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.