Published on February 27, 2014
NOVERTUR PROSPECT / INTERACT / TRADE Market-Entry Mode Strategies How to select proper market-entry mode for your business expansion? Novertur International SA. All rights reserved. Novertur Publications Internationalization Strategy Tips Export Marketing www.novertur.com
Why doing business abroad? 4 main advantages of exporting goods and services (source: D&B): 1. Increased profitability: Increased opportunities 2. Spreading risks: Market diversification 3. Economies of scale: Lowered average costs as result of expanded operations 4. Enhanced innovation: Exposure to various environments boosts innovation 2
BUT, Expanding Abroad is Risky • There are lots of barriers to trade • SMEs have limited knowledge of foreign market • SMEs have limited resources • Going international is time-consuming and costly Selecting the right market-entry mode helps balance those risks 3
Development of Market-Entry Strategy Steps to develop your market-entry strategy Intended global strategic position Objectives Success patterns Served product markets Branding Positioning in local markets Segment attractiveness Macro-environment analysis Internal analysis Competitor analysis Market-entry mode selection Export/import Contractual agreements Strategic alliances and JV FDI Source: Mühlbacher, Leihs & Dahringer, 2006 4
Positioning in Local Market Adjustment of value proposition and competences to external opportunities present on new markets Determine attractive segments: Align customer segment with value proposition Focus on key differentiation (internal strengths and competitive advantages) Distinct value proposition and company’s identity on market of expansion determines the positioning 5
What is a Market-Entry Mode? “An entry mode is an institutional arrangement that a firm uses to market its product in a foreign market in the first three to five years, which is generally the length of time it takes a firm to completely enter a foreign market” Root, 1994, in Ekeledo & Sivakumar, 2004 6
Model of Market-Entry Mode Choice (1) Choice of Entry Modes 4 main options • Non-Equity Modes Equity Modes Export • Contractual Agreements • Equity Joint Venture • Export Contractual Agreements Equity Joint Venture Wholly Owned Subsidiary Wholly Owned Subsidiary Direct export Licensing Minority EJV Greenfield Indirect export Franchising 50% share EJV Acquisition Others Management contract Majority EJV Others Alliances Others Source: Pan & Tse, 2000 7
Model of Market-Entry Mode Choice (2) Source: “A model of resource-based view of a firm’s entry strategies”, Ekeledo & Sivakumar, 2004 8
Selection Process (1) Criteria of Market-Entry Mode Selection (Long-Version) Criteria Issues specific to the Elements Objectives organization Rules of business behavior Level of influence needed Control over value chain Personal resources Financial resources Characteristics of the served Acceptable risk Availability of information product market Market resistance Market volume Product considerations Product market lifecycle Level of customer service Conditions of local business Product usage Competition environment Macro-environment Distribution channels Geographic distance Stability Currency risks Level of technological development Infrastructure Political situation Legal restrictions Source: Mühlbacher, Leihs & Dahringer, 2006 Trade restrictions Cultural environment 9
Selection Process (2) Criteria of Market-Entry Mode Selection (Short-Version) 1) “Establish a set of knockout criteria”: Some criteria may be excluded. If I want to keep a level of control over the brand and sales activities, exporting might not be the adapted option and “lost of control over activities” is considered as a “knockout” criteria. 2) “Apply criteria related to organizational identity”: Remaining options are confronted to criteria regarding the intended branding of the company, the key attribute the company plans to compete on, the key benefits (value) offered to customers, the plan determined to reach the global corporate identity and position. 3) “Apply criteria related to the intended position in the local market”: Remaining entry options are compared on local positioning criteria (control over activities and resources, brand building, customer service capacity, etc.). Each criteria is ranked. 4) “Assessing the implementation potential”: Ranked options are confronted to their implementation potential based on local market macro-environment realities that may restrain the development of the most relevant market-entry mode identified. For instance, legal constraints may be too high for selecting an option, or labor cost may include high social charges excluding another option. Source: Mühlbacher, Leihs & Dahringer, 2006 10
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