Deciding On An Effective Market Entry Strategy Economics Essay
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International business refers to the performance of trade and investment activities by firms across national borders. Firms that participate in international business are Multinational Enterprises (MNE). International Trade refers to exchange of products and services across borders. This is done through the Medium Sized Enterprises (SMEs). Companies pursue internationalization in order for them to increase the market size and profitability.
Internationalization process model was developed in the 1970s to describe how firms expand abroad. Internationalization is a gradual process that takes place in stages over a long period of time. Firms begin with exporting and progress to foreign direct investment.
Earlier theories of international trade focused on why and how cross national business occurs among nations. Beginning in the 1960s scholars developed theories about managerial and organizational aspects of firm internationalizing.
3.0 DEFINITION OF EXPORTING
Exporting is defined as the strategy of producing products or services in one country and selling and distributing them to customers located in other countries (Cavusgil, Knight, Riesenberger) 1
Exporting is the best mode of entry into international markets by smaller firms wanting to expand their market. Firms venturing for the first time usually use exporting as their entry strategy.
This strategy is most favored by small and medium sized enterprises (SMEs). There are two types of export strategies. There are two types of export strategies that are Direct and indirect exporting. However all types of firms large and small, use exporting.
4.0 THE VALUE OF PLANNING
Many companies begin exporting activities haphazardly without carefully screening markets. The purpose of planning is first to assemble facts, constraints and goals. All personnel who will be involved in the export process should be trained and participate in the export plan. Formulating an export strategy, should be based on good information and proper assessment.
Before a firm enters in a new market, a firm should have knowledge and understanding of a market they are entering into. Once a company determines to export its products, it must consider the following:
. Is exporting consistent with its goals and objectives such as desired profitability, market share or competitive positioning.
. An organization should consider its resources and technological capabilities
available to it and how will these demands be met.
. What are the characteristics of the product to be offered to customers in the
. Are they unique conditions in the target market or country, such as legal culture, and economical conditions? The nature of business infrastructure such as distribution and transport system.
. What are the risks in the proposed foreign market, such as political that would hinder the firms, goals and objectives of pursuing internationalization?
Formulating an export strategy, needs planning and good assessment based on the
information gathered. The type of products or services such as its composition is very important. For example a company here in Zambia like Lafarge which produces cement, will have to consider the weight of cement. This will influence the type of internationalization strategy that a firm will choose. Lafarge will have to look at how transportation of cement will be carried out. They will have to do its logistics taking into consideration its weight ratio as this can make a product expensive due to high costs on transport.
Then management will have to assess which market to go to, for example will they go to Burundi or the Democratic Republic of Congo. It would be ideal to export to Congo as it is easier to transport its products.
Looking at the geographical location in these two markets, transportation will be the prime consideration. Lafarge will either use the road or railway line. So this requires managers with skills and competences to facilitate the exporting strategy.
5.0 ENTRY STRATEGIES ITS ADVANTAGES AND CHALLENGES
They are variety of ways in which organizations can enter foreign markets
(Cunningham 1996). Cunningham identified five strategies used by firms for entry into foreign markets namely Licensing, Franchising, Joint Venture, Counter Trade and Foreign Direct Investment.
Exporting is the most traditional and well established way of entering a new market of a foreign country. Exporting is the most favored by firms venturing abroad for the first time. This strategy is usually used by small and medium-sized enterprises, however all types of firms, large and small, use exporting regardless of their stage of internationalization. According to Collett3 (1991) exporting requires a partnership between exporter, importer, government and transport. Without these four coordinating activities the risk of failure is increased.
Exporting has its advantages such as it is easy to withdraw from a market at lower costs since the firm does not invest in the plant and machinery of the target market. It also gives an opportunity to learn about that foreign market as it increases its customer base reducing the dependency on the home markets alone. It improves the market share and generates profit margins than in the domestic market. For example Lafarge took advantage of the World cup 2010 In South Africa and exported cement in that country. This caused a sharp rise in prices here in Zambia and caused severe shortages in the Zambian market.
Exporting has also got its draw backs, because exporting does not require to have a physical presence in the foreign market, management has fewer opportunities to learn about the customers, competitors and other unique aspects of the market.
Exporting requires an organization to acquire new capabilities and expertise to deal with export transactions .firms must hire personnel with competency in international sales and foreign languages. For example Lafarge has to employ French speaking personnel to do its transaction in the Democratic Republic of Congo because French is the national language in that country. Otherwise they would find it very difficult to negotiate since very few speak English in that target market. Exporting is more sensitive to tariffs and trade barriers and the instability in exchange rates. For example the South African exporters complained to the strong Rand and asked government to devalue it as it was making its products to be expensive.
Exporting methods include direct and indirect export. In Direct exporting the firm may use agent's distributors or intermediaries located in the foreign market or act via government agency. These local intermediaries will negotiate on behalf of the exporter and assume responsibility as a local supply chain management, pricing and customer service. The exporter's task is to choose a market, find the representative or agent, set up a physical distribution and documentation, promote and price the product.
For example we have the Food Reserve agency here in Zambia, commercialized but
still has government control is the government agency. This agency is the only
permitted maize exporter and is allowed to export by the government only when they have a surplus. The Food Reserve agency finds a market and an agent to do the distribution and documentation. This year FRA was allowed to export to the Democratic Republic of Congo.
The advantage of direct exporting is that it gives the exporter greater control over the export process and it allows a closer relationship with foreign buyers and the market place.
The challenges to this strategy are that, there may be disagreements between
purchasers and third parties. It may be impossible to recover capital in countries like the Democratic Republic of Congo were war breaks out any time.
Indirect exporting is when a firm contracts an intermediary firm or agents located in the firms local market. These intermediaries find markets and buyers for its products.
Export Management Companies (EMCs) or an international trading company based in
the exporter's home country. They give the exporter access to well established
expertise and trade contacts.
The advantage of indirect exporting is hat it provides a way to penetrate foreign markets. The firm can start with small capital and has fewer risks but with prospects of incremental sales. The disadvantage is that the foreign intermediaries may not be reliable as to market and distribute the products as intended.
Licensing is defined as the method of foreign operation where by a firm in one country agrees to permit a company in a another country to use the manufacturing ,processing ,trade mark or some other skill provided by the licensor, in exchange for royalties or other compensation. This is done by a contractual entry strategy in international business. It refers to cross border connections where the relationship between the focal firm and its foreign partners are governed by a contract. Example of licensing here in Zambia is, Zambian Breweries which have the license to make Coca Cola.
Similarly, service firms in retailing, car rentals rely on licensing and franchising. An example is Avis car hire which operates in almost all the countries in Southern Africa. Licensing allows the licensee to produce and market a similar product like the one the licensor may already produce in its home country.
This strategy is usually preferred by small and medium-sized enterprises (SMEs), because it requires less capital investment or
involvement of the licensor in the foreign market. SMEs lack resources to
internationalize through more costly entry strategies.
Licensing gives the following advantages: The licensor bears no cost of establishing a physical presence in the market .Meanwhile, the licensee benefits by gaining access to a key technology at a much lower cost than if it had developed on its own. Licensing can also be used as a low-cost strategy to test the viability of the foreign markets and is a good way to start in foreign operation and it opens doors to low risk manufacturing relationship. Another advantage is that capital is not tied up in a foreign operation, for example Coca Cola does not have its capital tied up in countries that make its
Disadvantages of licensing: A poor partner may be unable to generate substantial
sales since royalties are based on the licensees sale volume, the licensor depends on the licensee's sales. The licensor has limited form of participation this may cause the licensee to produce substandard products. The partner develops know-how and so license is short. Licensee becomes competitors, because the technology transfer causes the licensee to produce a similar product like that of the licensor and market it in other countries. For example the U.S toymaker Mittel licensed rights to distribute Barbie to Brazilian toymaker Estrela. Estrela went ahead after the contract expired and developed a Barbie look-alike doll which did well on the market (Cavusgil. Knight, Riesenberger)
Franchising is an arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties or other forms of compensation.
Franchising is an advanced form of licensing in that the franchisor allows an
entrepreneur the franchisee the right to use an entire business system in exchange for royalties.
The franchisor provides the franchisee with training, marketing and on-going support.
The franchisee may require buying certain equipment and supplies from the franchisor.
The franchise has to make sure the product is exactly the same as the original. For example, if you buy food from subway here in Lusaka it should taste and have the same ingredients in Johannesburg. This is more comprehensive than licensing
because all business activities are prescribed to the franchisee. The franchisor controls the business system to ensure consistent standards.
The advantage is that its easy entry into the foreign market since there is no need to invest huge capital since the brand is already established it's easy to sale.
The disadvantage is that it's difficult for the franchisee to maintain the same standard and quality and this requires a going assistance. It emphasizes standantized products and marketing.
5.3 JOINT VENTURES
Joint ventures can be defined as "an enterprise in which two or more investors share ownership and control over property rights and operation." Joint Ventures are more extensive form of internationalizing than either exporting or licensing. For example, accounting firms like Pricewater house and Coopers and Lybrand went into a joint venture to form Pricewater Coopers Lybrand. This creates a financial strength for an organization.
Joint Ventures give the following advantages, combining the two firms may be the only means of entry into the market e.g. Vodacom South Africa was blocked from entering the Zambian mobile subscribers but of recent development Vodacom is going into a joint venture with Africonnet Zambia Ltd. Risks are shared and knowledge of acquiring technology from a foreign partner. Further, joint ventures change the image of another company with combined ideas from both companies entering the joint venture.
The disadvantages, however, are those partners do not have the control of
management. Vodacom is South African company so it will not have full control of
management at Africonnet here in Zambia. Partners may have different views on
expected benefits. It may be impossible to recover capital if need be.
5.3 COUNTER TRADE
This is another form of indirect method of exporting. Goods and services are traded for other goods and services when conventional means of payment are difficult, costly or non-existent. Counter trade refers to an international business transaction where all partial payments are made in kind rather than cash. These types of transactions are prevalent in developing country government. Counter trade can take many forms .
But the most used is BARTER, which is the oldest form of trade. Barter is the direct exchange of one good for another without any money involved. Generally there no middlemen involved, usually contracts are short and less complicated. However if it is for a longer time, provisions to include exchange rates fluctuation should be considered.
The disadvantages with this strategy are that goods may be of inferior quality, as the buyer may not have inspected the goods, and may be difficult to market the commodities. You cannot revert to currency trading due to exchange of goods. There is no consistence on delivery of goods, so quality may decline.
5.4 FOREIGN DIRECT INVESTMENT
Foreign direct investment is the most advanced and complex foreign market entry
strategy and involves huge resources, skills and expertise to be able to carry out this operation. This is an internationalization strategy In which a firm establishes a physical presence abroad through acquisitions of productive assets such as capital, technology, labor, land plant and equipment .This type of strategy is usually used by Multinational Enterprises (MNE) .For ample Toyota used foreign direct investment by investing in countries like South Africa and them have easy access to export to neighboring countries.
Having done all the preparation and planning, the firm must then decide on a suitable market entry strategy. There are two main ways of entering a foreign market, by direct and indirect exporting. Direct which includes the use of agents, distribution, Government and subsidiaries and indirect includes the use of trading companies, management companies and counter trade.
Out of these two main ways a marketer should adopt an appropriate mode of
internationalization .Exporting has many benefits as well as disadvantages which must be considered before making a choice. A firm must look at the production, financial and management capabilities to be employed in the chosen strategy.
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