Why Multinational Companies Choose Different Entry Modes for Different Markets at Different Times - Coursework Example

Running Head: WHY MULTINATIONAL COMPANIES CHOOSE DIFFERENT ENTRY MODES FOR DIFFERENT MARKETS AT DIFFERENT TIMES Topic; why multinational companies choose different entry modes for Different markets at different times Name: Course: Instructor’s Name: Date: Introduction; Today, due to increased globalization of business, more intense pressure has been put on most multinational companies to seek immediate entry into the foreign region, because markets are being integrated with each other and countries are becoming more dependent on one another in order to exchange the wealthy resources available. This is scrapping off the geographical barrier that existed in the past years, thus creating free accessibility for foreign investments by the international competitors, development in transport and communications which have reduced cost and risks as well as improving the flow and filtering of sensitive market information, therefore making foreign investments to be more attractive than it used to be (Hill, C.W.L., Cronk2010). This has been facilitated due to the fact that we are living in a global economy whereby the time people take to move from one continent to another has been greatly reduced as a result of modern technology such as internet and other similar connections which make it so instant for network connections in the business sector to be very fast and economical. Therefore there is an immediate need for all the businesses which operate in this global market to develop all the appropriate strategies so as to cope up with these dynamic developments in the market sector. One of the best example of such companies in food industry which have taken such measure are Kellogg’s, Cadbury Schweppes and Nestle that have developed market networks and global distribution based on power brands. As a result of globalization of business, the work hade has grown massively than the world output. This lead to surging of foreign direct investments while imports penetrated deeply into the world industrial nations and the comparative pressures increased from one particular industry to another. To retaliate and cope with this global pressure, firms started expanding to other foreign countries (Hill, 2010; Berlet & Ghoshal1087; Donnell, 2000). Despite all the benefits such as increasing both sales and market shares that are accompanied with a company trading in the foreign markets, entry into these markets is very challenging from marginal point of view (M.W. 2010). It is necessary that when a firm chooses to operate outside its domestic market, there is an argent need for it to choose which market to enter, the entry mode for entering the new market and the organizational structure to use. Entry mode is a defined institutional plan that a company applies to market its product into any foreign market for the first five years (Sivakuma & Ekeledo 2003). This entry modes can be classified into different categories, for instance, a firm might choose to export its products through independent intermediaries so as to enter in one market, while another firm may choose to operate overseas by having contractual modes like franchising and licensing or export through an integrated entity-owned channel or even through foreign direct investments such as wholly owned subsidiary and joint ventures (Eramili, 2006). Selection of an appropriate entry mode has a very important role when determining the performance and success of any firm in the new market (, J. R. 2008 & Ekeledo, 2003), because when inappropriate mode entry is selected, it may result into a significant financial loss and exit out of the foreign market. Descriptive and analytical review of reasons why multinational companies choose different market modes at different times; There are various reasons why multinational companies choose different market modes at different times; these reasons are base on both internal and external factors affecting a particular market segment. Internal factors are those which are within the firm’s control, examples are, the nature of production, company resources available, experience in using a particular model, market share target, risk associated and degree of control( Ekeledo, 2003). On the other side, external factors are those which outside the firm direct control; which are; market barriers, industry barrier, market growth rate and target country environmental factors such as political environment and level of economy. According to Journal of business studies (2004) one contemporary example which clearly shows the effect of external factors is flat panel display (FPD) industry which came into existence over 100 years ago after emergence of synthetic dye industry. High volumes of production were first experienced in Japan market in 1990s, and later after being spurred on by multinational community when the dye product enter into the global market, production spread over to Korea which became the largest producer in the market due to external factors in that market which Korea concentrated on to have a more competitive advantage over Japan that had existed in the market for quit a longer period. The strategy adopted by Korea to enter into the market through choosing an appropriate mode; producing unique and more advanced product that the consumer demanded at that particular time, enabled them to rapidly grow, dominating 85% market share over its competitors during that economic period (Murray analysis), thus reporting massive sales. It is important to understand that, Company’s core competitive advantage lies in the main product and the unique form of the product produced which relies on the specific resources available. Different multinational companies have different investment performance depending on the characteristics of resources available, for example some resources are only found in limited geographical locations of the binding nature. In order to have a competitive advantage over other competitor, the company may opt to acquire another company which has those require material. Recently, china being an example, caries out Merger and Acquisition (M & A) frequently in the international energy market, like CNOOC’s acquisition of JUNIK which aimed at making up the shortage of domestic resources (international Journal of Business and Management Vol4 2009). Once all the required resources to compete effectively are available, a company will freely choose a mode that has guaranteed returns at that particular moment. In building any market entry strategy, one of the crucial factors is time, because this will create an image and intelligence system by promoting effort, tasks time and money. There is large investment needed to promote the brand name of any company that needs To operate in the global market. Transaction cast are also critical which includes bargaining and researching cost may act as a high barrio to this multinational companies. Making research prior to entry into a particular market is so important, this is necessary to know if the market mode is prone to changes. An example is seen when a Swedish retail firms which entered into a foreign market of over thirty firms with a particular entry mode in that particular year, i.e. United Arab Emirate, the market modes changed. Such a situation could have been cubed if research would be made earlier to understand the behavior of the Swedish market modes (Ekeledo & Sivakuma, 2003). This can also be seen in the case which involved Citrus Marketing Board of Israel. Maximum spreading of the market risk is very important because, global business environment is so dynamic and is prone to changes at any particular time as seen in the example of Swedish market and also recently the Asian economy which experience strong growth that lead to fall in the market share overnight, there is a greater need for such multinational companies to hedge against risks resulting from such economies and market fluctuations by operating globally market which spreads such risks. Based on the case of Euro Disney, different modes of market entry may be appropriate if applied under different circumstances as it plays major role in the success of a project. In the example of Walt Disney co which faced a major challenge of constructing theme park in Europe, though its entry had been licensed to operate but it chose direct investment in European theme park where it owned more than 49% shares while the rest 51% was held publicly. Other than the mode of entry, according to Disney’s decision it was so essential to locate where exactly to locate it in Europe. This example directly shows that future success is not very much guaranteed especially when a firm is moving to operate in a different culture and country. The changing socio-political, cultural diverse and institutional contexts also present a major challenge to multinational enterprises such as the emergence of new Asian economies and their radical expansion overseas has really revised a debate on the new global market players (Journal of the word business 44, 2009) and in particular brought about the importance of these geographical issues. Therefore the new market player has to consider drifting towards regionalization as well as shifting demographics, in order to exploit cost differentials on a global basis. The outcome of market selection seems to shed more light on any entry mode choice by those firms which are less experienced firms because entering a similar culture markets can be a deliberate strategy on part of inexperienced company to facilitate the assumption of direct control. It doesn’t only help to avoid the uncertainties of evaluation on the new unfamiliar market but it also facilitates the management and development of the integrated operations (Journal of international business studies 3rd edition). These multinational companies will venture into en economically attractive proximate market where there are more opportunities though it might be lee familiar in such a territory. At such a point where an inexperienced firm enters in a competitive market mode this can make it have a lot of constraining factors, such as lack organizational plan and confidence can make it opt to look for partners and intermediaries fast before operating in unfamiliar market. Once this companies have jointly merged together (M.H, 2005), they will diminish and expedict transactional unnecessary which might have been felt when operating independently. Therefore this speculation can be used by those multinational investors making an appropriate entry choice mode that is dynamic and evolutionary. If a firm is considering entering into another country market where there are more competitors that needs to be acquired, even where incumbent exist, then it has to put into consideration the availability of competent skills and technology so as to have a higher stake in the market share. This clearly facilitates the future growth of such a business rather than prompting its existence. Ones the company has put in place database and information system which will facilitate positions and global strategies, and then it can go ahead and choose an appropriate market mode. This mechanism will enable the development of customer personal profile across the globe through cross-matching the intelligence of this database. There is also a high range of firm operations in a very low efficient market due to their inefficient management (Academy of management review), therefore depending on different levels of management that multinational companies put in place this will play a greater role in making the entire operation so efficient and successful based on the market mode chosen. Those firms with low management level are less competitive as compared to those companies which have high level of management resources such as skilled personnel who are competent and can deliver quality result when they are exposed to the challenging global economic environment. Maximum return will be attained at this high level of management as illustrated in the case of Greenfield investment that circumvented the high level of risk of management (International Journal of Business management). Some multinational companies which do not have highly skilled management are faced with the risk of exiting from the global market within a short duration immediately after having listed on the multinational stock exchange market (J.C.Y. 2006) Thus, it is so necessary that any company which is considering to compete effectively with those which are dominating in the market, has to have very competent management who can adhered to any changes. Legal regulations applicable in different markets is one of the key factors multinational companies have to look at before deciding to choose on which market mode to enter into and at what particular time, some markets which operate in countries which have strong and strict legal legislation governing their market, has proven to be very challenging and acts as regulatory constraints that protect incumbents market power. Therefore companies competing in such emerging markets frequently try to activate policy makers and local bureaucracy to protect their own domestic interests when they are threatened by competition from such markets. In addition such countries have restricted tariffs and they also impose high taxes on foreign companies that operate in their land. Most multinational companies would wish to operate in a free economy where there are no restrictions in the market therefore making them to choose different market modes. Sometime imposition of new laws in particular countries may discourage or deliberately kick away investors as they might appear to be against there operations. (Journal of international management 2nd edition). Conclusion Based on the analysis presented above, on the reasons why multinational companies choose different market modes at different times (2nd Edition McGraw Hill/Irwin) it is very clear that having experience on the behavior of any foreign market plays an important role for foreign market entry. For instance less experienced firms will prefer entering in an international market that is similar to its domestic market (international Business review 2009). Then later, as it gain more experience and become more competent and diversified, they increasingly they venture fully into the global market. This kind of result experienced by such companies, strongly support a model that depict the gradual outward diversity of firms in the international market operations. The outcome of entry mode choice has a direct implication which is contrary to conventional linear conceptualizations, because the relationship between experience in choosing a market mode and the desire for controlling the market is U-shape. The entire result on the choice of market mode taken into account will be reflected in the long rum when the performance of such a particular company is high despite the constrains and limitations which exists in the global market. Timing has to be one of the key essential things an investor should put into consideration so as to tap the opportunities available in the global market by producing what the market demands for at that particular time. Reference; Hill, C.W.L., Cronk, T., Wickramasekera, R. (2010) Global Business Today: Asia PacificEdition, 2nd Edition McGraw Hill/Irwin, Australia Cavusgil, S. T., Knight, G. and Riesenberger, J. R. 2008 International Business: Strategy, Management and New Realties. Pearson. 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