Penetration Strategy: Market Entry Modes
New Market Entry Modes By: Oluwaseun P. Adeola
Having discussed the most relevant new market entry approaches, the next question that naturally comes to mind is what are the modes of entry into new market? Again, scholars in the field of international business and trade have coined three modes of entry. One of the scholars, James (1999, 209) highlighted the mechanism or modes through which extension of services or products into new markets can be achieved. They are:
- Joint venture
- Direct investment
In essence, the modes of entry listed above highlight method through which a company can sell its services or products into a foreign target market. It therefore follows that a company can choose one or two of the modes, depending on the capacity and the objectives of the company. Importantly, the firm would have to consider and weigh the various options so as to ascertain the entry mechanism that best suits the conditions of the company.
Exporting is the marketing and the direct sale of domestically produced goods or services in another country. Exporting is a traditional and well established method of reaching foreign markets. Exporting does not require that a company’s product or service (depending on the nature of service) be produced in the target country; no investment in foreign production facilities is required. The major costs are only associated with exporting take form of marketing expenses. Also, in services such as Information technology that does not necessarily require physical presence of material; the firm can export the services to a foreign target market. By exporting the services, the firm will be able to save the cost of setting up facilities in the foreign market. As aforementioned, fraction of the cost saved from not setting up facilities in the foreign market can then be diverted to marketing and promotion (Ghauri & Cateora 2010, 275.)
E-commerce has made it rather easy for companies to enter a new or foreign market. Companies might choose to enter e-commerce by exporting via varieties of B2B and B2C channels. For instance, buyers and sellers can interact and transact businesses on eBay which is an online auction site. However, there are novel concerns when a firm employs e-commerce to penetrate a market or an international market place. One of the concerns is time difference. Due to time differences in the world, pressure is placed on the company to provide and meet orders of customers and also provide customer service. Moreover, the firm should have an understanding of international marketing environments so as to develop business relationships further. As maintained by Czinkota & Ronkainen (2010, 286), certain legal concerns for e-businesses such as export control laws exist, particularly if the company deals in strategically crucial software or products. Parts of the legal aspects that must be put in consideration are privacy intellectual property (IP) and security regulations. Importantly, companies should also assume the challenging responsibilities of protecting customers from online scams and other identity theft.
The usage of internet worldwide is fast growing. Even African and the Middle East are experiencing significant increase in usage rate since the advent of this century. Although these parts of the world still have a huge room for improvement concerning internet usage, but as the number of users increase; ecommerce will continue to be a more important channels for economic activities. (Czinkota &Ronkainen 2010, 286)
Cavusgil, Knight & Riesenberger (2012, 464) maintain that the two most popular contractual market entry strategies are licensing and franchising. They further described licencing as “An arrangement in which the owner of intellectual property grants another firm the right to use the property for a specified period of time in exchange for royalties or other compensation”. What this connotes is that a firm in the target market can be allowed to use the property of the firm that issues the licence. Such properties are usually not tangible assets. Some of them may include patents, procedures and systems of service trademarks and so on. The licensor would then have to charge the firm at the foreign market, licensee a specific fee for allowing it to use its properties.
The major benefit of this type of market entry mode is that that little or no investment is required on the part of the licensor; therefore, one can easily conclude that the return on investment will be as the cost of providing the service and promotion will be wholly borne by the licensee. However, the downside to this method is that if a licensee is using the trademark and the name of the licensor, care should be taken so that the name of the company (licensor) is not dragged in the mud. This can happen if the licensing deal is made with an unscrupulous licensee. The name of the company can be destroyed in the process of the licensee trying to maximize profit. Therefore, extra caution and measures must be taken to ensure that licensing agreement is not made with the company that cannot be trusted. Also, there are substantial risks involved in licencing. This is because parties involve in the licencing agreement are allowed to share intellectual properties, the licensee may become unscrupulous by using the knowledge gained through the agreement with the licensor to create other products or services (Ghauri &Cateora 2010, 276; Keegan 2002, 245)
As opined by Czinkota &Ronkainen (2010, 289), some of the key issues relating to the negotiation of agreements to create a licencing deal includes the scope of the rights conveyed, compensation, compliance, resolution of disputes and the duration and dissolution of the licencing contract. It is pertinent for the parties involved make coherent and comprehensive agreement so as to avoid or possibly reduce trouble along the line.
Joint ventures are a unique type of tactical alliance where two or more firms agree to share proprietorship of a venture so as to chase common commercial objectives in a target foreign market. Some of the mutual objectives in a joint venture usually include market penetration, risk/reward sharing, technology sharing and joint product or service developments. Other benefits include political connections and distribution channel access that may depend on relationships. Similarly, in the circumstance where a company has a cutting edge technology and does not possess the adequate financial stamina to embark on foreign direct investment by itself, connecting efforts with a partner in the target market will enhance the quick utilization of the technology and as such market entry becomes easier (Keegan 2002, 247-249.)These types of alliances mostly work when the following three conditions are true:
- The parties strategic goals converge while their competitive goals diverge
- The partner’s size, market power and resources are small relative to the industry leader
- Partners are able to learn from one another while limiting access to their proprietary skills (Som 2009, 293, Czinkota &Ronkainen 2010, 298.)
However, as it applies in all forms of partnership, there exist problem areas in Joint ventures. One of the grey areas is the trouble usually associated with the implementation and maintenance of business concepts and relationship respectively. Indeed, main problems that mostly surface are conflicts of interest, disclosure of company’ confidential information and disagreement over how to portion profits and risks. Although, these problems are constant in any partnership, but it can be avoided if proper planning and effective communication is effected before, during and after birth of the venture (Czinkota &Ronkainen 2010, 298.)
“The final mode of entry into global markets is foreign direct investment. The increase in FDIs by global corporations has influenced global trade patterns, although not always in ways that are straight forward; they generally result from a series of complex interactions, which may vary over time” (Som 2009, 292). According to the International Monetary Fund (IMF), FDI is described as “an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor”. Further, in cases of FDI, the investor´s purpose is to gain an effective voice in the management of the enterprise (International Monetary Fund, 1993).
“The foreign entity or group of associated entities that make the investment is termed the direct investor” (IMF, 1993). One apparent merit of this type of entry mode is that it affords the firm a high level of control in the operations of the business and equally gives the chance to better know and understand the customers and competitors alike. It is however pertinent to note that entry mode is a very crucial and critical factor in the process of internationalization and as such, the firm should know that no single entry mode is the’ ideal’ mode but that different modes of entry are at times more applicable under different situations. Therefore, the onus rests on the firm to measure its capability, resources, strategic goals and object in the light of the different new market entry modes (Ghauri &Cateora 2010, 275).
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