Business today is not limited to any geographical boundaries. A company that’s had success in the domestic market may well find its way all across the world if they have a world class product. Today, many companies have global presence, be it ones that were established 100 years back or recent start-ups. For instance, Spotify was launched recently around eight years back, but today has more than 140 million active users spread across the globe. It can pose an intriguing question, which is how can companies become multinational so quickly? The market entry strategy of companies have been evolving, allowing companies to go worldwide in a short period of time. Entering foreign market has many advantages including earning foreign currency, achieving economy of scale, gaining global customers, and distributing risks. However, there are plenty of options available to companies on how they choose to enter a foreign market. The challenge is to choose the right strategy by considering corporate strategy, tariffs, transportation costs, product localization needs, and marketing needs. So what are the top market entry strategies that are available to companies?
One of the easiest options to enter the foreign market is to produce the product in the home country and just ship the surplus to a new country. This market entry strategy can be perfect for new companies who cannot afford to take risks. It is also easier for the company to hire agents or distributors who will take care of exporting and promoting the new product in the new market. However, one significant drawback of this market entry strategy is that companies may not be able to react to customer communications as quickly as a local agent.
In simple terms, licensing is a contractual arrangement whereby the company offers proprietary assets to a foreign company in exchange for royalty fees. Sometimes it can be possible that a company may not be able to export the product because of complex rules and regulations or when the transportation cost is prohibitive. Although it significantly reduces the risk for the company and decreases the amount of investment required, the company will have to share their proprietary secrets with an outsider. Licensing can be done not only for a product but also for a trade name. This type of market entry strategy is perfect for companies who don’t want to commit highly to international expansion.
Franchising is one of the most popular market entry strategies that is gaining traction across all parts of the world. This works well for companies that have a reputable business model like McDonald’s fast food chain or Starbucks instant coffee. Businesses who opt for franchising should make sure that they garner a good brand name, build on it, and promote it. The franchising business model is excellent as it doesn’t require massive investment from the franchise, builds a reputable brand name, and earns a franchise fee.
Joint ventures, mergers, and acquisitions
It is entirely possible that companies trying to enter a new markets may not have adequate knowledge about the market. In such a case, companies can look to partner with established companies and make co-marketing arrangements to sell the product. Additionally, bigger companies can also opt for joint ventures who share risks and profit. One of the best examples of the joint venture can be considered the one between Sony and Ericsson cell phones. Finally, they can also opt for mergers and acquisitions to boost the status of the company.
If there was ever a perfect example of high-risk, high reward adage, greenfield investment could perfectly fit one. The company looking to enter the foreign market has to buy the land, build the facility and operate the business on a continuous basis. It requires a huge commitment, but it pays off as well. Companies can earn a handsome profit on their sales. However, they need to consider factors such as government regulations and access to technology or skilled labor.
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