International Marketing and Export Management - Strategy Enter Mode - Essay Example

Strategy Enter Mode Executive Summary The strategies used by firms for defeating their rivals either locally or internationally can highly vary. Usually, entering a foreign market is considered as an effective strategy for enhancing organizational performance. A firm that decides to proceed to such plan can choose among a variety of enter modes. Each of these modes has its benefits and drawbacks. In addition, certain of these modes tend to perform higher in regard to particular industries. These issues are discussed in this paper. The review of the relevant literature has led to the assumption that entering a foreign market is a common phenomenon in the global market. However, failures in regard to these plans cannot be avoided, especially if the enter mode chosen is inappropriate for the target market involved. Table of contents Executive Summary 2 1.0 Introduction 4 2.0 Literature Review – Enter modes 4 2.1 Exporting 5 2.2 Licensing 6 2.3 Joint Ventures 6 2.4 Foreign Manufacturing 7 2.5 Direct Investments 8 3.0 Insert Table 9 4.0 Synopsis 10 5.0 Conclusion and Recommendations 11 6.0 References 13 1.0 Introduction The entry in a foreign market can be a risky initiative, especially when the global market is not stable. However, choosing an appropriate enter mode can help to reduce the risks involved in such plans. The enter modes available to firms that aim to enter a foreign market are discussed in this paper. The literature developed in this field has been reviewed so that all aspects of this study’s subject are adequately explained. Moreover, five studies have been selected and are presented separately for highlighting important points of the issues under discussion. It is proved that a variety of entry modes is available to firms that wish to internationalize their activities. Still, not all these modes can be equally effective; indeed, the risks involved in the target market can be many. It should be also noted that the benefits from entering a foreign market may not be clear in the short term. For this reason, a firm trying to expand its operations globally should have alternative strategies available in case that the enter mode initially chosen is proved faulty. 2.0 Literature Review – Enter modes When trying to enter a foreign market, a variety of criteria is used in order to decide which enter mode is most appropriate. The resources available for supporting this project can highly influence the relevant decision (Levi 2006). On the other hand, the experience acquired through similar initiatives in the past can help a firm to choose an appropriate strategy for entering a foreign market (Levi 2006). In addition, when trying to entering a foreign market a firm is expected to face a variety of forces (Albaum and Duerr 2008). Managing these forces can be extremely difficult depending on the firm’s market position and its objectives (Albaum and Duerr 2008). For this reason, a firm that attempts the entry in a foreign market need to be sure that it can face the challenges and risks involved (Levi 2006). According to Gilligan and Hird (1986) choosing a market entry mode requires the achievement of ‘a balance between costs, control and risk’ (Gilligan and Hird 1986, p.99). Based on the potentials of an organization to respond to the needs of the above three factors managers can decide to choose a particular entry mode rejecting another one (Gilligan and Hird 1986). In any case, the choice of entry mode in regard to a particular market does not prohibit a firm from choosing a different entry mode for another market (John and Gilles 1996). 2.1 Exporting The most common strategy for entering a foreign market is exporting (Ireland, Hoskisson and Hitt 2008). Particular reference should be made to direct exporting which focuses on the following practice: ‘products are sent from one country to another for sale, delivery or distribution’ (Ireland, Hoskisson and Hitt 2008, p.157). The specific mode of entry is quite common mostly because of the significantly low risks involved, as compared with other, similar, strategies (Ireland, Hoskisson and Hitt 2008). Also, direct exporting does not affect the rest operations of the organization involved (Doole and Lowe 2008). The limited need for resources is another important benefit of direct exporting (Doole and Lowe 2008); even the investment required for developing direct export activities can be low (Doole and Lowe 2008). Still, direct exporting has also an important drawback: it can ‘increase the vulnerability of firms to tariffs’ (Ireland, Hoskisson and Hitt 2008, p.158). Also, the quality of the products exported needs to be at the level arranged with the buyer; otherwise, the market image of the firm can be destroyed (Doole and Lowe 2008). Indirect exporting can be also used instead of direct exporting (Gillespie, Jeannet and Hennessey 2010). Indirect exporting is based on ‘the use of an intermediary established in the target market’ (Gillespie, Jeannet and Hennessey 2010, p.250). In this way, the risks involved can be reduced. 2.2 Licensing Another common entry mode is licensing. In general, licensing indicates the entry in a foreign market through an intermediary, ‘known as licensee’ (Tielmann 2010, p.8). A firm can develop an agreement with the licensee paying a specific fee (Tielmann 2010, p.8). By making such agreement, a firm gives up certain of its rights in regard to the product’s manufacturing: the licensee is able to produce the product following the guidelines given (Tielmann 2010, p.8). Licensing has been used for Coca-Cola: Indeed, ‘Coca-Cola licenses bottlers internationally and provides them with the Coca-Cola syrup” (Tielmann 2010, p.8). Because licensing can lead to the limitation of the control over a product, the use of the specific entry mode is not always welcomed (Tielmann 2010). It should be noted that the level at which a firm gives up certain of its powers by licensing is not standardized (Doole and Lowe 2008). Usually, the licensing can refer only to the technology involved in a product’s manufacturing (Doole and Lowe 2008). In certain cases, licensing can be extensive incorporating both the product’s manufacturing process, the product’s packaging and the power to distribute the product within a country (Doole and Lowe 2008). 2.3 Joint Ventures An alternative, quite popular, entry mode is joint venture. Joint venture is based on the following strategy: a foreign company develops an agreement for cooperation/ partnership with a local business (Yu 1999, p.138). Joint venture is extensively used in the case of developing countries (Yu 1999, p.138). In these countries, the concerns in regard to ‘the stability of the local government’ (Yu 1999, p.138) can lead to the partnership with a local partner so that the risk is reduced (Yu 1999, p.138). Indeed, the local partner is aware of the legal framework and the culture of the local market, a fact that reduces the chances for failures, at least major ones, for a foreign firm that aims to enter the particular market. Joint ventures are related to an important disadvantage: in case that the cooperation between the partners is problematic, their interest on supporting the partnership is decreased (Francis 2010). Such condition can appear especially in the following case: if changes appear in one of the organizations participating in the partnership then the terms of the partnership have to be alternated (Francis 2010). This perspective may not be welcome by the other member of the partnership (Francis 2010). In regard to the above it could be said that joint ventures can be successful only when the level of trust and communication between the members of the partnership is quite high (Francis 2010). 2.4 Foreign Manufacturing Foreign manufacturing is an entry mode based on the following condition: the whole or part of the manufacturing process related to a particular product is transferred to a foreign country (Gilligan and Hird 1986). The lower costs of the above process in the foreign country are usually the key criterion for deciding to use foreign manufacturing as an entry strategy (Gilligan and Hird 1986). The high cost for transferring a product to a foreign market can be also a reason for transferring the product’s manufacturing, fully or partially, to a foreign country (Gilligan and Hird 1986). High tariffs for delivering a product to a foreign market can also lead to foreign manufacturing (Gilligan and Hird 1986). For example, in 1984 ‘Nissan decided to establish a manufacturing unit in North-East England for lowering its products’ costs’ (Gilligan and Hird 1986, p.108-109). In practice, foreign manufacturing, as an entry mode, has a series of aspects/ forms (Doole and Lowe 2008). Assembly is a common form of foreign manufacturing (Doole and Lowe 2008); assembly is highly used in the automotive industry but it can also appear in other industries worldwide (Doole and Lowe 2008). Assembly refers to the following activities: ‘the components of the product are manufactured in the domestic market and they are sent to the foreign market in order to be assembled’ (Doole and Lowe 2008, p.250). 2.5 Direct Investments Foreign Direct Investment (FDI) is a term used for indicating the ‘ownership and control of a business productive assets by a foreign investor’ (Schaffer, Agusti and Earle 2008, p.19). Acquiring the ownership of a firm’s assets an individual, or an organization, also takes the risks involved, unless a different agreement is made (Schaffer, Agusti and Earle 2008, p.19). The key characteristic of FDI is that it is related to certain restrictions (Schaffer, Agusti and Earle 2008, p.19). The decision to proceed to direct investment on a foreign market reflects the willingness of an organization to enter the specific market under the less, possible, risks (Czinkota and Ronkainen 2007). In fact, foreign direct investment (FDI) is one of the most popular enter modes for entering a foreign market. The popularity of these enter mode is based on the following reasons: a) when using FDI a firm has no obligation to pay tariffs or duties in regard to the products promoted in the local market (Czinkota and Ronkainen 2007); b) through FDI a firm manages to avoid ‘import restrictions in regard to certain products’ (Czinkota and Ronkainen 2007, p.297); c) consumers in the foreign market are expected to trust more local products that are aligned with local culture (Czinkota and Ronkainen 2007); in this way, through FDI a firm secures the positive response of consumers within the foreign market in regard to the firm’s products (Czinkota and Ronkainen 2007). A foreign firm that enters a market for the first time is expected to face difficulties in persuading the local consumers for the advantages of its products (Brady 2010). Still, a popular brand would be welcomed more than a totally unknown local product (Brady 2010). On the other hand, FDI can have certain drawbacks: a) the level of investment made as FDI is usually high (Brady 2010); this means that the risks involved are significant (Brady 2010). In case of unstable markets, such as developing countries, other enter modes, of lower risk, would be preferred (Brady 2010). Indeed, in the above cases joint venture is usually preferred, as related to fewer failures (Brady 2010). The enter modes presented above would be checked using appropriate evidence, as included in relevant literature. 3.0 Insert Table Five studies focusing on strategy enter modes have been chosen for exploring the issues discussed in this paper. The key aspects of these studies are presented in Table 1 below. Author’s comments Point of view Confirmed/Disconfirmed Yean (2007) supports that Malaysian firms use FDI in order to decrease their labor costs, to test the competitiveness of the Malaysian market worldwide and to check their ability to enter foreign markets. The author considers national policies as not critical in regard to the decision of firms to proceed to FDI. The specific view is confirmed by the literature, as presented above, especially Czinkota and Ronkainen 2007 and Brady 2010 Tang and Liu (2011) support that ‘no relationship can exist between the enter mode chosen and the post-selection performance’ (Tang and Liu 2011, p.56). The researchers have tried to check at what level the enter mode chosen can influence the performance of the organization after the end of the selection process. The potential relationship between a particular enter mode and high profitability had been probably set under examination. This view is confirmed in the literature; in fact, certain enter modes as FDI and Exporting are preferred due to the increased chances for profit (Ireland, Hoskisson and Hitt 2008, Doole and Lowe 2008, Gillespie, Jeannet and Hennessey 2010, Czinkota and Ronkainen 2007 and Brady 2010) Kamal (2011) notes that a relationship can exist between ‘the enter mode chosen by the parent company and the performance of subsidiaries’ (Kamal 2011, p.20) Kamal (2011) tries to promote the idea that a relationship can exist between the enter mode chosen and the organizational performance. It should be noted that the study is related only to emerging economies. In the literature also the existence of such relationship is verified (Ireland, Hoskisson and Hitt 2008, Doole and Lowe 2008) Hyun (2012) notes that changing the enter mode at a later stage of the entering process can result to benefits for the organization. Hyun (2012) tries to check whether there is a potential to turn to FDI after having used another enter mode. His research leads him to the assumption that such change is possible. The specific issue is not confirmed in existing literature. Existing studies focusing on the effects of a chosen enter mode, under the terms that the same enter mode will be used to establish the presence of the firm in the foreign market. Teixeira and Grande (2012) support that in countries where corruption is at high level specific enter modes, such as direct export and joint venture would be preferred. The researchers have tried to prove that the high level of corruption in a specific country can affect the performance of a foreign organization operating in this country. The relationship between corruption and organizational performance has not been reviewed in the literature, especially in regard to the efforts for entering a foreign market. Table 1 – Studies related to strategy enter modes 4.0 Synopsis The efforts of firms to enter a foreign market can be delayed by a series of obstacles. Factors, such as lack of resources available, political instability or high corruption in the foreign market, seem to be able to affect such plans. In any case, the literature developed in this field has led to the following assumptions: a) the success of an enter mode is not standardized; in fact, an enter mode that it is successful in one market may be unsuccessful in another market; b) the skills required for the development of such plans are many; the experience in such role is necessary for individuals involved in such initiatives; c) the enter mode chosen by each organization can be depended on different criteria; other firms can focus on cultural/ economic environment of foreign market while there can be firms focusing on the chances for high profits; d) the change of an enter mode, after having being used for entering a foreign market, is possible but under certain conditions and e) political decisions can affect the decisions of foreign investors to enter a specific market; still, it is possible for foreign investors to set different criteria for the investment decision, as explained above. 5.0 Conclusion and Recommendations In order to enter a foreign market an organization needs to take into consideration the objectives related to the particular plan but also the resources available. The use of one of the existing enter modes can increase the chances for success of the specific initiative. However, as proved above, these plans are related to certain drawbacks. This means that before choosing an enter mode an organization has to check benefits of each of these modes, as compared to the disadvantages. At the next level, the organization should choose the enter mode the drawbacks of which the organization is able to manage. On the other hand, the benefits of an enter mode can take long to appear. In this case, the organization should decide on the practice that should be followed: the organization will stay loyal to the enter mode chosen or another enter mode will be employed for achieving the firm’s objectives in regard to the chosen market? In addition, how major failures could be avoided when trying to implement the chosen enter mode? The literature published in this field has extensively analyzed the benefits and drawbacks of each of the enter modes used for entering a foreign market; still, the explanation given in regard to the limitation of failures related to such initiatives is inadequate. A series of actions is suggested for controlling the risk of major failures related to such projects: a) the individuals involved in such decisions would be appropriately checked in advance as of their skills and background; only individuals who have experience on similar plans would be given the power to decide the enter mode used by their firm to enter a foreign market; b) the lessons learned from similar initiatives of the organizations in the past should be taken into consideration when the need for entering a foreign market appears; c) before taking any such decision a detailed analysis of the organization should be developed; identifying the organization’s strengths, weaknesses and resources would help to locate an enter mode that will be feasible; d) choosing an enter mode is a complex process; the particular process includes not only the identification of the enter mode that it is appropriate for a specific organization but also the implementation of the relevant framework in practice; the monitoring of the plan in regard to all its phases is an indispensable part of the selection process. Indeed, without appropriate monitoring the effectiveness of the plan would be minimized. Finally, the following fact should be taken into consideration: before choosing an enter mode for a specific organization it is necessary to check the organization’s objectives and culture. It is important to understand whether the organization has the potentials/ resources to support such plan in all its phases; otherwise, the change of the enter mode or even the cancellation of the project would be decided. 6.0 References Albaum, G. and Duerr, E., 2008. International Marketing and Export Management. 6th ed. Essex: Pearson Education. Brady, D., 2010. Essentials of International Marketing. New York: M.E. Sharpe. Czinkota, M. and Ronkainen, I., 2007. International Marketing. 8th ed. Belmont: Cengage Learning. Doole, I. and Lowe, R., 2008. International Marketing Strategy: Analysis, Development and Implementation. 5th ed. Belmont: Cengage Learning. Francis, C., 2010. International Business: Text and Cases. 5th ed. Delhi: PHI Learning Pvt. Gillespie, K., Jeannet, J. and Hennessey, H., 2010. Global Marketing. 3rd ed. Belmont: Cengage Learning. Gilligan, C. and Hird, M., 1986. International Marketing: Strategy and Management. Oxon: Taylor & Francis. Hurduc, N. and Nitu, A., 2011. “Forms and Strategies of the Banks to Enter on a Foreign Market.” Theoretical and Applied Economics, 18(7): 43-52. Available at http://store.ectap.ro/articole/611.pdf Hyun, H., 2012. “Strategic Foreign Direct Investment in Developing Countries under Demand Uncertainty: Commitment vs. Flexibility.” Journal of East Asian Economic Integration, 16(1): 25-66. Available at http://www.iadb.org/intal/intalcdi/PE/2012/10437.pdf Ireland, D., Hoskisson, R., Hitt, M., 2008. Understanding Business Strategy: Concepts and Cases. 2nd ed. Belmont: Cengage Learning. John, R., Gilles, G., 1996. Global Business Strategy. Belmont: Cengage Learning. Kamal, S., 2011. “ENTRY MODE AND SUBSIDIARY PERFORMANCE IN EMERGING ECONOMIES.” Mustang Journal of Business & Ethics, 20-29. Available at http://dspace.bracu.ac.bd/bitstream/handle/10361/1613/Entry%20Mode%20and%20Performance%20-Kamal%20,%20Shawkat.pdf?sequence=1 Levi, K., 2006. Market Entry Strategies of Foreign Telecom Companies in India. New York: Springer. Schaffer, R., Agusti, F. and Earle, B., 2008. International Business Law and Its Environment. 7th ed. Belmont: Cengage Learning. Tang, J. and Liu, B., 2011. “A NETWORK BASED THEORY OF FOREIGN MARKET ENTRY MODE AND POST-ENTRY PERFORMANCE.” International Journal of Business and Social Science, 2(23): 50-59. Available at http://www.ijbssnet.com/journals/Vol_2_No_23_Special_Issue_December_2011/6.pdf Teixeira, A. and Grande, M., 2012. “Entry mode choices of multinational companies (MNCs) and host countries’ corruption: A review.” African Journal of Business Management, 6(27): 7942-7958. Available at http://www.academicjournals.org/ajbm/pdf/pdf2012/11July/Teixeira%20and%20Grande.pdf Tielmann, V., 2010. Market Entry Strategies. Norderstedt: GRIN Verlag. Yu, L., 1999. The International Hospitality Business: Management and Operations. London: Routledge. Yean, T., 2007. “Outward Foreign Direct Investment from Malaysia: An Exploratory Study.” Südostasien aktuell 5/2007: 44-72. Available at http://www.giga-hamburg.de/openaccess/suedostasienaktuell/2007_5/giga_soa_2007_5_tham.pdf Read More