Market Entry Strategy for Coffee Product - Essay Example

? Market Entry strategy Report Contents Introduction……………………………………………………………………..3 Mode of Entry: Exporting……………………………………………………..4 i. Indirect Exporting……………………………………………………..6 ii. Direct Exporting…………………………………………………….….8 Advantages of Exporting……………………………………………………....10 Risks of Exporting…………………………………………………………….12 Conclusion………………………………………………………………………13 References…………………………………………………………………….14 Introduction Escalating globalization has remanded the notice of practitioners who are increasingly looking for unrelenting competitive benefits in a changing world. For executives and entrepreneurs, the significance appears remarkably apparent: markets are rapidly being borderless; schemes that fail to recognize the integration of the global market place are shortsighted and misguided (Root, 1994, p. 27). Firms that maneuver in international marketplaces require to come up with the most critical resolutions while selecting the most appropriate method of entrance into a country. Arguably, Westhead et al (2002, p. 123) notes that organizations must decide on the most fitting entry strategy in order to optimize on resources. Globalization, as described by Wood and Robertson (2004, p. 143), facilitates and necessitates businesses to move to other international markets. However, before deciding on the entry mode, it is essential to understand the country’s economic, social and political institutions. In addition, a company should apprehend the foreign country’s history, culture, demography and geography while thinking of expanding its business activities to the country (Johansson, 1997, p. 143). It may be hard and challenging to comprehend the business environment without first understanding the government policies, political institutions and systems and data related to the country’s financial system (Czinkota & Ronkainen, 1995, p. 24-26). There exist diverse strategies of entry into an overseas market. Every strategy has its own disadvantages and advantages. Nonetheless, each company and organization selects a suitable mode of entry depending on the company background, temperament of the company, tactical aims over and above the resources available. In numerous instances, while deciding on the appropriate mode of entry a company experiences many problems and challenges such as environmental, safety, packaging, patents, labeling, copyrights and trademarks (Cateora & Graham, 2002, p. 124). This paper delineates the most appropriate foreign entry strategy for Coffee product. In addition, it attempts to clarify issues arising in the international market selection for the product. Entry Mode Root (1994) describes a market entry strategy as the planned method of delivering and distributing goods and services to a target market (p. 24). A market entry strategy maps out how an organization sells, delivers and distribute its products in a foreign country. Westhead et al (2002, p. 65) notes that when an organization chooses to explore an international market, the selection of the most appropriate strategy is resolved by the company’s development stratagem. The chief objective of each firm is to institute itself in the international marketplace (Cateora & Graham, 2002, p. 134). For this reason, Westhead et al (2002, p. 145) notes that the procedure of deciding on the most appropriate entry mode necessitates instituting an effectual international promotion stratagem to point out the international chances, discover reserves and potentialities and make use of nucleus capabilities to adopt the international stratagems. The resolution on how to penetrate an overseas market has momentous effect on the outcomes. Hill et al (1990) asserts “what entry mode that a multinational company chooses has implications for how much resources the company must bear and the degree of control that the company can exercise over the operations on the new market” (p. 37). Keegan and Schlegelmilch (2001, p. 25) note that the strategy an organization chooses primarily depends on the nature of products the organization produces. Agricultural products, which are domestically produced in a country, are better sold and distributed in a foreign country using the export market entry strategy. Exporting is the most conventional and established mode of entry into a foreign country especially for primary goods (Root, 1994, p. 161). Johansson (1997, p. 145) describes exporting as the marketing of goods produced in one country into another. Exporting would be the most appropriate strategy into an overseas market for coffee product. In exporting, according to Keegan and Schlegelmilch (2001, p. 146), there are no direct investments required in the oversea country though significant marketing are required. Exporting coffee to a foreign market may require coordination between four key players who include the government, the importer, the transporter and the importer (Johansson, 1997, p. 135). In most instances, agricultural products’ marketing and production are interlinked, and information and infrastructure required to build market entry may be enormous (Root, 1994, p. 162). For this reason, the government may get involved. This is to support the commodity as a “public good”. As a result, there is a terrific deal of information available on export markets provided by the government (Johansson, 1997, p. 136). According to Root (1994, p. 145), a firm can have two options in exporting its products to a foreign country. The markets can be contacted through a mediator situated in the exporter’s country or directly through a mediator situated in a foreign market. This gives rise to indirect and direct exporting (Johansson, 1997, p. 167). Indirect exporting is done by a mediator situated in the exporters country while direct exporting involves selling and distributing in a foreign country with the aid of a mediator (Johansson, 1997, p. 168). Direct Exporting In coffee direct exporting, the company will sell and deliver the product directly to the client. In this case, the intermediary is eliminated and will result to higher returns. By avoiding the intermediaries, the product prices will be lower, and the coffee product will be more competitive (Wood & Robertson, 2000, p. 45). Direct exporting necessitates the creation of an export department responsible for “market contact, market research, physical distribution, export documentation, and pricing” (wood and Robertson, 2000, p. 161). Direct exporting increases sales, “control, better market information and the development of expertise in international marketing” (p. 162). In direct exporting, Root (1994) asserts that the exporter acquires a direct contractual relationship with the importer where the products are sold directly to the buyers (p. 162). In direct exporting, for instance, the coffee could be sold through agents or distributors who assist in promoting the coffee without taking ownership. The distributors may take ownership of the coffee after arrival in the country and, therefore, accept the associated risks (Wood & Robertson, 2000, p. 134). In addition, according to Johansson (1997, p. 168), foreign distributors also offer sale services in the market. Sending international sales representatives could aid in implementing direct exporting strategy. These sales representatives create contacts and directly negotiate coffee sales contracts (Keegan & Schlegelmilch, 2001, p. 87). In addition, direct exporting could involve creating a fully owned commercial subsidiary to have a greater control over foreign operations. This could be a local joint venture created with a local firm in the foreign market to gain access to local relationships. Deciding to form an alliance or partnership with a foreign company can provide the coffee firm with technology, expertise, and capital and market access that the company could not afforded on its own (Cateora & Graham, 2002, p. 156). Czinkota and Ronkainen (1995, p. 214) denote that affiliating with a foreign company or organization whose products complements those of the coffee firm can help lessen costs through joint marketing attempts and sharing of distribution channels (Wood & Robertson, 2000, p. 89). While expanding to a foreign market, the coffee firm may decide to use trading houses in direct exporting. According to Charles et al (1990, p. 36), trading houses refers to domestic intermediaries that market a firm’s good and services overseas. In reference to Czinkota and Ronkainen (1995, p. 218) trading house can assist the coffee export of exporting such as market research, appointing distributors, transportation, trade show exhibitions and advertising. To handle the marketing of its products within the target market, the coffee company must choose between relying solely on local independent distributors and establishing its own marketing subsidiary (Westhead et al, 2002, p. 56). In making this choice, the company must consider cost, control, and legal restrictions. A distributor makes an edge on the price of the merchandises. Though using a distributor involves no undeviating cost to the exporting firm, the “margin the distributor earns represents the opportunity that is lost to the exporting company” (Czinkota & Ronkainen, 1995, p. 78). In reference to Wood and Robertson (2000, p. 156), by “switching to a sales subsidiary to carry out the distributor’s tasks, the coffee exporter can keep the margin previously paid to the distributor”. For instance, coffee exports priced at $7,500 each bag, with airfreight, tariffs, and taxes added, the products landing costs amount to $9,000. An independent distributor or intermediary will have to price products at $13, 500 or any other high price to earn a desired gross margin profit. In order to keep the profit margin that the distributor earns, the exporter can set up a wholly owned marketing subsidiary, in this case consisting of a manager, a sales manager, several agents, clerical staff, a warehousing operation and a warehouse room (Johansson, 1997, p. 176). In this case, the subsidiary will earn the margins that the distributor earned. In addition, the subsidiary will aid in marketing the coffee products. Indirect Exporting Cateora and Graham (2002, p. 86) note that this is an exporting market entry mode that offers the lowest level of risks and the least control. Indirect exporting refers to a situation where an organization or producing company enters into a contractual relationship with an intermediary (Johansson, 1997, p. 169). In exporting of coffee, the firm can choose on the intermediaries to use depending on the degree to which the company is prepared to commit resources to foreign rather than domestic activity. Indirect exporting uses agents, trading houses, foreign distributors and export management companies as the intermediaries (Westhead et al. 2002, p. 89). Charles et al (1990) terms an export management company as a firm that handles all aspects of export operations under a contractual agreement (p. 187). The export management company normally will take responsibility for the “marketing research, patent protection, channel credit, and shipping and logistics”, as well as for the actual marketing of products in the foreign market (p. 190). Export Management Company operates either as a merchant that takes title for the product. The arrangements between the coffee exporting company and the export management company will vary depending on the services offered and the volume of goods expected (Keegan & Schlegelmilch, 2001, p. 162). Use of an export management company has numerous advantages (Johansson, 1997, p. 178). The coffee exporting company will not require investing or may invest little while entering the foreign market, and no-in-house personnel will be required. In addition, Wood and Robertson (2000, p. 153) notes that the exporting management company offers an establishment network of sales offices as well as international marketing and distribution knowledge. However, when the coffee company opts to use the export management company, it will give up direct control of the international sales and marketing efforts. Export mediators are people or organizations that help producers in exporting commodities (Root, 1994, p. 135). They are comparable to export management companies, except that they are inclined to supply more restricted services and concentrate on one region. According to wood and Robertson (2000, p. 156), an export agent understands the requirements for moving goods through international channels, but do not provide all the services that an exporting management company provides. Export agents center on the retailing and management of commodities. Employment of export agents has several advantages. The use of export agents will relief the coffee exporting company the burden of looking for a manger to handle all documentation and the shipping tasks (Westhead et al 2002, p. 201). However, the use of export agents will limit the market coverage for the coffee products. The coffee firm may need to employ more export agents in order to cover several parts of the foreign country and other foreign markets (Czinkota & Ronkainen, 1995, p. 132). In addition, the coffee firm may use domestic sales organizations entering the foreign market. This is where a domestic trader buys the company commodities and sells them in a foreign market (Root, 1994, p. 167). This may happen when a foreign department has a buying office in the firm’s home country. Advantages of using exporting In an industry characterized by a nonevolving traditional competitive environment, exporting would be able to influence the structure evolution of the coffee industry (Root, 1994, p. 187). There are different aspects in exportation that sets it aside from the traditional competitive environment. One of the aspects is the marketing of its products and the management style of company resources (Czinkota & Ronkainen, 1995, p. 231). The merger of local and foreign ideas in exporting is a rich birthplace for pushing competition in the local business environment to the next level. In reference to Wood and Robertson (2000, p. 156), use of the different intermediaries can preempt competition by influencing market conditions that will force local players to compete among themselves. According to Wood and Robertson (2000, p. 256), One way of preempting competition among the local players is for the exporting company to induce price wars among the local players by artificially cutting back on its prices. This will force local players to cut their prices to maintain their market share (Root, 194, p. 197). As each local player increasingly cuts his prices, each local player will be forced to take on the market losses up until such a point where he cannot sustain his operations and later folds up. By preempting competition, the exporter is able to eliminate some local players to its advantage. Exporting creates strong competitive units. The larger scope and business size of distributors and agents is representative of the exporter stronger market power (Root, 1994, p. 199). This is seen as a threat by the local players, who in turn consider undergoing consolidation in order to prove and strengthen their market position (Czinkota & Ronkainen, 1995, p. 199) (. This creates strong competitive units that may lead to a competitive threat of the exporter. Exporting speeds up distribution in the market. With its vast resources and market power, the coffee exporter is able to add speed to market (Keegan & Schlegelmilch, 2001, p. 175). First, its relatively large product volume attracts a much faster and efficient distribution network, as the large product volume will make it possible to make economies of scale by spreading the distribution company over a larger volume (Keegan & Schlegelmilch, 2002 p. 178). Local companies with a smaller production volume may not be able to act so fast in the market as their smaller volumes will have to be consolidated to get a minimum shipping capacity to meet the break-even levels. If there is no distribution network that can serve both, the exporter and the local players, the exporting company has a bigger capacity to create a road map to the market due to its larger resources compared to local players. In reference to Westhead et al (2002, p. 165), the exporter can have access to previously unavailable distribution network to transport its products. The local players may even need to pay the exporter to keep them take their products to the market. The use of the agents and distributors by the coffee exporting company can assist in reaching the consumers quickly (Westhead et al 2002, p. 173). In addition, the exporting company will have complete control over the production of its products. Risks of Exporting Exporting is not free of risks (Cateora & Graham, 2002, p. 187). Thus, careful consideration must be given to selecting the agents and distributors. This the most salient factor for a failure or success of exporting entry mode. Factors such as company objectives, strategies, and resources must all be evaluated to ensure a satisfactory “fit” between the agents, distributors and the exporting company (Wood & Robertson, 2000, p. 189). In doing so, the exporting company will avoid entering into problematic partnerships (Keegan & Schlegelmilch, 2001, p. 212). While exporting the coffee products, the expenses of trade barricades such as import taxes and quotas are a huddle. The high tariffs imposed on the coffee products increases the initial prices and in turn increase the selling prices (Wood & Robertson, 2000, p. 199). Increased selling prices will result to diminished competitive advantage of the company. Transportation in a foreign country may be challenging to the exporting company. Transportation costs are always particularly high for an exporting company in a foreign market (Root, 1994, p. 184). Agents help in reducing costs of transportation in the foreign market. In the foreign market, the agents and distributors are the ones in direct contact with the consumers. It may be difficult for the exporter to respond to the consumers need and wants well since the agents and distributors may fail to inform the exporter. For this reason, Westhead et al (2002, p. 178) asserts that the exporting company may need to invest a lot in customer care services such as direct marketing. Conclusion Global business atmosphere affects the promotion premeditated endeavor of a company. The facets that envelop a business affect the company’s existence and its progress. Arguably, the firms that desire to enlarge their business operations to international market should do some research and analysis. A business can carry out an environmental, economical and political research and analysis before venturing into a foreign market. Globalization is among the most considerable inclinations that facilitate expansion of international stratagems. Choosing a global market can affect a company’s operations. Trade and entry barriers such as tariffs, quotas, existence of competitors, geographical distance and transport accessibility may inhibit the trading activities and expansion into a foreign market. References Cateora, P. R. & Graham, J. L. (2002) International Marketing. 11th ed. New York, McGraw Hill Companies. Charles W.L.Hill, Peter Hwang and W.Chan Kim (1990) An Eclectic Theory of the Choice of International Entry Mode, Strategic Management Journal. Wiley, USA. Czinkota, M.,Ronkainen,I. (1995) International Marketing, The Dryden Press, Sydney. Johansson, J. K. (1997) Global Marketing: Foreign Entry, Local Marketing and Global Management. New York, Times Mirror Books. Keegan, W. J. & Schlegelmilch, B. B. (2001) Global Marketing Management - A European Perspective. Harlow, Pearson Education Limited. Root, R.F. (1994), Entry Strategies for International Markets. Jossey-Bass, Inc., Publishers, San Francisco, California. Westhead, P., Wright, M. and Ucbasaran, D. (2002) ‘International market selection strategies selected by “micro” and “small” firms’, Omega The International Journal of Management Science. European Journal of Social Sciences – Volume 22, Number 4 (2011) 584 Wood, V. R. & Robertson, K. J. (2000) Evaluating international markets. International Marketing Review. Read More