Principles Of Management - Essay Example

Principles Of Management Introduction Globalisation of the world markets has led to a revolution in the business sector with many firms wanting to explore the global environment. Increased competition, technology advancement and liberalisation have created the need for firms to enter foreign markets for business expansion. However, venturing into foreign markets is not a smooth sailing affair as such organisations are faced many roadblocks and complexities. To succeed in such markets is difficult due to “different customs, business procedures and regulations which put new entrants at a disadvantage to those who already know the market well” (Cherunilam, 2010, p. 2). In light of this, venturing into foreign markets requires a formulation of global strategy which is linked to the company strategy. A global strategy, according to Andexer (2008, p. 30), refers to “standardisation across the country boundaries with interdependent business units operating in each country. These operations are manned at the head quarters to allow a high degree of integration.” Many decisions thus need to be made in formulating the global strategy. The most important strategic decision in international business, according to Cherunilam (2010, p. 497), is the mode of entering the foreign market. A marketer has to decide whether to manufacture products locally and export, manufacture in foreign market or any other alternative such as franchising, strategic alliance, or mergers and acquisitions. Whatever decision is made depends on the domestic as well as foreign business environment. The main aim of this report is to explore the positive and negative aspects of market entry strategies by international businesses during implementation of global strategy. The first task will be to analyse the international business environment and then discuss the various market entry strategies available and their strengths and weaknesses. International Business Environment Before delving into the business environment it is imperative to determine why firms engage in international business. The first reason as stipulated by Andexer (2008) is to increase market size. Businesses undergo a lifecycle and as they mature, they need to venture into new business or offer different products so as to remain relevant and competitive. Besides, every firm needs to gain a high market share as a growth strategy and also to spread risks of fluctuating economic cycles or currency risks. A business can thus decide to enter international markets depending on the internal and external environment and its resource capabilities. Another reason a firm may wish to enter new markets is as a reactionary measure; that is, reacting to information gathered in the market (Andexer, 2008). If a firm gets information of available opportunities in the foreign market that offers future possibilities, internal growth and prospective profitability, it can react by developing strategies to enter into that market. Furthermore, firms aim at increasing returns on their investments, and this can be achieved by entering into more profitable segments. Globalisation and technology advancements have also led firms to venture into new markets. As business environment is very dynamic, organisations need to keep up with the changes so as to satisfy the changing needs of customers (Cherunilam, 2010). Development of infrastructure and communication has played a great part in enabling firms to expand into other parts of the world. This is enhanced by trade liberalisation which opens borders for doing business and creates a good environment by reducing restrictions that hinder expansion (Lymbersky, 2008). For example, a firm can now produce products where labour is cheap and export to other countries or it can import materials and make finished products in domestic country. This can be done easier by establishing a subsidiary or licensing another firm to do so. After a firm determines the need to enter a new market, that is not the end, but the beginning of a complex process. The management or marketers have to decide where, when and how to enter new markets. This will be determined by the business environment as any company’s aim is to minimise costs. A firm must decide on where or which country to venture in depending on available resources; for example, it can decide to manufacture goods domestically and export or to establish a subsidiary in a foreign market and manufacture goods there if the environment is favourable (Lymbersky, 2008). After deciding where to enter, the next big decision to make is when to enter. It can decide to enter one country at a time especially if it is a small business or to enter many countries at once if it has the available resources (Andexer, 2008). Deciding where and when to enter new markets is not a problem but how to enter is a serious problem. A firm needs to analyse the business environment both domestic and foreign and then formulate a market entry strategy that will enable it to meet organisational goals (p. 32). There are many market entry strategies each with advantages and disadvantages hence the great task is to establish which strategy is suitable. Some organisations enter new markets but collapse after a while for not conducting a thorough research on the factors that influence the strategies and make a sound decision. It therefore is vital to discuss the factors that influence market entry strategies and how firms can overcome such roadblocks. Cherunilam (2010, p. 55-127) divides business environment factors into economic, social/cultural, demographic, political, regulatory and technological environment. The domestic environment differs from foreign environment and even the environment may not be similar in segments within domestic or foreign environment. In some cases, the foreign environment may be similar to domestic environment; thus, it is the duty of management to determine market entry strategies. The global environment also has a lot of influence on global strategy. The economic environment has a great impact on the choice of marketing strategy. It includes such elements as economic policies, fiscal and monetary policies, business scope, economic resources, and nature and level of development among others (Cherunilam, 2010, p. 59). Economic policies such as those concerned with foreign exchange, foreign investment and technology policies affect business location, product mix and choice of technology. This is because they determine the role of different sectors in the economy thus restricting their functions. A country can also restrict imports thus hindering firms in their expansion activities. Technology and foreign investment policies may hinder the growth of firms, especially those wishing to engage in joint ventures (p. 66). Those firms restricted from engaging in foreign investments can only engage in indirect exports as opposed to direct exports. Fiscal and monetary policies also affect the domestic business environment by affecting demand and supply thus determining the direction of investment. They also affect infrastructure growth which is vital in determining marketing entry strategy. The social/cultural environment is also very crucial in determining the market entry strategy and operations in foreign environment. According to Cherunilam (2010, p. 58), “the root cause of international problem is self-reference criterion (SRC).” This is whereby firms fail to adapt to the culture of foreign countries and stick to their own cultural values, experience and knowledge in making decisions. He gives an example of an American firm Texas Instruments which refused to acknowledge the Japanese culture of rewards and benefits and sticking to own approach to recruitment, pay, reward and benefits. The company experienced recruitment problems until it adopted the Japanese approach. This shows how important culture is while operating in foreign markets. Social/cultural environment includes religion, customs, language, traditions and beliefs, tastes and preferences, social institutions as well as buying and consumption habits. Most successful companies’ especially Indian firms adopt ethnic marketing before introducing products to other markets. In countries where cultural conformity is the norm, it is difficult to introduce new products as opposed to where deviance is appreciated (p. 80). Culture also determines the kind of relations with foreign firms. For example, those countries with universalism culture value rules while those based on particularism value relationships thus make it easy to review contracts. It is also worthy noting that countries do not adapt culture at the same pace hence it is advisable not to introduce products in markets which are not ready to adopt them (p. 81). The demographic factors such as age structure, gender, income distribution, education, occupation, race, religion and nationality are vital. A firm wishing to enter a new market should consider these factors when assessing viability of the venture. Some countries especially Muslim countries are bound by religions which make it difficult to venture into new products (Lymbersky, 2008). Political and regulatory factors cannot be overemphasised. A firm should establish if a country is politically stable before deciding to enter. Some countries also ban imports or protect industries through protectionist policies that act as barriers to expansion. A firm should consider the regulatory and political environment of the foreign country to understand what is required before entry and in order not to act ethically or land into problems (Cherunilam, 2010). If a country does not allow foreign investors the establishing a wholly owned subsidiary or direct exports may not be possible. Political and regulatory environment also has effect on mergers and acquisitions and joint ventures. Market Entry Strategies Once the business environment has been evaluated, marketing strategies can be decided upon. The marketing strategy must be able to integrate the components of market mix (product, price, promotion and place). These include exports, joint ventures, mergers and acquisitions, licensing, strategic alliances but the company can use different strategies for different foreign markets or products (Cherunilam, 2010, p. 497). Exports may be direct or indirect (use of intermediaries) and is used when the volume of foreign business is not large enough, high cost of production in foreign market, political risks in foreign country, and foreign investments not allowed in foreign country (Cherunilam, 2010, p. 499; Lymbersky, 2008). The advantage of exporting is that it is less costly than setting up facilities in foreign market; it is less risky since it is home based, and it gives opportunity to learn foreign market before investing. However, if the firm is left at the mercy of agents, it has no control over business (Lymbersky, 2008). It my also be affected by foreign policies such as import ban. It also requires established distribution channels. The marketer is also at a disadvantage as he/she may not have access to target market intelligence (Andexer, 2008). Contract manufacturing is another strategy. It involves contracting to manufacturers but retaining responsibility of marketing. It is advantageous because no production facilities need to be set up, reduced risks, can get started immediately, low production cost, and it is less risky to start with as owner can drop it any time. Not establishing facilities in foreign country insulates the business from cultural hindrances and political and regulatory problems (Lymbersky, 2008). However, the marketer loses control of the business. Licensing is another entry strategy whereby the firm gives a licence to a foreign firm to operate under its name. It is used when there are low sales potential in the target market or Import and export barriers exist (Cherunilam, 2010). It is advantageous if that capital is not tied up in investments; it is less risky as there is no need to establish production facilities, speedy entry, and also it brings high returns. However, the licensor may develop a potential competitor; it is short lived and also loss of control (p. 501). A firm may engage in mergers and acquisitions. This involves taking over a foreign company or merging operations with a foreign firm in order to increase competitiuve strength (Cherunilam, 2010). The advantage is ease of entry into foreign market since existing firms already have a well established infrastructure, markets and distribution network. It also leads to benefits of economies of scale and also escapes regulatory factors. For example, approval is not needed for food and drugs administration if merger firm is already approved (p. 510). It is disadvantageous in that the company takes over the problems of the new firm. Thorough evaluation also needs to be carried out lest a wrong merger decision is made. The company may also lack expertise to manage the newly acquired firm especially due to cultural, economic, political and regulatory factors (Andexer, 2008). Changing the organisation culture of the acquired firm may be very difficult especially where conformity is the norm. In a joint venture instead of merging, two or more companies can share ownership and control (Cherunilam, 2010). It is vital in the following conditions: restriction of foreign ownership, high sales potential, where assets cannot be fairly priced and a large cultural distance exists (Lymbersky, 2008). The method is advantageous in spreading risks, high returns, can compete effectively and cultural barriers are eliminated. The company also has control and can learn about the target market easily. It also does not require huge investments for entry. However, it is disadvantageous since the partner has potential of becoming a competitor combined with conflicts due to divergent views. Conclusion Globalisation, increased competition and technology advancement have led to increased investments by firms in international business. Now firms are not only dealing with how to capture different market segments in domestic market, but also on how to enter foreign markets. A successful market entry strategy depends on a well conducted analysis of the domestic and foreign business environment. Based on the analysis, a company can decide to use different strategies for different foreign markets or different products or different strategies for the same product in different markets. The market entry strategies include exporting, joint ventures, licensing, mergers and acquisitions, contract manufacturing, counter trading, or strategic alliances. The methods have both positive and negative consequences; thus, a marketer has to decide where, when and which strategy to adopt. References Andexer, T., 2008. Analysis and evaluation of market entry modes into the Asia-Pacific region. Germany: GRIN Verlag. Cherunilam, F. 2010. International business: texts and cases. 5th ed. New Delhi: PHI Learning. Lymbersky, C., 2008. Market entry strategies. Hamburg: Management Laboratory Press. Read More