275 Reading: Entry Strategies in Global Markets

Choosing a Global Entry Strategy

Firms typically approach international marketing cautiously. They must analyze the market opportunity as well as their internal capabilities to determine which approach will be the best fit. Often businesses start with a lower-risk strategy and progress to other strategies involving additional investment and risk and additional opportunity after they have proven initial success. The most common market entry strategies are outlined below.

Exporting

Exporting means sending goods produced in one country to sell them in another country. Exporting is a low-risk strategy that businesses find attractive for several reasons. First, mature products in a domestic market might find new growth opportunities overseas. Second, some firms find it less risky and more profitable to export existing products, instead of developing new ones. Third, firms that face seasonal domestic demand might choose to market their offerings abroad to balance out seasonal demand in their revenue streams. Finally, some firms might export because there is less competition overseas. Smaller firms often choose to export over other strategies because it offers a degree of control over risk, cost, and resource commitment. Smaller firms often only export in response to an unsolicited overseas order, which is also perceived as low risk.  Canada exports approximately one-third of its goods and services.

Licensing and Franchising

Under a licensing agreement, a firm (licensor) provides a product to a foreign firm (licensee) by granting that firm the right to use the licensor’s manufacturing process, brand name, patents, or sales knowledge, in return for payment. Since its debut in the late 1970s, Star Wars remains the most lucrative source of licensing in the entertainment business and has generated more than $42 billion from the sale of licensed merchandise. The licensee obtains a competitive advantage in this arrangement, while the licensor obtains inexpensive access to a new market. Scarce capital, import restrictions, or government restrictions often make this the only way a firm can market internationally. This method does contain some risks. It’s typically the least profitable method for entering a foreign market, and it entails a long-term commitment. Furthermore, if a licensee fails to successfully reproduce a licensed product, or if the licensee markets licensed products ineffectively, it could tarnish the original product’s brand image.

A longer-term and more comprehensive way to access the global market is through franchising. Under the terms of a franchise agreement, a party (franchisee) acquires access to the knowledge, processes, and trademarks of a business (the franchisor) in order to sell a product or service under the business’s (franchise’s) name. In exchange for the franchise, the franchisee usually pays the franchisor both initial and annual fees. Holiday Inn, Hertz Car Rental, and McDonald’s have all expanded into foreign markets through franchising. Canada has started successful global franchises that have been acquired by U.S. companies including Tim Horton’s and Pita Pit.

Joint Ventures

A joint venture is a partnership between a domestic and foreign firm. Both partners invest money, share ownership, and share control of the venture. Typically the foreign partner provides expertise about the new market, business connections and networks, and access to other in-country elements of business like real-estate and regulatory compliance. Joint ventures require a greater commitment from firms than other methods, because they are riskier and less flexible. Joint ventures may afford tax advantages in many countries, particularly where foreign-owned businesses are taxed at higher rates than locally owned businesses. Some countries require all business ventures to be at least partially owned by domestic business partners. Joint ventures may also span multiple countries. This is most common when business partners team up to conduct business in a world region. An example of a Canadian joint venture is between Air Canada and Air China. This joint venture took over four years to develop.^[1]

Direct Investment

Multinational organizations may choose to engage in full-scale production and marketing abroad by directly investing in wholly-owned subsidiaries. For example, Clearwater Seafood has a wholly-owned Scottish subsidiary Macduff. As opposed to the previously mentioned methods of entry, this type of entry results in a company directly owning manufacturing or marketing subsidiaries overseas. This enables firms to compete more aggressively abroad, because they are literally “in” the marketplace. However, because the subsidiary is responsible for all the marketing activities in a foreign country, this method requires a much larger investment. It’s also a risky strategy because it requires a complete understanding of business conditions and customs in a foreign country.

Product and Trade Intermediaries

If a company lacks the resources or expertise to enter a foreign market, it can hire or engage trade intermediaries, who possess the necessary contacts and relationships in those markets.  There are several types of middlemen: agents, representatives, trading houses, and distributors.

• Agents and representatives aren’t exactly the same. An agent secures orders from foreign customers in exchange for a commission.
• A representative specializes in sales within a specific geographic area. Both types of intermediaries may be authorized and commissioned to enter into contractual sales agreements with foreign customers on your behalf.
• Tading houses are domestic intermediaries that market your goods or services abroad.
• Unlike agents, distributors actually purchase your product or service and resell it to local customers.

Example: Toyota’s Progression into Global Business

Toyota Motors started out as a domestic marketer in Japan. Eventually, it began exporting its cars to a few regional markets. As it saw greater success, Toyota became adept as a multinational marketer, and today is a true global marketer. Today Toyota operates manufacturing plants in foreign countries with local labor, using local ad agencies, and pursing marketing strategies that appeal to each country’s market segments and consumer needs. As Toyota progressed through each stage of global expansion, it revised its attitudes and approach to marketing and its underlying philosophy of business.