Pressure amounting from globalization has pushed companies to consider venturing in the international market. When management of a firm considers expanding its business to foreign regions or outside of its home market, it has to explore and come up with the best operation through which the decision will be undertaken. Importantly, the firm should as well have an optional entry mode strategy as it may not be easy to change or alter its operations and still have a long-term impact on the company's foreign operation. The purpose of the research is to evaluate some of the hierarchical market entry modes and factors that may lead a firm in choosing a given entry mode. Additionally, the paper will use the example of a company to understand better real-life attempts of the company to enter a given market.
Hierarchical Market Entry Modes
An entry mode refers to an institutional arrangement that a firm chooses in its bid to undertake an operation in a foreign market. The choice is carefully made because it likely affects future operations and decisions as it is a trade-off between risk and return. According to Ana-Maria (2018), foreign market is characterized with two types of risks; that is external which come from the foreign country and internal risks that are in line with the company's experience to undertake a foreign country venture. It is important to note that the levels of risks can be controlled or reduced when a type of control is implemented through strategic decisions and having well-planned operations within the foreign venture. Apart from factors within the company that influence their choice of mode of the market into a new or international market, there are other issues a firm ought to consider (Andrea and Sandor, 2014, 49). The first one issue is in line with the government policies. Each country has their policies that aid in controlling foreign investment. While some countries may have an open market with fewer restrictions, others have strict policies that may interfere with international business. The second issue is the cultural differences and similarities. Arslan and Wang (2015) argue that before investing in another country, it is important to understand their culture because it will affect the way operations are undertaken. Primarily, something may be considered right in one country and wrong in the other. Therefore, to avoid making cultural mistakes especially in adverts, it is important to take note of cultural differences. As put by Andrea and Sandor (2014), companies can as well take advantage of cultural similarities in their bid to enter into a country. Internal factors that may influence a firm's decision on the choice of market entry mode include, their level of commitment and financial capability (Ana-Maria, 2018, 20). Finally, the internal and external factors are jointly important in aiding a firm in choosing the most pragmatic market entry mode.
Some of the most commonly applied market entry modes include joining ventures, wholly owned subsidiaries, franchising, licensing, exporting, and turnkey projects (Cristina et al., 2015, 47). Even though there are other entry modes, there seem to exist close similarities between them. The market entry choices differ in their levels of risks, associated costs, and commitment.
Exporting is a market entry strategy that is commonly used by manufacturing companies to enter into a foreign market. In this entry mode, a company physically transport as merchandise to the identified foreign market sometimes with the help of an agent and in some instances without an agent. The main advantage is avoidance of the expense of establishing and running a manufacturing plant in the new market. Exporting is as well advantageous as it allows the entering company to maximize on location economies like economies of scale and its experimental curve.
Export, however, some limitations have. In foreign locations where the economy is low, exporting from a home economy that is high maybe disadvantageous. Further, transporting goods to other regions require transportation costs that may weigh down a company. There are also issues to do with tariffs and quota barriers that may limit or disadvantage export. Lastly, the company may not get the standard marketing strategies it enjoys in its home market as it may be forced to rely on local machinery. In India and China, exporting as a strategy of venturing into a foreign market is highly discouraged (Arslan and Wang, 2015, 291). For instance, companies like Apple Inc. had to establish their manufacturing companies in China. The argument behind discouragement of export as a market entry strategy is that it limits employment opportunities for the locals while enjoying their markets. An example of a company that successfully relied on export entry strategy is American Cedar, Inc. which manufactures cedar. Telecommunication companies such as Apple and other companies that produce mobile phones and computers find it easy to invest mainly in developing countries by exporting their products. Google, for instance, has its headquarters in the United States but has its services enjoyed in other parts of the world.
In some cases, the foreign market or country may put conditions on the export strategy to ensure they also benefit and to reduce instances of business exploitation. It is in this regard that India had to put terms to Google that for them to have their products sell in India, they had to outsource customer care services from India. Based on this, it can be concluded that is it upon the host country to come up with policies that will ensure its people benefit from the foreign company. If managed well, exporting creates opportunities for the host country regarding employment opportunities and exchange of know-how.
Turnkey projects are another way by which businesses enter foreign markets. In this strategy, a contracting company works on a project to its completion then hands it over when it is ready for operation. The strategy is majorly used by petrochemical industries, pharmaceuticals, and refining companies. The significant advantage of the approach is that it allows for the transfer of technical knowledge, specials in the country with FDI restrictions (Anil and Ozkasap, 2014). Again, Turnkey projects are less risky. The disadvantages associated with the entry mode is that the contractor may not have a long-term interest in the operation.
Additionally, the projects sometimes change to competitors of the originating company, especially where technical know-how is the main source of competition. The moment the contracting company is working on the project, it means they are selling their competitive advantage of technical expertise. Example of a company that successfully implemented the strategy is Toyota which had a car plant in Turkey. The most recent company that has done well with the principle of turnkey projects is Manhattan Corporation Limited. The company has experienced significant growth in the supply of refurbished and new mineral processing equipment's. Manhattan has successfully taken projects in some countries including Zimbabwe and South Africa.
Apart from export and Turnkey projects, licensing is another strategy by which companies can enter into a foreign market. In this case, the licensor permits the rights to intangible property to another firm or the licensee for a particular people of the time (Anil and Ozkasap, 2014). The licensee in return pays royalty fees. Because it is the licensee that offers capital for operation the licensor seem to enjoy reduced risks. The licensing mode works well for companies seeking to explore markets in countries that have restrictions on investment. Importantly, it is mostly applicable to companies that use their know-how to make income. Such companies can seek for license through other companies and take the opportunity to exploit their skills and knowledge for financial gain. The main advantage of licensing is that it is effective when a business is considering entering into a market with investment restrictions. It is as well applicable by small and medium businesses because it requires less capital investment. Again, it allows a company to gain income from a foreign market without having to incur a lot of risks as they do not commit much funds. Most countries as well prefer the mode, and hence it is the fastest when entering in most countries. Despite its advantages, licensing is characterized by a number of shortcomings. The first one is in terms of return from the investment. Compared to other modes of direct investment, licensing brings low returns. With a low level of control, investing company may risk its reputation and trademark. Lastly, the mode reduces the company's ability to coordinate global business expansion that is characterized by stiff competition. Examples of firms that undertook to license as a strategy include Dominos Pizza, McDonald's and Coffee Republic Restaurants. McDonald's a fast food company chain in 2011 identified Yunnan as a target for expansion for more of its restaurants. The market entry strategy the company considered for expanding to Yunnan is through licensing. The license the company was using to develop to the Southwest China, Yunnan province was given to it over thirty decades ago.
Franchising market entry mode is just like licensing with the only difference that it is stricter. The franchisee has to work according to the rules of the business set by the franchisor. However, just like in licensing, the franchisor does not incur the cost of establishment or running the operation. The mode has a major disadvantage of quality control. Additionally, just like in licensing, in case of a poorly operated franchise, a business can suffer poor reputation that may affect their public perception.
In a joint venture, two or more companies come together to own an investment jointly. In this regard, assets whether tangible or intangible are pooled together, and the ownership and control of the operation are then shared among the stakeholders. In this mode of entry, there is a mutual benefit between the foreign firm and the local company. The foreign firm benefits from the fact that local company has tremendous insight into the local business environment. The companies are coming together for a joint venture as well as shares benefits and risks. The mode is the only market entry allowed in some countries. On the same note, joint ventures have exposed a company to lose know-how to the partners in the venture. Due to differences in strategic goals and objectives from one firm to the other, it may not be easy to operate joint ventures. Lastly, some companies may not take control over subsidiary serious thereby leading low benefit as a result of poor strategic coordination. Example of a company that successfully used joint venture to entire into the Chinese market is Landover. The company sealed a joint venture deal with Cherry Automobile a Chinese company. The move led to Jaguar Land Rover Company investing close to 1.1 billion investment in China.
Wholly Owned Subsidiaries
The last market entry mode strategy is a wholly owned subsidiary. In this case, one hundred percent of an investment in a foreign country or market is owned by the parent company. In wholly subsidiaries, a new operation may be established, or an old one may be acquired. The mode is characterized by the parent firm having total control of the investment. In this respect, wholly owned subsidiaries have the advantage of total control over the business operations and the technical know-how. The firm is, therefore, able to coordinate strategically. The...
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