December 24, 2011

MB0051 [Legal Aspects of Business] Set1 Q2

Q2. What are the different market entry strategies for a company, which is interested to enter International markets?

Exporting is the most traditional and well established form of operating in foreign markets. Exporting can be defined as the marketing of goods produced in one country into another. Whilst no direct manufacturing is required in an overseas country, significant investments in marketing are required. The tendency may be not to obtain as much detailed marketing information as compared to manufacturing in marketing country; however, this does not negate the need for a detailed marketing strategy.

The advantages of exporting are:
· manufacturing is home based thus, it is less risky than overseas based
· gives an opportunity to "learn" overseas markets before investing in bricks and mortar
· reduces the potential risks of operating overseas.

The disadvantage is mainly that one can be at the "mercy" of overseas agents and so the lack of control has to be weighed against the advantages. For example, in the exporting of African horticultural products, the agents and Dutch flower auctions are in a position to dictate to producers.

A distinction has to be drawn between passive and aggressive exporting. A passive exporter awaits orders or comes across them by chance; an aggressive exporter develops marketing strategies which provide a broad and clear picture of what the firm intends to do in the foreign market. Pavord and Bogart (1975) found significant differences with regard to the severity of exporting problems in motivating pressures between seekers and non-seekers of export opportunities. They distinguished between firms whose marketing efforts were characterized by no activity, minor activity and aggressive activity.

Those firms who are aggressive have clearly defined plans and strategy, including product, price, promotion, distribution and research elements. Passiveness versus aggressiveness depends on the motivation to export. In countries like Tanzania and Zambia, which have embarked on structural adjustment programmes, organisations are being encouraged to export, motivated by foreign exchange earnings potential, saturated domestic markets, growth and expansion objectives, and the need to repay debts incurred by the borrowings to finance the programmes. The type of export response is dependent on how the pressures are perceived by the decision maker. Piercy (1982) highlights the fact that the degree of involvement in foreign operations depends on "endogenous versus exogenous" motivating factors, that is, whether the motivations were as a result of active or aggressive behaviour based on the firm's internal situation (endogenous) or as a result of reactive environmental changes (exogenous).

If the firm achieves initial success at exporting quickly all to the good, but the risks of failure in the early stages are high. The "learning effect" in exporting is usually very quick. The key is to learn how to minimise risks associated with the initial stages of market entry and commitment - this process of incremental involvement is called "creeping commitment"

Aggressive and passive export paths
Exporting methods include direct or indirect export. In direct exporting the organisation may use an agent, distributor, or overseas subsidiary, or act via a Government agency. In effect, the Grain Marketing Board in Zimbabwe, being commercialised but still having Government control, is a Government agency. The Government, via the Board, are the only permitted maize exporters.

Bodies like the Horticultural Crops Development Authority (HCDA) in Kenya may be merely a promotional body, dealing with advertising, information flows and so on, or it may be active in exporting itself, particularly giving approval (like HCDA does) to all export documents. In direct exporting the major problem is that of market information. The exporter's task is to choose a market, find a representative or agent, set up the physical distribution and documentation, promote and price the product. Control, or the lack of it, is a major problem which often results in decisions on pricing, certification and promotion being in the hands of others. Certainly, the phytosanitary requirements in Europe for horticultural produce sourced in Africa are getting very demanding. Similarly, exporters are price takers as produce is sourced also from the Caribbean and Eastern countries. In the months June to September, Europe is "on season" because it can grow its own produce, so prices are low. As such, producers are better supplying to local food processors. In the European winter prices are much better, but product competition remains.

According to Collett (1991)) exporting requires a partnership between exporter, importer, government and transport. Without these four coordinating activities the risk of failure is increased. Contracts between buyer and seller are a must. Forwarders and agents can play a vital role in the logistics procedures such as booking air space and arranging documentation. A typical coordinated marketing channel for the export of Kenyan horticultural produce.

In this case the exporters can also be growers and in the low season both these and other exporters may send produce to food processors which is also exported.

Exporting can be very lucrative, especially 'if it is of high value added produce. For example in 1992/93 Zimbabwe exported 5 338,38 tonnes of flowers, 4 678,18 tonnes of horticultural produce and 12 000 tonnes of citrus at a total value of about US$ 22 016,56 million. In some cases a mixture of direct and indirect exporting may be achieved with mixed results. For example, the Grain Marketing Board of Zimbabwe may export grain directly to Zambia, or may sell it to a relief agency like the United Nations, for feeding the Mozambican refugees in Malawi. Payment arrangements may be different for the two transactions.

Foreign production
Besides exporting, other market entry strategies include licensing, joint ventures, contract manufacture, ownership and participation in export processing zones or free trade zones.

Licensing: Licensing is defined as "the method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor".

It is quite similar to the "franchise" operation. Coca Cola is an excellent example of licensing. In Zimbabwe, United Bottlers have the licence to make Coke.

Licensing involves little expense and involvement. The only cost is signing the agreement and policing its implementation.

Licensing gives the following advantages:
· Good way to start in foreign operations and open the door to low risk manufacturing relationships
· Linkage of parent and receiving partner interests means both get most out of marketing effort
· Capital not tied up in foreign operation and
· Options to buy into partner exist or provision to take royalties in stock.

The disadvantages are:
· Limited form of participation - to length of agreement, specific product, process or trademark
· Potential returns from marketing and manufacturing may be lost
· Partner develops know-how and so licence is short
· Licensees become competitors - overcome by having cross technology transfer deals and
· Requires considerable fact finding, planning, investigation and interpretation.

Those who decide to license ought to keep the options open for extending market participation. This can be done through joint ventures with the licensee.

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 a more extensive form of participation than either exporting or licensing. In Zimbabwe, Olivine industries has a joint venture agreement with HJ Heinz in food processing.

Joint ventures give the following advantages:
· Sharing of risk and ability to combine the local in-depth knowledge with a foreign partner with know-how in technology or process
· Joint financial strength
· May be only means of entry and
· May be the source of supply for a third country.

They also have disadvantages:
· Partners do not have full control of management
· May be impossible to recover capital if need be
· Disagreement on third party markets to serve and
· Partners may have different views on expected benefits.

If the partners carefully map out in advance what they expect to achieve and how, then many problems can be overcome.

Ownership: The most extensive form of participation is 100% ownership and this involves the greatest commitment in capital and managerial effort. The ability to communicate and control 100% may outweigh any of the disadvantages of joint ventures and licensing. However, as mentioned earlier, repatriation of earnings and capital has to be carefully monitored. The more unstable the environment the less likely is the ownership pathway an option.

These forms of participation: exporting, licensing, joint ventures or ownership, are on a continuum rather than discrete and can take many formats. Anderson and Coughlan (1987) summarise the entry mode as a choice between company owned or controlled methods - "integrated" channels - or "independent" channels. Integrated channels offer the advantages of planning and control of resources, flow of information, and faster market penetration, and are a visible sign of commitment. The disadvantages are that they incur many costs (especially marketing), the risks are high, some may be more effective than others (due to culture) and in some cases their credibility amongst locals may be lower than that of controlled independents. Independent channels offer lower performance costs, risks, less capital, high local knowledge and credibility. 

Disadvantages include less market information flow, greater coordinating and control difficulties and motivational difficulties. In addition they may not be willing to spend money on market development and selection of good intermediaries may be difficult as good ones are usually taken up anyway.
Once in a market, companies have to decide on a strategy for expansion.

One may be to concentrate on a few segments in a few countries - typical are cashewnuts from Tanzania and horticultural exports from Zimbabwe and Kenya - or concentrate on one country and diversify into segments. Other activities include country and market segment concentration - typical of Coca Cola or Gerber baby foods, and finally country and segment diversification. Another way of looking at it is by identifying three basic business strategies: stage one - international, stage two - multinational (strategies correspond to ethnocentric and polycentric orientations respectively) and stage three - global strategy (corresponds with geocentric orientation).

The basic philosophy behind stage one is extension of programmes and products, behind stage two is decentralisation as far as possible to local operators and behind stage three is an integration which seeks to synthesize inputs from world and regional headquarters and the country organisation. Whilst most developing countries are hardly in stage one, they have within them organisations which are in stage three. This has often led to a "rebellion" against the operations of multinationals, often unfounded.

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