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Internationalization
International market selection process - introduction
• Why is it important to identify the ‘right market’ to enter?• Influences likelihood of success • Influences nature of marketing programmes• Affects firm’s ability to coordinate foreign operations
• How do usually SMEs choose their markets?• Low psychic distance• Low cultural distance• Low geographical distance
Potential determinants of the firm’s choice of foreign markets
The firm The environment
International
market segmentation
INTERNATIONAL MARKET SELECTION
(IMS)
Source: Hollensen, Global Marketing 4e, Pearson Education 2008.
Determinants of firm’s choice
The firm• Degree of
internationalization• Size/amount of
resources• Type of industry/nature
of business• Internationalization
goals• Existing networks of
relationships
The environment• International industry
structure• Degree of
internationalization of the market
• Host country:• Market potential• Competition• Distance• Market similarity
International Market Segmentation
The firm Environment
Step 1: Selection of segmentation criteria
Step 2: Development of segments
Step 3: Screening of segments
Step 4: Microsegmentation
Market entry
Source: Hollensen, Global Marketing 4e, Pearson Education 2008.
8-7
Criteria for effective segmentation
• Measurability
• Accessibility
• Substantiality/profitability
• Actionability
The basis of international market segmentation
General characteristicsGeographic
Language
Political factors
Demography
Economy
Industrial structure
Technology
Social organization
Religion
Education
Specific characteristicsCulture
Lifestyle
Personality
Attitudes and tastes
High degree of measurability,
accessibility, and actionability
Low degree of measurability,
accessibility, and actionability, but high degree of relevance
Source: Hollensen, Global Marketing 4e, Pearson Education 2008.
Market expansion strategies: waterfall approach
Advanced
countries
Developing
countries
Less developed
countries
Gro
ss n
atio
nal
p
rod
uct
per
cap
ita
TimeSource: Hollensen, Global Marketing 4e, Pearson Education 2008.
high
low
Market expansion strategies: shower approach
Advanced
countries
Developing
countries
Less developed
countries
Source: Hollensen, Global Marketing 4e, Pearson Education 2008.
How to enter market?
ENTRY MODES & STRATEGIES 1/3
ENTRY MODES
EXPORTING INTERMEDIATEHIERARHICAL
(INVESTMENT)
DIRECT INDIRECT GREENFILED BROWNFIELD
RISK CONTROL FLEXIBILITY
ENTRY MODES & STRATEGIES 2/3
EXPORT MODES
INTERMEDIATE MODES
INVESTMENT MODES
100% resource EXTERNALIZATION ( control; risk; flexibility)
Partial resource EXTERNALIZATION (shared risk and control; shared ownership)
100% resource INTERNALIZATION (control; risk; flexibility)
ENTRY MODES & STRATEGIES 3/3
Level of inclusion
DIRECT EXPORTING: directly in charge of your own exporting
Domestic-based sales representative
Appropriate when “order taking” is the main sales task
PROS: increased market presence, larger market control
CONS: larger costs but still no permanent market presence
INDIRECT EXPORTING
• Working through your company or domestic exporter
• Using: export buying agent, broker, export management company, trading company, piggyback
• PROS: easy access to international markets; low risk and low costs
• CONS: low control, lack of market presence
INDIRECT EXPORT MODES
Distributors• Independent merchants who take possession and usually
title of goods for resale.• Usually will seek exclusive rights for a specific territory• Represent the manufacturer/exporter in all aspects of sales
and service • May or may not handle other or competing products
Agents• Represents an exporting company, which sells to
wholesalers, retailers and sometimes end-users in the home country.
• Do not take title to goods• Typically paid on commission• May represent other companies’ products as well
WHAT SHOULD AGENTS AND DISTRIBUTORS HAVE?
• Knowledge of the market• Ability to cover the assigned territory• Prompt payment• Good sales organization• Administrative support – warehousing, delivery, sales
records, sales forecasts (purchase forecasts), credit, etc. • Adequate stocks• Competitive information• Marketing research, advertising and promotional support• A marketing plan• Ability to work together
INTERMEDIATE ENTRY MODES
• Contract Manufacturing
• Licensing
• Franchising
• Joint Ventures/ Strategic Alliances
CONTRACT MANUFACTURING
• Allows the firm to have foreign production without making a final commitment
• Lack of resources, capacities or lack of the will to invest in production
• Concentration on other functions rather than production, e.g. R&D, marketing distribution
EXAMPLE: contract manufacturing
Benetton relies upon a contractual network of
small overseas manufacturers
LICENSING
• Licensing to a foreign company to use a manufacturing process, trademark, patent or formula in return for a fee. Includes an agreement between the possessor of the intellectual property (the licensor) and the receiver of the license (the licensee)
• The licensor gains access to a market with relatively low risk.• The licensor can concentrate on R&D and core
competencies• Government regulations on direct investment and import
barriers may make licensing the only alternative
• Main drawback: the licensor may be creating a potential competitor!
RIGHTS THAT MAY BE OFFERED IN A LICENSING AGREEMENT
• Patent covering a product or process
• Manufacturing know-how not subject to a patent
• Technical advice and assistance
• Marketing advice and assistance
• Use of a trade mark/trade name
LIFE-CYLE BENEFITS OF LICENSING
FRANCHISING
• Selling a business service to investors with sufficient capital but often little prior business experience.
• Usually used in service and people-intensive economic activities (restaurants, retail, hotels, banks, insurance, car rentals....)
• Two types:1. Product and trade name franchising – similar to trademark licensing2. Business format “package” franchising – goes beyond licensing to include an entire business concept or format
• Successful franchisor-franchisee relationships is a key!
EXAMPLE: franchising
JOINT VENTURES/STRATEGIC ALLIANCES
• Forming a partnership with a local firm• Strategic alliance is a non-equity cooperation, while the joint
venture is usually an equity cooperation (a new company is formed)
PROS:• Access to market (culturally, politically, ...)• Shared costs and risk• Builds goodwill with host government (FDI regulations,
investment climate)
CONS:• Unreliable partners• Different goals and objectives of partners
JOINT VENTURE
Parent firm
A
Parent firm
B
Joint venture C
REASONS FOR JOINT VENTURES
• Complementary technology or management skills can lead to new opportunities
• Firms with partners in host countries can increase speed of market entry
• Less developed countries may restrict foreign ownership• Costs of global operations in R&D and production can be
shared
DESIRABLE PARTNER RESOURCES
Development know-how
Sales and service expertise
Critical manufacturing capabilities
Low-cost production facilities
Reputation/brand equity
Market access/knowledge
cash
STRATEGIC ALLIANCES
Parent firm
A
Parent firm
B