Challenges Facing Firms as They Enter Foreign Markets by Adopting Different Modes of Entry - Coursework Example

Challenges facing firms as they enter foreign markets by adopting different modes of entry Course Professor’s Name Name of the Institution Date Introduction In this era of 21st century globalization is reality to business and it comes with global competition. Before a business compete in any given market, it must enter into that market and there are many impediments and barrier that makes it hard for business and companies to enter into any given market. Entry barrier can be defined as a situation that might hinder a company from entering a given market. However, scholars have disagreed on the universal definition of entry barriers. Niu, Dong and Chen (2012) defines barrier to entry as structural, institutional and behavioral conditions that enables firms to earn economic profits for a significant length of time. Ang et al., (2015) on the other hand defines entry barrier as the set of technology or product conditions that allow the incumbent firms to earn economic profits in the long run. In his definition, three major things are outlined here as economies of scale, product differentiation and absolute cost advantages of established firms. Barrier to entry has been discussed by scholars like Seamans (2013) to included cost and policies that are put in place to enable a firm to earn sustainable income over a given period of time. For this paper, barrier to entry will be defined as the set of structural, institutional and behavioral condition that allow incumbent firms to earn economic profits for a significant length of time. This will hinder other new firms from getting into the markets as the established firms continue marking profit in the same market. Strategic entry deterrence These are intentionally activities created by incumbent firms in the market mainly to create deterrence to entry. Strategic barriers normally arises from the behaviour such as exclusive arrangements within the industry or prospective governments. Measuring the extent through which behaviour such as exclusive arrangement may impact on the potential entrance into the market. It should also be noted that it is not easy to establish whether strategic behaviour help in fostering or restricting competition in the market but it is clear that some of the strategic behaviour may be well designed to help in thwarting competition in the market (Niu, Dong and Chen, 2012). The conceptual problem with the analysis of limit pricing which is called SYLOS POSTULATE which are often criticized due to weak unrealistic assumptions and assumptions which are often relaxed and do not affect the validity of the model. The SYLOS discusses the barriers which are generated by sunk cost which are impossible to reverse. For example cost like taxes required to enter into new market, legal fees, equipment cost which might prove to be so high and ones a firm has decided to enter into a market, these are cost which are not easy to reverse once incurred (Seamans 2013). There is also a very naïve assumptions that the incumbent will keep its output at the pre-entry level in the event of entry which might prove to be a real threat to new entrants (Seamans 2013). Suppose given a case scenario where sunk cost which a firm must bear in entering the market is $40 million, then if it decides to enter, the possible scenario will be:- From this scenario, when the prices are high, it mean that incumbent does not fear competition and is ready to accommodate new entrants into the market but will use different strategies to move others out of market (Ang et al., 2015). When the incumbent but price so low, it means that it fights new entrants and low prices will make new entrance non-profitable hence not able to survive in the market in short run. Bain-Sylos postulate believes that the incumbent would maintain the same output after entry that it did before therefore there is no worry, which brings the question of capacity to produce and ability to produce a given quantity (Ang et al., 2015). Some of the strategic barrier may include government policy which aims at promoting local firms and the expense of international firms and also strategic interest of a country. A government may make it impossible for global firms to enter into their market space through tedious legal means and high taxes. These are impediments to the entrance into global markets. Some examples of entry deterring strategies are limit pricing, predatory pricing and capacity expansion. For these strategies to work Incumbent must earn higher profits as a monopolist than as a duopolistic and The strategy should change the entrants’ expectations regarding post-entry competition Structural barriers Structural barriers are things to do with the basic industry conditions which include cost and demand rather than tactical actions that are being taken by incumbent firms (Belleflamme and Peitz 2015). Structural barriers to large extend may exist due to the existence of economies of scale and network effects in a given market. They include factors like:- Incumbents have cost advantages Incumbent have marketing advantages Incumbents are protected by favorable government policy and regulations In the situation of economies of scale, if the market has significant or large economies of scale which are in place by the incumbent firms, the new entrants will have difficulties in venturing into such markets unless they have real financial muscles. This is a huge deterrence for global market entrance. Another factor is the network effects. It is the condition where many users have on the value of a good or service (Belleflamme and Peitz 2015). The more the number of people using specific good or service the greater the individual benefit. In situations where strong networks already exist, it may hinder the new entrants in such markets who fails to gain sufficient number of users to create positive enough networks. Another important structural hindrance is the ownership and control of key scarce resources which could be used by incumbent firms to create barrier to the new entrants to the market has they are the sole controller of such resources (Niu, Dong and Chen 2012). The best example is airline controlling access to airport and a case in point is that of the Frankfurt Airport Case and British Airways which uses this policy to control the entrants of new firms into their market space. Another structural barrier is high set up cost more so the high initial set up cost which are mostly sunk cost will act as a barrier to small firms (Niu, Dong and Chen 2012). They in include cost like advertising and marketing cost, high research and development cost which may not be recovered by the firm easily hence deter small firms into venturing into global markets. Ways of overcoming barrier to entry to global markets The best way for a company to go global is the question many are asking after considering various structural and strategic barriers which comes with entering into the market (Niu, Dong and Chen 2012). There are two major methods which a firm can use to enter into global market as a new entrants and this include:- Strategic alliance Standalone entries It is of great importance for companies to visualize the profits they are anticipating in a given market, they are normally forced to form strategic alliances while entering into new markets or in case they would like to continue in servicing their current markets (Huisman and Kort, 2015). The strategic alliances are being brought by both structural and strategic barriers like capital inadequacies, strict government policies, knowledge and experience about trading environment among others. The nature of strategic alliance for instance will majorly depends on the complimentary resources or the major impediment which the company is looking to overcome in the foreign market. Some of the strategic alliance include:- Joint Ventures Contract Manufacturing Licensing Franchising Exporting Joint ventures In this case, the strategic partnership looks to overcome entries barriers brought buy structural barrier of capital outlay. The joint venture applies to those strategic alliances where there is equity contribution both from the foreign company and local firm. The equity contribution in this case can be in the same ratio of different ratio depending on the agreement or financial capabilities of the parties involves (Huisman and Kort, 2015).. Using this method of entrance, foreign investor is able to reduce the capital risk involves in entering into the new market while the local company facilities in manufacturing and distribution are being leveraged. They are able to leverage the local company managerial capability and lastly, leverage the local company’s contact with the government to get green signals. Contract manufacturing This is another strategy that can be used by foreign firms to enter into foreign markets and maneuver entrance barriers into the market. This method in most cases are used to overcome structural barriers like networks into the new markets. Firms may produce in foreign countries but form strategic alliance with partner in foreign country to sell its product on its behalf hence acting as a supply chain or distribution channels. This is a simpler way of entering into new markets by foreign firms (Huisman and Kort, 2015). Licensing This is common with companies that are having distinctive and legally protected asses which is a key differentiating elements in their marketing offer. They help in overcoming strategic barriers into foreign markets (Belleflamme and Peitz 2015). Franchising Mostly used in consumer service businesses, fast food chains among others. A franchise is an ongoing business relationship where one party grants another one to distribute goods using its brands. It is simpler ways of using string brand names to enter into market and attract customer loyalty (Belleflamme and Peitz 2015). Export This help in overcoming set up cost in the foreign countries, though it has many challenges has high export tariffs increases the cost and make goods less competitive in long run. Reference Ang, S.H., Benischke, M.H. and Doh, J.P., 2015. The interactions of institutions on foreign market entry mode. Strategic Management Journal, 36(10), pp.1536-1553. Belleflamme, P. and Peitz, M., 2015. Industrial organization: markets and strategies. Cambridge University Press. Huisman, K.J. and Kort, P.M., 2015. Strategic capacity investment under uncertainty. The RAND Journal of Economics, 46(2), pp.376-408. Niu, Y., Dong, L.C. and Chen, R., 2012. Market entry barriers in China. Journal of Business Research, 65(1), pp.68-76. Seamans, R.C., 2013. Threat of entry, asymmetric information, and pricing. Strategic Management Journal, 34(4), pp.426-444. Read More