GLOBAL MARKETING
A decision-oriented approach
Chapter 9 – Some approaches to the choice of entry modes
9.1
An entry mode is an arrangement for the products and services of a
company to enter a foreign market. Strategies for entry mode selection
are:
- Naive rule same entry mode for all foreign markets
- Pragmatic rule chooses the most workable and low risk entry mode. If
this doesn’t work, the company looks for another.
- Strategy rule all alternative entry modes are compared and evaluated
before a choice is made.
9.2
Transaction cost approach
The idea behind this approach is that there is always friction between the
buyer and seller in market transactions. This is caused by opportunistic
behaviour: misleading/distortion/disguise/confusion.
Elements that result in conflicts with the intermediary:
- Stock size of the intermediary
- Extent of commercial and technical service that the intermediary must
carry out
- Division of marketing costs between producer and intermediary
- Fixing of prices
- Fixing of commission to agents
Opportunistic behaviour from intermediary:
- manipulating invoices of promotion costs to get a higher payment from
the producer
- manipulating information on market size and competition to get a higher
payment from the producer
Opportunistic behaviour from producer:
- The producer can change the entry mode
- Or choose another intermediary
To protect itself, the intermediary could establish relationships with key
employees, create an independent identity or add further value to the
product. The intermediary could also represent more producers to cover
the risks.
9.3
Factors that influence the entry mode decision:
1
, Internal factors
- Firm size resource availability (SME’s will more likely choose for less
control: export modes, and bigger companies for hierarchical modes)
- International experience reduces uncertainty from operating in a
foreign market.
- Product/service characteristics of the product determine where the
production is located. When products are of high value/ economies of scale
/ keep control over production, then businesses tend to choose for direct
export. When export costs are expensive and a lot of service is needed,
companies choose for a hierarchical mode of entry.
External factors
- Sociocultural distance between home country and host country
distance of language, education, industrial practices and cultural
characteristics. Creates uncertainty and a firm will choose for a mode with
agents or a importer.
- Country risk/demand uncertainty If there is a high risk in the economic
or political environment companies choose for export. With low risk for
hierarchical modes.
- Market size and growth The bigger the country and marketsize / rate
of market growth, the more likely companies will choose for hierarchical
modes. The smaller, isolated, the more likely companies will choose for
export or licensing.
- Direct and indirect trade barriers tariffs, quota’s, preference to buy
national, product and trade regulations. If there are a lot of these barriers,
companies may choose for contractual arrangements like a joint venture
2
A decision-oriented approach
Chapter 9 – Some approaches to the choice of entry modes
9.1
An entry mode is an arrangement for the products and services of a
company to enter a foreign market. Strategies for entry mode selection
are:
- Naive rule same entry mode for all foreign markets
- Pragmatic rule chooses the most workable and low risk entry mode. If
this doesn’t work, the company looks for another.
- Strategy rule all alternative entry modes are compared and evaluated
before a choice is made.
9.2
Transaction cost approach
The idea behind this approach is that there is always friction between the
buyer and seller in market transactions. This is caused by opportunistic
behaviour: misleading/distortion/disguise/confusion.
Elements that result in conflicts with the intermediary:
- Stock size of the intermediary
- Extent of commercial and technical service that the intermediary must
carry out
- Division of marketing costs between producer and intermediary
- Fixing of prices
- Fixing of commission to agents
Opportunistic behaviour from intermediary:
- manipulating invoices of promotion costs to get a higher payment from
the producer
- manipulating information on market size and competition to get a higher
payment from the producer
Opportunistic behaviour from producer:
- The producer can change the entry mode
- Or choose another intermediary
To protect itself, the intermediary could establish relationships with key
employees, create an independent identity or add further value to the
product. The intermediary could also represent more producers to cover
the risks.
9.3
Factors that influence the entry mode decision:
1
, Internal factors
- Firm size resource availability (SME’s will more likely choose for less
control: export modes, and bigger companies for hierarchical modes)
- International experience reduces uncertainty from operating in a
foreign market.
- Product/service characteristics of the product determine where the
production is located. When products are of high value/ economies of scale
/ keep control over production, then businesses tend to choose for direct
export. When export costs are expensive and a lot of service is needed,
companies choose for a hierarchical mode of entry.
External factors
- Sociocultural distance between home country and host country
distance of language, education, industrial practices and cultural
characteristics. Creates uncertainty and a firm will choose for a mode with
agents or a importer.
- Country risk/demand uncertainty If there is a high risk in the economic
or political environment companies choose for export. With low risk for
hierarchical modes.
- Market size and growth The bigger the country and marketsize / rate
of market growth, the more likely companies will choose for hierarchical
modes. The smaller, isolated, the more likely companies will choose for
export or licensing.
- Direct and indirect trade barriers tariffs, quota’s, preference to buy
national, product and trade regulations. If there are a lot of these barriers,
companies may choose for contractual arrangements like a joint venture
2
