Market Entry Strategies

Definition: Market Entry Strategies are the plan, methods or channels available with the firm to expand their business in the new target market within and across nations.

It is one of the firms’ most important decisions when entering new markets.

Firms move to new markets to grab the growth opportunities prevailing in different markets.

Firms can either enter new markets within the same country or go international. Thus, these strategies can be of two types:

• International Market Entry Strategies: When firms expand in foreign markets, i.e. outside the country.
• Domestic Market Entry Strategies: When the company plans expansion in the domestic markets or within the country.

This post will discuss the market entry strategies focused on international markets.

When entering foreign markets, the most important thing is to find the best strategy to make an entry.

Firms can start with two basic questions, i.e., Why and How? After that, they must find the best method for setting foot into a new market. For this, firms must analyze the variety of ways to make the entry.

Another vital decision is exporting or manufacturing products in the target country. In addition, firms must consider the factors below while designing the market entry strategy.

1. Degree of Control
2. Capital Investment
3. Expected Profitability
4. Cost Involved
5. Risk Factor

The simplest strategy for market entry is Exporting either directly or indirectly. And the most complex one is the Joint Ventures or Export Processing Zones.

Content: Market Entry Strategies

1. Methods of Entering International Markets
   • Exporting
   • Turnkey Projects
   • Licensing & Franchising
   • Joint Venture
   • Wholly Owned Subsidiary
2. Examples
3. Factors Affecting
4. Best Market Entry Strategy
5. Bottom Line

Methods of Entering International Markets

Selecting the strategy to enter the global market is vital for firms as their success largely depends on the method of entry.

There is no ideal strategy that fits all the firms. However, the most suitable method can be identified based on the following:

• Availability of Resources
• The objective behind Going Global
• Type of Market

There are several methods to enter global markets:

1. Exporting
2. Turnkey Projects
3. Licensing and Franchising
4. Joint Venture
5. Wholly Owned Subsidiary

1. Exporting

It is simply the trading of goods and services outside the country. It is the traditional and widely used strategy to begin international trade.

Exporting involves very low risk as the control remains in the hand of the exporter. Also, it is a cost-effective method as the production facility remains the same. Only the products are exported to increase Sales. However, the product’s cost increases due to high transportation costs.

It can be done in two primary forms –  Direct and Indirect Exporting.

The possible reason for opting for exports can be:

1. The decline in Sales in the home country.
2. Growth opportunities in the foreign country.

Advantages

• Simple and easy way of taking entry into overseas market.
• Firms only require low or fewer funds.
• Exports through intermediaries need no investments.
• The risk profile is very low.

Disadvantages

• Cost of production increases making firms less competitive.
• Trouble in exporting when a foreign country imposes restrictions on imports.
• Unable to establish a close connection with the customers.

2. Turnkey Projects

Another way to make entry into global markets is through Trunkey Projects.

In this method, the firm sets up and operationalizes an entire plant in the host country. After that, the entire project is handed over to the licensee. Due to this reason, such projects are named Turnkey projects.

Firms get everything readily available. They have to turn the key and start working.

Companies generally opt for turnkey projects when construction is more complicated than operations. It is also used when companies want some customization.

Advantages

• Companies can become specialized in core competencies.
• Turnkey projects contribute to the economy of the host country. Thus, they get the support of the government.
• It is suitable when there is a restriction on the capital inflow in the host country.

Disadvantages

• Suppliers often fall back on their monopoly position in the international market.

3. Licensing & Franchising

These are basically the contractual entry modes. Both are pretty similar, but they differ in their area of application. Franchising is opted for services, and licensing is used for products and marketing.

Licensing: Under this market entry method, firms obtain a license from a foreign company in exchange for a fee called Royalty. By doing so, they can legally use the intellectual property of the company, which may include the following:

1. Patents
2. Knowhow
3. Trademarks
4. Technology
5. Marketing Skills

Franchising: It is nothing but a contractual agreement that enables firms to use the intellectual rights of the foreign firm for a specific duration. The firm uses these rights against an agreed amount of payment for a specific duration.

Some common examples of Franchising are as follows:

1. Hotel
2. Restaurant
3. Bank
4. Travel Agency, etc.

Advantages of Licensing and Franchising

• Less risky and expensive method.
• Losses are less likely to happen as the licensor or franchiser receives Fees or Royalties.
• They can use the same Marketing, Brand and Labels.

Disadvantages

• Licensees or franchisees can copy the business idea and open their own venture.
• If trade secrets are revealed in the market, companies can suffer losses.
• It involves the risk of conflict between both parties.

4. Joint Venture

It is the market entry method in which a local company creates a joint venture with a company in the host country.

Both companies share an equivalent share of the degree of control and ownership. One company shares its expertise, and the other one manages its operations.

It is popularly known as the International Joint Venture (IJV). One can enter into an IJV in the following ways:

1. Buying equity in a local company.
2. A local company can acquire equity in the existing foreign company.
3. Foreign and local firms may form a new company.

Advantages

• Higher rate of return and more control over operations.
• Creation of synergy through complementing assets and resources or sharing costs of risks.
• Quick access to the distribution network.

Disadvantages

• The local partner may leak the technology and trade secrets.
• There is room for conflicts between the firms.

5. Wholly Owned Subsidiary

As the name suggests, the firm establishes its wholly-owned subsidiary in a foreign country. Thus, it involves the establishment of the subsidiary company from scratch.

Companies use this strategy for market entry when there are no other players in the market segment. The required resources and workforce are arranged locally.

The company formed in such a way is known as a Greenfield Venture.

Advantages

• The company has full control over its subsidiary.
• The company’s technology and know-how need not be shared.

Disadvantages

• The parent company invests the entire capital.
• Companies have to bear full risk of loss from the failure of their foreign operations.
• The political environment may strongly affect the subsidiary company.

Examples of Market Entry Strategies

Following are some of the practical examples of successful market entry:

1. Exporting: Saudi Arabia exports oil to different countries and is the largest oil exporter. Besides, many things like Fruits are exported to various countries.
2. Turnkey Projects: Most typical examples of this method are big construction projects. The airport’s development is an excellent example, as a private company constructs the airport and receives payments from the government.
3. Licensing and Franchising: The food chains like Domino’s and Pizza Hut are an example of Franchising.
4. Joint Venture: One popular joint venture happened between Google and NASA. They are working together to develop Google Earth.
5. Wholly Owned Subsidiary: KFC is a subsidiary of Pepsi Co. Another known example is Starbucks Japan, which is a wholly owned subsidiary of the Starbucks Group.

Factors Affecting Market Entry Strategies

Factors affecting the choice of market entry strategy:

1. Firm Factors
2. Industry Factors
3. Location Factors
4. Venture-specific Factors

Bottom Line

To sum up, entering new markets allows the business to grow. It enables firms to attract new customers, revenue and competitors. As and when the companies plan to go international, they strategize when and how to expand. However, technology has made things easy as compared to the past.