Working Notes: Root, Franklin R., 'Designing Entry Strategies for International Markets'

The full source reference is: 

Root, Franklin R., «Designing Entry Strategies for International Markets», p. 22-24, chap.2, Entry Strategies for International Markets, Lexington Books, New York, 324 p., 1994, ISBN: 0-02-926904-0

-- 

The first point important point to remember is that an entry strategy into a foreign market takes time and commitment. The text throws out a time span between 3-5 years; the point is that the time horizon is long enough for managers and the organization to evaluate and control the process; i.e. ultimately to minimize errors.

The elements in the entire entry strategy

First of all this process should not be seen as sequential but as diffuse; crucially the manager of the plan must allow for feedback loops and control mechanisms which per definition entails a certain backtracking. In the end this is also underpinned by the notion of international marketing as a strategic decision; i.e. you do not engage in international marketing by default. The actual process is shown in figure 2 … (described below).

1. Choose target product and market – Which product do we wish to sell on foreign markets and where?
2. Setting objectives and goals.
3. Choosing the mode of entry; exporting, contractual, or investment (basically this is step is the focus for the rest of chapter and these notes)
4. The design of the actual marketing plan (i.e. the four Ps vis-à-vis our chosen export market).

Remember that this process must be surrounded by a given amount of control mechanisms.

In general an international company faces two key objectives in the process described above; first of all the mode of entry is crucial; by which method and channel do we wish to sell our product to our target foreign market? Secondly the marketing plan must differ from each market and thus be tailor made. It is thus important to consider that the mix of the four Ps is evaluated in terms of each target market (unless we are globalizing our strategy of course J ) even if we are talking about the ‘same’ product. After all, the marketing mix constitutes the most important controllable variables of the company as opposed to uncontrollable variables as for example macroeconomic and political conditions etc.

Entry modes

In essence there are two ways in which we can enter a foreign market as marketers. 1) By exports or 2) by some kind of transfer of knowledge, technology, and/or equipment to the target market. Generally the former entails less commitment than the latter but the choice between the two is not straightforward as we shall see later on. Scrutinizing further we can break up these two entry modes into more distinctive methods each with their specific characteristics. In essence though we end up with three overall entry strategies …

Export entry modes (i.e. limited to physical products since the manufacturing base is outside the country [1] ) – Here it is important to distinguish between indirect and direct exporting. Indirect exporting uses middlemen (agents, distributors etc) in the country of product (i.e. outside the target market) whereas direct exporting might use middlemen in the target country to facilitate the distribution process. As such direct exporting may in some circumstances entail equity investments in the target country (e.g. setting up a sales agent office or distribution center).

Contractual entry modes – These kinds of entry modes are defined as non-equity associations between the producing company and a company in the target country. Notable examples of this could be licensing and franchising. In essence a contractual entry mode can be anything in which a contract is being made concerning the transfer of technology, knowledge and/or equipment. What make contractual entry modes different are to a large extent the different legal conditions and degrees of commitment and involvement from the ‘parent’ company.

Investment entry modes – This entry mode is defined as involving some kind of equity investment and therefore ownership of equity in the target market. The most common definition of this entry mode is FDI (foreign direct investment). In general the text speaks of sole ventures in terms of setting up new establishments or acquiring existing ones and joint ventures.

Important pointers concerning entry modes …

Often the resources devoted and the commitment displayed rises as we go from export to investment.

However, on the flipside the degree of control and internalization advantages also rise as we go from export to investment.

How to choose mode of entry?

Well this is obviously very difficult to answer in general terms. However there are certain natural guidelines. First of all the available resources might make some of the choices above unviable because of the costs entailed. As such small and medium sized companies rarely have the capacity to engage in heavy FDI activities; in fact constraint in resources might actually prevent you from even engaging in international marketing in the first place. Holding the question of resources equal we can however set up a basic framework which may help us in our decision on which mode of entry to choose.

Firstly we look at the external factors (remember the notion of uncontrollable variables above). Basically we can operationalize this analysis through the PESTEL analysis.

Market factors in target market – The first pointer here is that markets with low sales potential should be engaged with an entry mode to fit this fact and conversely with markets of high sales potential. The point is that high sales potential can justify entry modes which are more risky and expensive but also more suited to cater for a potentially big market. Also the competitive structure of the foreign market is important; i.e. if the market is dominated by few very strong companies we might need a very strong base (i.e. FDI/equity investment) in order to gain foothold. Once again, it is all a question of the amount of resources you have available given the projections of your business on the foreign market. Lastly we can mention the marketing infrastructure of the target market; i.e. if the distribution network is very good in the foreign market direct exporting might be the right choice.

Production factors in the target market – Obviously this plays a large role in your decision but the final decision also rests on why you wanted to go international in the first place. I.e. perhaps the production factors in the target market were precisely the reason you chose that market. In general though high production costs in the target market would favor exporting as an entry mode as oppose to equity investment.

Environmental factors in target country – This category covers very wide area of analysis as it is defined by the economic, sociocultural, and political environment of the target country. As such the potential elements to be mentioned here are endless. However, one thing we obviously need to look out for is trade barriers be they tariff or non-tariff in nature. Another factor is transportation costs and of course limitations and restrictions on FDI. Furthermore, the text advices us to do a thorough macroeconomic check of our targeted country; a clear example is the currency relationship. I.e. if the currency is allowed to depreciate (for whatever reason) exports are obviously disfavored as oppose to equity investment.

Home country factors – Lastly we have the conditions of the home country (i.e. the domestic base). Generally in terms of international marketing this is a crucial perspective to consider. See for example Michael Porter’s diamond in which he argues how a company’s competitiveness first and foremost is derived from the competitive dynamics (or lack thereof) of the home base. More specifically in terms of entry modes we have the same argument as in terms of foreign market potential described above. A company with strong and large domestic market will probably have the financial capacity to consider an entry mode based on FDI whereas a smaller company probably cannot. The competitive situation can also affect the entry mode; e.g. in an oligopolistic industry a company can be forced to act according to a move by its competitors. Moreover companies in oligopolistic industries are more inclined to exhibit FDI behavior than companies in more atomized industries.

As we can see we are moving towards a crude general rule … large companies in oligopolistic industries are biased towards entry modes through investments whereas small companies in atomized industries are inclined to enter foreign markets with the use of exports and/or contractual agreements. Lastly it is obviously important to note than many companies deploy a combination of the three entry modes described above in their collective strategy for international marketing.

Now we turn over to the internal factors of the company which exert influence on the decision of entry mode.

Product factors – Here we are first of all talking the nature of the product (tangible or intangible) and also the product’s competitiveness in the home market. Generally if the company’s products are highly differentiated the entry mode will be biased towards exporting since the product itself will be able to carry high transportation and distribution costs and still be competitive. Conversely, if your products are not differentiated it will prompt you to do local manufacturing through either a contractual arrangement or equity investments. If the product is a service it cannot by definition be exported (perhaps by internet, but in general not) and as such the entry mode requires some kind presence in the foreign market. If we are talking about technology intensive products generally the company will have an inclination to internalize this technology through equity investment. However, often this is not possible to resource constraint and as such licensing is a viable possibility although control and internalization. Exporting often is not considered here (very crude obviously) since companies want to avoid the transfer of technology without their ‘control’; even if their product is patented.

Resource and commitment factors – This is probably the most important pre-requisite for engaging in international marketing at all. The point here is very simple; if the company has plenty of resources as well as strong commitment from the management it will have the possibility to choose from a wide range of entry modes whereas the company with few resources and only a mediocre or perhaps even weak commitment from the management will have to choose an entry mode accordingly. As such none of the other factors mentioned above matter much if the company simply does not possess the resources to go international; i.e. it begins (and potentially) ends with this point.

Dynamics of entry mode decisions

It should already be clear from the above that a certain dynamic exists between the choices of these three overall modes of entry. The crude general rule is that a company will most likely begin with exporting and then slowly move onwards towards equity investment. This is based on the assumption of rising costs as we move closer to the decision of investing in foreign equity but also the risk. As such as the company becomes an experienced international player the position towards the trade-off between risk and control will shift.

Table 3 shows this evolution described with stylized facts …

Stage 1 – Overall weak commitment to foreign markets; often indirect exporting or perhaps merely responding to the occasional unsolicited export order.

Stage 2 – This stage is often market by the transition from indirect to direct exporting in the sense that the company commits more rigorously to the foreign market by actively seeking to find distribution channels in the local market of sale. This stage may also include some form of licensing arrangements.

Stage 3 – Here we are first and foremost talking a diversification of the international marketing strategy. I.e. the company is most likely involved in all three kinds of entry modes. The text also emphasizes organizational changes here as an international division often is set up to take care of the international activities.

Stage 4 – This stage referred to as the much allured ‘multinational company.’ The differences stage 3 and 4 are primarily the scope and reach of the company’s international operations but also the organizational structure tends to change; i.e. a push towards divisions divided into regional areas rather than products and functions perhaps moving over into the globalization of the company’s strategy.

---

[1] This is of course conventional wisdom; the internet might make this point untrue in terms of certain services.