Select your language

Suggested languages for you:
Log In Start studying!
StudySmarter - The all-in-one study app.
4.8 • +11k Ratings
More than 3 Million Downloads
Free
|
|

All-in-one learning app

  • Flashcards
  • NotesNotes
  • ExplanationsExplanations
  • Study Planner
  • Textbook solutions
Start studying

Market Entry

Save Save
Print Print
Edit Edit
Sign up to use all features for free. Sign up now
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?

Global sourcing is part of the internationalisation strategy. It refers to the act of buying raw materials or product components from other parts of the world, not just the local region.

Nike gets organic cotton to make shoes from China, India, Turkey, and the United States.

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.

The majority of Nike shoes are manufactured in countries like China and Vietnam where labour is relatively cheap. In total, Nike has over 1 million workers worldwide in 785 contract factories producing 500,000 different products.

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.

Types of global sourcing, StudySmarterFigure 1. Types of Global Sourcing, StudySmarter

Market entry definition

Market entry is part of the internationalisation process that extends beyond global sourcing. It is the case when the company sells its products and services to a foreign market.

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 strategies

Based on the level of engagement (see Figure 2 below) in the host country there are four different types of entry modes: exporting, licensing, franchising, and wholly-owned ventures:

Market entry strategies, StudySmarterFigure 2. Market Entry Strategies, StudySmarter

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.

Sourcing Resources and Entering Markets - Key takeaways

  • Global sourcing is the act of buying raw materials or product components from other foreign countries.
  • Companies source their materials abroad due to lower production costs, higher production capacity, high-quality products, and market experience.

  • There are two types of global sourcing: sole sourcing and multi-sourcing.

  • Market entry is the case when the company decides to sell its products and services to a foreign market.

  • Companies enter new markets to achieve a higher profit market, avoid competition, and acquire new talents and market incentives.

  • Four entry mode strategies include exporting, licensing, franchising, and wholly-owned ventures.

Frequently Asked Questions about Market Entry

Exporting, licensing, franchising, and wholly-owned ventures are the four market entry strategies.

Exporting, licensing, franchising, and wholly-owned ventures are the four market entry strategies.

Exporting is the best market entry strategy. Exporting is the act of sending goods and services to foreign markets. It is the best market entry strategy as 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. 

The six types of entry modes are export, licensing, franchising, wholly-owned ventures, Greenfield strategy, and Mergers and Acquisitions.

Final Market Entry Quiz

Question

What is global sourcing?

Show answer

Answer

Global sourcing is the act of buying raw materials or product components from other foreign countries.

Show question

Question

What are the two types of global sourcing? 


Show answer

Answer

Suppliers abroad may have the capacity and infrastructure to produce the material and product components at a faster rate than the company themselves.

Show question

Question

What are the two types of global sourcing? 


Show answer

Answer

Two types of global sourcing are sole sourcing and multi-sourcing.  

Show question

Question

What are some incentives for global sourcing?


Show answer

Answer

Low production costs, advanced technology, more efficient logistics, transportation, and infrastructure.

Show question

Question

How do you define market entry?


Show answer

Answer

 Market entry is the case when the company decides to sell its products and services to a foreign market.

Show question

Question

What is not a benefit of market entry? 


Show answer

Answer

Higher profit margin


Show question

Question

What is licensing? 


Show answer

Answer

Licensing is the case where the company (Licensor) grants permission to a licensee to distribute its products or services under a trademark.

Show question

Question

What is the benefit of exporting?


Show answer

Answer

Lower resource commitment, less financial risks, less human resources are required.

Show question

Question

Why is franchising based on reciprocity?


Show answer

Answer

The franchisor is responsible for improving the performance of the franchise and provides assistance to the franchisee to market the product successfully. In return, the franchisee pays the franchisor a fee.

Show question

Question

Explain the concept of wholly-owned ventures


Show answer

Answer

Wholly-owned ventures is a market entry mode where the firm establishes its own subsidiaries in the host country or merge with an existing business.

Show question

Question

What is the greenfield strategy?


Show answer

Answer

Greenfield strategy means building a subsidiary in the host country to market the company’s product.

Show question

Question

What are the types of acquisitions and mergers. 


Show answer

Answer

  • Horizontal M&A: the merger of companies in the same industry. 

  • Vertical M&A: the merger of companies that complement each other in the supply chain.

  • Conglomerate M&A: the merger of companies in unrelated industries. 

Show question

Question

What are the six types of entry modes?


Show answer

Answer

foreign trade investment, exporting, licensing, franchising, greenfield strategy, mergers, and acquisitions.

Show question

Question

What is the least risky market entry approach?

Show answer

Answer

Exporting

Show question

Question

Name an example of horizontal M&A

Show answer

Answer

The merger of Facebook, Instagram, Whatsapp, and Messenger into one big social media company.

Show question

Question

__ is the act of sourcing materials from one supplier.

Show answer

Answer

Sole sourcing

Show question

Question

___ is the act of sourcing materials from different suppliers. 

Show answer

Answer

Multiple sourcing

Show question

Question

This type of sourcing offers the company more resistance to risks. What type of sourcing is it?


Show answer

Answer

multiple sourcing

Show question

Question

Companies using this strategy may receive preferential treatment from the supplier as a reward for loyalty. What type of sourcing is it?

Show answer

Answer

sole sourcing

Show question

Question

___ is part of the internationalisation process that extends beyond global sourcing. It is the case when the company sells its products and services to a foreign market.

Show answer

Answer

Market entry

Show question

Question

___ is when a company 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. 

Show answer

Answer

Franchising

Show question

Question

This is a merger of companies that complement each other in the supply chain. What is it?

Show answer

Answer

Vertical M&A

Show question

Question

What does M&A stand for?

Show answer

Answer

Mergers and acquisitions

Show question

Question

This is a merger of companies in unrelated industries. What is it?

Show answer

Answer

Conglomerate M&A

Show question

Question

The merger of Facebook, Instagram, Whatsapp, and Messenger into one big social media company is an example of...

Show answer

Answer

horizontal M&A.

Show question

Question

___ strategy means building a subsidiary in the host country to market the company’s product.

Show answer

Answer

Greenfield

Show question

60%

of the users don't pass the Market Entry quiz! Will you pass the quiz?

Start Quiz

Discover the right content for your subjects

No need to cheat if you have everything you need to succeed! Packed into one app!

Study Plan

Be perfectly prepared on time with an individual plan.

Quizzes

Test your knowledge with gamified quizzes.

Flashcards

Create and find flashcards in record time.

Notes

Create beautiful notes faster than ever before.

Study Sets

Have all your study materials in one place.

Documents

Upload unlimited documents and save them online.

Study Analytics

Identify your study strength and weaknesses.

Weekly Goals

Set individual study goals and earn points reaching them.

Smart Reminders

Stop procrastinating with our study reminders.

Rewards

Earn points, unlock badges and level up while studying.

Magic Marker

Create flashcards in notes completely automatically.

Smart Formatting

Create the most beautiful study materials using our templates.

Sign up to highlight and take notes. It’s 100% free.