Advantages and Disadvantages of a Market Entry Strategy for SMEs - Essay Example

Advantages and Disadvantages of a Market Entry Strategy for SME’s Introduction Market entry strategy plays a pivotal role in ensuring success and sustainability for a company which intends enter into a new market with the aim of making growth and expansion. Market entry strategy can be derived as a planned technique for distributing goods as well as for providing services to the targeted market. The market entry strategy of exporting has several advantages as well as disadvantages. Exporting can be referred as manufacturing of goods in a country and after completion of manufacturing transferring the goods to the host market of another country (Food and Agriculture Organization of the United Nations, 1993). The risks associated with entry into a new and unfamiliar market can be reduced by applying pertinent market entry strategies. Under this strategy, exporting can be divided into two parts such as indirect exporting as well as direct exporting. Indirect exporting is referred as decreasing the producer’s risk by selling the manufacturer’s product in the foreign market with the help of others. On the other hand, direct exporting signifies that a company controls the export activities as well as sells the manufactured products directly to the foreign market. Therefore, in the direct exporting strategy producers have more control on the activities of a foreign market (Tielmann, 2010). Methods of Foreign Market Entry Source: (Food and Agriculture Organization of the United Nations, 1993) In this paper, the benefits and the disadvantages of a foreign market entry approach about exporting of small and medium enterprises (SME’s) as well as multinational enterprise (MNE’s) are discussed. Advantages as well as Disadvantages of Market Entry Strategy of Exporting for SME’s Evaluating the advantages as well as the disadvantages of market entry strategy is most important in order to develop SME’s exporting. Entry strategy of exporting for SME’s can be defined as sale of goods produced by the SME’s in the foreign market with the help of agents and distributors (Bendt & Skropska, 2011). The advantages of exporting for SME’s are as follows: The selection of optimal entry mode strategy is imperative for SMEs in the international marketing context in order to make their presence felt in the competitive foreign markets where there are a number of existing competitors present. SMEs have been observed to possess quite simple objectives as well as organisational structures. SMEs’ key aim is to make growth as well as development, which can be ensured by maximising the anticipated profit level. However, SME’s face resource and information constraints (Decker & Zhao, 2004). SME’s aim to increase their profitability by selling products as well as services in the international markets. According to a study, it has been observed that near about 25 percent of their turnovers are coming from exports (The Hindu Business Line, 2012). The expansion of the market size is responsible for the additional sales of products. Long-term additional foreign sales facilitate to reduce the operating costs of the products. This results in enhanced profitability of the SME’s. The competitiveness in the domestic market helps firms to prepare a better strategy for the international market. Selling products in the international markets helps SME’s to gain international market share which results in occupying large international marketplace. Exporting helps in reducing business risks of SME’s by diversifying their products in the international market. Diversification is one of the important methods which can reduce business risk in a particular market of a country. Exporting to the foreign market can enable to capture huge marketplace. Additional goods have to be produced for satisfying the market demand. The increased production helps to reduce the costs per unit as well as the proper utilization resources can be done. Exporting facilitates those companies or firms which sells seasonal goods as well as services. In such situation, companies can export their products in other countries throughout different seasons, thus making their offerings usable throughout the year. Exporting to foreign market is an appropriate way of expanding the market size. Companies which have excess production capacity or stocks in hand can dispose their stocks in the international market. Companies need not to charge lower prices for their products. Through exporting, SME’s get more information as well as knowledge about the international technologies mainly used for production purpose. Entering in international market has significant impact on the product life cycle. Once products enter in the maturity stage in the domestic market it may need to introduce in the international market for acquiring a successive growth rate (Sebhatu, 2012). The disadvantages of exporting for SME’s comprise certain factors such as: Without having proper idea as well as strategy for international market, it is quite difficult to enter in the unfamiliar marketplace. Additional cost might need to be incurred for studying as well preparing adequate strategies for international market. At times, it is essential to modify the exporting products for the security purpose of the foreign country as well as modifications may be required for satisfying foreign country labelling and packaging. These are the additional tasks for SME’s. The payment process of foreign company is quite complicated. Consignment, letter of credit as well as documentary collection are a few of the time consuming payment modes. At times, documentation regarding exports creates a complicated situation to the exporters. Analysing a foreign market for export purpose is more difficult rather than analysing the domestic market. Lack of reliable sources on international market’s information as well as cultural barriers may create difficulty to make analysis and understand the current market situation (Sebhatu, 2012). The Advantages and Disadvantages of Exporting for MNE’s Multinational enterprises (MNEs) have several benefits as well as certain shortcomings of exporting. The advantages of exporting for multinational enterprises are as follows: Multinational enterprises intend to expand their business by exporting goods and services to foreign markets as well as they aim to generate substantial revenues from international markets rather than domestic market. Exporting helps MNE’s to enter in a new market as well as expand their market size. MNE’s can enhance their market share in the global market by exporting goods to the foreign countries. At times, lack of efficient workforce in the domestic market may create problem in the production sector and to solve this problem MNE’s require to enter in a new market. Once MNE’s enter in the foreign market by exporting goods as well as services then they can analyse the market segment of that particular country and prepare strategies for growing their market size. Exporting process necessitates incurrence of fixed costs for establishment of networks for distribution, advertising investment to capture public attention and requirement of market research to obtain knowledge about the consumers’ preferences in the foreign market among others. As the MNEs already possess a significant base related to these aspects thus it is quite advantageous for them to commence market entry through exporting (Greenaway & et. al. 2011). MNE’s contribute in the domestic Gross Domestic Product (GDP) by exporting goods and services to the foreign market. Export intensity can be augmented due to the presence of MNEs in the international market. The management as well as the production technique of MNE’s may be enhanced by analysing production process of the foreign country. Exporting helps to increase the competitive skills of MNE’s. MNE’s can create monopoly in under-developed countries (Blyde & et. al. 2004). Disadvantages of exporting for MNE’s include: On Occasions, MNE’s face critical problems regarding the political obligations. Entering in a new market through exporting may be difficult due to lack of market information as well as lack of resources regarding the key elements of foreign market. Cultural barriers may create a huge problem for analysing the critical factors of foreign market. At times, it is difficult to overcome those critical cultural barriers. Often, MNE’s have to face difficulties in a foreign country due to social barriers and environmental challenges such as lack of transport facilities due to bad condition of the road (Wattanasupachoke, 2002). Conclusion Market entry strategy of exporting is one of the efficient ways for entering in the international market. SME’s adopt exporting for entering in the foreign market. SME’s and MNE’s have lot of advantages for exporting goods to foreign market. However, certain problems may arise due to exporting goods and services in the foreign market. Moreover, market entry strategy of exporting helps SME’s and MNE’s to enter in the foreign market and enables them to enjoy certain advantages which in turn enable them to attain growth and make continued development. References Bendt, F. & Skropska, M., 2011. The Relationship between Foreign Market Expansion Strategies and Foreign Market Entry Strategies for SME’s. LTU. pp. 1-38. Blyde, J. & et. al. 2004. Exporting vs. Outsourcing by MNC Subsidiaries: Which Determines FDI Spillovers? European Trade Study Group. [Online] Available at: http://www.etsg.org/ETSG2004/Papers/kugler.pdf [Accessed November 29, 2012]. Decker, R. & Zhao, X., 2004. SMEs’ Choice of Foreign Market Entry Mode: A Normative Approach. International Journal of Business and Economics, Vol. 3, No. 3, pp. 181-200. Food and Agriculture Organization of the United Nations, 1993. Entry strategies. Market Entry Strategies. [Online] Available at: http://www.fao.org/docrep/W5973E/w5973e0b.htm [Accessed November 29, 2012]. Greenaway, D. & et. al. 2011. Do Domestic Firms Learn to Export from Multinationals? Leverhulme Centre For Research on Globalisation and Economic Policy, pp. 1-17. Sebhatu, T., 2012. The advantages and challenges of exporting for the SME. Home. [Online] Available at: http://resources.alibaba.com/article/37653/The_advantages_and_challenges_of_exporting_for_the_SME.htm [Accessed November 29, 2012]. 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