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International Entrepreneurship - Entry Mode Strategies

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International Entrepreneurship - Entry Mode Strategies

  1. 1. International Entrepreneurship Module 2 – Internationalization strategies Winter 2012 Senthil Mukundakumar smukunda@sce.carleton.ca Technology & Innovation Management Supervisor: Steven Muegge Licensed under a CC BY-SA license
  2. 2. Objectives Internationalization strategies Upon completion of the module, you will know about • International new market entry strategies • Types of entry modes • Timing of entry and market selection decision criteria and you will be able to • Understand the key determinants of internationalization strategy • Answer when and how to enter the new market • Identify decision influencing entry mode smukunda@sce.carleton.ca Slide 2 Licensed under a CC BY-SA license
  3. 3. Agenda 1. Introduction - Internationalization strategies 2. Timing of entry 3. Market entry modes 4. Market selection 5. Key lessons 6. Key concepts 7. Questions 8. References smukunda@sce.carleton.ca Slide 3 Licensed under a CC BY-SA license
  4. 4. 1. Internationalization strategies New market entry “The essential act of entrepreneurship is new entry. New entry can be accomplished by entering new or established markets with new or existing goods or services. New entry is the act of launching a new venture, either by a start-up firm, through an existing firm, or via internal corporate venturing.” (Lumpkin and Dess, 1996: 136) smukunda@sce.carleton.ca Slide 4 Licensed under a CC BY-SA license
  5. 5. Internationalization strategies Internationalization strategies, the new market entry has three key questions • When to internationalize? • Decision between first mover or late mover to new market • How to internationalize? • Enter in large scale or small scale depends on firms resource and commitment • Where to internationalize? • Which market more attractive seeking balance between benefits, costs, risk smukunda@sce.carleton.ca Slide 5 Licensed under a CC BY-SA license
  6. 6. Internationalization strategies Market entry strategies Timing of entry Entry mode Market selection smukunda@sce.carleton.ca Slide 6 Licensed under a CC BY-SA license
  7. 7. 2. Timing of Entry • The moment when the initial decision taken by the firm whether to internationalize or not is defined as `Timing of entry` in to international market. • Timing of entry has traditionally been misunderstood as the time between the founding of a firm and the initiation of its international operations. • Firm can establish themselves in new market as • Early entrant • Late entrant • Both early entrant and late entrant has its own pros and cons. smukunda@sce.carleton.ca Slide 7 Licensed under a CC BY-SA license
  8. 8. Early entrant • The first player in the market with a new product and first to break in to a particular market segment or geographical areas. • Early entrant status is not an end in itself but rather the beginning of a long complex strategy in which the initial advantage has to be defended against followers in order to stay head in the competition. • Early entrant with a distinctive presence in marketplace need to be in a position to react or even better anticipate potential entrants and increase barriers to late entrants. For example early entrant may be in a position to reduce its price and decrease the value of the business for a late entrant or it can block entrance entirely by controlling key distribution channel. smukunda@sce.carleton.ca Slide 8 Licensed under a CC BY-SA license
  9. 9. Early entrant Risk and rewards of being a early entrant • Being early entrant only make sense if the rewards justify the risk • Some industries reward early entrants with new monopoly status • In other cases the late entrant is given the opportunity to compete more effectively and efficiently against the early entrant smukunda@sce.carleton.ca Slide 9 Licensed under a CC BY-SA license
  10. 10. Early entrant Advantages • A competitive edge gained by being the first to introduce a product or service in new market • The opportunity to grab the best market place • Technological leadership • Chance to build brand loyalty • Scope to create barriers to entry • Enhances reputation • Scope for creating a lead which others have to follow smukunda@sce.carleton.ca Slide 10 Licensed under a CC BY-SA license
  11. 11. Early entrant Disadvantages • The cost of pioneering can be high: technology, R&D, establishing distribution channel, marketing know-how • Carriers greatest risk in terms of possible failure in the market • Loyalty of first time buyers is often weak • Innovators products are primitive and might not live up to expectation • Rapid technological change allows follows to take advantage • Skills and know how of early entrants are easily imitated smukunda@sce.carleton.ca Slide 11 Licensed under a CC BY-SA license
  12. 12. Late entrant • Usually the second player entering in to the market with improved product & service or by imitating the early entrant. Late entrants have been working along the same lines but are slightly later or have a adopted a deliberate policy allowing the first in company to test the market • Late entrant are often able to capture a large market share despite following the early entrant by learning from the mistakes done by them. Late entrants works well if the firm has superior marketing or enough resource to compete. Weaker late entrant may find themselves continually following the early entrant. smukunda@sce.carleton.ca Slide 12 Licensed under a CC BY-SA license
  13. 13. Late entrant Advantages • Have lower R&D costs • Able to learn from the mistakes of the early entrant • Have lowering marketing costs as the public have already been educated about the new type of product • Able to focus on making superior product and to dominate market • Able to polish the design and capture a large market share • Can occupy a previously unoccupied niche in the market • Lower risks and greater chance of returns from investment smukunda@sce.carleton.ca Slide 13 Licensed under a CC BY-SA license
  14. 14. 3. Entry mode Companies entering a foreign market have to choose a strategy. The question is; what kind of strategy should be used for the entry mode selection? According to Root (1994) there are three different rules • Naive rule - Company uses the same entry mode for all foreign markets • Pragmatic rule - Company uses a workable entry mode for each market. These kinds of companies usually start with low-risk entry modes. • Strategy rules - Alternative entry modes are compared and evaluated before a decision is made. smukunda@sce.carleton.ca Slide 14 Licensed under a CC BY-SA license
  15. 15. Types of Entry mode Internationalization Hierarchical mode – high control, high risk, low flexibility Intermediate mode – Shared control & risk, split ownership Externalization Export mode – low control & risk, high flexibility smukunda@sce.carleton.ca Slide 15 Licensed under a CC BY-SA license
  16. 16. Types of entry mode – Export mode Export mode • Firms products are manufactured in the domestic market or a third country and then transferred either directly or indirectly to the host market. In establishing export channels a firm has to decide which functions will be the responsibility of the firm itself and which will be taken care of by external agents. • There’s three major types of export modes: • Indirect export • Direct export • Cooperative export smukunda@sce.carleton.ca Slide 16 Licensed under a CC BY-SA license
  17. 17. Export entry mode Indirect export • Manufacturing firm does not take direct care of exporting activities. Instead another domestic company, such as an export house or trading company, performs these activities, often without the manufacturing firms involvement in the foreign sales of its products. Country 1 Company A Country 2 Sells to domestic customer Company B Company C Sells to foreign customer smukunda@sce.carleton.ca Slide 17 Licensed under a CC BY-SA license
  18. 18. Export entry mode Direct export • The producing firm takes care of exporting activities and is in direct contact with the first intermediary in the foreign target market. The firm is typically involved in handling documentation, physical delivery and pricing policies, with the product being sold to agents and distributors. Country 1 Country 2 Company A Company B Sells directly to foreign customer smukunda@sce.carleton.ca Slide 18 Licensed under a CC BY-SA license
  19. 19. Export entry mode Cooperative export • Firms involves collaborative agreements with other firms to produce product to export. Small firms do not achieve sufficient scale economies in manufacturing because of the size of the local market or the inadequacy of the management or marketing sources available. By cooperating firms achieve higher economies of scale and form broader product concept. Country 1 Country 2 Produce product and Company A export Company B Company B together Company C Sells to foreign customer cooperatively smukunda@sce.carleton.ca Slide 19 Licensed under a CC BY-SA license
  20. 20. Types of entry mode – Intermediate Intermediate entry mode • They are primarily vehicles for the transfer of knowledge and skills but may also create export opportunities. There is no full ownership (by the parent firm) involved, but ownership and control can be shared between the firm and the local partner. • Types of arrangements in intermediate entry mode; • Licensing • Franchising • Contract manufacturing • Joint ventures smukunda@sce.carleton.ca Slide 20 Licensed under a CC BY-SA license
  21. 21. Intermediate entry mode Licensing • A formal permission or right offered to a firm or agent located in a host country to use a home firm’s proprietary technology or other knowledge resources in return for payment. • Another way for a firm to establish local production in foreign markets without capital investment. It is usually for a longer term than contract manufacturing and involves more responsibilities for the national firm. • A licensing agreement is an arrangement wherein the licensor gives something of value to the licensee in exchange for certain performance and payments from the licensee. It should always be formalized in a written document. smukunda@sce.carleton.ca Slide 21 Licensed under a CC BY-SA license
  22. 22. Intermediate entry mode Licensing The licensor may give the licensee the right to use • a patent covering a product or process • manufacturing know-how not subject to a patent • technical advice and assistance • marketing advice and assistance • the use of a trade mark/name smukunda@sce.carleton.ca Slide 22 Licensed under a CC BY-SA license
  23. 23. Intermediate entry mode Licensing Advantages Disadvantages • manufacturer is near the • re-negotiation is expensive customers’ base • when agreement expires the • little capital investment, high former licensee can be seen as a return on capital employed competitor • valuable spin-off is possible • the licensee may not fully exploit • no danger of nationalisation/ the market leaving space for expropriation of assets competitors’ entry • new product can be rapidly • licensee fees are often too small exploited on a worldwide basis • lack of control over licensee • protects patents operations quality control of the • local manufacturer can secure product is difficult government contracts • governments often impose conditions on royalties or supply smukunda@sce.carleton.ca Slide 23 Licensed under a CC BY-SA license
  24. 24. Intermediate entry mode Franchising • Under franchising an independent organization called the franchisee operates the business under the name of another company called the franchisor under this agreement the franchisee pays a fee to the franchisor. • The franchisor provides the right to use trade marks, operating System, product reputation and continuous support system like advertising, employee training etc. There are two major franchising types: • Product and trade name franchising • Business format “package” franchising smukunda@sce.carleton.ca Slide 24 Licensed under a CC BY-SA license
  25. 25. Intermediate entry mode Franchising Product and trade name franchising • Distribution system in which suppliers make contracts with dealer to buy or sell products; dealers use the trade name, trade mark & product line. Business format “package” franchising • The package transferred by the franchisor contains most elements necessary to establish a business and run it profitably. The package can contain trade marks/names, copyright, designs, patents, trade secrets, know-how. In return the franchisor gets an initial fee and/or continuing fees. smukunda@sce.carleton.ca Slide 25 Licensed under a CC BY-SA license
  26. 26. Intermediate entry mode Franchising Advantages Disadvantages • greater degree of control • search for a competent franchisee compared to licensing is expensive and time consuming • low-risk, low-cost entry mode • costs of creating/marketing a • using highly motivated business unique package of products contacts with money, local recognised internationally market knowledge and • costs of protecting goodwill and experience brand name • quick development of • problems with local legislation international markets • opening internal business • generating economies of scale knowledge may create a future • precursor to possible future direct competitor investment in foreign markets • risk to the company’s international profile and reputation • Lack of control smukunda@sce.carleton.ca Slide 26 Licensed under a CC BY-SA license
  27. 27. Intermediate entry mode Contract manufacturing • Enables the firm to have foreign sourcing without making the final commitment. Enables the firm to develop and control R&D, marketing, distribution, sales and servicing of its products on international markets, while handing over responsibility for production to local firm. IKEA rely heavily on a contractual network of small overseas manufacturers smukunda@sce.carleton.ca Slide 27 Licensed under a CC BY-SA license
  28. 28. Intermediate entry mode Contract manufacturing Advantages Disadvantages • low-risk market entry • transfer of production know-how • no local investment with no risk is difficult of expropriation • hard to find a reliable • control over R&D, marketing and manufacturer sales service • extensive technical training of • avoids financial problems local Manufacturer • a locally made image • the subcontractor could become • entry into markets protected by a competitor tariffs or barriers • control over manufacturing • cost advantage quality is difficult • avoids transfer-pricing problems • Possible supply limitations smukunda@sce.carleton.ca Slide 28 Licensed under a CC BY-SA license
  29. 29. Intermediate entry mode Joint venture • Two or more firm join together to create a new business entity that is legally separate and distinct from its parents. It involves shared ownership. Various environmental factors like social , technological economic and political encourage the formation of joint ventures. • It provides strength in terms of required capital. Latest technology required human talent etc. and enable the companies to share the risk in the foreign markets. This act improves the local image in the host country and also satisfies the governmental joint venture. smukunda@sce.carleton.ca Slide 29 Licensed under a CC BY-SA license
  30. 30. Intermediate entry mode Joint venture Advantages Disadvantages • access to expertise and contacts • large investments of resources in local markets • partners may be locked into • reduced market and political risk long-term relations • shared knowledge and resources • transfer pricing problems • economies of scale • the importance of venture to • overcomes host government each partner may change over Restrictions time • may avoid local tariffs/non-tariffs • cultural differences may result in Barriers • management differences • shared risk of failure • loss of flexibility and • less costly than acquisitions confidentiality • better relations with national • problems of management government structures and dual parenting smukunda@sce.carleton.ca Slide 30 Licensed under a CC BY-SA license
  31. 31. Types of entry mode – Hierarchical Hierarchical Entry mode • An entry mode where the firm completely owns and controls the foreign entry mode. This mode is also called as Investment mode. • The new setup in the host country is fully owned subsidiary by the parent firm. This Subsidiary or individual body as per their own generates revenue. But policies and trademark will be implemented from the Parent body. • The firm can enter in hierarchical mode in two ways; • Merger or acquisition • Green field smukunda@sce.carleton.ca Slide 31 Licensed under a CC BY-SA license
  32. 32. Hierarchical entry mode Merger or acquisition • A domestic company selects a foreign company and merger itself with foreign company in order to enter international business. • Alternatively the domestic company may purchase the foreign company and acquires it ownership and control. It provides immediate access to international manufacturing facilities and marketing network. smukunda@sce.carleton.ca Slide 32 Licensed under a CC BY-SA license
  33. 33. Hierarchical entry mode Merger or acquisition Advantages Disadvantages • Less time consuming and quick to • Acquiring a firm in a foreign country execute is a complex task involving bankers, • Less risky as compared to greenfield lawyers regulation, mergers and • Immediate grab of market share acquisition specialists from t he two • Reduce competition by taking over countries rival • The investor can bank on the • Sometimes host countries imposed existing goodwill of the acquired restrictions on acquisition of local business companies by the foreign companies • Labour problem of the host country’s companies are also transferred tot he acquired company smukunda@sce.carleton. smukunda@sce.carleton.ca Slide 33 Licensed under a CC BY-SA license ca
  34. 34. Hierarchical entry mode Green field strategy • Greenfield is the process of expanding operations in foreign market from ground zero. It requires purchase of local property and local man power. Production facility in Pune, India Advantages Disadvantages • No risk of losing technical • Lengthy process from scratch competence to a competitor • Faces competition before it is setup • Tight control of operations • Time consuming research has to be • New jobs created in the local market carried out before hand • Emerging markets might be unstable hence leading to extra cost and time smukunda@sce.carleton.ca Slide 34 Licensed under a CC BY-SA license
  35. 35. Entry mode dynamics Situation The firm has no foreign manufacturing expertise and requires investment only in distribution Optimum solution smukunda@sce.carleton.ca Slide 35 Licensed under a CC BY-SA license
  36. 36. Entry mode dynamics Situation The firm has no foreign manufacturing expertise and requires investment only in distribution Export smukunda@sce.carleton.ca Slide 36 Licensed under a CC BY-SA license
  37. 37. Entry mode dynamics Situation The firm needs to facilitate the product improvements necessary to enter foreign market Optimum solution smukunda@sce.carleton.ca Slide 37 Licensed under a CC BY-SA license
  38. 38. Entry mode dynamics Situation The firm needs to facilitate the product improvements necessary to enter foreign market Licensing smukunda@sce.carleton.ca Slide 38 Licensed under a CC BY-SA license
  39. 39. Entry mode dynamics Situation The firm needs to connect with an experienced partner already in the targeted market and reduce risk Optimum solution smukunda@sce.carleton.ca Slide 39 Licensed under a CC BY-SA license
  40. 40. Entry mode dynamics Situation The firm needs to connect with an experienced partner already in the targeted market and reduce risk Joint venture smukunda@sce.carleton.ca Slide 40 Licensed under a CC BY-SA license
  41. 41. Entry mode dynamics Situation The firms intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast and the need for global integration is high Optimum solution smukunda@sce.carleton.ca Slide 41 Licensed under a CC BY-SA license
  42. 42. Entry mode dynamics Situation The firms intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast and the need for global integration is high Greenfield strategy smukunda@sce.carleton.ca Slide 42 Licensed under a CC BY-SA license
  43. 43. 4. Market selection Market potential Distance factor Cultural distance Administrative International distance market selection Geographic distance Economic distance smukunda@sce.carleton.ca Slide 43 Licensed under a CC BY-SA license
  44. 44. Market selection criteria Cultural distance • Culture is usually defined as shared values and meanings of the members of a society. It affects not only the underlying behavior of customers in a market but also the execution and implementation of marketing and Management strategies. • Culture is considered among the most challenging aspects while selecting a new market. Cultural distance impacts on the way messages concerning the ability of the product or service to satisfy the needs and wants, are received and interpreted. smukunda@sce.carleton.ca Slide 44 Licensed under a CC BY-SA license
  45. 45. Market selection criteria Administrative distance • It is also termed as political distance and exists due to different bureaucratic, working and political structure prevalent in host countries. • Different government policies are an important source of administrative distance. For example : Indian government maintains tight controls over foreign investment in domestic retail sector in order to protect domestic companies. • High regulations in the foreign country will need more time and money to spend in overcoming these regulations. Presence of corruption can also increase the administrative distance between the countries. smukunda@sce.carleton.ca Slide 45 Licensed under a CC BY-SA license
  46. 46. Market selection criteria Economic distance It is a measure of economic disparity between two countries. Firms find it easy to deal with host countries that are close in economic distance for the following reason: • Transfer knowledge easy because of Having similar market segments that can afford to consume similar types of foods and services. • Efficiency in operation and lower cost by having similar physical infrastructure such as airport, roadways, railways etc. • Leverage skills and knowledge based resources by replicating process learned in one market to another. smukunda@sce.carleton.ca Slide 46 Licensed under a CC BY-SA license
  47. 47. Market selection criteria Geographic distance • It plays an important role in the foreign market selection. When the distance between the home and host increases it is hard to conduct business. • Apart from inter-country distance, distances within a country, the size of the country, conditions of roads, and availability of transpiration and communication infrastructure will impact the international firms business operations in that country. • For example: Time to travel 200 km in North America will be 2 hours whereas in India it will take more than 6 hours due to conditions of road. smukunda@sce.carleton.ca Slide 47 Licensed under a CC BY-SA license
  48. 48. Market selection criteria Long term Market potential • Host market potential is one of the most important explanatory factors in country attractiveness and market selection and constitutes a primary driver in company expansion into foreign markets. • Market size, growth, competition and ease of access, as well as models of indirect measures, prediction of demand for specific products, estimates of import demand are used as indicators market potential. smukunda@sce.carleton.ca Slide 48 Licensed under a CC BY-SA license
  49. 49. 5. Key lessons • Progressive opening of the economics of host country does not mean success will get easier • Early entrant should increase the barrier to late entrant by innovating faster and building a market responsive flexible organization • The logic of success is not to be first to enter the market, but to strive for market leadership by scanning opportunities, building on strengths, and committing resources to customers effectively. • The entry mode decision is necessarily a trade-off between the resources available and the support requirements of the customer. smukunda@sce.carleton. Slide 49 Licensed under a CC BY-SA license ca
  50. 50. 6. Key concepts • Timing of entry • Early entrant • Late entrant • Entry mode • Export mode • Contractual mode • Subsidiary • Market selection • Cultural distance • Economic distance • Administrative distance • Geographic distance smukunda@sce.carleton.ca Slide 50 Licensed under a CC BY-SA license
  51. 51. 7. Questions smukunda@sce.carleton.ca Slide 51 Licensed under a CC BY-SA license
  52. 52. 8. References Driscoll, Angie M, Paliwoda & Stanley.1997. Dimensionalizing International Market Entry Mode Choice. Journal of Marketing Management, Jan-Apr1997, 13(1-3):57-87 Evans.J, Treadgold, A & Mavondo,F.T. 2000. Psychic distance and the performance of international retailers: A suggested framework. International marketing review 17:373 J.Roberta Minifie & Vicki West.1998. A small business intermational market selection model. International Journal of Production Economics, 56–57:451-462 McDougall, P.P., & Oviatt, B.M. 2005. Defining international entrepreneurship and modeling the speed of internationalization. Entrepreneurship Theory & Practice, 537-553. Root F. 1994. Entry Strategies for International Markets. 2nd ed. Lexington, MA: Lexington Books. Sakarya.S, Eckman.M & Karen.H.H. 2006. Market selection for international expansion: Assesing opportunities in emerging markets. International marketing review, 24(2):208- 238 Sharma, D & Blomstermo, A. 2003. The internationalization process of Born Globals: A network view. International Business Review, 12:739-753. Stewart, David B. 1997. Domestic Competitive Strategy and Export Marketing Strategy: the Impact of Fit on the Degree of Internationalisation of SMEs. Journal of Marketing Management, Jan-Apr1997, 13(1-3):105-117 Xinming He & Yingqi Wei. 2011. Linking market orientation to international market selection and international performance. International Business Review, October 2011, 20(5):535- 546 smukunda@sce.carleton.ca Slide 52 Licensed under a CC BY-SA license