Market entry strategies
Entry into New Markets: Strategies By Oluwaseun P. Adeola
Entering a new market is a pivotal point in any company’s life span; it can prove to be both an exciting exercise and a rigorous process. Ultimately, the intention for entering into a new market for most companies is expansion. The general assumption is that once a new market is penetrated, more goods or services will be sold which will then lead to more revenue for the company. But as interesting as that may sound, Hollensen (2001, 229) warned that “ill-judged market entry selection in the initial stages of a firm’s internationalization can threaten the firm’s future market entry and expansion activities”. After that the company has chosen the market it intends to penetrate, the next question that should be asked is what method of entry should be adopted.
In order to successfully penetrate a market, there are different modes of entry that are available for a company to choose from; depending on the nature of the business and its interests. An entry mode once adopted is easily institutionalized by a company and then it becomes the model entry mode for entry into another target markets. As postulated by Hollensen (2001, 229), it is common for firms to have their initial mode choice institutionalized over time, as new services are being sold via same established channels and new markets are penetrated employing the same penetrating method, a problematic initial entry mode choice can survive through the institutionalization of this mode. He further stressed that the reluctance to change entry modes once they are in place and the difficulty involved in so doing makes the mode of entry decision a key strategic issue for firms operating in today’s internationalizing market place. Appropriately, the question will be what are the approaches to the modes of entry into new markets? Academicians have theorized the modes of entry approaches and have been so divided into three stages, two of which will be discussed here and they are discussed below.
The foundational work for this market entry approach was first established by Coase (1937, 135) He advanced that “a firm will tend to expand until the cost of organizing an extra transaction within the firm will become equal to the cost of carrying out the cost the same transaction means of an exchange on the open market”. The transaction cost theory suggests that a company will likely to carry out those business activities which it undertakes at lower cost through the establishment of an internal management control and implementation system while relying on the market for activities in which independent outsiders such as export intermediaries, agents, and distributors have a cost advantage. It is of course a rudimental knowledge in business that all kinds of transactions involve cost. But precisely the cost of doing business in a foreign markets can be summarized into four types of cost; search cost, contracting cost, monitoring cost and enforcement cost (Hollensen 2001, 234.)
- Search cost: As the name suggests is the cost of gathering information to identify and evaluate potential export intermediaries. Even if this cost appear to be prohibitive, knowledge about foreign markets is essential to new market entry success. The truth is that the search cost in the somewhat unorganized markets such as it obtains in Africa may prove exorbitant but that is certainly not a sufficient reason to back off plans to enter such markets.
- Contracting cost: This type of transaction cost involves the cost of negotiating and preparing agreements between the service producer and the intermediaries and/or agents. Depending on the market of interest, the contracting cost varies hugely.
- Monitoring cost: This type of cost entails the cost of ensuring that the contracted parties fulfil their contractual obligations and meet the requirements for the success factors established in the agreement.
- Enforcement cost: Lastly, this cost encompasses the cost of ascertaining that detracting parties are duly sectioned so as to serve as a deterrent to others. Failure to carry out stern enforcement of the agreement between the service provider and the agents might mark the beginning of business failure in the new market (Hollensen 2001, 235; Keegan 2002, 232-236.)
Hollensen (2001, 234-235) added that the fundamental assumption of transaction cost theory is that firm will attempt to minimize the combination of these costs when undertaking transactions. In other words, when considering the most efficient method of organizing new market entry functions, transaction cost theory maintains that company will have to choose the solution which minimizes all the cost when summed up. Controlling the transaction cost of new market entry is a bottom line issue and as such, it should not be treated with any sort of inconsequentiality. Basically, the underlining motive for a business to attempt to extend its services to a new market is to maximize profit. Therefore, if cost is allowed to be unreasonably built up at the initial stage of entry, the goal of profit maximization may be subjected to a major threat.
This concept points the possible undue advantages intermediaries in a new market might want to take from the company entering into the market. Three of the major means by which intermediaries take undue advantage of companies intending to come into a new market are manipulation of receipts, manipulation of the price competitors charged their service and lastly, manipulation of market size information. These kinds of manipulations can successfully occur when the company involved lacks sufficient information about the market it intends to penetrate. Generally speaking, it may be impossible to totally halt the intermediaries from manipulating the firm but the firm should possess the ability to significantly minimize the possibilities of being manipulated. This the company can achieve by possessing substantial knowledge of the target market. On the other hand entering into a strategic alliance or using intermediaries in the target market is essential because such alliance(s) can help the company acquire the necessary skills required to achieve the organizational objectives more efficiently and even at a lower cost or lower risks (Hollensen 2001, 236; Ghauri &Cateora 2010, 272.)
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