As a company’s business grows and expands, it can reach a point where the executive board has to decide whether or not to enter new markets. Once a company is well established in its domestic market, it makes sense to start looking at foreign markets and considering market entry overseas. However, transitioning from a domestic business to an international one can be complicated, and companies that don’t understand the details involved are likely to struggle when entering the international market.
International Entry Strategies
A company looking to expand into foreign markets needs to consider three things as part of its entry strategy:
- Sourcing: The company must decide whether goods will be made in the new region itself or shipped to the new region from existing production or if goods will be purchased in the new region to be reworked and sold. Depending on this answer, the cost of the market entry will change.
- Marketing: The company needs a strategy for marketing to the new region, such as what markets it will enter, what segments are the most important and whether the marketing strategy will be global or regional.
- Ownership: Will the new operations be part of the existing company, or will the company reach out for a global partner? Will the operation be licensed or franchised? Are there foreign companies that can be acquired or opportunities for a joint venture?
These three key pieces all combine into a set of entry modes: the various ways a company can enter a foreign market.
Market Entry Strategy Framework
The entry mode strategy encompasses the way an organization plans to enter a new market. The most common entry modes into international markets are:
Exporting as Entry Strategy
Exporting is directly selling goods from one country into others. Exporting can be direct (there is no intermediary; goods are sold from the company headquarters directly) or indirect (goods are sold to an intermediary who then is responsible for the sale of these goods in the foreign market). Indirect exporting carries lower risk to the company in general, but direct exporting is recommended for companies that expect international marketing to become a significant part of their operational strategy.
This can be the fastest way to enter an international market, and it protects the company’s intellectual property, but the logistics and shipping may add additional cost to the product and complications to the process. In this case, very little capital investment is required, as there will be no production in the new region, but significant investment in marketing is a must in order for exporting to be successful. Exporting can be a good test run to explore foreign markets, and moving business transactions online can help streamline the process, but it will require preparation by the sales and marketing teams to ensure success.
Licensing as Entry Mode
Licensing allows a foreign company to operate using the home company’s strategies, technology and/or trademarks to produce the home company’s product under specific terms. Licensing agreements allow a company the logistical advantage of having physical operations in a new region without having to build production facilities from the bottom up.
To be successful, licensing depends mainly on an exchange of proprietary and confidential information, which can put the company’s strategic advantages at risk, but agreements can be adapted to protect both parties. The licensee provides some of the capital, absorbs some of the risk and should provide an independent income stream, as it pays the fees associated with the license itself. The downside is a loss of control over both operations and intellectual property.
Partnering as Entry Mode
Partnering can also be called a joint venture or a strategic alliance and occurs when two or more companies agree to invest in a new opportunity in a foreign market. This allows the investors involved to pool their resources both financially and in terms of R&D, critical information and existing experience. This often occurs when the home company reaches out to an existing company in the foreign region and offers a new opportunity. This gives the home company a physical point of entry into the foreign market and gives the partner company a new opportunity in its existing markets.
Partnering can be difficult if the firms involved end up wanting to move in different directions or if the agreement dissolves and leaves the foreign company as a new competitor. In some countries, in order to enter the market, a foreign company must form a partnership or joint venture with an existing company in that country to avoid foreign businesses holding 100% of ownership in certain markets. It’s best to examine each nation’s laws when deciding how to move into international markets.
Acquisition as Entry Mode
Acquisition involves purchasing an existing company in the new region and integrating it as a subsidiary within the parent company. The acquisition of a competitor, supplier or related business already located internationally can be an ideal way to introduce the company’s products to the new market. Acquisition of a local business is one of the fastest ways to enter an international market.
It can be difficult to integrate business cultures, and transitioning an acquisition’s production to align with the company's strategy can take time. The advantages lie in the acquisition’s knowledge of regional cultures, markets and strategies as well as its already-established management and corporate structure. An acquisition can also provide new opportunities for development of new products and expansion of the company’s portfolio, especially if the strategy is to lean into goods tailored to each market.
Franchising as Entry Mode
Franchising is offering a potentially independent business owner the rights to operate a franchise using the company’s strategies, business format and technology. Franchising is similar to licensing, although a franchise usually offers the entire package of a company’s standard operations, while a licensee may have its own business methods.
Franchising allows the home company to share the risk with the semi-independent business owner and can better protect trade secrets, but the success of the franchise will heavily depend on the decisions made by the franchise team. The franchisee comes to the table with capital to invest, but the home company gives up a portion of control over the international franchise.
Choosing an Entry Strategy
When choosing an international entry method, it all comes back to the three decisions the company has to make about how it wants to approach its expansion. The first point is sourcing: The company needs to decide whether it plans on directly exporting goods from its existing facilities into the foreign markets or if it intends to have some kind of production physically within the new region. If the company does not want to make an investment in overseas production facilities, its choice is then to export its goods from existing plants. If the company is open to foreign production of its usual products, most of the other options are available.
The next point of decision is ownership: The company needs to decide the level of control it wants over these international pieces. A company that’s willing to share control in order to mitigate risk will look at licensing, franchising and partnering as agreeable options.
Companies that desire more control over operations will look at acquisition or direct exporting as the more favorable choices. The company also needs to consider the international markets that are being targeted as well as capital available, and much of this particular decision comes from the final point of decision: marketing.
Marketing and International Business
Marketing is key when entering international business. It’s incredibly important to get to know the regional laws, regulations and rules as well as the work culture and new customer base that any new department or subsidiary will be required to handle. There can be issues involving governments, regulations and other legal issues when operating overseas.
The company needs to determine exactly which international markets it intends to enter and the important aspects of those markets. This involves considering whether to bring in local advisers and in what forms. Licensing, franchising, partnerships and acquisitions can help the marketing transition because they’re likely to have an existing management structure and sales or marketing teams that are already integrated with the local cultures and customs.
Familiar Examples of International Business Entry
Starbucks faced a major hurdle when entering China’s markets, as Chinese culture distinctly favors tea over any other beverage. Starbucks focused on marketing its stores as a comfortable place to come and be social, unrelated to work or home. This concept resonated with the Chinese market, and Starbucks has expanded successfully into this tea-soaked market.
McDonald's offers franchising options in many countries and has learned that making small changes that appeal to new international customers can have a large effect on success. For example, in France, McDonald's incorporated baguettes on its menu and marketed itself as a coffee-shop-type venue, where the French could continue to have multiple small meals and socialize. This propelled McDonald's from being a middling market player to big success.
Citgo formed a strategic alliance with Fujitsu (a Japanese company) to help grow its Japanese market share. It decided to co-brand certain products in order to leverage Fujitsu’s excellent reputation in IT services with Citgo’s broader resource pool and global reputation. This type of agreement benefits both parties and gave Citgo an opportunity to build brand recognition in Japan for other products it might introduce at a later date.
International Entry in Chinese or Saudi Markets
Businesses looking to enter certain national markets like China or Saudi Arabia will need to look for a business partner to form a joint venture, strategic alliance or partnership because these countries, among others, do not allow any international business to be 100% owned by a foreign country.
When entering the Chinese household market, IKEA managed success, whereas Home Depot did not do well. Home Depot is a do-it-yourself hardware store and requires that consumers know how to do home improvement projects already. The new middle class in China did not have that knowledge at the time. By presenting itself as the bearer of fully finishable projects and providing guidelines on how a home should be furnished, IKEA appealed to the middle-class segment and was able to have success.