Consider first whether your firm should enter into foreign markets or not.
This decision to market products abroad is a very important one, but it is just the first step in a long and detailed planning process of the business expansion.
You can ask the following questions when considering growing the business internationally to start with:
- Should the company seek overseas markets?
- What are foreign barriers to imported goods?
- Are there any political risks or social instability?
- Are there any legal differences in contract law, product safety, advertising, etc.?
- Will there be increased transport and distribution costs?
- Will the supply chains be longer due to customer remoteness?
The process to enter into foreign markets
Consider all countries at first.
STAGE 1: Conduct desk research for preliminary screening to identify general factors relating to the product and the market. Reject uncompromising countries.
STAGE 2: Conduct further investigation of potential markets. Concentrate on market size and sales potential.
STAGE 3: Carry out detailed investigation of countries with a high market potential. Focus on competition, market structure and distribution channels.
STAGE 4: After choosing the country or countries, concentrate on identifying target segments. Finally, conduct field research to target those market segments with appropriate marketing strategy.
The next major decision must be about choosing the method or methods of entering the markets abroad.
Methods to enter into foreign markets
There are several different methods a business can use to enter into overseas markets. These methods include both internal methods as well as external methods. Let’s take a closer look at both of them.
A. Internal methods of entering into international markets:
1. E-Commerce
2. Exporting:
a. Exporting Directly
b. Exporting Indirectly
3. Direct investment in subsidiaries
B. External methods of entering into international markets:
1. Licensing
2. Franchising
3. Mergers & Takeovers
4. Joint Ventures (JV)
5. Strategic Alliances (SA)
A. Internal methods of entering into international markets
Main internal options for expanding into international markets include:
1. E-Commerce
E-Commerce can help to reduce the costs and risks of international marketing. It enabled many businesses of all sizes to enter new markets abroad quite easily without having a physical location in a foreign country.
E-Commerce means the trading of goods and services using technologies such as the Internet, electronic systems and computer networks. Businesses use those technologies to market and sell their product to customers as more and more consumers are making purchases entirely online. E-Commerce takes place via the use of computers, smartphones and tablets linked to the Internet. Buying and selling happens virtually with customers making purchases of groceries, books, clothes, home appliances, electronic devices, etc.
Once E-Commerce businesses grow in size, they will most likely start exporting their goods and services to other countries using traditional distribution channels.
Example 1: Many online retailers, such as Amazon.com and eBay, have gained access to foreign markets without having to physically set up retail stores.
2. Exporting
Which is the simplest method for a firm to enter an overseas market? Exporting is often the first step for a business wishing to enter an overseas market.
Exporting involves creating and manufacturing products at home, but selling them abroad. In other words, selling domestically produced goods and services to overseas buyers.
Exporting can help gain access to larger international markets. It is cheaper and less risky than opening up businesses overseas as it eliminates the need to set up a business abroad with the associated costs. The firm can ‘test out’ the market overseas which minimizes commitment of resources, but need an agent. By selling to larger customer base, the company can reap the cost savings from larger scale operations through economies of scale.
Exporting can be undertaken either by selling the product directly to a foreign customer (e.g. via the company website or E-Commerce portal) or indirectly through an export intermediary (e.g. via an agent or trading company in the foreign country). Some of the benefits and limitations of exporting directly and exporting indirectly are listed below.
a. Exporting directly:
It is a more engaging way. The company has complete control over the international marketing of its product using dedicated sales personnel dealing with foreign buyers. The company handles the logistics of transporting, storing the product and dealing with all paperwork. Company management may need to travel abroad to meet important customers to discuss contracts as the business actively seeks distribution channels.
The business does not have a supporting local agent or trading company, so may lack important local knowledge. No commission is taken by intermediaries, so profit margins are not reduced.
A producer may eventually organize distribution through an agent. However, these agents or traders usually represent several other companies exporting goods, so may not give priority to a new exporting business and its products.
b. Exporting indirectly:
It is a more passive way. A producer sells to an agent, an export company or trading company that undertakes the marketing, but it gets a lower price for goods. A commission or payment will have to be paid to the agent or trading company and this will reduce the exporting firm’s profit margin.
This way definitely minimizes the risk of operating abroad. It can also be used as a means of testing out the ground. Because sometimes the business may have little or no control over how the product is actually marketed in the countries to which it is sent, many firms exporting abroad make use of overseas agents who plays an active role in the marketing of the product. The overseas agent or trader has local market knowledge and contacts with potential customers and this should aid the marketing of the product.
Also, transportation and all administrative procedures become the responsibility of the agent. Overall, it may be cheaper for the exporting firm as fewer staff involved in selling abroad will need to be employed and fewer visits from senior managers will be needed.
Example 2: Heineken, the Dutch brewery, exports its beer to 170 different countries.
3. Direct investment in subsidiaries
Direct investment is an increasingly common way for businesses to reach overseas markets. Setting up company-owned subsidiaries in foreign countries can achieve higher success rates than taking over or merging with locally based companies. The reason is that the corporate culture of the business, the organizational structure and other differences between the company and the locally acquired business can often present obstacles too great to overcome.
Direct investment means that a business is setting up production and distribution facilities in foreign markets. They can be built for specific purpose or obtained through merger or takeover. Foreign governments are often willing to offer some financial support to encourage such investments in their countries. Having a wider distribution network overcomes the problem of exporting which limits the potential number of foreign buyers.
Example 3: A car company such as Ford from the US decides to build a factory in an overseas country in Africa.
The control of the company is centralized in the head office which is located in the home country while local managers abroad make most of the key operational decisions. Those local managers take decisions that reflect local conditions as there is no agent or joint venture partner to consult with or take joint decisions with. The appropriate choice of location can benefit the business in reducing costs and enhancing overall business performance.
Domestic companies that decide to invest in foreign subsidiaries avoid paying import duties that were placed on foreign products when exporting. They can benefit from availability of relatively cheap labor in overseas countries to lower the cost of production, lower distribution costs and access local knowledge. As no commission is paid and no sharing of profits with foreign partner businesses, all Net Profits after TAX belong to the company.
However, it is expensive to set up operations in foreign countries as much higher capital cost required than exporting directly or indirectly. Foreign operations may be subject to frequent changes in government policy. Additionally, decentralized foreign subsidiaries might take decisions that could damage the firm’s reputation. That is why senior staff will need to visit and may need to be based in the country.
Example 4: Direct investments in subsidiaries can include factories set up in foreign countries by Business organizations such as Honda, Toyota or Nissan which all have set up their manufacturing plants in the UK in the 1990s allowing the Japanese car producers to access the European market.
B. External methods of entering into international markets
Other external options for expanding into international markets include:
1. Licensing
Licensing is similar to franchising, but used more for production industries.
Licensing occurs when a third party company (licensee) buys the rights to produce the goods or provide services of another business (the licensor). Simply, the domestic firm is using another company in a foreign country to produce products. A business in one country permits a firm in a foreign country to produce its branded products or patented products under specific license. Licensing involves strictly controlled terms over quality.
Thanks to licensing, the problems of entering foreign markets are removed as all the goods are produced in a foreign country by a firm that understands the local markets. In this way, goods do not have to be physically exported saving on time and transportation costs. The parent firm also avoids the capital cost of setting up its own operating bases abroad by not investing in foreign subsidiaries.
However, the risk of poor quality and lapses in quality could damage the reputation of the business whose product it is. Also, any unethical production methods used by the licensee to cut costs could damage the reputation. Also, the foreign manufacturer lacks consumer knowledge about the product. In the worst-case scenario, the licensee could fail to supply the product.
Example 5: Nike licenses the production of its sports shoes and sportswear to manufacturing businesses in Asia such as in China and Indonesia.
Example 6: Disney licenses the production of its merchandise such as soft toys of Mickey Mouse and Donald Duck to businesses in Vietnam and India.
Licensing patents can also apply to trademarks, copyrights, designs and other forms of intellectual property rights. The licensor earns money from royalty payments paid by the licensees.
2. Franchising
Franchising is similar to licensing, but used more for services industries
International franchising is very similar to franchising in the same country. Franchising occurs when a third party company (franchisee) buys the rights from the domestic business (franchisor) to operate the business abroad. Simply, the foreign firm uses your name, brand and products to operate the outlet in a foreign country.
Foreign franchisees are used to operate a firm’s activities abroad. Either one foreign company is used as a franchisee for all the branches in their own countries, or individual franchisees are appointed to operate each outlet.
Franchising minimizes some of the international business problems. It is quick and easy giving franchisor has high degree of control. The benefit of appointing franchisees is that they will have important local market knowledge.
Example 7: This method of entry into new markets in other countries is often used by Subway, the sandwich company.
Example 8: Companies such as McDonald's, Starbucks, KFC, Burger King and Pizza Hut, have ‘gone global’ by establishing overseas franchises around the world.
3. Mergers & Takeovers
Mergers and takeovers are often used by multinationals as a method of entering overseas markets.
Merging with a foreign company can help businesses gain access to overseas markets. A merger takes place when two businesses agree to integrate into a single organization.
It is demonstrated by having Company A from Germany to merge with a business in from another country such as Company B from Spain to form a new company C. Company A and Company B both disappear.
Example 9: India’s Mittal Steel Company and Luxembourg’s Arcelor merged in 2006 to form Arcelor-Mittal, the world’s largest steelmaking company in the world.
Takeovers refer to buying a business in another country, either purchasing the entire business or purchasing a majority stake in the target company. Increasing numbers of takeovers can give access to new markets or guarantee supply of raw materials.
It is demonstrated by having Company A from Germany to buy a business in another country such as Company B from Spain. Company B disappears.
Example 10: UK mobile phone giant Vodafone took over India’s mobile operator Essar in 2007. Vodafone gained access to the huge potential market in India, the world’s second most populous country.
Example 11: Tata from India took over Land Rover and Jaguar.
4. Joint Ventures (JV)
Joint Venture (JV) includes two or more business organizations from different countries joining resources and sharing risks to set up a specific business project that will be operated jointly. So, avoiding the need for a complete merger, but allowing the organizations to benefit from joining forces.
The financial arrangements between the companies involved will tend to differ, although many Joint Ventures (JV) between two firms involve a 50/50 share of costs and profits, responsibilities and risks. In Joint Ventures (JV) two companies from foreign countries will pool their resources to form a separate business. The companies then retain their separate legal identities in their own countries.
Each business brings different expertise to the Joint Venture (JV). The market potential for the businesses in the Joint Venture (JV) is increased from one to two marekts, especially if each business operates in different geographical country. Market and product knowledge can also be shared to the benefit of the businesses.
However, any mistakes made by each firm will reflect on both parties. This may damage the reputation of all firms, even it was another business that caused the mistake. The decision-making process may be ineffective too due to different business cultures, management styles or languages.
Example 12: Many foreign firms from USA and Europe have formed joint ventures with Chinese and Indian companies to gain access to these growing markets.
5. Strategic Alliances (SA)
Strategic Alliances (SA) may be highly practical for international marketers to allow a business to gain access to overseas markets.
These are similar to Joint Ventures (JV) except the partners do not form a new business with a separate legal identity. A Strategic Alliance (SA) is an arrangement for between two or more foreign companies to pursue a specific common business objective of an international scale. The term however could cover a broad spectrum of business relationships like a network.
The principal reason to form Strategic Alliance (SA) is to try to create an international organization that is better able to compete in the global market place.
Strategy to enter into foreign markets
Choice of strategy depends on internal factors and external factors.
Internal factors include: financial resources, level of expertise, ability to cope with risk, need for control, corporate objectives and strategy, as well as costs and profitability.
External factors include: market conditions, market potential, political factors such as political stability, competition in the market or availability of distribution outlets.
