Factors and Methods of Entry to International Markets - Coca-Cola Company - Case Study Example

Factors and Methods of Entry to International Markets Introduction Global business management can be defined as the interaction of people from different cultures, societies, and various backgrounds in undertaking various business activities with the aim of achieving their goals for example earning profits from their investments. Because of invention of advanced technology the world has increasingly become a village and as a result global business is the modern form of business in this 21st century. Because of globalization there have been great disregard to national borders, governments have lower hand in controlling the flow of their economies and MNC’s are now not restricted to only one particular country as it was before. (Anand and Delios, 1996) The reality and existence of globalization can be witnessed when patterns of trade are considered, for example the general level of imports and exports in several countries have magnificently increased over the past few years. Also globalization have led to significant increase in production of business services for example firms dealing with Just-in-Time (JIT) ideas have led to customers getting information .e.g. of accounting and auditing conveniently. Discussion Also due to globalization and international business, financial systems organizations have now been integrated and they work as one unit thus enhancing the chances of conducting business globally for example through the use of Credit Cards and the existence of flexible exchange control systems in many countries. (Cullen and Boteeah, 2005) It is therefore important to identify different approaches to international business which can be employed in a business setting of management across cultures and across a diverse workforce in a global setting. Also it is worth noting the various factors that hinders or augments such methods of entry. Globalization is also now vividly evident because of the way people migrate from one country to another without much difficulty, for example different countries have relaxed their stringent traveling rules to allow ample time for business activities to be undertaken. It is also critical to look into how respective managers can maximize the practical applications of these approaches to Multi-National Companies (MNCs) such as Coca Cola Company. This paper therefore will focus on the methods of entry and factors to be considered when choosing the appropriate method with particular regards to Coca Cola Company. (Daniels and Caroline, 1993) International business management practice is the greatest concept that must be understood clearly by all managers and Chief Executives Officers of MNC’s before going global. It is the process of applying management concepts and techniques in multinational environment so that firms can become and remain international in scope. This process is influenced by new technologies, improved communication and transportation systems. It involves identifying the suitable approaches to going global and understanding all the advantages and disadvantages of each approach before going global in any business undertaking. Any company may invest in another country and there are different approaches that a manager can employ depending on the factors that the respective organizations are considering, for example; the cost of entering the new market, existing policies in the country of choice, the rate of technology, foreign currency exchange rate control systems among others. (Maund, 2001) According to John Tomlinson in globalization and culture he argues that, globalization lies at the heart of modern culture and cultural practices lies at the heart of globalization. He says that business globalization has led firms that operate and invest in a global scale to transform patterns of trade and shape the interactions between them for example through mergers. Under this case Coca Cola Company has entered to nearly every market in the world by using several strategies after carefully considering several factors attributed to such strategies. The first approach that Coca Cola Company has utilized is that of exporting and depends on a number of factors that includes the following; the available resources that a firm is capable of spending, the size of the company, if the company posses any past export experience and expertise or it is trying it for the first time, conditions of conducting business in the selected abroad market and products nature for example if the products are perishable or durable. (Andersen, 1997) Under exporting there are two methods namely; direct exporting and Indirect exporting. Direct exporting involves the producer of the products or services dealing directly with a buyer in the foreign country and often regarded as the difficult method of entry because the owner or the exporter of the product is entirely responsible for the business undertaking for example researching the suitable market for the products and establishing the suitable distribution channels to be used. Therefore this method requires much attention in terms of management and the resources to be used in the entire exporting process. It is also arguably the best method because the exporter may benefit from reaping maximum profits and may enjoy long-term growth thus the company can maintain its base in those countries. Under direct exporting Coca Cola Company has identified agents and distributors, domestic sales representatives, overseas sales office or subsidiary. Such methods have various advantages that have assisted Coca Cola Company to exploit the host markets, for example agents and distributors are familiar with the market, there have existing business contacts and sales people are always dedicated to the customers thus can boost business activities in these identified market. (Hill, 2005) Under indirect exporting an exporter can access foreign market free from risks of doing it directly. It involves the use of independent organizations within the exporter’s domestic markets. It can be done through various ways, for example, a domestic based export merchants, who take the title of the goods and sells them in those countries abroad, domestic based export agents who sell and market the goods on behalf of the exporter and co-operative organizations who act on behalf of the producers. Coca Cola Company have preferred the use of some of the above methods of entry because of the following advantages; communication is very much easy because the exporting company is domestically based and the risks of investing are much lower than coming up with full market in the host country. This approach might be cumbersome to undertake because the cost of getting links with agents thus taking long time to establish a market. (Gronroos, 1994) Another approach of entering the new market and has contributed to Coca Cola opening of branches in the America, Africa, Asia and China is a method of entry called relationship based partnership and comprises of the following; Joint venture partnership whereby it can be defined as a partnership created by one or more companies with a view to carry out a business together. They contribute equally to the business and agree to share any profits in a certain percent in the course of the business. Such a business is referred to as equity joint venture and it is favorable because there is sharing of risk and loses. There is also contract joint venture which involves creation of new firms in which foreign and local investors share ownership and control. Generally joint ventures are common where government conditions demand so in order to ensure control, nationalism and reduced re-patriation of profits. It will be an ideal situation if the company that am working for is still young and wish to exploit other markets for their products since it require fewer resources. However, it has potential problems and includes sharing of profits, employment issues, market coverage and decision making due to different long-term interest in partners. (Hill, 2005) Another relationship based partnership that Coca Cola Company use is licensing method of entry, whereby it can be termed as contracts in which a foreign licensor provides a local license with access to know-how in exchange for financial compensation. The company has over the past preferred to use this method because it has presented many opportunities to entering markets that may have been otherwise closed to exports and also it has not required Coca Cola Company to have substantial capital investments in the host market horizon e.g. in Africa. However, Coca Cola Company has been faced with problems like loosing production control of the company’s products. Also still under relationship based partnership Coca Cola Company have utilized franchising as a method of entry. Franchising involves one partner called franchisor licensing trademarks and established methods of entry to a party called a franchisee in swap for a recurring compensation. A good example that illustrates this method is that of the Coca-Cola Company selling its syrup together with the rights to use its trademark and name to other independent bottlers. Coca Cola Company prefer this method of entry because it is easy to start the business abroad, there is room for rapid expansion, there is stable offering of the same products for a long time and therefore will attract customers and most of the time franchisors offer training for free that is always not offered to individuals setting up their businesses. (Kotler, Armstrong, Saunders, and Wong, 1999) Strategic alliance method of entry can also be employed under relationship based partnership in going international which involves formal partnership between two or more parties to undertake a common business with the view of attaining same objective but the parties involved always remains independent to each other. Business resources to be shared may include common distribution, channel, knowledge, products or expertise. Coca Cola Company have utilized this method in some of its markets because of the following advantages; there are low research and development costs, getting access to partner’s capital, new markets for the products of the company and quick time in marketing the products, there is sharing of distribution channels and tapping the other partners advanced technology and intellectual property among others. An example here is the Coca Cola Company reaching an agreement with any producers of drinks to market and distribute their products on their behalf. (Aulakh, Kotabe and Teegen, 2000) Another approach that Coca Cola has utilized in entering international markets is referred to as direct investment method of entry. Direct investments entail setting up manufacturing facilities although it requires heavy capital and management dedication. It can also be carried out through acquisition and this involves purchasing of already existing foreign investments that will include existing experience workforce, management structures, local knowledge and the existing contacts in the market and the government. Although direct investment method is expensive and difficult to start should it succeed the company will enjoy good returns and will establish strong market base in its new market. An example here is that of Coca Cola Company opening subsidiaries in Africa for example in Kenya. This has been a viable project since the company has explored new markets in Africa and thus broadens its market share as well as augmenting its profits for the company and also it has established a long-term economic market. (Kotler, Armstrong, Saunders, and Wong, 1999) After successfully identifying the methods of entry and setting the subsidiaries its markets Coca Cola have embarked on various strategies of managing its investments. Coca Cola Company has in the process appointed competent local managers in their respective countries to mange its investments. Research now days indicate that products associated with local people in a country tends to be selling unlike those days when people will go for products associated with foreigners. With the management being the local people it will be easier for marketing purposes since the locals will be motivated to buy the products of the company in the basis that they are promoting their own fellow citizens and hence their standard of living. For example certain African countries do not like foreigners in managing their business activities for example a case in which recently in Zimbabwe the whites were being forcefully ejected out of their farms and other businesses. Therefore such factor of management should be considered in order to remain competitive both locally and internationally (Aswicahyono and Hill, 1995) The local people will always feel respected when one of their own is doing the management job and that will lead to success of the subsidiaries started. Another case to show that the locals in Africa have developed a negative attitude towards foreigners is when the local residents in Kenya boycotted to buy Delamere products when the owner was accused of murder. In fact they demonstrated and demanded that the business be changed to local owners. Another good example is that, in China history shows that they are very conservative people and will always promote local investors rather than foreigners. It is for these reason that companies wishing to invest in overseas should consider the factor of employing local people to be managers in order to attract more customers and hence success of the company. (Lee and Carter, 2005) Another factor of prime importance is that of legislation by the different countries that firms prefer to invest their business undertakings. It is always prudent to carry out marketing research to find out if the methods of entry chosen are lawful in the preferred markets. Sometimes some methods of entry like foreign direct investments are restricted in some countries and therefore firms should consider such factor before going international. (Agarwal and Ramaswami, 1992) Cunningham in 1986 identified five strategies used by firms to enter foreign markets and include the following; Low price strategy- a penetration price is necessary to allow more products to sell at first but when it catches up, other pricing strategies are adopted Product adoption strategy- making modifications to existing product Availability and security strategy- countering perceived risks by overcoming transport risks Technical strategy- demonstration of superior products Total adaptation and conformity strategy- usually a foreign producer gives a straight copy to his/her customers Customers in a foreign market are normally sensitive on currency, quality and quantitative figures of countries which the products originate from. Therefore in building a market entry strategy, various issues need to be taken care of; the infrastructure, information and other resources are needed for a start. First, is the development of buildings and other networks that are crucial to the company? Secondly, are the government issues such as licensing, taxing, policies and duty remittances In addition, massive start up campaigns are necessary to reach all the target within a very short time. Transactional costs are crucial to international marketing because there are language barriers, logistic costs; physical distance and other bargaining costs make initial costs very high. Enforcement of contracts and weak legal integration between countries are other factors that need to be assessed before the final arrangements to start the business are made. (Murray, 1989) Another factor to be considered by firms before selecting method of entry is the corporate social responsibility and stance of the target market. Corporate responsibility is the obligations that consider the interests of all customers, employees and shareholders, communities and other ecological considerations in the majority of all their operations in the company. This obligation will extend beyond their legal obligations to factors such as profits and dividends. But it should also consider immediate and long-term social, cultural and environmental consequences of their operations. Today’s heightened role of businesses in the society has been enhanced by increased sensitivity and awareness of urgent ethical and environmental issues. These issues include. Environmental damage Improper treatment of workers Faulty production that inconveniences or endangers customers As part of international commitment to conduct business with integrity and comply all applicable laws, the companies like Coca Cola company strives to maintain a strict code of conduct that have seen its social responsibility in its target markets increase through the following; fund raising, community assistance, project funding etc. Ethical behaviour is a firm’s responsibility regardless of position or location; it will reflect the highest ethical standard expected of employees, directors and all people bound by it of the firm that has entered the market. (Balabanis, 2000) Also a factor of time scale for entry is suitable for the firms wishing to go international in order to make prior arrangements of getting things started in preferred markets. The time scale for entry will depend on the commitment by the company and its intended objectives. It can be on a monthly basis or yearly basis. Conclusion We can therefore conclude that globalization has led to prosperity to all and the main ingredient to it has been international marketing which have been employed by firms in order to increase there market share and profits. Due to modernization and advancement in technology, most businesses are beginning to explore international markets for better profits and opportunities. (Sparrow and Hilltop, 1994) In the recent past, trading activities has become increasingly global in some way because of the need to gather and increase the company’s financial bases. Advancement in technology including communication efficiency and better international relations has contributed to the promotion of the international trade. Competition has however become a great challenge to the success of global business management but most companies are rising to the challenge. To take advantage of the world being global village and to achieve greater investments and better market opportunities in the international market, it is necessary that primary and secondary market research is done to ensure that information regarding the target markets in countries desired is obtained. (Brassington and Pettitt, 2000) Read More