Deciding on how you will enter the foreign market place is an important decision to take and will affect many other decisions you will be required to make. What options are available to you? Well, you can:
- Export indirectly – This involves making use of an export agent, trading house or by piggybacking. The export agent simply acts as your representative, while the trade house buys and sells for its own account and represents a customer for you. Piggybacking is when a firm with an existing sales network in the foreign marketplace agrees to carry your product in addition to their own line. They will normal only agree to this arrangement if your product(s) complement theirs in some way and adds value to their sales network. The term piggybacking is sometimes (incorrectly) used when another exporter buys your product as an input to their manufacturing process. Essentially your product is being sold overseas, but only as a component of the other exporter’s product. This is little more than a domestic sale for you – you would be paid in rands even though your products end up overseas.
- Export directly – This you can do either through an import agent, foreign distributor, wholesaler, retailer, or by selling directly to the end user. The agent (like an export agent) functions as your representative on a commission basis, while the distributor buys and sells products for their own account. This is a significant difference – the agent is little more than your representative, while the distributor is a customer in its own right. Wholesalers and retailers function in a similar way to the distributor in that they are also customers of your company, yet sell the product on to other intermediaries and/or the final user. Finally, there is always the option of selling your products to the end user using direct marketing, including the Internet.
- License, franchise or contract the production and/or marketing of your product abroad – In this instance, you enter into a contractual agreement with a foreign company to either use your technology or intellectual property (licensing) or entire business system (franchising) in the foreign market place. In both the case of franchising and licensing, your involvement is somewhat limited beyond providing access to the intellectual property or the business system. Thereafter, the foreign company operates largely on its own. In the case of contract manufacture, the foreign company simply manufacturers the goods to your specification – you will normally keep control over the marketing.
- Invest directly in the foreign marketplace – Direct foreign investment may take different forms, such as foreign assembly or foreign manufacture. In the case of manufacturing abroad, you can decide to either start a new manufacturing operation altogether, or you can buy into an existing manufacturing operation.
- Enter into a co-operative agreement – With co-operative agreements, you enter into an agreement with a foreign firm, where your two firms work closely together to develop the business in the foreign market place. Examples of co-operative agreements include joint-ventures (a shared ownership of a new operation), strategic alliances (involving close cooperation in the area of technology, R&D, distribution or marketing) and reciprocal share holdings (normally not common with smaller firms).
Smaller exporters are likely to use only some of these market-entry options
Most of these market entry options are not likely to be serious options for the small- or medium-sized firm. Realistically, smaller firms are likely only to consider export agents, local trading houses, piggybacking, import agents, import distributors, foreign wholesalers or retailers, direct marketing, licensing (only where you have unique technology or intellectual property to market), or franchising (generally only in retail scenarios such as restaurants or retail stores) as market entry options. The other options are generally the domain of the larger firms.
Your market-entry decision is an important marketing issue
Your decision about market-entry is a very important one to make, as this decision will affect many –if not all – of the other marketing decisions you will make. For example, if you sell direct to the end user, your pricing is likely to be different from the situation where you selling to an import distributor or through an import or export agent. Similarly the market entry decision has a direct impact on your distribution decision – market entry, after all, is a distribution decision. Also, the close to the end customer that you sell your goods, the fewer intermediaries there will be in the marketing channel and the more control you will have over the process and the cheaper it will be.
Conversely, the further away from the customer you sell your product (say to an import distributor), the less control you have and the more intermediaries there are likely to be, affecting distribution costs and distribution complexity, For example, if you sell through an export agent, this agent may arrange for you to sell your product to an import distributor, who in turn sells the product to a wholesaler, who sells to a retailer, who eventually sells the product to an end user. Each of these intermediaries adds a further mark-up to the product and the product is handled more often with the danger of being damaged. It is also a more time-consuming process, the longer the marketing/distribution channel.
Work with rather than against a channel
On the other hand, some markets have traditionally long distribution chains – the Japanese are known for this – and it may be very difficult to sell outside of an established marketing channel. It is important that you quickly learn how the marketing channel traditionally works in the country you are targeting (i.e. who are involved and what markups they are likely to impose). This will ensure that you do not waste time trying to by-pass intermediaries who considered key in that particular channel. For this reason, when doing your marketing research, you should strive to learn how the marketing channel works in your target market and who the important channel members are.
In selecting your channel members, consider the following:
- What value will the channel member offer your firm?
- Are they seen as key to your distribution efforts by other channel members (in which case will have to work through them)?
- What coverage does the channel member offer you?
- What services do they offer?
- What will they expect of you?
- How will you communicate with them (do they speak your language)?
- What will they cost (what mark-ups are they likely to charge)?
- Will you have any say in the further distribution decisions that they make?
- You are not likely to have much control over the channel beyond the first intermediary
Unless you have a very desirable product and are quite a large, influential company, you are seldom likely to have much control of the marketing channel beyond the first channel member. For example, if you sell to an import distributor, the distributor will generally not allow you to make any decisions or have any control over who they, in turn, sell to or through. Your control over the channel pretty much ends with the import distributor!
Large multinational corporations such as Kodak, for example, may enter a market and develop a channel that they control by providing active assistance (such as providing financial marketing incentives to photo shops to carry their brand as they did in China) and even by taking over or partnering with some key channel members (such as distributors and wholesalers). Indeed, they may even set up a wholesaling and sales operation in competition to the existing channel structure. Kodak also franchise their Kodak brand by allowing entrepreneurs to set up small Kodak-only photo outlets. With this effort, Kodak has taken control over much of the marketing channel. But in reality only a few companies have the reputation, brand and resources to do so.