Entry into a foreign market could be relatively easy or hard. Companies use different market entry strategies dependent on their advantages and disadvantages.
Most Common International Market Entry Strategies
1. Exporting
It is the selling of goods and services in another country. In exporting, no investment in foreign production facilities is needed.
Advantages of exporting
a. Low cost – relatively cheap compared to setting up production facilities in a foreign country.
b. Faster capital recovery – due to access to an international market with high demand.
c. Supported by favorable government policies – manufacturers sometimes enjoy incentives and subsidies in the home country.
d. Contributes to economic growth – this happens where there are more exports than imports hence a positive balance of trade.
Disadvantages of exporting
a. Expensive – especially if the labor cost in the home country is high.
b. High transportation costs – in the long run, this eats into the exporter’s profit margin.
c. Long lead time – it hurts customer satisfaction because delays may temporarily halt the intended use of the goods in transit.
d. Tariff barriers make – exports expensive and less competitive with locally produced substitutes.
2. Turnkey projects
This market entry strategy is an agreement between contractors from the host country and foreign clients. They agree that the contractor will handle every business activity of foreign clients, including training and recruiting operating personnel and how they will run the project.
After the contract, the contractor will hand over everything to a foreign client (in a nutshell, a fully operational firm or product). BMW supplying Range Rover engines is an example of a turnkey project.
Advantages of turnkey projects
a. More revenue in the short term – especially when a foreign client lacks the needed production technology.
b. Less risk – suitable for short-term investments that are less exposed to political and economic risks.
Disadvantages of turnkey projects
a. Possible revenue loss – after the contractor is no longer in the picture of active management of the company resulting from the turnkey project, the foreign investor might lack the necessary knowledge of the market.
b. Unintended competition – the contracted party might become a direct competitor later after handing over the company or project to their client.
c. Losing of competitive advantage – an untrustworthy contractor may end up selling their client’s trade and business secrets to their rivals.
3. Licensing
It is an agreement in which the intellectual property owner grants another business the right to use the property for a certain period in exchange for royalties or other compensation fees. Examples of intangible assets are copyrights and patents. A good example is Calvin Klein products; some are produced under licensing.
Advantages of licensing
a. Strategic marketing – the licensed producer has better knowledge of their local market. They know where to find customers and the value they would buy. The licensor enjoys brand promotion to the most relevant customers in foreign markets without their direct input.
b. Avoids product and overhead costs – a company can collect loyalties from those licensed for manufacturing. These are the ones who bear production costs and other overheads.
c. Easier entry into the international market – the licensed party has tangible assets ready for production in their home country. They only need intangible assets like copyright and others through licensing to start production. A brand can thus establish a footprint in the international market faster and more successfully.
Disadvantages of licensing
a. Possibility of losing credibility – if the licensee employs cheap and less qualified labor, poor quality is attributed to poor performance of the licensor.
b. Potential conflicts – especially when the licensee withholds revenue by compromising books of accounts.
c. Potential theft of intellectual property – untrustworthy licensees might steal intellectual property like inventions and trade secrets of the licensor after terminating their contract.
4. Franchising
A franchise is a market entry strategy that is a specialized form of licensing. The franchiser allows franchisees to use their intellectual product, such as prestigious brands, in systems and service organizations. The franchisee has to follow the rules regarding how to operate a business. A good example of a franchise market entry mode is MC Donald.
Advantages of franchising
a. Quicker penetration in foreign markets – reputable brands often find franchising a cost-effective way of penetrating potential international markets.
b. Fast expansion of franchisees – they often receive regular support from franchisors on how to add value for competitiveness.
Disadvantages of franchising
a. Franchisees can become future competitors – through training, franchisees acquire skills and knowledge they can later use to compete directly or indirectly with the franchisor.
b. Possibility of conflicts – this majorly emanates from hardships in maintaining control over the franchisees.
5. Joint ventures
A joint venture is a market entry strategy in which two or more partners come together and agree to contribute resources, energy, and skills to accomplish a specific business project.
The ownership ratio usually is 50%-50% (the ratio depends on the partner’s agreement). A good example joint venture is the partnership between Volvo and Uber.
Advantages of joint ventures
a. Enjoying support from a local partner – the local partner brings in better marketing and provides the knowledge needed for developing a competitive advantage.
b. Sharing risks and costs – since the ownership ratio is proportionate, the partners in question share costs and losses.
Disadvantages of joint ventures
a. Compromise of management – One partner cannot control a joint venture completely since ownership is shared.
b. Possibility of conflicts – these emanate due to conflicts of interest and management rationale of parties involved being out of sync.
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