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3.2 Market Entry Strategies
The traditional means of market entry fall into three broad categories: direct exports, indirect exports and partnerships/alliances.
1. Direct exports: Market and sell directly to the client.
It has advantages because it can: give a higher return on your investment than selling through an agent or distributor; allows you to set lower prices and be more competitive; and gives you close contact with your customers. A Caribbean food company may sell its products directly to end users in the US such as hospitals, schools or businesses. In this scenario, the manufacturer is responsible for shipping, payment collection, and product servicing unless other arrangements are made.
However, there are disadvantages to direct exporting since you do not have the services of a foreign intermediary, therefore you may need a longer time to become familiar with the market and your customers or clients may take longer to get to know you. Such familiarity is often important when doing business internationally.
2. Indirect exports: You market and sell to an intermediary such as a foreign distributor. The US distributor is a merchant who purchases goods from an exporter (at a wholesale price) and resells it for a profit. The foreign distributor generally provides support and service for the product, thus relieving the manufacturer of these responsibilities. The distributor usually carries an inventory of products and a sufficient supply of additional product and also maintains adequate facilities and personnel for normal servicing operations. Distributors typically handle a range of non-conflicting but complementary products. However, end users do not usually buy from a distributor; they typically buy from retailers.
A Caribbean food company may also sell directly to US retailer, although in such transactions, products are generally limited to select product lines. This method relies mainly on traveling sales representatives who directly contact foreign retailers, although results might also be achieved by mailing catalogs, brochures, or other literature. The direct mail approach has the benefits of eliminating commissions, reducing traveling expenses, and reaching a broader audience.
You can also retain a foreign agent or representative who does not directly purchase the goods. The representative uses the company's product literature and samples to present the product to potential buyers. A representative usually handles many complementary lines that do not conflict. The sales representative usually works on a commission basis, assumes no risk or responsibility, and is under contract for a set period of time (renewable by mutual agreement). On the other hand, an "agent" means a representative who normally has authority, perhaps even a power of attorney, to make commitments on behalf of the firm being represented (it is important that any contract states whether the representative or agent does or does not have legal authority to obligate the firm). For many new exporters, an intermediary may be the best way to enter a market.
Using an Agent or Distributor
Companies wishing to use distribution, franchising and agency arrangements need to ensure that the agreements they put into place are in accordance with US laws. Potential exporters should also note that there might be federal laws as well as individual state law governing such arrangements. For instance, franchising in the US requires compliance with a vast range of regulations, including federal and state laws governing pre-sale disclosure and state laws governing franchise registration and the relationship between franchisors and franchisees (Hodgson Russ Attorneys , 2011).
3. Partnerships/alliances: Another option is a partnership at home or abroad or alternatively, establishing a commercial presence in the overseas target market (FDI).
A well-structured partnership can benefit both parties in the following ways: Your partner can complement your capabilities and provide the expertise, insights and contacts that may make the difference between success and failure. Each company focuses on what it does and knows best. Both partners share the risk.
In a partnership, you can also pool ideas and resources to help keep pace with change as well as approach several markets simultaneously. Your partner may provide technology, capital or market access that you might not be able to afford on your own. Strategic alliances can also be very profitable. One of the easiest ways to export is to form an alliance with a company that has a product or service that complements your own. Then you can save money by using the other company's distribution and marketing expertise.
Alternatively, establishing a commercial presence or production hub in the overseas market via a subsidiary of your existing enterprise may also be a viable option for some producers. The major deterrent to this approach is the considerable amount of capital which might be initially required and therefore, this approach may not suit smaller and less endowed producers. However, for the producer for which this approach is feasible, establishing a commercial presence in a US State can generate considerable benefits as it eliminates costs and uncertainties associated with transportation from the Caribbean to the US. It also allows for much easier entry to the Canadian market.
Some producers may prefer not to establish a production hub abroad and in such a case, consideration could be given to setting up a marketing office in the US or entering into a licensing agreement with a US producer to manufacture your product. Once the exporter has a commitment to the market and anticipates considerable business activity in the US, a marketing office can act as the importer of the parent company's product and is the principal developer of all sales related activities.