GLOM_C09.qxd 3/12/07 10:02 Page 291 PartPart IIIIII MARKET ENTRY STRATEGIES Introduction to Part III Once the firm has chosen target markets abroad (see Part II) the question arises as to the best way to enter those markets. In Part III we will consider the major market entry modes and criteria for selecting them. An inter- national market entry mode is an institutional arrangement necessary for the entry of a company’s products, technology and human capital into a foreign country/market. To separate Part III from later chapters, let us take a look at Figure 1. The figure shows the classical distribution systems in a national consumer market. Figure 1 Examples of different market entry modes and the distribution decision GLOM_C09.qxd 3/12/07 10:02 Page 292 Part III Market entry strategies In this context the chosen market entry mode (here, own sales subsidiary) can be regarded as the first decision level in the vertical chain that will provide marketing and distribution to the next actors in the vertical chain. In Chapter 17 we will take a closer look at the choice between alternative distribution systems at the single national level. Some firms have discovered that an ill-judged market entry selection in the initial stages of its internationalization can threaten its future market entry and expansion activities. Since it is common for firms to have their initial mode choice institutional- ized over time, as new products are sold through the same established channels and new markets are entered using the same entry method, a problematic initial entry mode choice can survive through the institutionalization of this mode. The inertia in the shift process of entry modes delays the transition to a new entry mode. The reluc- tance of firms to change entry modes once they are in place, and the difficulty involved in so doing, makes the mode of entry decision a key strategic issue for firms operat- ing in today’s rapidly internationalizing marketplace (Hollensen, 1991). For most SMEs the market entry represents a critical first step, but for established companies the problem is not how to enter new emerging markets, rather how to exploit opportunities more effectively within the context of their existing network of international operations. There is, however, no ideal market entry strategy, and different market entry methods might be adopted by different firms entering the same market and/or by the same firm in different markets. Petersen and Welch (2002) found that a firm often combines modes to enter or develop a specific foreign market. Such ‘mode packages’ may take the form of concerted use of several operation modes in an integrated, complemen- tary way. In some cases a firm uses a combination of modes that compete with each other. Sometimes this occurs when a firm attempts a hostile takeover of an export market. The existing local distributor might be able to resist giving up the market, depending on the nature of existing obligations, but the exporter nevertheless may establish a wholly owned sales subsidiary. As shown in Figure 2, three broad groupings emerge when one looks at the assort- ment of entry modes available to the firm when entering international markets. There are different degrees of control, risk and flexibility associated with each of these dif- ferent market entry modes. For example, the use of hierarchical modes (investment modes) gives the firm ownership and thereby high control, but committing heavy resources to foreign markets also represents a higher potential risk. At the same time heavy resource commitment creates exit barriers, which diminish the firm’s ability to Figure 2 Classification of market entry modes 292 GLOM_C09.qxd 3/12/07 10:02 Page 293 Introduction to Part III Figure 3 Examples of the different market entry modes in the consumer market change the chosen entry mode in a quick and easy way. So the entry mode decision involves trade-offs, as the firm cannot have both high control and high flexibility. Figure 3 shows three examples representing the main types of market entry mode. By using hierarchical modes, transactions between independent actors are substituted by intra-firm transactions, and market prices are substituted by internal transfer prices. Many factors should be considered in deciding on the appropriate market entry mode. These factors (criteria) vary with the market situation and the firm in question. Chapter 9 will examine the different decision criteria and how they influence the choice among the three main groupings of market entry modes. Chapter 10 (Export modes), Chapter 11 (Intermediate modes) and Chapter 12 (Hierarchical modes) will discuss in more detail the three main types of entry mode. A special issue for SMEs is how their internationalization process is related to their much bigger customers and their sourcing and entry mode decisions. This will be discussed further in Chapter 13. Finally in Chapter 14 (Global e-commerce) the special online entry modes will be discussed. The simple version of the value chain (see Figure 1.10) will be used to structure the different entry modes in Chapters 10, 11 and 12. References Hollensen, S. (1991) ‘Shift of market servicing organization in international markets: a Danish case study’, in Vestergaard, H. (ed.), An Enlarged Europe in the Global Economy, EIBA’s 17th Annual Conference, Copenhagen. Petersen, B. and Welch, L.S. (2002), ‘Foreign operation mode combinations and internationalization’, Journal of Business Research, 55, pp. 157–162. 293 GLOM_C09.qxd 3/12/07 10:02 Page 295 99 Some approaches to the choice of entry mode Contents 9.1 Introduction 9.2 The transaction cost approach 9.3 Factors influencing the choice of entry mode 9.4 Summary Case studies 9.1 Jarlsberg 9.2 Ansell condoms 9.3 Video case study: Understanding entry modes into the Chinese market Learning objectives After studying this chapter you should be able to do the following: l Identify and classify different market entry modes. l Explore different approaches to the choice of entry mode. l Explain how opportunistic behaviour affects the manufacturer/intermediary relationship. l Identify the factors to consider when choosing a market entry strategy. 9.1 Introduction Entry mode We have seen the main groupings of entry modes which are available to companies An institutional that wish to take advantage of foreign market opportunities. At this point we are con- arrangement necessary for the entry of a cerned with the question: what kind of strategy should be used for the entry mode company’s products and selection? services into a new foreign market. The main According to Root (1994) there are three different rules: types are: export, intermediate and 1 Naive rule. The decision maker uses the same entry mode for all foreign markets. hierarchical modes. This rule ignores the heterogeneity of the individual foreign markets. 2 Pragmatic rule. The decision maker uses a workable entry mode for each foreign market. In the early stages of exporting the firm typically starts doing business with a low-risk entry mode. Only if the particular initial mode is not feasible or profitable will the firm look for another workable entry mode. In this case not all potential alternatives are investigated, and the workable entry may not be the ‘best’ entry mode. 295 GLOM_C09.qxd 3/12/07 10:02 Page 296 Part III Market entry strategies 3 Strategy rules. This approach requires that all alternative entry modes are systemat- ically compared and evaluated before any choice is made. An application of this decision rule would be to choose the entry mode that maximizes the profit contri- bution over the strategic planning period subject to (a) the availability of company resources, (b) risk and (c) non-profit objectives. Although many SMEs probably use the pragmatic or even the naive rule, this chapter is mainly inspired by an analytical approach, which is the main principle behind the strategy rule. 9.2 The transaction cost approach The principles of transaction cost analysis have already been presented in Chapter 3 (section 3.3). This chapter will go into further details about ‘friction’ and opportunism. The unit of analysis is the transaction rather than the firm. The basic idea behind this approach is that in the real world there is always some friction between the buyer and seller in connection with market transactions. This friction is mainly caused by opportunistic behaviour in the relation between a producer and an export intermediary. In the case of an agent, the producer specifies sales-promoting tasks that the export intermediary is to solve in order to receive a reward in the shape of commission. In the case of an importer, the export intermediary has a higher degree of freedom as the intermediary itself, to a certain extent, can fix sales prices and thus base its earn- ings on the profit between the producer’s sales price (the importer’s buying price) and the importer’s sales price. No matter who the export intermediary may be, there will be some recurrent ele- ments that may result in conflicts and opportunistic actions: l stock size of the export intermediary; l extent of technical and commercial service that the export intermediary is to carry out for its customers; l division of marketing costs (advertising, exhibition activities, etc.) between producer and export intermediary; l fixing of prices: from producer to export intermediary, and from the export inter- mediary to its customers; l fixing of commission to agents. Opportunistic behaviour from the export intermediary In this connection the export intermediary’s opportunistic behaviour may be reflected in two activities: 1 In most producer–export intermediary relations a split of the sales promoting costs has been fixed.