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Market Identification and Selection:
Any firm wanting to internationalise its operations may adopt either a reactive or a proactive
approach to market identification as described below:
Reactive Approach to Market Identification:
Most firms internationalize as an unintended response to an international marketing opportunity
in the form of unsolicited export orders. In doing so, the positive stimulus in terms of increased
profitability, turnover, market share, or image leads to catering to overseas markets as a repeat
activity. A firm takes up overseas marketing on a regular basis. Consequently, international
marketing becomes an integral part of the firm’s marketing strategy.
Systematic Approach to Market Identification:
However, a systematic proactive approach is generally adopted by larger companies in selecting
international markets. Since a firm ahs limited resources, it has to focus on a few foreign
markets. Besides, proper selection of markets avoids wastage of the firm’s time and resources so
that it can concentrate on a few fruitful markets. A firm has to carry out preliminary screening of
various countries before a refined analysis is carried for market selection.
The approach to enter into international markets can range from minimum investment with
infrequent and frequent exporting to large investments of capital and management in order to
capture and maintain a permanent, specific share of world markets. Depending upon the firm’s
objectives and market characteristics any of these approaches can be adapted.
Very often, entering international markets is not a matter of choice but of necessity to stay
competitive in new and established markets. An executive involved in global marketing
operations should have a thorough understanding of various entry modes. The major modes of
entry into international markets adapted by firms are discussed in detail.
1.0 PRODUCTION IN THE HOME COUNTRY
There are two possible ways of tapping overseas markets basing your operations in the home
country. These are (a) indirect export and (b) direct export.
1.1 Indirect Export
The simplest form of indirect export one can think of is sales which are effected from the country
when the foreign visitors purchase goods and in the process add to the foreign exchange earnings
of the country. Foreign department stores or firms that have branch offices locally or agents who
make purchases on behalf of their parent offices abroad also lead to one form of indirect export.
Though resulting in foreign exchange earnings to the country, they are not the result of any
deliberate effort on the part of locals to promote exports.
The most important means of indirect export is through merchant exporters/export houses where
the manufacturer entrusts the job of selling his products abroad to the specialist agencies which
normally do engage in manufacturing.
1.1.1 Advantage of using an Export House / Merchant Exporter
Exporting through merchant exporter/export house can confer the following advantages:
1. The manufacturer avoids the problems of direct exporting such as investment of
resources, collecting market intelligence, setting up of export department etc. and is
served with instant foreign market knowledge.
2. Since the operational cost of export house / merchant-exporter will be spread over several
parties, going through them will result in saving in unit cost.
3. In case the export house works on commission basis, there is possibility of expansion of
exports, since there is incentive for the export house to expand sales.
4. In view of the fact that the export house will be effecting consolidated shipments there is
a possibility of reduction in unit freight.
5. The reputation of export house will enable the manufacturer to get better representation
for his products abroad. In case the export house is selling complementary products, sales
might increase.
1.1.2 Disadvantage of using Export House / Merchant Exporter
1. The export house/merchant exporter, in order to earn more through commission, may
take on too many unrelated lines resulting in the producer getting neither the expertise
nor the attention he is looking for.
2. There is a possibility, under this arrangement, of the manufacturer continually depending
on the export house and not developing export expertise himself.
3. There is also a possibility of both the manufacturer and the export house lacking personal
involvement in the export business since either party may drop the other at any moment.
4. In view of the fact that the export house will be pushing the product abroad on its own
name and reputation, the foreign customers may not associate the product with the
manufacturer at all. This danger is more if the export house uses its letterhead and brand
name.
Another form of indirect export is the consortium approach i.e., a limited number of
manufacturers of the same product joining together and exporting it on a cooperative basis.
In this type of arrangement, export management function is performed for several firms at the
same time. There is closer cooperation and control as compared to merchant exporter or
export house. Export orders will be procured on a joint basis and distributed amongst the
constituent units. The individual units will be permitted to use their own letterheads and
brand name. This arrangement confers more bargaining power on the consortium since the
parties coming together can bargain over a position of strength. As in the case of exporting
through export house, there is a possibility of saving in unit freight on account of
consolidated shipment. Under-cutting is reduced to a great extent and all economies of scale
associated with joint operation can be reaped.
The greatest disadvantage of consortium approach is that for this approach to succeed there
should be perfect understanding among the members and each one should put in his best. As
is well-known, cooperation can succeed only to the extent the individual members want it to
succeed. Misunderstanding may arise over main issues and the presence of unscrupulous
members is enough to spoil the business or the entire consortium.
1.2 Direct Export
When a manufacturer engages in direct export he takes more risks but gets more returns. More
than anything else, direct export means more involvement for the manufacturer, more control
and more expertise with the firm.
2.0 FOREIGN MANUFACTURING
There are various reasons for a company to go in for foreign manufacturing. Some of them are:
1. High cost of shipping of product to the export market;
2. Tariffs and non-tariff restrictions in the importing country;
3. Nationalist feelings in the country concerned not favouring import products;
4. Large size of the country, particularly regional groupings justifying establishment of
manufacturing facilities in that country/region;
5. Greater scope to be in constant touch with the changing requirements of the foreign
customer which is particularly true of fashion goods;
6. Lower production costs due to availability of cheaper/plentiful factor(s) of productions
and
7. Advantages of acquiring an existing foreign product with all his facilities
Foreign manufacturing can take one or more of the following forms:
1. Assembly
2. Contract manufacture
3. Licensing
4. Joint Venture and
5. Wholly-owned foreign production (100% ownership)
2.1 Assembly
Under assembly, most of the components or ingredients are domestically produced and finished
products are assembled abroad. All exports on CKD condition are examples of assembly. In a
slightly different way, the pharmaceutical industry may also be considered to be engaged in
assembly though here the ingredients are “mixed” and not “assembled”. For assembly, the firm
may have its own arrangements abroad or leave it to a local party to assemble the product. A
company may go for this sort of arrangement either to avoid high transportation cost of the final
product or to take advantage of the cheap labour available in the export market or to get over the
high tariff and non-tariff restriction.
2.2 Contract Manufacture
In this method of market entry, manufacturer permits the production of his product abroad by a
local party under contract with him but he reserves to himself the right of marketing that product
in that market. It is obvious that this type of arrangement is possible if only there is a producer
with the necessary capability to manufacture the product and maintain its quality. Normally firms
with comparative advantage in marketing and service, rather than production, resort to contract
manufacturing. Procter and Gamble is known to have many of its products manufactured abroad
under contract. This method is advisable particularly in politically unstable countries where one
would always like to pull out at short notice in case of trouble.
The disadvantages of contract manufacturing are:
1. The parent company has to forego the manufacturing profit to the local firm;
2. It is not always easy to locate a local party with the necessary capabilities to manufacture
the product upto the requirements of the parent firm;
3. The possibility of the local party gaining experience in marketing in the course of time
and posing a threat to the parent party; and
4. The difficulties faced in maintaining the quality of the product upto the standard required
of the parent firm.
2.3 Licensing
As compared to contract manufacturing, licensing is for a longer term and involves must greater
responsibilities on the part of the national party. Licensing is an arrangement wherein the
licenser gives something of value to the licensee in return for certain performance and payments
from the licensee. The licenser may agree to give one or more of the following:
1. Patent Right
2. Trade Mark Rights
3. Copy Rights
4. Know-how
In return, the licensee usually promises (a) to produce the licensor’s products covered by the
rights; (b) to market these products in the assigned territory; and (c) to pay the licenser some
amount related to the sales volume of such products. It may be noted that the licensee markets
the products of the licenser in addition to producing it, whereas contract manufacturing covers
only manufacturing.
Advantages of Licensing Arrangement
1. Licensing arrangement does not involve any capital outlay on the part of the licenser;
2. This is a very quick and easy way to enter the foreign market;
3. By this method, the licenser gains easy access to knowledge about the local market;
4. Licensing normally gains local government approval more quickly than foreign
manufacturing because of inflow of technology with very little cost and strings; and
5. Licensing also has other advantages such as savings in shipping freight, avoidance of
tariff and non-tariff barriers, etc.
Disadvantages of Licensing
1. As in the case of contract manufacturing, there is a possibility that the licensee might
become competitor to the licenser in the long run;
2. The return normally in licensing is limited as compared to other forms of investment;
3. It is difficult to exercise much control on the licensee.
2.4 Joint Ventures
Joint Ventures are very much like licensing arrangements, but in the former the international
firm has, normally, equity participation and management voice in the local firm.
Advantages of Joint Ventures:
As compared to the earlier three forms of overseas investment, joint venture has the following
advantages:
1. Potentially greater returns from equity participation as opposed to royalties;
2. Greater control over production and marketing;
3. Better market feedback; and
4. More experience in international marketing.
Disadvantages of Joint Ventures:
The disadvantages of Joint Ventures as compared to licensing, contract manufacturing and
assembly are:
1. Joint Ventures involve greater risks; and
2. They also involve greater investment of capital and management resource.
As compared to 100% ownership, joint ventures (a) require fewer capital and management
resources and thus this arrangement is open to smaller companies, (b) a given amount of capital
can be spread over many countries, and (c) the danger of appropriation is less, since a national
partner is involved in a joint venture.
On the other hand, there is a possibility of conflict of interest with the national partner.
2.5 Wholly-Owned Foreign Production
Wholly-owned foreign production involves greatest commitment to a foreign market. More than
complete ownership, it gives complete control over all the activities of the firm.
There are two ways in which one can acquire 100% ownership in a foreign country. They are (a)
acquiring an existing foreign production unit, and (b) developing one’s own facilities from
scratch.
2.5.1 Acquisition: Acquiring a foreign company with all its resources is a much quicker way to
enter a market than developing one’s own facilities. Acquisition means getting qualified
management personnel and labour, gaining instant local knowledge and contract with the local
market and government and, most of all, removing a potential competitor from the scene.
2.5.2 Establishment of a New Facility: A firm normally builds up its own facilities from
scratch where (a) it does not find a national producer willing to sell out or the national
government does not allow it and (b) there are no local firms having the requisite standard of
facilities. Establishment of its own set up helps the firm to incorporate the latest technology and
equipment and avoids the problems of trying to change the traditional practices of the local firm.
Advantages of wholly owned operations are:
1. 100% ownership means 100% profit
2. Greater experience in international operations;
3. No scope for conflict of interest with any local party; and
4. Complete control leading to better integration of various national organisations into a
synergistic international system.
Disadvantages of wholly owned operations are:
1. They are costly in terms of capital and management resources;
2. They may result in negative public relations;
3. There always is the possibility of expropriation by the host government; and
4. Lack of involvement of a national partner who might act as a bridge between the
international firm and the country concerned.
In conclusion, it might be said that there is no one best way to enter foreign markets. A firm,
intending to enter foreign markets, should analyse carefully its strength and weaknesses and
the opportunities and conditions in each market before deciding about the type of entry. It
should take the initiative on its own. Whatever the firm does, it should always follow a
flexible policy ready to change with changes in environment.
2.6 OFFSHORE SOURCING, SUB-CONTRACTING AND MANUFACTURING
Although imports have always been important in some sectors, companies in more and more
industries find offshore sources of components and finished products a means of increasing their
profitability. As offshore sourcing has spread across industries, it has also spread to countries in
Asia, South America and other developing areas.
The motivations for offshore sourcing are usually to obtain lower-cost products.
Selecting the form of Offshore Sourcing
Offshore Purchase
This is a relationship between independent buyers and sellers in which goods are
exchanged for money.
Offshore sub-contracting
This term covers many different relationships between independent companies in which the
buyer is more involved with the source than in a simple buyer-seller relationship. The
buyer may provide detailed product specifications, technical assistance, raw materials or
needed components or even some financing to the foreign manufacturers.
Joint Venture Offshore Manufacturing
This relationship involves the joint ownership with a foreign company of an offshore
manufacturing enterprise.
Controlled Offshore Manufacturing
This relationship is that of a parent and wholly-owned foreign operation, generally a subsidiary
corporation that supplies the parent’s needs for a product.
Selection Criteria
Four important selection considerations are:
Company capabilities and resources
Availability and capabilities of suppliers or partners
Projected sourcing volumes and variability
Degree of integration of offshore sourcing with other operations.
Company Capability and Resources: Different forms of offshore sourcing demand different
abilities on the part of enterprises and vastly different commitments of resources. Simple
offshore purchasing requires little experience or investment, whereas controlled offshore
manufacturing requires a considerable commitment of investment capital and management time.
Availability and Capabilities of Suppliers or Partners: Whether acceptable suppliers and/or
partners are available depends on the country, on the complexity of the production requirements,
and on the size of the proposed operation. Small operations for relatively simple products may
have a wide choice of suppliers or partners, whereas larger investments for more complex
products will be more limited in this respect. This partly explains why more controlled offshore
manufacturing exists in electronics than in the apparel industry.
Evaluating Products for Offshore Sourcing
Main Cost Tradeoffs
o Labour
o Materials and Components
o Factory Overhead
o Corporate Overhead
o Shipping and Duties
Products Available for Offshore Sourcing
o Labour Intensive Products
o Standardised Products
o Products with a predictable sales pattern
o Products that are easy to ship and face low import duties
Evaluating Sources and Partners
Capabilities for manufacturing and delivering acceptable products on time and acceptable
costs
Willing to be good long term suppliers
A partner is expected to bring to the venture considerable expertise in addition to its
capital investment.
The Selection of an International Market Entry Mode:
An SME needs to critically examine several factors while selecting the most appropriate entry
mode for international markets. The major factors which need to be examined are as under:
Market size
Market growth
Regulatory framework
Structure of competition
Level of risks.
These factors should be carefully evaluated considering the willingness and strength of the
organisation to commit its resources for global expansion. Since in the initial phase a company
entering into the international market on the basis of its competitive strengths in technological
and managerial skills, it may choose to enter by using multiple entry modes in different markets.
Opportunistic market entry modes such as International Sub-Contracting and subsidiary routes
may be looked into for markets with high entry barriers and high competitive intensity. For
countries with substantial market size and high growth rate, a firm may consider using Strategic
Alliance and Joint Venture for market entry. However, an in-depth detail analysis is required for
the firm before a final decision is taken on an international market entry mode.