Consider the factors involved, including the market entry mode strategies that could be used, evaluate these factors, then offer recommendations to the British Safety Razor Company (BSR) on its forthcoming strategic planning.

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Whether considering entering new international markets, or concluding that a revised strategy is needed for existing multi-national companies (MNC), the decisions to do so are based on numerous variants. This paper shall initially consider the factors involved, including the market entry mode strategies that could be used, evaluate these factors, then offer recommendations to the British Safety Razor Company (BSR) on its forthcoming strategic planning.

Variants and Factors

The fundamental reason for being in, or entering, a new market has to be potential demand (Arnold 2003). This in turn leads to opportunities for growth and expansion. Once demand has been established a business must consider both internal and external factors. Internally, consideration needs to be given to the overall goals and objectives, technology, product line, location and size (Bradley 1991). Does the organization seek market penetration in a select number of markets, or does it adopt a market skimming strategy, entering a large number of markets simultaneously? Managerial aspirations, experience and motivation are also relevant. Externally, and almost exclusively out of the business’s control, are factors such as the market size and growth potential, the market’s competitive structure and marketing infrastructure. The political and economic situation of both the home and international market environment including legal controls, legislation, barriers and the extent of the cultural divide are also to be included in the decision making process.

The choice of market entry mode strategy is also dependant on the level of control a business requires, the financial risk it is willing to undertake, the desired return on investment (ROI) and also the business’ previous or current experience in international markets. Certain entry modes offer little risk, lower returns but high degrees of control, others the opposite. The figure below demonstrates this trade-off;

Control and Return

Costs and Risk

Figure 1. Adapted from Arnold 2003.

Where a business has experienced international trade it can draw on research carried out by Jody Evans of Manchester Metropolitan University which found support for the hypothesis that “international experience” is “the most important predictor of entry strategy selection” and “experienced retailers are more likely to enter foreign markets through high cost/ high control strategies”. One final consideration is that of the customer. Svensson (2002) draws on Champy’s view that “going global…it starts with recognizing that the world has no center…customers will differ from country to country and that they will expect you to respect those differences. Learn this or stay at home.”

Selection Procedure

Prior to reaching a final decision on the type of entry mode strategy a business is to adopt it must first decide on which markets to enter. Walsh (1993) considers that “a country does not necessarily equate to a market, but it may also be a region within a country or a group of several countries.” Walsh offers a screening process during which possible markets are eliminated should they fail to meet the selection criteria. This consists of 6 stages;

Initial screening assessing the countries economy, political and financial risks, and regulations.
Accessibility to the market allowing for tariffs and non-tariff barriers, and the market size.
More detailed assessment on the remaining markets assessing criteria such as market size and growth potential, competition and distribution channels.
The use of consumer goods researchers, telephone surveys on nationals in the relevant countries.
Field research is employed to answer specific questions as required by the business decision makers.
The final stage is to produce estimates of sales levels, costs and profit.

Once all factors have been evaluated and the selection process has produced possible markets the decision must now be reached on what strategy to adopt. Strategies range from indirect exporting to wholly owned production in foreign markets and to get the international coverage a business wants it may have to combine different strategies (Terpastra and Sarathy 1994). The following options are available to BSR and are evaluated along with their advantages and disadvantages, and the market conditions that apply.

Export

Exporting can be either;

Indirect – sales are like domestic sales and the business does not carry out any overseas marketing. Instead, products are sold to home based organizations such as export houses and the buying offices of foreign firms. The use of an Export Management Company with its knowledge and export know how provides the producer with an export department and allows a greater deal of control.

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Direct – this mode is suited to a business seeking larger sales and requiring greater involvement than indirect exporting. The physical distribution, market research export costs, pricing, etc. are all the responsibility of the producer. This method also allows management to choose its own markets.

Advantages – minimizes risk and investment, speed of entry, maximizes scale (uses existing facilities).

Disadvantages – trade barriers and tariffs add to costs, transport costs, limited access to local information, company viewed as an outsider.

Applicable market conditions – limited sales potential in target market, distribution channels close to manufacturing plants, ...

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Direct – this mode is suited to a business seeking larger sales and requiring greater involvement than indirect exporting. The physical distribution, market research export costs, pricing, etc. are all the responsibility of the producer. This method also allows management to choose its own markets.

Advantages – minimizes risk and investment, speed of entry, maximizes scale (uses existing facilities).

Disadvantages – trade barriers and tariffs add to costs, transport costs, limited access to local information, company viewed as an outsider.

Applicable market conditions – limited sales potential in target market, distribution channels close to manufacturing plants, high target country production costs, liberal import policies, high political risk.

Licensing

Bradley suggests “international licensing arises when a firm provides for free or a royalty technology needed by another firm to operate its business in a foreign market.” This form of contractual strategy allows firms to generate an income from international markets where exporting may not be possible due to, for example, high import tariffs. Certain rights may be transferred to the licensee such as patents, copyright and trademarks. The licensee has more control of the product dealing not just in its production but also it’s marketing. This provides a low cost presence for the international firm in foreign markets.

Licensing is often used as a fallback position when other entry modes either fail or are prevented by tariffs or trade restrictions.

Advantages – minimizes risk and investment, speed of entry, able to circumvent trade barriers, high ROI.

Disadvantages – lack of control over use of assets, licensee may become competitor, knowledge spillovers, license period limited.

Applicable market conditions – import and investment barriers, legal protection possible, low sales potential, large cultural distance, licensee lacks ability to become competitor.

Joint Ventures (JVs)

JVs are similar to licensing. However, the international firm has some degree of financial interest in the foreign firm and also has management input. JVs offer a foreign firm the opportunity to access local marketing skills and contacts whilst sharing the investment risks. JVs create a separate organization with the partners contributing on an equal basis or in different proportions. The shared interests and control is two of the contributing factors that often lead to conflict.

Advantages – overcomes ownership restrictions and cultural distance, combines resources of two companies, potential for learning, viewed as an insider, less investment required.

Disadvantages – difficult to manage, dilution of control, greater risk than exporting and licensing, knowledge spillovers, partner may become a competitor.

Applicable market conditions – import barriers, large cultural distance, assets cannot be fairly priced, high sales potential, some political risk, government restrictions on foreign ownership, large company can provide skills, use of local company assets and resources.

Contract Manufacture

Contract manufacture can be viewed as the half way point between licensing and direct investment. Walsh views this as “merely a formal long term contract….for the manufacture or assembly of a product”. The company placing the contract stipulates the conditions of sale and the products specifications thereby retaining greater control. The latter is a strong motivator when considering the easier entry routes into foreign markets.

Advantages – limited local investment, retain market control, no currency risks, local image,

Disadvantages – local manufacturer can be unreliable, extensive training require by manufacturers staff, contractor could become competitor at the end of the contract, quality control difficult to achieve.

Applicable market conditions – market too small to justify investment in manufacturing facilities, markets protected by high import tariffs or other trade barriers, limited funds available to establish either a JV or wholly owned subsidiary.

Direct Investment

Terpastra and Sarathy support the principle that this represents the greatest commitment to a foreign market by a firm. The firm can enter the market in two ways;

Acquisition – this is the most popular and involves the purchase of an existing business in a foreign country, quite often as the result of a firm buying out its JV partner. This offers a speedier route into the market than…
Establishing a new facility. This offers a fresh start and an opportunity for the international organisation to shape the local firm.

Almost always 100% wholly owned, either option offers the greatest degree of control, the potentially highest ROI, but it is accompanied by the greatest risks.

Advantages – greater knowledge of local market, can better apply specialized skills, minimizes knowledge spillover, can be viewed as an insider.

Disadvantages – higher risk than other modes requires more resources and commitment may be difficult to manage local resources.

Applicable market conditions – import barriers, small cultural distance, and assets cannot be fairly priced, high sales potential, low political risk.

BSR Objectives and Strategic Plan

Before applying the most appropriate strategies available to BSR and offering recommendations, it is vital that we first consider the company’s overall aims for the Africa, Arabia and Asia Group (AAA).

The following objectives have been identified for the AAA region;

Build up brand awareness of “Double A”
Pre-empt competitive attempts
Minimise activities of AAA independent intermediaries
Review agreements
Review de-centralised approach
Adopt local manufacturing wherever possible
Duplicate other strategic alliances in AAA region

The strategic plan follows this route;

Local equity participation
In the event of unacceptable low minority shares (<25%), then establish a contract manufacturer
Develop a licensing fall-back should options 1 and 2 not be available
Investigate establishing wholly-owned manufacturing companies where conditions are favourable
Expand and modernize existing blade plants
Ally above proposals with local selling companies where possible.

BSR has demonstrated a motivated commitment to re-entering the markets in the AAA group and has in place the management experience to carry this strategy forward.

Recommendations

At this stage the reader is directed to;

Appendix 1 - Country Briefings and
Appendix 2 - Selection Criteria Matrix.

Based on this information, the entry mode strategies available to BSR, it’s objectives and plans, and allowing for all variants previously mentioned; the following are recommendations for each country or group of countries.

It is recommended that the AAA Group be subdivided as shown below;

The AAA Group

Sub-division 1. Headed by South Africa and including

Nigeria
Kenya
Yemen

Sub-division 2. Headed by India and including

Pakistan
Iran
Iraq

Sub-division 3. Headed by Egypt and including

Algeria
Morocco

Sub-division 4. Headed by Poland and including

Russia
Ukraine
Turkey

The political and economic situations in each of the four lead countries offer conditions suitable for a major commitment in the form of wholly owned manufacturing and distribution. These lead countries offer encouraging economic growth and relatively low inflation. Their governments are openly seeking FDI as an aide to economic reforms and growth. Any import barriers imposed by these countries will be overcome.

It is recommended that BSR commission the acquisition or complete new-build of manufacturing plants in each lead country. The company has the past experience and current management strength to undertake such projects.

Sub-division 1

In addition to manufacturing and distribution, the South African subsidiary will also take responsibility for Nigeria, Yemen and Kenya. It is suggested that each of these markets is entered through an export strategy, the products being produced in South Africa. Whilst offering opportunities for sales Kenya is still troubled with corruption and the poor economic outlook for Nigeria suggests indirect exporting would be the initial step for entering these markets. This transfers the risks and problems to the buyers in South Africa. However, should conditions improve then a move to direct exports should be considered.

Yemen also offers sales opportunities and should be entered through direct exporting, again, from South Africa. Whilst BSR wishes to move away from intermediaries these are seen as the most appropriate at this moment in time, but should be supported by a company presence in each market.

Sub-division 2

As a member of the South Asian Association of Regional Co-operation (SAARC) India offers an ideal base from which to reach the Pakistan market. The high tariffs imposed by the Indian administration and the non-tariff barriers recently introduced would be overcome whilst at the same time India will provide a route into the other member countries of SAARC should the opportunity present itself. Current political tensions between India and Pakistan are at a high but trade between the two is encouraged. BSR are recommended to set up a JV in Pakistan with the long-term objective of 100% ownership when conditions are right.

With due regard to both Iran and Iraq, the current political, economic and military situation suggests that these markets be avoided. However, should the situation and tensions ease then this strategy can be reviewed.

Sub-division 3

All three members of this group are party to the Euro-Mediterranean Free Trade Area and are geographically close. Establishing the main facility in Egypt overcomes that country’s high import tariffs currently in place. Membership of the free trade area allows greater and easier access to both Algeria and Morocco. As both Morocco and Algeria are seeking FDI through JVs then this mode should present BSR with the highest success rate in both markets.

Sub-division 4

Poland’s impending entry into the EU, it’s continuing economic reforms and current high rates of FDI, support investor confidence. It’s location on the eastern border of the EU and close proximity to the other members of this division offers BSR an ideal base. Establishing a wholly owned manufacturing and distribution facility in Poland will enable BSR to support JVs in both Russia and Ukraine. As these latter two further integrate into the EU and adopt a free market system then a move to wholly owned investment would follow.

Turkey, however, still has many difficulties. High inflation and tensions in the Middle East do no encourage anything more than a direct exporting strategy; the products being manufactured and imported from Poland. Again, should the situation improve then this can be reviewed.

In considering all variants, factors and options this paper has made a series of strategic recommendations to BSR. However, in an ever changing world such options and strategies must maintain a degree of flexibility so, should the need arise, then the adoption of an alternative market entry mode strategy may be necessary.

References;

Arnold, D. (2003) “Strategies for Entering and Developing International Markets” Financial Times Prentice Hall. (04 12 03)

Bradley, F. (1991) International Marketing Strategy 2nd edn, pgs 65 and 385. Prentice Hall International Ltd

Evans, J. “International Determinants of Foreign Market Entry Strategy” Manchester Metropolitan University Business School (05 01 04)

Svensson, G. (2002) “Beyond global marketing and the globalization of marketing activities” Management Decision 40/6 pp 574 – 583

Terpstra, V. and Sarath, R. (1994) International Marketing 6th edn, ch 10. The Dryden Press

Walsh, L. S. (1993) International Marketing 3rd edn, chs 10 and 15. Financial Times Pitman Publishing

The following web sites were referred to in the compilation of the data chart and the country briefings;

(08 01 2004)

Market Access Database (08 01 2004)

(09 01 04)

The World Factbook (09 01 04)

Appendix 1 - Country Briefings

Algeria

State-owned enterprises open to foreign buyers
Party to the Euro-Mediterranean Free Trade Area
Committed to removing tariffs
Investors eligible for benefits in terms of reduced custom duties, Value Added Tax and transfer fees

Egypt

Party to the Euro-Mediterranean Free Trade Area
Will allow duty free access for European exports
Until then importing will continue to be costly, restrictive and time consuming

India

Import tariffs substantially reduced following reforms
Quantative restrictions removed
New non-tariff barriers introduced
Economy open to FDI but over population continues to handicap the economy

Iran

State subsidies, inefficient public sector and state monopolies, international isolation and sanctions continue to impede economic growth
Restrictions and duties on imports reduced
Attraction and Protection of Foreign Investment Law aims at encouraging foreign investment
Continued troubles in Middle East reduce investor confidence

Iraq

Previous government policies have impaired finances, leaving the average Iraqi citizen facing desperate hardship
Implementation of a UN oil-for-food program in December 1996 has improved conditions
Allowed to export oil in exchange for humanitarian relief supplies
Sanctions on other goods still in force

Kenya

Regional hub for trade and finance in East Africa
Hampered by corruption
The capital Nairobi hosts a wide range of foreign firms who maintain regional branch or representative offices in the city

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Morocco

Morocco has committed itself to pursue trade with the EU
Party to the Euro-Mediterranean Free Trade Area
Tariffs on most products imported from the EU will be gradually eliminated
Government promotes investment
The "Moroccanization" law abolished in September 1993 and foreign financing for joint ventures with Moroccan partners is now being encouraged

Nigeria

Past corruption problems
Undergoing economic reform
In transition from military to civilian rule
Weak government
Poor economic outlook

Pakistan

Pakistan's reform program is aimed at encouraging FDI
Party to the South Asian Association of Regional Co-operation (SAARC), which includes India
Envisaged primarily as the first step towards the transition to a free trade area

Poland

Poland will join the EU on 1 May 2004
Business surveys show improving prospects for the manufacturing industry
Interest rates cut by 550 basis points
This is expected to support the solid FDI inflows

Russia

Boosting FDI has become a key priority of the Russian Government.
Good macroeconomic performance and broad political stability
Impact of previous reforms have resulted in significant new commitments by reputable foreign strategic investors
The EU is Russia's main trading partner
Committed itself to the Partnership and Cooperation Agreement (PCA) which regulates the political, economic and cultural relations between the EU and Russia and is the legal basis for bilateral trade

Page A1 – 2South Africa

The EU and South Africa are part to a Free Trade Agreement
Will be phased in over a 10 to 12 year period
Favourable credit rating means that South Africa can attract foreign investment to meet its requirements
Ideally positioned for easy access to the countries comprising the Southern African Development Community (SADC), the islands off Africa’s east coast, and even the Gulf States and India
100% foreign ownership is permitted in South Africa

Turkey

Concerns still dominate Turkey’s progression in complying fully with the requirements for membership of the EU
Anti-competitive practices are based on the provisions within the Treaty of Rome, and prohibits agreements, decisions and concerted practices in restraint of competition, and abuse of dominant position
Tensions in the Middle East continue to shadow growth prospects

Ukraine

Overall positive macro-economic scenario is likely to further promote investment.
Activity Programme makes integration with the EU and WTO accession two key government priorities
Partnership and Co-operation Agreement commits Ukraine to providing the same treatment for EU investors as for its own companies
Foreign and domestic businesses receive equal treatment

Yemen

Foreign investors are accorded national treatment and receive investment incentives
Government control has been greatly reduced
Although the government encourages foreign investment, it is blocked by the same barriers which cripple domestic investment
Investments usually require 25-30 % participation by a Yemeni partner

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Appendix 2 - Selection Criteria Matrix

Guide.

Tariffs Economic Freedom

0 – 10% Low 0 – 3 (Zero = no freedom, 3 = total freedom)
11 – 25% Medium
>26% High
NA Not Available

GDP Gross Domestic Product GNP Gross National Product (per person)

GNI (PPP) Gross National Income (per person) (Purchase Price Parity)

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