Foreign Market Entry Strategies: A Comprehensive Guide
Written by: pTranslate Contributors
THE GLOBAL ENTREPRENEUR | MARKET ENTRY
The choice of foreign market entry strategies is one of the key decisions to be made in any firm looking to expand globally and become a true international player. Choosing the right strategy is crucial, as it maximizes the possibility of success for the company’s products.
There are a lot of criteria to consider, including which markets to enter, when to enter them, at what scale, and which market entry strategies to use. The wrong choices of market and entry strategy can be extremely costly, which results in inefficient use of time and human as well as financial resources.
In this article, we will explore 3 major foreign market entry strategies and their alternatives. Each method has its own advantages and disadvantages. By understanding what they mean, companies can select the ones that best suit their products and approaches to doing business.
1. What Is A Foreign Market Entry Strategy?
Market Entry Strategies are planned methods that companies use to deliver their goods and services to an international market and distribute them there effectively.
The choice of market entry method will have a huge impact on the rest of the company’s experience in the country. The firm’s ability to develop products, the level of control it has over the distribution of their products, and the ease of operating in the market varies drastically with each entry mode.
2. Why Do Companies Need To Develop Foreign Market Entry Strategy?
Each market entry strategy presents unique advantages and challenges to the firms in terms of the risks associated with it, the degree of control it offers, and the resources it requires. There are a wide variety of options to choose from, but there’s always a trade-off between control, cost, and risk involved.
For example, if the firm opts to manufacture in the host country, it’ll be able to gain greater control over its operations and marketing processes, although it will involve higher costs and greater risks. On the other hand, some strategies offer a more acceptable level of risk, for less market control.
There will always be a certain level of uncertainty to each entry mode, so it’s all about choosing what’s most suitable.
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3. 3 Major Foreign Market Entry Strategies
Market Entry Strategies range from direct exporting to wholly owned production facilities based in that foreign market.
There are 3 major market entry strategies:
- Indirect Exporting
- Direct Exporting
- Foreign Production
Indirect Exporting is when a company exports their goods and services indirectly using the services of agents, such as international distributors. Businesses choose Indirect Exporting if they’re relatively new to international distribution. Since they’re beginners, they lack the knowledge, local insights, or resources to distribute their products effectively. They have to pay the agents and distributors for their services, but the risk is significantly lower, and the ROI is quite high, since the agents know what they’re doing.
There are many approaches to export indirectly, including Export Houses, Export Management Company, International Trading Company, and Piggybacking.
Direct Exporting, on the other hand, takes a lot of preparatory work, time, travel, and effort to develop the strategy. It is a long-term process, but it gives the company greater control over their business strategies. Companies that sell luxury goods, or have sold their products in global markets in the past can use this method.
There are many approaches to export directly, including through an Agent, Distributor, or Overseas Subsidiaries
4. Indirect Exporting
4.1. Export Houses
Export House is any company which is not a manufacturer, whose main activity is the handling and and financing of export trade. Export houses include:
- Export Merchants
- Confirming Houses
- Export Agents
Export Merchants buy the companies’ goods and sell them under their own name. They act as domestic wholesaler, operating in foreign markets through their own sales agents or sales force. Export Merchants’ profit comes from the difference between their buying and selling price.
Confirming Houses act on the behalf of the overseas buyers to confirm an order which that overseas buyer has placed. They finance the movement of goods into the country by offering short-term credit to importers and guaranteeing the payment to the suppliers. The confirming house receives a commission from the buyer.
Export Agents act as the manufacturer’s export department and undertakes most of the exporting tasks. For example, export agents will take care of the physical and clerical tasks associated with exporting. They’ll also deal with goods stocking, do delivery management, provide after-sales service if required, carry out credit risk assessment, and so on.
These all fall under the umbrella of Export Houses. Exporting through Export Houses presents unique advantages and challenges.
Advantages: The firm can benefit from the local knowledge and industry expertise of their export merchants and agents. As a beginner in international business, things can get overwhelmed at times, but thanks to Export Houses, the firm no longer needs an export department.
Disadvantages: The firm does not get direct contact with their overseas customers, which leads to a lack of goodwill (a company’s reputation). The firm also has little to no control over the market. Moreover, the export merchants sometimes take on too many products at a time, and if unfortunately, your company’s products may be ignored when there are more profitable options to the merchants. And, most importantly, the company won’t be able to develop their international business experience, which translates to a lot of benefits in the long run.
4.2. Export Management Company vs International Trading Company
An Export Management Company (EMC) is a specialist intermediary. It acts as an export department for the exporting firm.
An International Trading Company (ITC) is a large-scale manufacturer and merchant that are involved in wholesale and retail distribution.
EMCs and ITCs both have instant market knowledge and business contacts abroad that benefit the exporter immensely. As these companies deal with many firms at the same time, they have the advantage of economies of scale in management and transportation costs.
However, since the exporter doesn’t get involved directly with the distribution of their products, they don’t have control over the process. They also won’t be able to gain international experience.
The main difference between Exporting Management Company (EMCs) and International Trading Company (ITCs) is that EMCs benefit small and medium-sized companies more, while ITCs usually work with large companies. ITCs also handle documentation, shipping, and pay in the country of origin.
In addition, EMCs carry a lot of unrelated products, so your products may not get the attention it requires. ITCs, on the other hand, carry a lot of similar products, since they tend to specialize in one or a few niches and industries, which may make it even harder for your products to stand out.
4.3. Piggybacking
Piggybacking is when a company enters a collaborative arrangement with a major overseas manufacturer in their field. In other words, the exporter leverages their international network to bring the products to other countries.
Both companies will establish a mutually beneficial partnership. Each firm can do what they’re good at, and make the best out of each other.
Piggybacking is ideal when:
- The marketing, distribution, and service cost is high, and the overseas partner can carry this cost for the domestic partner
- The products complement each other, which gives the foreign partner a competitive edge in the foreign market, while the exporter can still sell their goods effectively
- The marketing requirements are sophisticated, and the exporter doesn’t have strong experience in the field
- Overseas customers have a need for the products that the exporter has
- There is an opportunity for lowering unit distribution cost
For the exporter, piggybacking is a low-risk, simple foreign market entry strategy. It provides them an immediate access to the untapped potential of foreign markets, especially for firms with limited resources and experience. What’s better is that distribution cost is shared by both companies.
For the foreign company, it is a quick and effective way to broaden its product range. They can become more competitive on their market thanks to this simple tactic, which ultimately drive profits.
However, piggybacking is not without its disadvantages.
Sometimes it’s too good to be true. The exporter might have a hard time find a suitable piggyback partner. Even if they happen to find one, the piggyback partner still won’t put the product on the top of their priority list. It is only a complementary product, after all.
That’s not to mention the fact that the exporter’s products may be sold under the foreign partner’s brand name, which can damage the brand awareness in the long run. This limits future overseas expansion. Both companies need to work on their branding and promotional policies to maximize marketing effectiveness and reduces the risks associated with “merging” the 2 brands.
5. Direct Exporting
5.1. Agent
Agents act as intermediaries between the supplier and the users. They show the suppliers’ products to prospective clients, give them the necessary information and process purchase orders. In other words, agents act on behalf of the supplier.
There are different types of agents: commission agents, after-sale agents, stocking agents, and del credere agents.
- Commission agents don’t buy the merchandise and resell it. They only connect the supplier with the clients, then pass the purchase orders to the supplier, who then delivers the goods directly to the customer. Of course, they charge a commission, hence the name. Commission agents are great for markets with entry difficulties, or markets with limited or irregular orders
- After-sale agents provide after-sale services to the customers
- Stocking agents hold stock of the products and act as a wholesaler. The stocking agent receives a commission that covers their effort, plus a fixed sum to cover storage fee.
- Del decrede agents accepts the credit risks and agree to pay the supplier in the event of a default by the customer. As a result, the del decrede agents receive a much higher commission.
The agent brings the local knowledge, industry expertise, language proficiency, and high awareness of the local business environment to the table. Their knowledge enables a much more effective market entry process. The agent can even guide the company through the complexities of entering their market. All of these bring tremendous benefits to the company at a fairly low commission.
However, most agents don’t work for one single supplier. Since they work with a lot of companies, they might not put their full effort into the goods. As they don’t associate their reputation with the goods they promote, they might not invest their best into the work. In general, agents are not willing to take risks, except for del decrede agents.
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5.2. Distributorship
Distributors are customers that have been given exclusive or preferential rights to purchase or resell a specific range of products from a supplier organization. Normally they are given sole rights and operate in specific geographical areas or markets.
Distributors have to maintain sufficient stock of the products and take charge of pre-sales tasks, promotional support, post-sales services, sales feedback, sales reporting, sales forecasting, and more. This frees the produce from these daunting tasks, while still effectively bringing the products to the customers in markets that they aren’t familiar with.
Distributor works mainly in the retail market, and rarely with the final customers to enjoy the cost-effectiveness of economies of scale. Unlike agents, they’re willing to take the credit risks, while bringing their intimate knowledge of the market to the table and help the companies develop their marketing plan there.
As distributors take the credit risk, they might be reluctant to test the waters for new products.
5.3. Overseas Subsidiaries
Overseas Subsidiaries are overseas branch offices that the company use their own resources to set up. Overseas Subsidiaries is a great market entry strategy if suitable agents are not available, or hard to find.
The advantage these subsidiaries bring is that the company image can be projected in whatever ways the company intends to. It can also obtain immediate market feedback, which facilitate marketing and production planning. The firm can also deal with any local problems that may damage the company’s reputation more easily than if they were given into the hands of intermediaries. In addition, as there are no intermediaries, the exporter doesn’t need to share any profit.
However, the biggest drawbacks of this strategy is that the firm needs to fully develop an export organization overseas. This comes with a lot of foreign problems such as legal differences, repatriation of profits, and labor problems. Social and political risks exist, and should always be taken into account.
6. Foreign Production
6.1. Foreign Market Assembly
A foreign market assembly consists of the last stages of the manufacturing process. Most of the product’s components are manufactured in domestic plants or foreign countries before being transferred to that particular country for final assembling.
This is a halfway stage between indirect exporting and foreign manufacturing. Foreign Market Assembly is more labor-intensive than capital-intensive.
Foreign Market Assembly is an ideal choice when these conditions are met:
- That foreign market offers decent-quality, low-cost labor
- The local government incentivizes the setting up of assembly operations by banning the import of fully assembled goods.
- The local government encourages foreign businesses establishing their business in the region as it creates extra employment
- A tariff exists, which can affect the price of the imported, fully assembled goods
- Transportation cost on fully assembled goods is too high
- The final products are seen as a “local” product, which makes it extremely attractive for marketing
- Foreign market assembly is a great way to “test the waters” before fully entering the market once the company is established
6.2. Contract manufacturing
Contract Manufacturing is an alternative to assembly operations. Instead of assembling the product by themselves in the foreign market, the firm hires another company on a contractual basis to handle the manufacturing. Of course, they only handle the manufacturing. The Marketing and Distributing tasks are still handled by the exporter.
Contract manufacturing allows the company to avoid all of the major foreign market problems that may arise from an unfamiliarity to that particular market, such as legal and labor problems.
Contract manufacturing also brings similar advantages of a Foreign Market Assembly. It is not capital-intensive. The products can be marketed as “local”, which is perceived to be highly positive by the consumers and the government. There is also a huge saving in transportation costs. These cost-saving can be reinvested into other business areas.
However, it is not always easy to find a manufacturer that meets the technical standards that the firm requires, especially high-tech or engineering firms with complex manufacturing processes. Extensive technical training may be needed. Quality control can be difficult to achieve. It is even possible that the local producer becomes a competitor, since now they have fully acquired the marketing and production expertise needed. This can be prevented by a strong policy with clearly defined terms.
6.3. Licensing
Licensing is the sale of a patent of a product or process, manufacturing know-how, technical assistance, or trademark, to a foreign company.
The licensor (or the exporter) grants a license to the licensee (or the foreign company).
The licensor can receive payments from the licensee in various forms:
- An initial payment to cover the initial transfer of the patent/knowledge/know-how
- An annual percentage fee based on revenue/profits
- An annual minimum payment
- An exchange of patents or knowledge (also known as cross-licensing)
Licensing is an interesting market entry strategy for both parties.
The licensor can enter the foreign market with little to no capital overlay. If the firm is small on the global market, licensing is the way to go. Licensing is a quick, non-problematic way to enter a foreign market. The firm gains immediate access to local market knowledge, distribution, and existing customer contacts in markets that are difficult to enter.
The licensee can gain access to new process or technology from foreign countries without having to spend any penny on R&D, since the licensor has done it all. This strengthens the licensee’s competitive position on their market.
However, disagreement can sometimes arise when it comes to the responsibilities that each party have to take. Similar to Contract Manufacturing, Licensing gives away your company’s trade secret and creates a future competitor. Quality control is difficult to achieve as there is no one to monitor the business on site. There can be also difficulty communicating complex, subtle technologies from one language to another, or across cultures.
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6.4. Franchising
Franchising is a particular form of licensing. A licensing agreement only applies to registered trademarks, while a franchising agreement applies to a business’s entire brand and operations. In other words, the franchisor gives away almost everything needed for the brand to operate effectively, including brand name, marketing program, product, method of operation, and management advice.
Franchising is most suitable for the service industry. The service industry is not as complex and technical as the high-tech or engineering industry. Most processes can be easily explained and applied.
Franchising is a much faster foreign market entry strategy with minimum initial investment required, while still giving the franchisor a great amount of profit.
However, the amount of profit that a franchising model brings in is nowhere near as high as a fully autonomous model. The franchisee must also fulfill certain operation requirements and meet quality standards put out by the franchisor. If there’s not enough supervision, these conditions are fairly hard to meet.
6.5. Joint Venture
A Joint Venture is when two or more parties invest in one project that results in the formation of a new company. The parties share profits, risks and assets.
Of course, it is not easy to find a company with the same goals overseas. Having common goal is one thing, being mutually beneficial to each other is another. Key issues relating to profit distribution and responsibilities must be properly addressed right from the beginning to avoid conflicts later down the road.
When choosing this market entry strategy, profit is always going to be higher than other methods of entry, since the company is fully operating in the foreign market. There is a higher degree of control over the marketing and production processes. The risk is shared between the parties, while the firm can freely explore the international experience and learn more about the culture of the country it is in.
There is also the benefit of technology transfer for the local company. In return, the local company can offer their local knowledge, local business contacts, political influences on the government and other local organizations.
However, joint ventures require far more capital and management resources than other methods, especially licensing and franchising. Conflicts may also arise between the parties involved, since there is always the differences in management philosophy, culture, language, and business objectives. Most importantly, there can be a power imbalance in the organization, when one party exerts greater influence over the entire company, which greatly hinders the development of the firm.
6.6 Strategic Alliances
A Strategic Alliance is a type of international alliance between organizations from different countries that are often competitors.
Strategic Alliances, like many other foreign market entry strategies, allow companies to enter the market while retaining their competitive edge on a global scale and attaining the economies of scale.
There are several risks associated with Strategic Alliances:
- Differences in culture, management philosophy, and orientation for the company
- Differences in approaches to problem-solving
6.7. Local Production
Local production is the highest level of foreign market entry strategy. With this strategy, the firm undertakes local production in 3 primary ways:
- Buying shares of other companies
- Reinvesting in a foreign-owned company
- Establish wholly owned operations
It is easy to see that establishing an entirely new facility in a foreign country is extremely time-consuming and costly. There are a lot of preparatory work to go through, and it is even worse in countries where a bureaucratic system reigns, like China. However, all of the effort spent on it is worth it:
- The firm can freely develop in the way it wants to
- The firm doesn’t have to share its secrets to anyone else, hence always keeping its competitive advantage at a high level
- It doesn’t have to worry about managerial conflicts that arise when working with overseas partners
- Many government favors wholly-owned foreign enterprises
- Maximum control over all stages of production and marketing
- Stronger international experience
The following risks should be taken into consideration:
- Heavy costs: everything needs to be created from scratch
- Risks of political stability
- Longer time to see profits
- Lack of familiarity with the local business environment and the local law
Conclusion
Global expansion is a tricky process. There is no common rule for it, as the strategy varies tremendously by industry and company. However, there are only 3 main market entry strategies: Indirect Exporting, Direct Exporting, and Local Production.
There’s no right and wrong strategies. Companies have to consider a trade-off between three aspects: control, cost, and risk. In general, Indirect Exporting is cheap, but it doesn’t grant the company any control over their international expansion, while Direct Exporting gives greater control, but the cost and risk to take consideration is significantly higher.
As a global business, it’s your job to look at this with a global mindset and make wise decisions.
Feel free to share your thoughts and experience on international expansion in the comment section. pTranslate always welcome input from the experts.
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