Market Entry Strategy

Market Entry Strategy: A Comprehensive Guide for Entrepreneurs

Kurt GraverBusiness Development

This blog post aims to provide UK entrepreneurs with a comprehensive guide to selecting the most appropriate market entry strategy for their business. We will explore the various entry modes available: exporting, licensing, franchising, joint ventures, and wholly-owned subsidiaries.

By examining the pros and cons of each approach and considering factors such as target market conditions, industry dynamics, and company resources, entrepreneurs can make informed decisions that align with their business goals and capabilities.

Exporting: A Low-Risk Entry Point


Exporting is often the first step UK businesses take when expanding internationally. It involves selling goods or services produced in the UK to customers in foreign markets. In 2019, the total value of UK exports reached £689 billion, with services accounting for 46% of this figure [2].

There are two main types of exporting: direct and indirect. Direct exporting involves selling directly to customers in the target market through a local distributor or establishing a sales office. This approach offers greater control over the export process and higher profit margins but also requires more resources and market knowledge [3].

Indirect exporting, on the other hand, involves selling through an intermediary, such as an export management company or a trading house. This approach is less resource-intensive and can be a good option for businesses with limited international experience. However, it also means less control over the export process and potentially lower profit margins [3].

Advantages of exporting:

  • Low, upfront investment and risk compared to other entry modes
  • Ability to test the market before committing significant resources
  • Potential for increased sales and economies of scale

Disadvantages of exporting:

  • Transportation costs and logistical challenges
  • Limited control over distribution and marketing in the target market
  • Potential tariffs and non-tariff barriers

Licensing and Franchising: Leveraging Local Partners


Licensing and franchising are two market entry strategies that involve partnering with local companies to produce or distribute a business’s products or services in the target market.

Licensing involves granting a foreign company the rights to manufacture and sell a business’s products in exchange for royalties or other compensation. This approach is commonly used in pharmaceuticals, software, and entertainment [4].

Advantages of licensing:

  • Low investment and financial risk
  • Rapid market entry by leveraging the licensee’s local knowledge and distribution networks
  • Potential for ongoing revenue through royalties

Disadvantages of licensing:

  • Limited control over the licensee’s operations and product quality
  • Risk of intellectual property infringement or misuse
  • Potential for creating a future competitor

On the other hand, franchising involves granting a foreign company the right to operate a business under the franchisor’s brand name and business model in exchange for fees and royalties. This approach is commonly used in the food and beverage, retail, and service industries [5].

Advantages of franchising:

  • Rapid market expansion with minimal capital investment
  • Consistent brand image and customer experience across markets
  • Motivated franchisees with local market knowledge

Disadvantages of franchising:

  • Potential for quality control issues and damage to brand reputation
  • Ongoing support and training requirements for franchisees
  • Limited flexibility to adapt to local market conditions

Joint Ventures: Sharing Risks and Rewards


A joint venture involves partnering with a local company to establish a new business entity in the target market. The partners share the joint venture’s ownership, control, and profits [6].

Advantages of joint ventures:

  • Access to the partner’s local market knowledge, networks, and resources
  • Shared risks and investment costs
  • Potential for technology and knowledge transfer

Disadvantages of joint ventures:

  • Potential for conflicts over management styles, goals, and resources
  • Limited control over operations compared to a wholly-owned subsidiary
  • Risk of intellectual property leakage or misappropriation

When considering a joint venture, it is essential to choose a partner with complementary skills, resources, and objectives. A well-structured joint venture agreement should clearly define each partner’s roles, responsibilities, and exit options [7].

Wholly-Owned Subsidiaries: Full Control, High Commitment


Establishing a wholly-owned subsidiary involves setting up a new business entity in the target market fully owned and controlled by the parent company. This can be done through a greenfield investment (building from scratch) or an acquisition of an existing local company [8].

Advantages of wholly-owned subsidiaries:

  • Complete control over operations, strategy, and intellectual property
  • Potential for higher profits and economies of scale
  • Ability to fully align subsidiary with parent company’s goals and culture

Disadvantages of wholly-owned subsidiaries:

  • High upfront investment and financial risk
  • Longer time to establish operations and generate returns
  • Need for extensive local market knowledge and management expertise

Choosing the Right Entry Strategy


When selecting the most appropriate market entry strategy, UK entrepreneurs should consider the following factors:

  1. The chosen entry mode should align with the company’s long-term objectives and available resources, including financial capital, human resources, and management expertise [9].
  2. The economic, political, legal, and cultural environment of the target market can influence the feasibility and attractiveness of different entry modes. For example, countries with weak intellectual property protection may not be suitable for licensing or franchising [10].
  3. The nature of the industry, including its competitive landscape, regulatory requirements, and technological intensity, can affect the entry mode choice. For instance, in highly regulated industries like healthcare, a joint venture with a local partner may be necessary to navigate complex regulations [11].
  4. The complexity, customisation requirements, and cultural sensitivity of the product or service can impact the decision to enter mode. Standardised products may be more suitable for exporting or licensing, while complex or culturally sensitive products may require more local adaptation and control [12].
  5. Different entry modes involve varying levels of risk, from the low-risk, low-commitment approach of exporting to the high-risk, high-commitment approach of a wholly-owned subsidiary. Entrepreneurs should choose an entry mode that aligns with their risk tolerance and ability to manage uncertainty [13].

Conclusion


Choosing the right market entry strategy is critical for UK entrepreneurs seeking to expand their businesses internationally. By carefully considering the pros and cons of each entry mode and evaluating factors such as company goals, target market conditions, industry dynamics, product characteristics, and risk tolerance, entrepreneurs can select the approach that best fits their unique circumstances.

Exporting can be a low-risk, low-commitment way to test a foreign market while licensing and franchising offer the opportunity to leverage local partners’ knowledge and resources. Joint ventures provide a way to share risks and rewards with a local partner, while wholly-owned subsidiaries offer full control but require high investment and commitment.

Ultimately, the key to successful international expansion is to conduct thorough market research, develop a clear strategy, and remain adaptable to changing market conditions. By partnering with local experts, such as the Department for International Trade and UK Export Finance, UK entrepreneurs can access valuable resources and support to navigate the challenges of entering foreign markets [14].

As the UK continues to forge new trade relationships and seek opportunities in emerging markets, the ability to choose the right market entry strategy will be crucial for the success of British businesses on the global stage. By carefully weighing the options and making informed decisions, UK entrepreneurs can unlock the potential of international markets and drive the growth of the British economy in the coming years.

References

  1. Department for International Trade. (2020). UK trade in numbers. https://www.gov.uk/government/statistics/uk-trade-in-numbers
  2. Office for National Statistics. (2020). UK trade: December 2019. https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/december2019
  3. Cavusgil, S. T., Knight, G., & Riesenberger, J. (2020). International Business: The New Realities. Pearson Education Limited.
  4. World Intellectual Property Organization. (n.d.). Licensing and Intellectual Property Rights. https://www.wipo.int/sme/en/ip_business/licensing/licensing.htm
  5. British Franchise Association. (n.d.). What is Franchising? https://www.thebfa.org/what-is-franchising/
  6. Department for International Trade. (2021). Guidance: Joint Ventures. https://www.great.gov.uk/advice/define-route-to-market/joint-ventures/
  7. Gomes, E., Barnes, B. R., & Mahmood, T. (2016). A 22 year review of strategic alliance research in the leading management journals. International Business Review, 25(1), 15-27.
  8. Department for International Trade. (2021). Guidance: Set up an overseas operation. https://www.great.gov.uk/advice/define-route-to-market/set-up-an-overseas-operation/
  9. Hollensen, S. (2017). Global Marketing. Pearson Education Limited.
  10. Brouthers, K. D., & Hennart, J. F. (2007). Boundaries of the firm: Insights from international entry mode research. Journal of Management, 33(3), 395-425.
  11. Luo, Y. (2001). Determinants of entry in an emerging economy: A multilevel approach. Journal of Management Studies, 38(3), 443-472.
  12. Johanson, J., & Vahlne, J. E. (2009). The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership. Journal of International Business Studies, 40(9), 1411-1431.
  13. Schwens, C., Eiche, J., & Kabst, R. (2011). The moderating impact of informal institutional distance and formal institutional risk on SME entry mode choice. Journal of Management Studies, 48(2), 330-351.
  14. UK Export Finance. (n.d.). Our products and services. https://www.gov.uk/government/collections/our-products-and-services