertise might be a
significant feature of other entry methods.
 It is a temporary partnership between two companies until the project is
completed.
 6. Mergers

 Merger is an external strategy for growth of the organization.

 A merger is a combination (other terms used: amalgamation,
consolidation, or integration) of two or more organizations in
which one acquires the assets and liabilities of the other in
exchange for shares or cash, or both the organizations are
dissolved, and the assets and liabilities are combined and new

stock is issued.
 If both organizations dissolve their identity to create a new
organization, it is consolidation.
 Cont…

Types of mergers

1) Horizontal mergers: Horizontal mergers take place when

there is a combination of two or more organizations in the
same business, or organizations engaged in certain aspects of
the production or marketing processes.
For example, a company making footwear combines with
another footwear company, or a retailer of pharmaceuticals
combines with another retailer in the same business.
 Cont…

2) Vertical Mergers: take place when there is a combination of two or

more organizations, not necessarily in the same business, which
create complementary, either in terms of supply of materials (inputs)
or marketing of goods and services (outputs).

For example, a footwear company combines with a leather tannery or

with a chain of shoe retail stores.

3) Conglomerate Mergers: take place when there is a combination of

two or more organizations unrelated to each other, either in terms of
customer functions, customer groups, or alternative technologies used.
For example, footwear company combining with pharmaceutical firm, etc
 7. Licensing and franchising

 A licensing agreement lets others to use your brands or logo on

their products. With this agreement, you are selling your brand.
 The license fee may be one time or annual thing.

 With franchising you are allowing others to open a store that is

modeled on yours. It is more restrictive than licensing agreement

because franchisors expect franchisee to do things in the company

way. Franchisees pay fees more regularly.

 E.g. Hilton hotel of Addis Ababa
 8. Strategic alliance

 Strategic alliances in a business is a relationship between two or

more business that enables each to achieve certain strategic
objectives neither would be able to achieve on their own.
 It helps to join your rivals to cooperate instead of compete.

 It helps to create synergy.

END OF CHAPTER THREE

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