CHOICE OF ENTRY

Companies have a range of choices for how they can enter a new country market. These can be broadly grouped into two main areas, exporting and overseas production. In addition, companies need to determine the degree of ownership and involvement that they wish to commit to in developing their international business.

Exporting

Most companies, large and small, use exporting as an entrance route for some of their country markets. To generalise, smaller companies often use exporting for all their international business. On the other hand, larger companies will often use a range of exporting, foreign production and ownership approaches. The difference stems from the greater resources of the larger companies and therefore their ability to choose between different approaches.

In the consideration of exporting there are two main divisions:

 Direct exporting takes place when the distribution intermediaries used are based in the country market that is the target for the exports, for example, agents or distributors.

 Indirect exporting takes place when the country market is developed through

distribution intermediaries, such as export management companies, who are based in the same country as the exporting company.

Direct exporting

The main methods of entering foreign markets through direct exporting are as follows:

 Distributors

A distributor earns a profit by selling products that have been previously bought by the distributor. Distributors usually have a sales force and provide some logistics and marketing inputs in addition to the sales function.

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 Agents

Agents act on behalf of a principal. In the case of export distribution, the agent sells products on behalf of a principal who is based in another country. The agent provides a sales function but does not own the product that is sold. Agents receive lower levels of sales commissions than distributors because they provide fewer services to the principal. Agents are usually smaller organisations than distributors; they may be one person who acts primarily in a sales capacity.

Agents are similar to distributors in that they often represent a number of companies, sharing their time and efforts between a number of products and clients. The

companies that use agents and distributors need to manage them and to motivate them to sell their products. There is a tendency for agents and distributors to ‘cherry pick’ in the sense that they put their main efforts behind those products that are easiest to sell and those that provide them with the best profit earning possibilities.

 Company sales force

A company can use its own sales force to sell in another country market. If the market potential is sufficiently large, the company can use salespeople who are based in that country. If the market is smaller or risky, the company is more likely to use salespeople who merely visit the country and its customers from time to time.

An important consideration in using this method of entry’ is the nature of its cost. Most of the costs of using the company sales force are fixed or indirect costs. This means that if the level of sales is poor, the same indirect costs will be spread across a small number of sales.

The decision as to which entry route is appropriate will partly relate to company experience in international business, but it will also relate to the type of product. If the product requires high levels of after-sales service, then there will be a need for in-country presence and service capability. Some companies have the resources to be able to carry out customer-responsible servicing, while other companies will need to delegate this to local companies. If this is the case, the company would need either to appoint a distributor to carry out these tasks or to appoint a service company in addition to the agent.

Indirect exporting

Indirect exporting is the method used by companies that wish to reduce their risk and exposure to international business. It is a way in which companies can attempt to sell some of their excess capacity without incurring the problems associated with dealing with

customers in different countries. The main problem with indirect exporting is the lack of control over how the company’s products are marketed. It is quite common for the company to be unaware of who its customers are and how some of the marketing mix elements are used, for example, being unaware of the final price charged to customers.

The main methods of entering foreign markets through indirect exporting are as follows.

 Export management companies

Export management companies have similarities with agents and distributors but are different because they are based in the exporter’s own country. For the exporter, the export management company seems easier to deal with because of the absence of language, cultural and export documentation difficulties. Export management companies are sometimes called export houses and sometimes export marketing companies (EMCs).

EMCs, by selling a range of products, can offer an interesting package of products to foreign buyers whilst at the same time splitting the costs of selling, marketing and physical distribution across a number of products from different client companies.

EMCs usually specialise in some way, for example by part of the world, by product type

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or by type of customer. An EMC might therefore sell toys to retailers in Asian countries on behalf of UK companies. The company is able to have its products sold into a large number of country markets.

 Piggyback operations

This method of entry’ is based upon use of the established distribution arrangements of one company by another company. One company gives ‘a ride’ to the other company.

The ride consists of the selling and export administration, and benefits from the ongoing nature of the sales contacts that the company has. The ‘rider’ company receives an immediate benefit by gaining access to the working system that has been built up by the other company. The ‘carrier’ is either paid a commission and acts as an agent, or buys the product and acts as a distributor.

 Purchase in domestic market

Some companies sell their products to companies that send buyers, or who have established buying offices, in the domestic market of the selling company. Some large retailing companies from countries such as the United States or Japan will buy products in this way. This method, whilst creating export sales, keeps the selling company away from a direct understanding of the country market and minimises their need to handle the full range of export documentation.

Overseas Production

Overseas production in the country market will rule out exporting. There will be no need to transport products physically across country borders as the products will be produced within that country.

There is a range of methods of achieving foreign production:

 Wholly-owned subsidiary

This would be a company set up in another country which is 100% owned by the parent company. A wholly owned subsidiary with a complete production facility is the most obvious means of achieving foreign production.

 Foreign assembly

The company could produce most of the product in the domestic market and merely assemble it in the country market.

 Contract manufacture

The company could arrange for another company to produce the product for them through contract manufacturing.

 Licensing and franchising

The company could use licensing and franchising methods, which would result in other companies being responsible for production.

Licensing is a method of entry’ in which a company, for a fee or royalty payment, allows another company to use a patent or a trademark within the areas defined by the licensing agreement. Licensing is a low-cost, low-risk way to enter markets. The enterprise is only directly involved with the market through the company with which it has its licensing agreement. It is a method used by small and medium-sized

companies, particularly those in advanced technology, because it enables quick returns to be made with the use of extra capital.

The various difficulties with licensing relate to the usual low profit returns from licensing, and the difficulty in selecting suitable licensees. It is not uncommon for

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technologies. In this way the licensee can often become a competitor. Another difficulty with licensing is the lack of market control.

There are similarities between licensing and franchising. The main difference is the extent to which a marketing programme is assigned to the franchisee. In licensing agreements, the licensing might well be restricted to the trademark. In franchising, the agreement often covers the trademark, the logo, the particular method of operation, and sometimes advertising campaigns. Franchising is particularly used in fast food operations (for example, Kentucky Fried Chicken (KFC) and Burger King) soft drinks (for example, Coca-Cola and Pepsi-Cola) and car rental (for example, Hertz and Avis).

Ownership Strategies

Companies will need to decide on the level of direct ownership they desire in entry decisions.

The extreme positions are complete ownership or complete reliance upon other companies, with the intermediate option of entering into part-ownership schemes.

Ownership decisions will usually be corporate strategic decisions in addition to operational decisions. The decision will be strongly influenced by the level of political and economic stability in the chosen country. The higher the level of risk of interference, the more likely it will be for the company to want others to bear the risks of ownership.

Distribution-channel decisions have important and relatively long-term consequences for companies. The decision to include company ownership as part of the distribution-channel decision serves to increase the commitment and results in a major medium- to long-term view being taken about the market.

The following represent the major alternatives with regard to ownership:

 Wholly owned

Here, the alternatives are the setting up or acquisition of a subsidiary in the country market, or using the company’s own sales force. Both these methods have been outlined above

 Partly owned

There are two main possibilities for part ownership of foreign companies:

(i) Joint venture – A joint venture is a kind of partly owned subsidiary in which a multinational enterprise decides to share the management of a company with one or more collaborating companies. The reasons for entering into a joint venture are often to reduce political and economic risk. In some countries, joint ventures might be the only way in which a company can invest in the country (this is usually called inward foreign investment). Other reasons for using joint ventures include using the specialist skills and cultural knowledge of a local partner, to gain access to the distribution channels of a joint venture partner, and as a means of limiting the capital requirement of international expansion.

(ii) Strategic alliance – There are differences between joint ventures and strategic alliances. In a joint venture, two or more companies contribute specific amounts of capital to form a new company. In strategic alliances the arrangements

between, usually, two companies are more flexible. The alliance may or may not result in a new company. The usual purpose of a strategic alliance is to combine and gain benefits out of each partner’s skills and resources.

Alliances are a comparatively recent method in international business. It is possible that the very flexibility of the alliance will result in its eventual transition into a new company or a more formal joint venture, or the take-over of one company by the other.

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Alliances are most common in connection with providing access into distribution channels (entry’) and also as a means of gaining research and development expertise for new product development and manufacturing capability.

 Owned by others

Here, the strategy will be to operate through separate companies, the methods including those considered above such as licensing and franchising, distributors and agents, and EMCs and piggyback operations.

From this, we can see that the degree of involvement, in terms of ownership and commitment, in the country can range from high to low:

Figure 8.1: Spectrum of ownership options High involvement Wholly-owned subsidiary

Partly-owned joint venture Strategic alliance

Licensing/Franchising Distributors

Agents

Using the company sales force Export management companies Piggyback operations

Low involvement Purchase in domestic market by buyers from other countries