Different types of Foreign Market Entry Strategies

Market Entry Strategies

Market entry strategies, or market entry modes, can be categorized into three types: export mode, intermediate mode, and hierarchical mode. Organizations should analyze the foreign market environment before entering the international market because they need to ensure the mode has been selected, pays back the worth of investment, is appropriate to the business needs with low risk, and is able to achieve the target customer base.

Foreign Market Entry Mode Selection

Foreign Market Entry mode selection is based on four factors:

1. Internal factors
2. External factors
3. Desired mode characteristics
4. Transaction-specific behavior

As shown in the above image, there are multiple factors that affect the process of decision-making to enter the foreign market, and this entry mode decision can be identified in two ways: internalization and externalization.

1. Externalization

Externalization is the process of depending on an external partner; in this case, the manufacturing process is done in the home country, and then the products are sent to the partner.

2. Internalization

In internalization, rather than depending on the foreign partner, all the processes have been done by the firm’s own organization.

As mentioned in the diagram, when increasing the internalization, it is notated with the + sign, and when decreasing internalization or increasing the externalization, it is represented with the – sign.

According to the above diagram, when the factors increase, how it affects the decision of entry mode is displayed with the use of + and – signs to represent this internalization and externalization, respectively.

As an example, internal factors such as increasing firm size and international experience mean the organization has sufficient knowledge and financial stability to enter the international market. Due to that rather than go on externalization through the external partner such as an importer, agent, or distributer the organization moves with internalization in a hierarchical mode.

3. Desired Mode Characteristics

In desired mode characteristics, if it is risk-averse, then it is better to choose export modes by following externalization due to the low level of resources in financial and management in the organization firm.

If a company needs more control over its operations in the international market, then a better solution is internalization by holding its own subsidiaries, following the hierarchical model, because it provides more control to the organization.

Decision marking flexibility also needs to be analyzed before entering the international market. when an organization needs to be more flexible, it is good to prefer externalization and go with export mode.

4. Transaction Specific Factor

In the transaction-specific factor if it is tacit to define the articulate, then it is better to go with internalization by using hierarchical mode.

If there is a psychic distance between the host country and the home country then the export mode is recommended because the home country cannot be easily grasped with the culture of the host country by using internalization.

1. Export Mode

The export mode can be identified as the most common mode for initiating to international market. In the export mode, a company product is manufactured in a domestic country and then exported to the host country market as a direct or indirect transfer.

There are three types of export modes: indirect export, direct export, and cooperative export.

Indirect export

In the indirect export manufacturing company does not take the direct responsibility of exporting processes. In here export intermediaries are using to connect with the host country. Basically, this export intermediary is domestic middleman in that target country and by the use of export intermediaries, company can identify the customers, financing and provide distribution.

As shown in the picture in value chain in indirect export R&D, production, marketing is done by the home country; sales and services engage with the intermediary in home country when target the foreign market with export buying agent.

As a whole, in indirect export mode sale is like domestic scale and this mode is more suitable for those who has less objective to expand international marketing and objectives.

In the indirect exporting there are five main entry modes,

• export buying agent
• broker
• export management company/export house
• trading company
• piggyback

Direct export

In the direct export manufacturing company does take the direct responsibility of exporting processes. There are 3 main ways in direct export as, 

1. Direct export to the final customer

The manufacturing firm takes the responsibility of all the exporting activities and conduct the marketing research, investigation tasks, transportation and all the documentation tasks.

2. Export via representative

In here exporting is processing with the representative as an intermediary in the host country market.

3. Export through the establishment of company own.

In this method using company owned establishment for handling the exporting process.

A branch office is a location that supply the required in an international market

A subsidiary is a completely owned home country organization firm and that takes over the export function from the domestic firm.

Distributor stocks all the manufacture product that supplied from the home country and they have the freedom of selling the item by choosing their own customer and make the profit.

Agent is act as an independent company that selling the products to customer and take the profit as a agreed commission basis.

Cooperative export

In the cooperative export comes with agreement of export marketing groups by considering the exporting functionalities. This is the common mode of export in SME’s. 

in here as well intermediary is in foreign target market and marketing, sales and services are done by those intermediaries while R&D and the production is done in manufacturing firm in home country as shown in the image.

2. Intermediate Modes

Intermediate modes can be identified as the variety of types like licensing, franchising, joint ventures are some of them.

Contract manufacturing

When the organization suffering with lack of resources and impossibility to investing in an establishment contract manufacturing can be used as the intermediate mode of entry to international market. Not only that also the lack of understanding in foreign customer, and low production cost in foreign country, to reduce the transportation cost traffic and quotas could be the other main factors for choosing contract manufacturing.

As shown in the image in value chain organization provide the production for foreign partner and all other process such as R&D, marketing, sales and services are conducted by the home country.

This also provides a great deal of flexibility. If the organization is not satisfied in quality or delivery of product, they can move to another manufacturer after the contract period. If organization needs to leave the product on that country, they can easily leave with less losses rather than establishment of own manufacture firm on that country.

monitoring and controlling on production firm need to be highly concerned to meet all the standards in brand quality because the minor error of the production quality may be a huge impact to the brand name and to the business.

Licensing 

By the use of license home country organization can established local production in foreign market without investing huge initial capital cost. In here majority of value chain functionalities are done by the partner which is known as licensee such as production, marketing, sales and services. only the research and development value chain function is handled by the home country.

the licensor provide the license to licensee and it meant to give the right to use patent, manufacturing knowledge, technical assistance, marketing assistance and access to use the trade name.

Franchising

Franchising is another way of making an intermediate entry into the international market. It is a marketing-based way of selling the business, and by using it can be obtaining the rapid growth of the service-sector activities and self-employments. Home country company product can be manufactured, and trade name can be used as a package business format. According to the country culture and political and legal environmental concerns this product and brand look can be changed respective to the contract agreement. There are 2 main franchising models as 

1. Direct Franchising – coordinating and controlling the process of franchisees done by the home country franchisor
2. Indirect Franchising – coordinating and controlling process of franchisees done by the host country master franchisee.

Joint Venture/ Strategic alliances

Joint Venture is an association among two or more parties that have the same target market, common objectives, common market entry.  Due to the collaboration of multiple resources among parties can be led to technological and managerial skills complementary towards to new decisions and good opportunities. This will increase the speed of market entry. but some countries are restricted to have foreign ownership as well global operation and R&D can be expensive.

3. Hierarchical Modes

According to the entry mode decision if it is internalization then company can use hierarchical mode. There are 5 types of hierarchical mode as,

1. Domestic-based representatives
2. Resident sales representatives
3. Foreign sales branch 
4. Foreign sales subsidiary
5. Sales and production subsidiary

Domestic-based representatives

Domestic-based representatives are the ones who act as sales representatives and basically, this representative belongs to the home country travels to the foreign target market, and sells the products directly to the customer. In this method, all the value chain activities are governed and controlled by the domestic country.

Resident sales representatives /foreign sales branch/foreign sales subsidiary

If the foreign target customers are willing to make orders from their countries locally, then the organization can use these mentioned methods. As well if the usage of the product can be explained by a foreign representative (residential) then no need to acquire a domestic representative. In this method sales & service function in the value chain is done by the intermediary in a foreign target country.

Sales and production subsidiary

If, according to its analysis of international marketing its products can have a long-term potential market, then it moves to the sales and production subsidiary. In this method, R&D and marketing are carried out by the domestic country, and production and sales are handled by the foreign market country.

Conclusion

In conclusion, market entry strategies play a pivotal role in a company’s international expansion. These strategies, categorized into export modes, intermediate modes, and hierarchical modes, require careful consideration of various factors, including internal and external conditions, desired mode characteristics, and transaction-specific behavior. The choice between externalization and internalization hinges on these factors and affects the extent of control and flexibility in a company’s global operations. Additionally, the selection of export modes, such as indirect, direct, or cooperative export, should align with the company’s objectives and resources. Intermediate modes, including licensing, franchising, and joint ventures, provide options for international growth, while hierarchical modes like resident sales representatives and sales and production subsidiaries offer deeper control and involvement in foreign markets. Ultimately, understanding the nuances of market entry strategies and their suitability to specific contexts is crucial for businesses seeking successful international expansion.

References

Essentials of Global Marketing