Market entry strategy and distribution channels

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1 Market entry strategy and distribution channels Market entry strategies To select the most effective route to market you ll need a clear understanding of your target market and the needs and preferences of your target customers. Before entering a new market, you ll also need to take time to evaluate your business and its strengths and weaknesses. Ask yourself the following questions: How is business done in our industry sector and in our target market? Where are the potential customers located? What are their information requirements? How sensitive are they to price? What export experience does our company have? How much finance do we have available? How much after sales support or service will be needed? What degree of control are we happy with? What level of resource commitment are we prepared to make? What is our current level of ability to increase capacity? How much time can we spend travelling to the market? What entry option is best suited to our product or service? Having made the decision to enter an overseas market, the options available to you will vary according to the costs involved, degree of risk entailed and the amount of control required. The simplest form of entry strategy is exporting either direct or indirect. More complex forms may involve joint ventures or other forms of strategic alliances while, eventually, companies may decide to invest directly in the host country.

2 Direct exporting This involves selling directly to your target customer in their home market. With this approach your business will retain its full margin but it also requires a large financial and human resource commitment. It takes time to make contacts, build relationships, negotiate deals, understand the market and engage in relevant marketing activities. Advantages of direct exporting Direct control of pricing Full control of your brand Direct understanding of buyers' or end users' needs Ability to customise your product Maintain customer relationships Ability to identify possible new opportunities Customers may prefer dealing directly with the producer Disadvantages of direct exporting Takes considerable time, energy, staff resources and money Competitors with a local presence will be perceived as lower risk to buy from Aftersales commissioning and service may require local language capability Daily follow up of genuine export leads can come second to indigenous business Prompt troubleshooting may not be able to be done remotely and will require additional visits Slower growth commitment to an inmarket presence will have to be made at some stage should the business continue to grow. Indirect exporting Selling to (or through) an intermediary is a relatively cheap and straightforward way to enter a new market. Intermediaries are typically agents or distributors based in your target market who sell your products or services to end users. A good intermediary will have in-market experience, a good reputation and relevant contacts. Using them can be a quick way to get your products and services to the end user but they will generally require a degree of support for marketing and selling activities. Some intermediaries are based in the UK. Using a UK based intermediary means companies will not have to deal with international freighting and customs issues. Types of intermediary organisations Export management companies (export trading companies) Re-marketers Piggyback marketers Foreign intermediaries

3 Export management companies Export management companies (EMCs) often referred to as export trading companies act as the export department for one or several producers of goods or services. EMCs usually specialise by product or by foreign market and the best ones will know their products and the markets they serve very well. They usually have well-established networks of foreign distributors in place. One disadvantage in using an EMC is that the manufacturer can lose control over foreign sales. It s therefore important to maintain regular contact with your chosen EMC. Re-marketers Re-marketers purchase products directly from the manufacturer and then re-package them according to their own specifications. They then sell overseas through their contacts in their own names and assume all exportrelated risks. In transactions with re-marketers, a firm surrenders control over the marketing and promotion of its products which could have an adverse effect on future sales efforts abroad. Piggyback marketing This is an arrangement in which one firm distributes a second firm's products, generally without the latter incurring the marketing and distribution costs associated with exporting. Successful arrangements usually require that the product lines are complementary and appeal to the same customers. Foreign intermediaries Several kinds of intermediary firms in the host country provide a range of services, each offering distinct advantages for the exporting company. Sales representatives Use the company s product literature and samples to present the product to potential buyers Usually handles many complementary lines that do not compete Usually works on a commission basis, assumes no risk or responsibility and is under contract for a definite period of time (renewable by mutual agreement) The contract defines territory, terms of sale, method of compensation, reasons and procedures for terminating the agreement and other details May operate on either an exclusive or a non-exclusive basis Agents Normally have authority to make commitments on behalf of the firm he or she represents Any contract should state whether the agent does or does not have legal authority to obligate the firm

4 Distributors Merchants who purchase merchandise from an exporter (often at a substantial discount) and resells it at a profit Generally provides support and service for the product, relieving the export company of many (but not all) of these responsibilities Usually carries an inventory of products (and a sufficient supply of spare parts if required) and maintains adequate facilities and personnel for normal servicing operations Typically carries a range of non-competitive but complementary products End users do not usually buy from a distributor; they buy from retailers or dealers Commission agents (or buying agents) Find products that are required in overseas markets Seek to obtain the desired items at the lowest possible price and are paid a commission by their foreign clients In some cases, they may be foreign government agencies or quasi-governmental firms empowered to locate and purchase desired goods Licensing, franchising and joint ventures Can offer valid strategies for entering new markets Can provide faster, more affordable and potentially more profitable access to markets although there is a potential downside of less control Online exporting As consumers grow increasingly comfortable making purchases online, the internet can be an easy way to reach international customers. As with any method of market entry, selling online requires planning and focus to succeed. Advantages of selling online include: Test the water without major investment Avoid third party mark-ups/costs Maintain direct control over your marketing Before you decide on this method of market entry ask yourself three things: Are my customers online? Are my competitors online? Does my product lend itself to online sales? Be mindful that target customers may not feel comfortable purchasing from a company without a local presence as it may be difficult to provide good customer service and after sales support from a distance. Remember to account for potential higher freight costs if you re posting individual items directly to overseas customer. Review your export communications UKTI s Export Communications Review (ECR) can provide your company with impartial and objective advice on language and cultural issues to help you improve your competitiveness in existing and future export markets.

5 All ECR Consultants are multi-skilled, have experience in exporting and international marketing, are linguists and have lived and worked abroad. The language and cultural review assesses: Websites Print materials Customer service and communication with agents or distributors Administrative processes Recommendations will help you better communicate your key messages to an international audience. Find out more about improving your marketing collateral for an international audience: Selecting intermediaries Locating foreign intermediaries A company that chooses to use foreign representatives may meet them during overseas business trips or at domestic or international trade shows. Although there are other effective methods that can be employed without leaving the UK ultimately the exporter will need to travel abroad to identify, evaluate and sign the necessary contract. Your company could save a lot of time and effort by first conducting background research using the UKTI s Overseas Market Introduction Scheme (OMIS) or the Export Market Research Scheme (EMRS). Enterprise Europe Scotland (EES) can also be used to find potential partners in European markets. Learn more about our overseas market support: More on EES and support to tap into business opportunities in Europe: Evaluating foreign intermediaries Investigate potential intermediaries carefully before entering into an agreement. In brief, you ll need to know the following points about the intermediary s business: Current status and history, including background on principal employees Sales record Sales territory covered/size of sales force Product mix and compatibility with the exported product(s) Typical customer profiles Marketing activities and level of support required Facilities and equipment available Methods of introducing new products into the sales territory

6 Names and addresses of firms currently represented Trade and bank references (at least two from different sources) Information on whether the exporting firm's special requirements can be met View of the in-country market potential for the exporting firm's products (This last piece of information is not only useful in gauging how much the intermediary knows about the exporter's industry, it is also valuable market research in its own right.) Once you ve qualified some foreign intermediaries, key staff may wish to travel to the foreign country to observe the size, condition, and location of offices and warehouses. In particular, you should ensure that there is someone who ll make it a personal objective to achieve success with your product. Our overseas market support and trade missions programme can be used for this purpose. Overseas market support: Support for visiting potential markets: Negotiating an agreement Once you ve found a prospective intermediary that meets your company s requirements the next step is to negotiate a foreign sales agreement. The agreement may contain provisions that the foreign intermediary: Does not have business dealings with competitive firms (although this could cause problems in some European countries and may also cause problems under U.S. antitrust laws) Does not reveal any confidential information in a way that would prove detrimental or competitive to your company Does not enter into agreements that ties them to your company Refers all inquiries received from outside the designated sales territory to your company for action Heads of agreement Before creating a long-term legally binding agreement it is common to create a heads of agreement document (also known as a letter of intent) which outlines key issues to be covered when negotiating a more formal deal. Types of agreement Options with your international intermediary may range from a verbal agreement to a joint venture. Verbal agreements, although quite common, do not provide protection if your relationship runs into difficulties. An agency agreement sets out the terms when an agent acts on your behalf. A key point to consider is whether or not the intermediary should even be referred to as an agent. In some countries, the word agent implies power of attorney. The contract may need to specify that the intermediary is not a legal agent with power of attorney.

7 If entering into a distribution agreement consider the application of competition laws (both in Scotland and the target market) and the rights you re prepared to grant the distributor to use your name and brand when selling your products. Before signing a distribution agreement it is a good idea to set a trial period. This will give you a much better understanding of the distributor s ability to successfully sell-on your product or service. If you ve established a successful relationship with your intermediary you might consider entering a joint venture. This requires a long-term commitment but sends good market signals. Read our separate factsheet on strategic alliances and joint ventures for more detail. Drafting an agreement In drafting any agreement, pay special attention to safeguarding your company s interests. It s vital to include an escape clause in the agreement to allow your company to end the relationship safely and cleanly. Escape clauses (and other provisions to safeguard the exporter) may be limited by the laws of the country in which the intermediary is located. For this reason, you should learn as much as you can about the legal requirements of the intermediary's country and obtain qualified legal counsel in preparing the contract. Other points which the contract may cover include: In what language should the contract be drafted? English-language text should be the official language of the contract in most cases Term of the agreement (usually one year), but allows for automatic annual renewal unless either party gives notice in writing of its intention not to renew Performance requirements request monthly, quarterly and annual reports that cover key performance indicators (KPIs) such as sales, competitor activity, new products and market trends. Not meeting sales targets can trigger performance reviews and/or the right to terminate the relationship. Who carries the risk? consider who will be responsible for insuring the products against accidental loss or damage and when this risk should pass to the purchaser What constitutes just cause for ending the agreement? - specifying possible causes for termination in the written contract usually strengthens the exporter's position How far in advance must the intermediary be notified of the exporter's intention to terminate the agreement? Where will disputes be resolved and which country's laws (or which international convention) govern a contract dispute? Laws in the intermediary's country may forbid the intermediary from waiving its nation's legal jurisdiction What compensation is due to the intermediary on dismissal and what must the intermediary give up? e.g. the return of patents, trademarks, name registrations, customer records and so on Product adaptation To enter a foreign market successfully your company may have to modify its product to conform to government regulations, geographic and climatic conditions, buyer preferences or standards of living.

8 You may also need to modify your product to facilitate shipment or to compensate for possible differences in engineering and design standards. The extent to which your company needs to modify products sold in export markets is a key policy issue to be addressed by management. Questions to consider include: What foreign needs does the product satisfy? What product should your company offer abroad? Should you modify your domestic-market product for sale abroad? Should you develop a new product for the foreign market? What specific features, such as design, colour, size, packaging, brand and warranty should the product have? What specific services are necessary abroad at the pre-sale and post-sale stages? Are your service and repair facilities adequate? Will the product meet the electrical, engineering, labelling and packaging standards of the target country? Working relationships Building and maintaining relationships is an essential part of doing business. Your company will have to work hard developing and managing these. Remember that relationships are at all levels in an organisation, not just at the top so make sure your staff are aware of the importance of relationship building and can identify the key relationships they need to manage. Face-to-face meetings (both social and business) are important so you ll need to dedicate time and money to visit business partners abroad. Communicating with business partners in social situations helps to build and maintain trust but make sure the approach taken complies with what local customs dictate. GlobalScot Don't forget that there are many expat Scots who can and want to help. Using the GlobalScot network can provide you with invaluable contacts and advice to help your company on its journey into new overseas markets. Find out more about support available through the GlobalScot network: Contact us For more information or to speak with our Smart Exporter advisers call or enquiries@smartexporter.co.uk