International Entrepreneurship - Entry Mode Strategies

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

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

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


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)


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



Market entry
strategies

Timing of entry Entry mode Market selection


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.


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.

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


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


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

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.


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


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.


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


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

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

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


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


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



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.


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


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


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


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.


Franchising
• 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


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



Contract manufacturing
• 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


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.


Joint venture
• 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


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


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.


Merger or acquisition
• 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.
ca


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
• 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


Entry mode dynamics

Situation
The firm has no foreign manufacturing
expertise and requires investment only in
distribution

Optimum solution


Entry mode dynamics

Situation
The firm has no foreign manufacturing
expertise and requires investment only in
distribution

Export


Entry mode dynamics

Situation
The firm needs to facilitate the product
improvements necessary to enter foreign
market

Optimum solution


Entry mode dynamics

Situation
The firm needs to facilitate the product
improvements necessary to enter foreign
market

Licensing


Entry mode dynamics

Situation
The firm needs to connect with an
experienced partner already in the targeted
market and reduce risk

Optimum solution


Entry mode dynamics

Situation
The firm needs to connect with an
experienced partner already in the targeted
market and reduce risk

Joint
venture


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


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


4. Market selection

Market potential
Distance factor
Cultural
distance

Administrative International
distance market selection

Geographic
distance

Economic
distance


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.



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.

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.


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.


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.


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

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


7. Questions


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

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