Strategies for Entering and Developing International Markets

This chapter is from the book

Mirage of Global Markets, The: How Globalizing Companies Can Succeed as Markets Localize

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This chapter is from the book

This chapter is from the book 

Mirage of Global Markets, The: How Globalizing Companies Can Succeed as Markets Localize

Learn More Buy

The process of penetrating and then developing an international market is a difficult one, which many companies still identify as an Achilles’ heel in their global capabilities. In fundamental terms, entering a new country-market is very like a start-up situation, with no sales, no marketing infrastructure in place, and little or no knowledge of the market. Despite this, companies usually treat this situation as if it were an extension of their business, a source of incremental revenues for existing products and services. Two aspects of the typical approach are particularly striking. First, companies often pursue this new business opportunity with a focus on minimizing risk and investment—the complete opposite of the approach usually advocated for genuine start-up situations. Second, from a marketing perspective, many companies break the founding principle of marketing—that a firm should start by analyzing the market, and then, and only then, decide on its offer in terms of products, services, and marketing programs. In fact, it is far more common to see international markets as opportunities to increase sales of existing products and so to adopt a “sales push” rather than a market-driven approach. Given this overall approach, it is not surprising that performance is often disappointing. As was discussed in Chapter 1, profitability in international markets has lagged behind average firm profitability for much of the last two decades (the “foreign investment profitability gap”). This may well be because of what Ghemawat and Ghadar describe as “top-line obsession,” a focus on revenue growth rather than profitability growth.¹ The link between this perspective and a view of international sales as incremental business is self-evident. And, after all, many firms enter new country-markets through the indirect channel of a local independent distributor or agent, in which case the multinationals will not know their costs and therefore their operating profitability in the markets. Although more mature firms are altering the way they enter and penetrate new international markets, the mixed results in the post-2001 recession demonstrate that this remains a challenging phase of internationalization.

This common mismatch between expectations and situational requirements stems, above all, from a failure to follow in international operations the marketing strategy process that is probably established in the core domestic business. This may be because participation in the market is indirect (i.e., via an independent local distributor or agent, rather than via a directly controlled marketing subsidiary). It also often reflects a lack of control over strategic marketing and a failure to think rigorously about how the business will develop over the course of several years. While it is true that certain distinctive characteristics of an international marketing situation demand a different approach to marketing, this is not a reason for standards of strategic marketing management to be relaxed. This chapter will begin by examining these unique international marketing challenges and then discuss, in turn, several phases of the process of market entry and development, including the following:

• The objectives of market entry, which will have implications for the strategy and organization adopted.

• The choice of market entry mode (i.e., the form of marketing organization through which the company participates in the market). Particular attention will be paid to the low-intensity modes of entry most commonly favored in market entry situations.

• The marketing entry strategy, with a particular focus on the lessons learned from the strategies of western multinationals in emerging markets.

• A framework for the overall evolution of an international marketing strategy.

What Is Different about International Marketing?

Most executives are quite clear that international marketing is different from home-country marketing, and most multinational companies insist that their senior managers have international experience on their resumés. Despite this pragmatic recognition of the uniqueness of the international marketplace, there has been little agreement over the exact nature of this distinctiveness. Although the question has been long and inconclusively discussed by academics and business analysts, agreement has been limited to the valid but rather obvious observation that international marketing, as opposed to marketing in a single country, takes place in an environment of increased complexity and uncertainty, in areas as varied as consumer behavior and government regulation. This suggests that the differences between domestic and international marketing are differences of degree rather than underlying differences of kind. In fact, there are certain distinctive characteristics in international operations that, while they may not establish international marketing as a separate theoretical subdomain of marketing, nevertheless have a great bearing on managerial decisions. They are:

A Context of Rapid Business Growth and Organizational Learning

Penetration of a foreign market is a zero-base process. At the point of market entry, the foreign entrant has no existing business and little or no market knowledge, particularly with regard to the managerial competence necessary to operate in the new market environment. During the years after market entry, therefore, the rate of change in the country-specific marketing capability of the firm is likely to be greater than the rate of change in the market environment, and firm effects may dominate market effects in shaping strategy. This is particularly important given the business context, in which the generation of new business is of prime importance—rather than efficiency in managing a relatively stable business. This usually results in (a) entering the market via a partnership with a local distributor or other marketing agent rather than via a directly controlled marketing unit and (b) a relatively rapid sequence of changes to the marketing strategy (such as new product introductions or expansion of distribution) or to the marketing organization (e.g., taking over marketing responsibility from the local distributor).

The Hierarchical Nature of Decisions

International market situations are multilevel in their decision focus, with a hierarchy of decisions from country assessment and performance measurement decisions through to more traditional marketing mix allocations and programs. Thus, an executive responsible for a country in which the firm participates only for revenue generation and not for production (a common situation) is simultaneously managing country-level trends in the economy or government, and marketing decisions such as the product range or price level. In the domestic market, by contrast, these decision levels are addressed by separate specialists.

Managing a Multimarket Network

From the time a company enters its second country-market, it will inevitably be influenced by its previous experience. The greater the number of national markets in which a company participates, the more likely it is to seek to manage them as an aggregated network rather than as independent units. Marketing strategy decisions in one country-market may in this case be made against extra-market criteria. For example, price levels may be set to minimize the difference among markets and to maintain a price corridor rather than purely to reflect local market conditions. Similarly, a multinational company may subsidize price levels in one market for strategic reasons while recouping that loss in another market. This ability to leverage a global network is sometimes described as “the global chess game,”² and it is increasingly regarded as one of the key advantages enjoyed by a global firm relative to local players, partly because of the increasing globalization of firms and their consequent opportunities to integrate national operations. In practice, this frequently results in asymmetric competition in any single market, with different companies pursuing different objectives and setting different performance standards. As discussed later in this chapter, it is possible that one company may be participating in the market simply to learn, and it may therefore tolerate low profitability, while others are pursuing more conventional profit maximization goals.

Co-location of Strategic Marketing and Distribution Functions

A national distribution channel for an international corporation is usually responsible not just for the traditional distribution functions,³ but it is the de facto branch of the company in that country with an exclusive agency for the territory and responsibility for marketing strategy. The distribution unit in the country-market, whether an independent organization or a wholly-owned subsidiary, has to manage a strategy for growth, and it will therefore be judged on organizational criteria including feasibility, level of desired risk, supportability, and control issues. By contrast, distribution management in domestic markets is largely concerned with the implementation of preexisting marketing strategies such as communication platforms and target customer selection, and so the distributor is judged against efficiency or cost-minimization criteria. Although some more-established firms manage this trade-off with considerable sophistication, all too often the delegation of marketing strategy to what is essentially a distribution organization results in underperformance, as nobody is in fact formulating a marketing strategy (this is discussed at length in Chapter 5).

In practice, these unique characteristics mean that marketing strategy in the international arena changes rapidly as the business grows or fails to grow. Importantly, it is driven not only by market characteristics (the basis for marketing strategy in the pure or theoretical sense), but also by organizational development, as the economics and knowledge of the local marketing unit develop. Indeed, it is usually impossible to separate the process of market development from the process of organizational development. It is possible, however, to identify commonalities across companies in this process of internationalization and so to describe the usual evolution of international marketing strategy. Such a framework has to begin by recognizing that different objectives for market entry may produce quite different outcomes in terms of entry mode and marketing strategy.

Objectives of Market Entry

Companies enter international markets for varying reasons, and these different objectives at the time of entry should produce different strategies, performance goals, and even forms of market participation. Yet, companies frequently follow a standard market entry and development strategy. The most common, which will be described in the following section, is sometimes referred to as the “increasing commitment” pattern of market penetration, in which market entry is via an independent local distributor or partner with a later switch to a directly controlled subsidiary. This approach results from an objective of building a business in the country-market as quickly as possible but nevertheless with a degree of patience produced by the initial desire to minimize risk and by the need to learn about the country and market from a low base of knowledge. These might be described as straightforward financial objectives that are oriented around long-run profit maximization in the country, so this internationalization strategy could be described as the default option.

The fundamental reason for entering a new market has to be potential demand, of course, but nevertheless it is common to observe other factors driving investment and performance measurement decisions, such as:

Learning in Lead Markets

In some circumstances, a company might undertake a foreign market entry not for solely financial reasons, but to learn. For example, the white goods division of Koc, the Turkish conglomerate, entered Germany, regarded as the world’s leading market for dishwashers, refrigerators, freezers, and washing machines both in terms of consumer sophistication and product specification. In doing so, it recognized that its unknown brand would struggle to gain much market share in this fiercely competitive market. However, Koc took the view that, as an aspiring global company, it would undoubtedly benefit from participating in the world’s lead market and that its own product design and marketing would improve and enable it to perform better around the world.⁴ In most sectors, participation in the “lead market” would be a prerequisite for qualifying as a global leader, even if profits in that lead market were low. The lead market will vary by sector: the United States for software, Japan for consumer electronics and telecommunications, France or Italy for fashion, and so on.

The important point about such an objective for market entry is that it will change the calculus of the market entry mode decision. If a company is to maximize learning from a lead market, for example, it will need to participate with its own subsidiary and a cadre of its own executives. Learning indirectly, via a local distributor or other partner, is obviously less effective and will contribute less to the company’s development as a global player, even if short-term profitability is superior because of the lower investment required.

Competitive Attack or Defense

In some situations, market entry is prompted not by some attractive characteristics of the country identified in a market assessment exercise, but as a reaction to a competitor’s move. The most common scenario is market entry as a follower move, when a company enters the market simply because a major competitor has done so. This is obviously driven by the belief that the competitor would gain a significant advantage if it were allowed to operate alone in that market, and so it is most common in concentrated or even duopolistic industries. Another frequent scenario is “offense as defense,” in which a company enters the home market of a competitor—usually in retaliation for an earlier entry into its own domestic market. In this case, the objective is also to force the competitor to allocate increased resources to an intensified level of competition. In both cases, a company will have to adapt its strategies to the particular strategic stakes: rather than focusing on market development, the firm will set market share objectives and be prepared to accept lower levels of profitability and higher levels of marketing expenditure. This requires different performance standards and budgets from the usual scenario of low-risk entry and long-run development, and the company’s control system must have sufficient flexibility to adapt to this. The overriding competitive objective should also be taken into account when considering whether and how to participate in the market with a local distributor or partner. Certainly, the low-intensity entry modes, such as import agents and trading houses, would be inappropriate unless the local partner will accept the lower profit expectations.

Scale Economies or Marketing Leverage

A number of objectives result from internationalization undertaken as what is sometimes described as a “replication strategy,” in which a company seeks a larger market arena in which to exploit an advantage. In many manufacturing industries, for example, internationalization can help the company achieve greater economies of scale, particularly for companies from smaller domestic country-markets. In other cases, a company may seek to exploit a distinctive and differentiating asset (often protected as intellectual property), such as a brand, service model, or patented product. In both cases, the emphasis is on “more of the same,” with relatively little adaptation to local markets, which would undermine scale economies or diminish the returns from replication of the winning model. To achieve either of these objectives, a company must retain some control, so it may enter markets with relatively high-intensity modes, such as joint ventures. In particular, either franchising or licensing are business models naturally suited for the rapid replication of businesses through expansion of units since both are centered on protected and predefined assets.

Apart from these varied marketing objectives, it is also common for governments to “incentivize” their country’s companies to export, in which case the company may enter markets it would otherwise not have tackled. In summary, given the rapid business evolution that has been identified as one of the distinctive characteristics of international markets, it is reasonable to suppose that, for most companies, international operations will consist of a patchwork of country-market operations that are pursuing different objectives at any one time. This, in turn, would suggest that most companies would adopt different entry modes for different markets. More commonly, however, companies have a template that is followed in almost all markets. This usually starts with market entry via an indirect distribution channel, usually a local independent distributor or agent.