Equity Mode of Entry Techniques - Coursework Example

GLOBAL BUSINESS Student’s Name Course Professor’s Name University City (State) Date Introduction An organization that wants to succeed in the business must consider the concept of entering into global market. It is because of the competition in the domestic market as well as technology developments. As a result of this, many countries have eliminated trade barriers with the aim of attracting and retaining investors to improve their economic growth. In this regard, various market entry strategies are available. They are classified into equity and non-equity modes (Hill, 2014, 2). It is the responsibility of the management of the company to select the most appropriate market entry strategy that enables them to succeed in the new market. The purpose of this paper is to discuss the merits and demerits of the global entry strategies which are classified as equity and non-equity. The key words used in this essay include franchising which is contractual agreement between two companies, direct exporting where an organization exports products directly to the customers, equity and non-equity international market entry strategies. The structure of the essay starts by discussing non-equity entry techniques and then discusses equity strategies with their merits and demerits. Self-reflection is also provided and finally the conclusion summarizing the entire findings of the essay. Non-equity entry strategies The following are the non-equity entry strategies an organization can adopt when entering into new markets; Direct exporting It is the mode of entry where a company manufactures products in the home country and exports them to a different global market. It is applied when an organization wants to enjoy economies of scale. For instance, a manufacturing company makes products at a central place and distributes them to different markets globally (Dyer et al, 2003, 12). It means that the company has control over the distribution channels. The technique introduces the products into new market through export once the company has identified an opportunity in the international market. Advantages The first advantage of direct exporting is that the company has control over the foreign markets to distribute the products to. It means that the company has exclusive choice of the international markets and representative companies. Also, the direct export improves communication between the company and the customers because they provide effective feedback thus building strong relationship (McDonald et al, 2002, 23). Furthermore, the company is able to protect its patent rights such as trademarks intellectual property. Also, the company can increase its sales because of the large market share. In this regard, the company will have exclusive rights to control its operations. Disadvantages Despite the benefits of direct exports, demerits also exist. The first demerit is that there are high startup costs and high risks as compared to indirect exports. For instance, there is high risk of distributing the products to wrong markets and rejection by the target market (Peng, 2008, 21). Also, it requires large investment so that it can be successful. For instance, it requires competent workforce to conduct market research and adequate time to transport the products to the new markets. It also takes time to promote the products in the new market. Indirect exports It is another technique that an organization can use to introduce products into a new market. A company chooses an intermediary to distribute its products in the new markets (Cullen et al, 2011, 41). Once the products are manufactured, the middleman has the responsibility of using its channels to distribute to the target customers. Advantages The first advantage of indirect exporting is that the company is likely to access the market easily. It is because the intermediary understands the market well and can use its channels to distribute the products in the market. Also, the company concentrates its resources towards production effectiveness and not the marketing because that is the responsibility of the intermediary (Salomon, 2006, 19). Moreover, the manufacturing company is not committed regarding finances because the intermediary carries the responsibility of the marketing the products. Finally, the business does not have direct access to processes involved in exportation. Disadvantages The biggest disadvantage of indirect export is that the company does not have access and control over the distribution channels used. It is because it is the responsibility of the middleman to distribute the products and determines the channels to use (Cavusgil et al, 2008, 15). Finally, the company can experience low sales because the distributor might select wrong market segment. Licensing It is another international entry mode where a company allows another company in a foreign market to manufacture its products and sale to the market. The agreement can be exclusive or non-exclusive considering the relationship between the two firms (Hitt, 2009, 32). The home company provides limited rights to use when manufacturing the products regarding utilization of resources. Limited rights include patent rights and intellectual property. Advantages It helps to connect with new international markets effectively because the licensor helps to introduce the products into new markets easily. Also, the company has potential to expand easily without incurring huge resources (Bartett, 2009, 41). Finally, it helps to reduce political risks because the licensee understands the political dynamics and can protect the rights of the home company. Disadvantages The company experiences low income because the licensee keeps part of the income generated according to the agreement. Also, the company can lose control over the marketing and distribution of the products especially when they do not put in place best practices (Hollensen, 2008, 51). In the process, the company will lose its reputation in the global market due to incompetent and bad practices of the licensee. Eventually, the partner can start manufacturing its products thus becoming a competitor. Franchising It is the business strategy whereby the parent company is paid some royalty fees to a parent company to have some exclusive rights to the trademark (Peng, 2008, 21). The aim is to sell the products using the trademark of the other company. The process of entering into the agreement is longer and the licensed partner has rights to use the trademark when selling its products. Merits The first merit is that the political risk is less as compared to other modes of market entry. It is because the host company understands the political risks in the country and its name is well known thus political risk cannot affect its operations (Hill, 2014, 12). Also, there is low cost of introducing the products into the new markets because the licensed company is well established in the domestic market. It also promotes the company’s ability to expand into different locations easily. Disadvantages Firstly, it is not possible to control the operations of the franchisee and this can affect the operations of the home country. Legal disputes are likely to rise and this can lead to conflicts between the partners (Dyer et al, 2003, 33). Finally, the franchisee might use the knowledge gained from the partnership and become a competitor. Equity mode of entry techniques Joint venture It is the mode of entry where two partners agree to jointly to pursue and opportunity in the global market (McDonald et al, 2002, 27). For instance, they conduct joint marketing and research and agree on the distribution channels to use in introducing the products. Merits The partners in the joint venture share the risk of entering the new markets. Example of the risk they share is political risks and failure to succeed in the market (Hill, 2014, 32). Also, joint ventures are important because they help to share technologies between the companies and finally reduce the cost of introducing the products in the market. Demerits However, the potential issues affecting the joint ventures include mistrust among the partners. Lack of trust can affect the working relationship and eventually lead to break up (Cavusgil et al, 2008, 15). The other issue is regarding the ambiguity of performance. It is because the parties might not agree when splitting the pie. Finally, cultural clashes can affect the working relationship thus affecting the partnership. Reflection Based on the above discussion, it is essential to understand the management of an organization must develop the most appropriate strategy that protects the interests of the company and the customers (Salomon, 2006, 19). The factors to consider when selecting the mode of entry include cost, types of products and effectiveness of the strategy to protect the company’s reputation as well as improve its performance. Conclusion Global market expansion is the aspect many organizations apply with the aim of improving their performance. Developments of technology have promoted the intention of many companies expanding their businesses operations to the global market expansion. However, it is important to understand the different strategies that organizations apply when entering into the global market so as to select the most effective appropriate strategy that will ensure success. In this regard, the modes of entry are divided into equity and this includes joint ventures. It is the technique where two companies with same interest agree on the approach they can use to enter into global market to exploit the opportunity identified. Also, there are non-equity modes of entry. They include direct exporting where a home company manufactures products in the home country and transports them directly to the global target market. Another entry strategy is indirect exporting. It is where the products are distributed to the international market using a domestic intermediary to distribute the products to the market. Further, there is franchising technique where a company allows another one in a different country to use its rights such as trademark to sell its products. It helps because of its ability to introduce the company’s products into the new market. Finally, there is licensing mode where a company in the domestic market is licensed to use the home company’s intellectual property to manufacture the products and distribute into the new market. However, the technique is not appropriate because bad practices of the licensee can affect the company’s reputation in the market. References Bartett, C.A (2009) Transnational Management: Text, Cases and Readings in Cross-Border Management. 5th Ed., New York: McGraw-Hill Higher Education. Cavusgil,T.; Knight,G & Riesenberger, J (2008) International Business - Strategy, Management and the New Realities, London: Pearson. Cullen, K. Praveen, P & John, B (2011) Strategic international management (5th ed.). Australia: South-Western Cengage Learning. Dyer, J. H., Kale, P & Singh, H (2003) “When to ally & when to acquire”. Harvard Business Review. Vol. 82, No. 78. pp. 108-15. Hollensen, S (2008) Essentials of global marketing. Harlow, Essex, England: Pearson Education. Hill, C. W (2014) International Business: Competing in the Global Marketplace, 10th Ed (Global Edition) McGraw-Hill Irwin: Maidenhead. Hitt, A (2009) Strategic Management Competitiveness and Globalization, Nelson Education Ltd, McDonald, F. Burton, F & Dowling, P (2002) International Business, London: Cengage Learning EMEA. Peng, W. M (2008) Global Business. New York: Cengage Learning. Salomon, R (2006) Learning from Exporting: New Insights, New Perspectives, Edward Elgar Publishing Limited. Read More