Market Entry

Global sourcing has been made possible due to globalisation. The advantages of global sourcing mostly come from lower costs. Other than low costs, why would companies want to source materials and resources globally? Let's take a look.

Why do companies adopt global sourcing?

There are four main advantages to sourcing materials abroad:

Cheap labour costs

Many multinational companies outsource their production and assembly to developing countries with cheap labour. This reduces the production costs and results in cheaper prices for the customers.

High-quality products

Some countries produce better products or product components than others, making it the obvious choice for sourcing. For example, Brazil and Colombia grow brilliant coffee and the majority of Starbucks coffee beans are sourced from there.

Global sourcing also provides the company with advanced technology and a skilled workforce which might not be available at home. Thus, they can make products cheap and with a greater quality to gain a competitive advantage.

High production capacity

Many companies do not have the capacity to produce a large number of products. In this case, the production can be outsourced to other countries to take advantage of the abundant space and resources.

Companies also source their materials from multiple countries to ensure sufficient goods when the supplier in one country cannot make the delivery on time.

Market experience in new countries

By sourcing abroad, companies can learn how to develop foreign market expertise which may enable market entry in the future. They can also compare manufacturers in different countries to choose the best-performing ones at the lowest costs.

Types of global sourcing

When sourcing materials and components abroad, companies can choose either sole-sourcing or multi-sourcing (see Figure 1 below):

• Sole sourcing is the act of sourcing materials from one supplier. With this strategy, the company can benefit from discounts by making large orders. It may also receive preferential treatment from the supplier as a reward for loyalty, especially during tough times.

• Multiple sourcing is the act of sourcing materials from different suppliers. This strategy offers the company more resistance to risks. For example, if suppliers in one country run out of stock and are hit by natural disasters, the company can still get its suppliers from other sources.

Figure 1. Types of Global Sourcing, StudySmarter

Market entry definition

For a smooth entry, companies must gain expertise in international trade agreements, tariffs, barriers of entry as well as local regulations and legal requirements. They should also assess customers’ purchasing power, competition, and resources available in the foreign market.

Why do companies enter a market?

Like global sourcing, entering a foreign market can bring the company multiple benefits:

Higher profit margin

Companies expand internationally to achieve economies of scale. As the products or services are introduced to new customer segments, companies can enjoy a greater market share and profit margin. This not only accelerates their business growth but also establishes a global image to drive out competition.

Less competition

When the local market has become saturated, going international can give the company a fresh start. As it’s easier to introduce a new product and build brand awareness in markets where the competitors have yet to enter.

New talents

Market entry also provides the firm access to a talented workforce from different parts of the world. This can bring unique insights, ideas, and innovation to help the company improve its operation and reach a new high.

Incentives

There are also plenty of attractive incentives to businesses that extend their territory worldwide such as low production costs, advanced technology, more efficient logistics, transportation, and infrastructure.

Market entry modes

Market entry modes describe the methods through which companies can enter a new market. The new market may be a foreign country, known as the host country. Based on the level of engagement in the host country, there are four different types of entry modes:

1. Exporting,

2. Licensing,

3. Franchising, and

4. Wholly-owned ventures.

Fig 2 - Market Entry Modes

Exporting

Exporting is the act of sending goods and services to foreign markets. It is the simplest mode of entry and is widely adopted by SMEs. There's little risk to this approach in terms of finance and human resources. However, the company will have less control over the operations abroad.

There are three main export categories:

• Experimental involvement: the company has limited exporting activities.

• Active involvement: the company explores a wide range of exporting opportunities.

• Committed involvement: the company allocates its resources to international marketing ventures.

Licensing

Licensing is the case where a company (Licensor) grants permission to a licensee to distribute its products or services under a trademark. In many cases, the license is only applicable to a particular region for a certain period of time. Licensed products are not duplicate of the original product but often go through some adaptation process such as translated labels and instructions, modifications to local laws and regulations.

The major advantage of this strategy is the speed of entry, especially when the firm doesn’t have enough skills and knowledge of the foreign market. However, there’s also the risk of choosing the wrong partner which affects the company’s global image.

Franchising

Franchising is the case where the company (franchisor) licenses some or all of its business know-how, intellectual property, use of brand names, and business models to a franchisee and allows it to sell the branded products or services. In return, the franchisee pays the franchisor a fee.

The strategy is based on trust and reciprocity. The franchisor is responsible for improving the performance of the franchise and assists the franchisee to market the product successfully.

Wholly-owned ventures

Compared to the other modes of entry, wholly-owned ventures are the riskiest approach as the company is directly involved in operations abroad.

This strategy is further classified: greenfield investment and acquisition or a merger with an existing business.

Greenfield strategy

Greenfield strategy means building a subsidiary in the host country to market the company’s product. In this case, the parent company clones its organizational culture, technology, and supply chain in the foreign market.

The strategy is often utilized by companies with strong technical and organizational skills. However, there are lots of risks regarding partnership building and international recruitment.

Mergers and acquisitions

Mergers and acquisitions are cases where a foreign company acquires a local business or merges it into its own entity.

There are three forms of mergers and acquisitions:

• Horizontal M&A: a merger of companies in the same industry. For example, the merger of Facebook, Instagram, Whatsapp, and Messenger into one big social media company. The platforms still remain independent but they belong to the same company Facebook Inc.

• Vertical M&A: a merger of companies that complement each other in the supply chain. For example, the merger of eBay and PayPal. PayPal offers the gateway for easier online payment on the eBay website which adds to the success and profits of both companies.

• Conglomerate M&A: a merger of companies in unrelated industries. For example, Amazon bought Whole Foods in 2017. The acquisition marked the eCommerce giant’s step into the food and beverage industry. Amazon now has a brick-and-mortar grocery store.

Successful market entry examples

Starbucks entering the Chinese market

For centuries, tea has been a religious drink in China. It seemed almost impossible to popularize another drink in the country and get the mainland people to embrace it.

However, this is a remarkable feat Starbucks has accomplished. In 1999, the roasted coffee brand opened its first store in Beijing; 30 years later, the network has grown to over 5100 stores in more than 200 cities.

The key to this massive success is Starbucks’ market entry strategy, which consists of several smart moves:

• First, the company introduced beverages closeto the host country's culture such as green tea to attract local customers. Once the customer got used to its brand, Starbucks began adding more coffee flavours to the menu. This increases the chance of new beverages being accepted.

• Second, the company avoids any form of advertising that shows itself as a threat to tea drinking culture. Also, advertisements are placed at high locations in high traffic places.

• Third, they send baristas from established markets to the emerging ones. This ensures the Starbucks culture be the same everywhere around the world.

• Finally, Starbucks partnered with local businesses, which allowed them to break into the new culture more easily.