International

Marketing

© Daniel W. Baack, Barbara

Czarnecka & Donald Baack

Part One

Essentials of international

marketing

Chapter 4

Country selection and entry

strategies

Learning objectives

1. What two factors drive market economies, and how are these factors different in command economies?

2. How do Rostow’s five stages of economic development apply to the concepts of most-, less-, and least-developed economies, emerging markets, newly industrialized countries, and transition economies?

3. What factors help create a national competitive advantage for an economy?

4. How do the five forces that increase competitive rivalries relate to industry-level competitive advantage?

5. How do the various modes of entry balance a company’s level of control with its level of risk?

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5

Learning objective #1

• What two factors drive market economies, and how are

these factors different in command economies?

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Economic systems

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Market economy

• An economy in which most economic decisions are made in

the marketplace is a market economy.

– The marketplace may be found anywhere money

changes hands in a capitalist economic system.

• Supply and Demand

– Supply is the amount of goods and services that

producers will provide at various prices.

– Demand is the amount or quantity of goods and services

the consumers are willing to buy at various prices.

– The market price, or equilibrium price, represents the

meeting place between supply and demand.

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Components of market economies

• Profit

– Revenue exceeds costs

– Personal and business

• Private Property Rights

– Allow individuals to buy land, machinery, and other goods

• Competitive Marketplace

– Government does not interfere with prices or sales

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Most economically free countries

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Command economy

• A central authority makes all key economic decisions in a command economy.

– Socialism refers to economic systems where the state owns at least some parts of industry.

• Strong command economy

– Heavy governmental control will be present.

– Communism is an extreme form of socialism that bans private ownership of property.

• Moderate command economies

– A degree of private enterprise operates.

– The state owns all of the major resources.

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Mixed economy

• The marketplace guides part of the economic system and

the government runs the other part.

– Government may oversee defense, education, building

and repairing roads, and/or fire protection.

– Marketplace vends other items, including necessities,

sundries, and luxuries.

• Most countries have mixed economies.

– One force, marketplace or government, tends to be more

dominant.

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Learning objective #2

• How do Rostow’s five stages of economic development

apply to the concepts of most-, less-, and least-developed

economies, emerging markets, newly industrialized

countries, and transition economies?

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Economic development

• Degree of economic development in a region or country

drives many international marketing decisions.

• Development can be controversial and rooted in politics and

conflicts between countries.

• Different levels of economic development

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Stages of economic development

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Initial stages of development

• Traditional Society

– Subsistence economy

– Agricultural primary occupation and means of production

– Limited technology and capital

• Preconditions for Takeoff

– Technology begins to develop

– Rudimentary transportation to encourage trade

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Rapid development

• Takeoff

– Manufacturing industries grow rapidly

– Airports, roads, and railways built

– A few leading industries support high levels of economic growth

• The Drive to Maturity

– Growth has spread to all parts of the economy and is self-sustaining

– Modern transportation systems embedded

– Rapid urbanization

– Traditional industries may start to decline

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Final stage and application

• The Age of Mass Consumption

– Rapid rise of tertiary, third-wave support industries

– Decline in manufacturing

– Citizens enjoy abundance, prosperity, and a variety of

purchasing choices

• At each stage, the presence and growth of potential target

markets changes.

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Emerging markets

• Emerging markets are countries that are moving through the

transformation from developing to developed.

– Mexico, South Africa, and several countries in Asia

• Big Emerging Markets (BEMs)

– Emerging markets with a large population

– BRIC countries – Brazil, Russia, India, and China

– Large regional (and increasing global) economic and

political footprint

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Newly industrialized countries (NICs)

• For NICs, rapid economic development places them

between less- and more-developed stages.

– China, Taiwan, South Korea, Mexico, Brazil

• NICs are always emerging markets, but emerging markets

are not always NICs

– Government plays a clear role in NICs and less so in

some emerging markets

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Characteristics of NICs

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Transition economies

• Occur in formerly communist countries with centrally

planned economies as the country transitions to a free

market economy.

– Eastern Europe, China

• Opportunity for growth

– Increased standard of living

– Increased purchasing power

– Gaps in market may be filled by foreign companies

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Features of transition economies

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Struggles for transition economies

• Split population

– Younger consumers more comfortable with the change

– Older consumers may desire return to old system

– Economic growth more beneficial for urban than for rural

consumers

• Corruption a large problem limiting growth

• “The task may be difficult, but the resources are scarce.”

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Transparency international corruption index

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Bottom-of-the-Pyramid

• Low-income, bottom-of-the-pyramid customers are most

likely to reside in least-developed economies or in Rostow’s

traditional societies.

• The potential does exist for products that are tailored to

these consumers.

• As an economy moves forward and infrastructure emerges,

the opportunities tend to grow and expand impressively.

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Learning objective #3

• What factors help create a national competitive advantage

for an economy?

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National competitive advantage

• The basis of global economic leadership

• Michael Porter’s Diamond Model

– Demand conditions

– Related and supporting industries

– Firm strategy, structure, and rivalry

– Factor conditions

– Government

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Demand conditions

• The unique features of demand in a nation make up that

country’s demand conditions.

• Domestic consumers may be more or less representative of

the global consumers.

• Consumers who move the global taste in a category or

industry help a nation become global leaders in that

category.

– France and fashion

– South Korea and technology

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Related and supporting industries

• Support from various other companies that provide inputs,

support production, or facilitate other aspects of an industry

together count as related and supporting industries.

• Nations with this type of support network exhibit one of the

conditions needed to have a national competitive advantage

in that industry.

– Nokia in Finland is surrounded by needed related and

supporting industries.

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Firm strategy, structure, and rivalry

• Nations differ in terms of how the government allows

companies to be formed, maintained, and structured,

including control of domestic and potentially foreign

competitors.

• This results in differences in firm strategy, structure, and

rivalry

– In Italy, companies tend to be smaller, family owned, and

privately held.

– In Germany companies tend to be large and highly

structured, and employ managers with technical

backgrounds.

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Factor conditions

• Factor conditions include components needed for

production of goods or services, such as labor and

infrastructure.

– Each industry has specific factors associated with

success in that field.

• Traditionally, these factors were natural endowments that

nations possessed without effort.

– Labor or land or various natural resources such as oil or

minerals

– Increasingly, resources are created such as trained

human resources.

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Factor conditions

• Factor conditions most clearly lead to national competitive

advantage when specialization exists.

– The American film industry has the various directors,

actors, producers, and cinematographers needed.

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Government

• Government, and how government interacts with the free

market, plays a role in creating national competitive

advantage.

• Industry innovation results from competition and

governmental activities can assist this.

– Support for education

– Encouraging cooperation between related industries

– Assisting in the development of new technologies and

emerging industries

• Policies that increase competition while supporting

innovation help create national competitive advantage.

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Learning objective #4

• How do the five forces that increase competitive rivalries

relate to industry-level competitive advantage?

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Industry-level competitive advantage

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Threat of new entrants

• The threat of new entrants affects the nature of local,

national, and international competition.

• The large size of the markets in Big Emerging

Markets alone sparks interest and increases the chance of

new entrants.

• Barriers to entry can be used by companies to prevent or

limit new entrants.

– Potential barriers include brand equity, large initial cost

requirements, regulations, monopolies overdistribution or

needed resources, and/or lack of specific, hard-to-learn

knowledge.

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Threat of substitute products

• The existence of substitute products increases competitive

intensity.

– Different substitute products exist in international markets.

• When consumers can switch from product to product,

companies face stronger pressure from competitors to get

consumers to make the switch.

– Switching costs increase

– Consumer loyalty increase

• Brand loyalty, unique product benefits, and repeat purchase

rewards all decrease switching.

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Bargaining power of suppliers

• Companies within an industry typically use the same supplier or a small group of suppliers for the resources needed, including labor and raw materials.

– Suppliers of these resources with strong bargaining power increase the competition within the industry.

• Supplier bargaining power increases when only one or a small number of companies serve as supplier.

• Steps to lower the bargaining power of suppliers:

– Buy the supplier.

– Supply the resource internally.

– Find substitutes for the resource, often by looking internationally.

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Bargaining power of consumers

• Consumers possess bargaining power.

– When only a few individuals purchase a product, such as

can be the case in business-to-business marketing, those

buyers hold more power.

– Small numbers of consumers increase competition.

• Price sensitivity increases consumer power due to the

increased likelihood of a customer switching to a lower-

priced competitor.

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Bargaining power of consumers

• Methods to decrease consumer bargaining power:

– Brand loyalty

– Opening new markets or increasing market share

– Growth in market size

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Rivalry among competitors

• Together, the four forces above work to increase rivalry

among competitors.

• Company-specific factors also increase rivalries among

competitors.

– Widely accessible knowledge and processes result in

more rivalry than does specialized, difficult-to-imitate

knowledge.

– Innovation, especially when legally protected, can reduce

competition within an industry.

• When every company in an industry competes based on

similar, duplicable factors, rivalry becomes intense.

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Economic forces and international marketing

• Economic forces affect culture.

– Sons are highly valued for their ability to work, whereas

daughters may be viewed as an expense.

– Development increases materialism.

• Economic forces affect language.

– New terms for new technologies

• Economic forces affect political and legal systems.

– Laws governing property rights and commerce

– Laws can speed up or slow down development.

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Economic forces and international marketing

• Economic forces affect infrastructure.

– Growth leads to more complex and developed

infrastructure.

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Sustainability and international marketing

• As countries develop economically, sustainability becomes

an increasing concern.

• How can economic development be done sustainably?

• Economic development increases global consumption of

resources.

– Energy

– Water

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Net virtual water globally

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Global water consumption footprints

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Learning objective #5

• How do the various modes of entry balance a company’s

level of control with its level of risk?

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Modes of entry

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Exporting

• The product is shipped in one manner or another into a

foreign market.

– Typical initial method to enter a market

– Little control after products leaves home country

• Two broad methods:

– Direct sales

– Use of an intermediary

• The Internet has led to a growth in direct sales.

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Licensing

• A contract that grants a company (the licensee) the legal

right to use another company’s brand, image, and other

marketing components

• Can provide a quick, low-cost method for entering a foreign

market

– The licensee holds additional knowledge about the local

market that increases the chance for success.

• Primary concern is lack of control.

– Local partner behavior may detract from the image of the

company.

– May make poor marketing choices.

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Franchising

• The contractual agreement to implement a business model

– McDonald’s, KFC, 7-Eleven, Supercuts, and Jani-King

• In return for an up-front fee, signees obtain access to the

company’s colors, images, and products, which offers

greater control over the marketing process by the parent

company.

• The risk is a poor franchisee.

– Signee may ignore contract or make decisions that hurt

the company.

– Costs accrue to control signees.

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Joint ventures

• Some companies choose to partner with local businesses

when entering a country.

• When these legal partnerships involve an investment, a

division of ownership, and the creation of a new legal entity,

the newly created business is joint venture.

• The categories of joint ventures include:

– Majority owned, where the foreign company owns 51% or

more of the joint venture;

– Minority owned, where the foreign company owns 49% or

less of the joint venture;

– 50% / 50%, or an equal split of ownership.

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Joint venture advantages and disadvantages

• Advantages:

– Local partners provide access to local connections.

– Local partners understand the local business

environment.

– Sharing of risk lessens potential losses.

– Costs may be lowered.

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Joint venture advantages and disadvantages

• Disadvantages:

– Lost or leaked proprietary knowledge.

– Partners may misappropriate company assets and may

even break the joint venture and then use that knowledge

to succeed in separate, independent business ventures.

– Conflicts between partners can also occur.

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Strategic alliances

• A formal agreement between companies to work together to

achieve a common goal.

– In contrast to joint ventures, a separate legal entity does

not get created.

– Resource sharing, project funding, and knowledge

transfer all happen within most strategic alliances.

• Many strategic alliances investigate problems that affect all

or most members of an industry.

– Sharing research on a new technological breakthrough or

combining resources to enter a new market are two

common goals for strategic alliances.

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Strategic alliances

• Advantage

– Limited financial commitment and fewer formal legal

lessens risk.

• Disadvantage

– Exposure to a potential partners leaving or stealing

technology.

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Wholly owned subsidiary

• A 100% ownership stake in a business in that country

– Must comply with local regulations, adjust to local cultural standards and mores, operate in the native language, fit with local economic conditions, and be supportable through the local infrastructure.

• Company is able to use its own brand, logo, and color scheme, and maintains control over both managerial operations and marketing decisions.

– Primary advantage is complete control.

– Primary disadvantage is lack of shared risk and high cost. Also, fail to have a local contact to facilitate entry success.

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Types of wholly owned subsidiaries

• Acquisitions, the company purchases a local business that

is then transformed into the subsidiary.

• Greenfield investment, the company builds the subsidiary

from the ground up.

• China has a unique type – the wholly foreign-owned

enterprise

– The subsidiary maintains special economic status within

China.

– These businesses typically manufacture goods solely for

export to foreign markets.

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Entry mode failure and exit

• Put a plan in place regarding market exit pre-entry.

– Set clear, measurable goals regarding entry success with

set deadlines.

• Failure may result from many things.

– Poor planning

– External, unpredictable forces

• When leaving, focus on maintaining the relationships built.

– Settle contracts fairly.

– Focus on maintaining company reputation.

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Entry mode failure and exit

– The partner in the country being exited might also be a

potential partner in a separate country.

– It is always possible that the firm will choose to enter the

market again at a later date.

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Theories of entry mode selection

• Explaining entry mode choices is a dominant area of

international business academic theory.

• The three dominant theories:

– Internationalization Theory

– Internalization Theory

– Eclectic or OLI Theory

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Internationalization theory

• Companies go through four stages during the move to

becoming a completely global company:

– no regular export activities,

– export via independent representatives,

– establishment of an overseas sales subsidiary, and

– foreign production.

• The model views global entry as an incremental process.

– A company’s marketers begin by exporting to close,

familiar markets.

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Internationalization theory

– Through these exporting activities, the company leaders

gain the knowledge needed to export to other close

similar markets .

– Eventually enough knowledge is gained to expand

globally.

• Key concept is psychic distance or the differences between

managers from different countries.

– It includes differences in language, communication styles,

legal and political structures, education, and overall

cultural values.

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Internalization theory

• Focuses on advantages to each entry mode type.

• Exporting represents the default, “efficient” choice for market entry.

– Supply and demand guide the process.

– The company exerts little control and less cost is involved.

– The lack of control is acceptable if no unusual risks or uncertainties and trusted partners.

• In many cases, uncertainty and risks exists making exporting too risky.

– Managers choose to internalize the entry – hence the name of the theory.

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Internalization theory

• Internalization refers to taking some degree of ownership.

– Choosing a nonexporting entry mode such a wholly

owned subsidiary or a joint venture

– The high costs are offset by the level of control resulting

from ownership.

– Greater control allows for better response to risk and

uncertainty.

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Eclectic or OLI theory

• Assumes that exporting will be the most efficient and

preferred form of entry but that inefficiencies or problems in

the market mean that in many cases the best decision is

another form of entry. These best decisions are based on

three factors:

– Ownership advantages

– Location advantages

– Internalization advantages

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Ownership advantages

• Ownership advantages can be thought of as the “why” for

multinational corporation foreign activities and represent the

reasons marketers spend the time and effort to enter a

foreign country.

• Two types of ownership advantages:

– Asset advantages represent anything the company does

well that competitors cannot do.

– Transaction ownership advantages relate to the ability to

capture transactional benefits, such as lower costs, from

the common governance of a network of ownership

assets.

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Location advantages

• Location advantages explains the “where” of entry location

advantages.

• Some markets are more attractive than others and are

entered first due to:

– Local resources, natural and human;

– Governmental activities;

– Market potential; and

– Lower political risk.

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Internalization advantages

• Internalization advantages are the “how” of market entry, and the advantages that come from making the correct entry decision.

• While exporting is the default option, when companies are considering entering an attractive market (location advantages) and have unique assets that will generate sufficient profit (ownership advantages), the correct selection of entry mode type leads to internalization advantages.

• To select the right type of entry mode, companies need to balance risk, uncertainty, the ability to exploit economies of scale, and cost.

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