In-Depth Notes on Entering Developed and Emerging Markets

Learning Objectives

• Explain the three basic decisions firms must make for foreign expansion:
  • Which markets to enter
  • When to enter
  • On what scale to enter
• Compare and contrast different modes of entry into foreign markets.
• Identify factors influencing entry mode choice.
• Recognize pros and cons of acquisitions versus greenfield ventures as strategies.

Basic Entry Decisions

• Businesses must consider:
  • Which Foreign Markets to Target
  • Timing of Entry
  • Scale of Entry
  • Entry Mode Selection

Which Foreign Markets?

• As of 2023, there are 195 countries and additional territories.
• Assess potential based on long-term revenue.
• Balance benefits, costs, and risks associated with each market.
• Example: Tesco’s International Growth Strategy highlights complexities in market assessment.

Timing of Entry

• First or Early Mover Advantage:
  • Pros: Brand establishment, sales volume, experience curve.
  • Cons: Pioneering costs such as promotion and regulatory compliance.
• Late Movers:
  • Pros: Learn from first movers, avoid pioneering costs.
  • Cons: High switching costs and potential cost disadvantages.
• Technological Change: Complicates first mover advantages (refer to the auto industry discussion).

Scale of Entry

• Large-Scale Entry:
  • Requires significant resource commitment and rapid action.
  • Can capture first-mover advantages, but often at a high risk and limited flexibility for other markets.
• Small-Scale Entry:
  • Limits exposure, allows for market learning and diversification.
  • Best for strategic flexibility.

Entry Modes

• Common entry modes include:
  • Exporting
  • Turnkey Projects
  • Licensing
  • Franchising
  • Joint Ventures
  • Wholly Owned Subsidiary

Exporting

• Pros:
  • Avoids setup costs associated with local manufacturing.
  • Achieves location economies and experience curves.
• Cons:
  • May be impractical if lower-cost manufacturing exists abroad.
  • High transport costs and potential tariff barriers.

Turnkey Projects

• Definition: Contractor manages project from start to finish, including training.
• Pros: Efficiency in complex tech projects where foreign investment is limited.
• Cons: No long-term market interest and risk of creating competitors.

Licensing

• Definition: Licensor grants rights to intangibles for a royalty fee.
• Pros: No development costs, suitable for restrictive markets.
• Cons: Loss of manufacturing control and missed experience curve benefits.

Franchising

• Specialized form of licensing, where strict operational rules apply.
• Pros: Franchisee assumes costs and risks.
• Cons: Similar issues as licensing: control loss, and quality oversight challenges.

Joint Ventures

• Firms jointly own a new enterprise.
• Pros: Benefit from local knowledge and shared risks.
• Cons: Risks sharing technology, control issues, and potential conflicts of interest.

Wholly Owned Subsidiaries

• Firms fully own operations via greenfield ventures or acquisitions.
• Pros: Maximizes control and can realize economies.
• Cons: Costly and requires familiarity with local culture.

Strategic Considerations for Technological Competence

• If competitive advantage is reliant on technology:
  • Avoid licensing and joint ventures to maintain control.

Management Know-How

• Service firms leverage management skills as competitive advantages.
• Risk of losing such competitive edge through partnerships is lower.

Pressures for Cost Reduction

• Favors exporting or wholly owned subsidiaries.
• Strategy (i.e. global standardization or transnational) influences entry mode choice.

Greenfield Ventures vs Acquisitions

• Greenfield Ventures:
  • Pros: Customization of subsidiaries.
  • Cons: Slower establishment process.
• Acquisitions:
  • Pros: Rapid market presence.
  • Cons: High costs and cultural challenges.

Common Problems in Market Entry (Case Study: China)

• Cultural differences, foreign exchange issues, local employee quality, training requirements, high operating costs, and finding local connections are common challenges.
• Solutions often include hiring local talent and offering training, as well as providing competitive compensation to attract skilled employees.

Conclusion

• Entry strategy should be chosen based on the specific circumstances of the target market and competitor landscape. Consider both broad strategic goals and local market conditions.