Global Marketing Management Chapter 8 Entry and Expansion

Global Marketing Management Chapter 8 Entry and Expansion Strategies: Marketing and Sourcing Warren J. Keegan

Overview z. Decision Criteria for IB z. Entry & Expansion Decision Model z. Exporting z. Additional Expansion Alternatives z. Market Strategy z. Summary Keegan: Global Marketing Management Chapter 8 / 2

Learning Objectives z To identify criteria for selection of foreign markets. z To appreciate which market entry alternatives are available to companies. z To recognise export activities as a process developing over time. z To understand different entry startegies: sourcing, licensing, investment & ownership Keegan: Global Marketing Management Chapter 8 / 3

Decision Criteria for IB z. Political risk z. Market access z. Factor cost & conditions z. Shipping consideration z. Country infrastructure z. Foreign Exchange Keegan: Global Marketing Management Chapter 8 / 4

Selecting Foreign Markets z. . . should be based on a number of criteria: ymarket-related characteristics ycost-related aspects ythe regulatory framework ytariffs, duties & non-tariff trade barriers zthe importance of these selection criteria depends upon the industry & the markets taken into account Keegan: Global Marketing Management Chapter 8 / 5

Market Selection Criteria z 1. Market Potential z 2. Market Access z 3. Shipping Cost & Time z 4. Appraising Level & Quality of Competition z 5. Service z 6. Product Fit Keegan: Global Marketing Management Chapter 8 / 6

Critical Questions for a Product-Market Profile: The 9 W´s 1. Who buys our product? 2. Who does not buy our product? 3. What need or function does our product serve? 4. What problem does our product solve? 5. What are customers currently buying to satisfy the need and/or solve the problem for which our product is targeted? 6. What price are they paying for the products they are currently buying? 7. When is our product purchased? 8. Where is our product purchased? 9. Why is our product purchased? Keegan: Global Marketing Management Chapter 8 / 7

A Multi-Stage Selection Process Source: adapted from D. J. G. Schneider, and R. U. Müller, Datenbankgestützte Marktselektion: Eine methodische Basis für Internationalisierungs-strategien, Stuttgart, 1989 Keegan: Global Marketing Management Chapter 8 / 8

Visiting the Potential Market z. . . is essential after assessment & selection of potential market(s) z goals: yto confirm (or contradict) assumptions regarding market potential yto gather additional (primary) data yto develop a marketing plan in co-operation with the local agent or distributor Keegan: Global Marketing Management Chapter 8 / 9

Production Abroad Ownership and Control Keegan: Global Marketing Management Chapter 8 / 10

z COUNTRY-OF-ORIGIN EFFECT DEALS WITH QUALITY PERCEPTIONS OF PRODUCTS. THIS EFFECT DIFFERS BY PRODUCT CATEGORY. ALSO, THE QUALITY LEVEL AT WHICH A COUNTRY PRODUCES IS FACTORED IN. z COUNTRY-OF-ORIGIN BIAS CUSTOMERS TEND TO OVERSTATE THE POSITIVE AND NEGATIVES OF PRODUCT ATTRIBUTES AND THIS CAN CAUSE A BIAS TOWARDS PRODUCTS FROM A GIVEN COUNTRY. Keegan: Global Marketing Management Chapter 8 / 11

Direct Exporting z Direct market representation yvia wholesalers or retailers or directly to the consumers z Independent representation yindependent distributor z Piggyback marketing ydistribution through another distributor´s channel Keegan: Global Marketing Management Chapter 8 / 12

Exporting: A Developmental Process Stages of the firm 1. . is unwilling to export. 2. . fills unsolicited export orders (export seller). 3. . explores the feasibility of exporting (may bypass stage 2). 4. . exports to one or more markets on a trial basis. 5. . is an experienced exporter to one or more markets. 6. . pursues country or region focused marketing. 7. . evaluates the global market potential. All markets, domestic & international, are regarded as equally worthy of consideration. Keegan: Global Marketing Management Chapter 8 / 13

Export Selling vs. Export Marketing y. Export selling involves selling the same product, at the same price, with the same promotional tools in a different place y. Export marketing tailors the marketing mix to international customers Keegan: Global Marketing Management Chapter 8 / 14

Requirements for Export Marketing y. An understanding of the target market environment y. The use of market research and identification of market potential y. Decisions concerning product design, pricing, distribution and channels, advertising, and communications Keegan: Global Marketing Management Chapter 8 / 15

Government programs that support Exports z. Tax incentives z. Subsidies z. Governmental assistance Keegan: Global Marketing Management Chapter 8 / 16

Governmental Actions to Discourage Imports and Block Market Access z. Tariffs z. Import controls z. Nontariff barriers y. Quotas y. Discriminatory procurement policies y. Restrictive customs procedures y. Arbitrary monetary policies y. Restrictive regulations Keegan: Global Marketing Management Chapter 8 / 17

Export-Related Problems z Logistics z Legal procedure z Servicing exports z Sales promotion z Foreign market intelligence Keegan: Global Marketing Management Chapter 8 / 18

Sourcing Decision Factors 1. 2. 3. 4. 5. 6. Factor costs & conditions Logistics Country infrastructure Political risk Market access Exchange rate, availability & convertibility of local money Keegan: Global Marketing Management Chapter 8 / 19

Non-exporting modes of entry z. Three main non-exporting modes of entry y. Licensing (including franchising) y. Strategic Alliances y. Wholly owned manufacturing subsidiaries Keegan: Global Marketing Management Chapter 8 / 20

Three modes of entry Host Country Home country Ho Host County st Co u Blueprint : “how to do it” nt ry WHOLLY-OWNED SUBSIDIARY A replica of home LICENSING Keegan: Global Marketing Management STRATEGIC ALLIANCE (J. V. ) Chapter 8 / 21 A “joint effort”

Licensing z“contractual arrangement whereby one company (licensor) makes an asset available to another company (licensee) in exchange for royalties, license fees or other form of compensation” Keegan: Global Marketing Management Chapter 8 / 22

Licensing y. LICENSING refers to offering a firm’s know-how or other intangible asset to a foreign company for a fee, royalty, and/or other type of payment x. Advantages for the new exporter • The need for local market research is reduced • The licensee may support the product strongly in the new market x. Disadvantages • Can lose control over the core competitive advantage of the firm. • The licensee can become a new competitor to the firm. Chapter 8 / 23 Keegan: Global Marketing Management

Licensing z. Original Equipment Manufacturing (OEM) y. A company enters a foreign market by selling its unbranded product or component to another company in the market country x. Examples: • Canon provides cartridges for Hewlett. Packard’s laser printers • Samsung sells unbranded television sets , microwaves, and VCRs to resellers such as Sears, Amana, and Emerson in the U. S. Keegan: Global Marketing Management Chapter 8 / 24

Franchising z A form of licensing where the franchisee in a local market pays a royalty on revenues - and sometimes an initial fee - to the franchisor who controls the business and owns the brand. z The local franchisee typically invests money in the local operation and has the right to operate under the franchisor’s brand name. z The franchisee gets help setting up the operation, usually according to a welldeveloped blueprint. The business is typically very standardized (fast food operations is a case in point). Keegan: Global Marketing Management Chapter 8 / 25

Franchising z. A form of licensing z“a company permits name, logo, cultural design and operations to be used in establishing a new firm or store. ” Keegan: Global Marketing Management Chapter 8 / 26

Franchising Pros and Cons y. Advantages x. The basic “product” sold is a wellrecognized brand name. x. The franchisor provides various market support services to the franchisee x. The local franchisee raises the necessary capital and manages the franchise y. A disadvantage x. Careful and continuous quality control is necessary to maintain the integrity of the brand name. Chapter 8 / 27 Keegan: Global Marketing Management

Strategic Alliances z. Strategic Alliances (SAs) y. Typically a collaborative arrangement between firms, sometimes competitors, across borders x. Based on sharing of vital information, assets, and technology between the partners x. Have the effect of weakening the tie between potential ownership advantages and company control Keegan: Global Marketing Management Chapter 8 / 28

Equity and Non-Equity SAs Equity Strategic Alliances – Joint Ventures Non-equity Strategic Alliances: – Distribution Alliances – Manufacturing Alliances – Research and Development Alliances Keegan: Global Marketing Management Chapter 8 / 29

Equity Alliances: Joint Ventures z Joint Ventures y. Involve the transfer of capital, manpower, and usually some technology from the foreign partner to an existing local firm. y. Examples include Rank-Xerox, 3 MSumitomo, several China entries where a government-controlled company is the partner. y. This was the typical arrangement in past alliances – the equity investment allowed both partners to share both risks and rewards. y. Today non-equity alliances are common. Keegan: Global Marketing Management Chapter 8 / 30

Joint Ventures z Company run by two or more partner firms z Risk is shared and different value chain strengths are combined z Influence depends on degree of ownership z Good opportunity to build on local know-how z JV finds greater acceptance by local authorities Keegan: Global Marketing Management Chapter 8 / 31

Distribution Alliances y. Also called “piggybacking”, “consortium marketing” y Examples • SAS, KLM, Austrian Air, and Swiss Air • STAR Alliance (United Airlines, Lufthansa, Air Canada, SAS, Thai Airways, and Varig Brazilian Airlines) • Chrysler and Mitsubishi Motors Keegan: Global Marketing Management Chapter 8 / 32

Pros and Cons of Distribution Alliances z Advantages y. Improved capacity load y. Wider product line y. Inexpensive access to a market y. Quick access to a market y. Assets are complimentary y. Each partner can concentrate on what they do best z Disadvantages y. Time arrangement can limit growth for the partners y. Can hinder learning more about the market, creating obstacles to further inroads Keegan: Global Marketing Management Chapter 8 / 33

Manufacturing Alliances z Shared manufacturing examples y. Volvo and Renault share body parts and components y. Saab engines made by GM Europe z Advantages y. Convenient y. Money saving z Disadvantages y. The organization must deal with two principals in charge of production, harder to communicate customer feedback y. Can put. Keegan: constraints on future growth Chapter 8 / 34 Global Marketing Management

R&D Alliances z R&D Alliances y. Provide favorable economics, speed of access, and managerial resources and are intended to solve critical survival questions for the firm y. Used to be seen as particularly risky, since technological know-how is often the key competitive advantage of a global firm y. The risk of dissipation has become less of a concern, however, as technology diffusion is growing ever faster anyway. Keegan: Global Marketing Management Chapter 8 / 35

Wholly-owned Subsidiaries/Acquisition z Represents the most extensive engagement abroad z Subsidiary is either established through the creation of a new facility or the acquisition of an existing firm z Company has complete decision power & control z Investor achieves greater flexibility z In many countries majority or 100% ownership by foreign companies is forbidden Keegan: Global Marketing Management Chapter 8 / 36

Manufacturing Subsidiaries z. Wholly Owned Manufacturing Subsidiaries y. Undertaken by the international firm for several reasons x. To acquire raw materials x. To operate at lower manufacturing costs x. To avoid tariff barriers x. To satisfy local content requirements Keegan: Global Marketing Management Chapter 8 / 37

Manufacturing Subsidiaries ADVANTAGES • Local production lessens transport/import-related costs, taxes & fees • Availability of goods can be guaranteed, delays may be eliminated • More uniform quality of product or service • Local production says that the firm is willing to adapt products & services to the local customer requirements DISADVANTAGES • Higher risk exposure • Heavier pre-decision information gathering & research evaluation • Political risk • “Country-of-origin” effects can be lost by manufacturing elsewhere. Keegan: Global Marketing Management Chapter 8 / 38

FDI: Acquisitions y. Instead of a “greenfield” investment, the company can enter by acquiring an existing local company. y. Advantages x. Speed of penetration x. Quick market penetration of the company’s products y. Disadvantages x. Existing product line and new products to be introduced might not be compatible x. Can be looked at unfavorably by the government, employees, or others x. Necessary re-education of the sales force and distribution channels Keegan: Global Marketing Management Chapter 8 / 39

Entry Modes and Local Marketing Control The local marketing can be controlled to varying degrees, quite independent of the entry mode chosen. The typical global firm maintains a sales subsidiary to manage the local marketing. Examples: Keegan: Global Marketing Management Chapter 8 / 40

Market Expansion Strategies z. Narrow focus: concentrated markets/concentrated countries z. Country focus: diverse markets/concentrated countries z. Country diversification: concentrated markets/diverse countries z. Global diversification: diverse markets/diverse countries Keegan: Global Marketing Management Chapter 8 / 41

Summary z. The choice of potential foreign markets must be based on a thorough evaluation of criteria which influence the potential success abroad; eg market potential, market access, or product fit. z. Once the potential foreign target market(s) is selected, a company has to decide how to enter this market. Keegan: Global Marketing Management Chapter 8 / 42