Entry Modes of Multinational Companies into the International Markets - Starbucks Corporation - Case Study Example

Name: Task: Instructor: Date: Different Entry Modes of Multinational Companies into the International Markets Introduction It has been evident that different companies have embraced different entry strategies with regard how they approach different markets at different times. Multinationals companies would venture into the different markets for different reasons, however the core reasons that makes these companies to move to the new markets include increasing the market size for their existing products, finding new markets for their new products, and finally increasing their revenue volumes through investing in new markets where they feel they have the capacity to make more sales. Effectiveness of any multinational company is often related to its effectiveness in its target markets, its capacity to penetrate to new markets that were perceived to be difficult, and its strength with regard to maintaining its market dominance in the foreign market where it has moved to. All these parameters often relate to the entry mode that was used. When a multinational company has used an effective mode to enter the market, then the company finds it easier to penetrate in the market, and make more sales. Multinational companies choose different entry mode/strategies for different markets due to different market dynamics found in the market. Modes of entry into foreign markets The role that the mode of entry by which a multinational company chooses to in penetrating into a foreign market is very significant with regard to the success levels that company will attain in that foreign market. There various modes of entry which multinationals embrace as they enter into the foreign market (Jansson & Hans 30). The key ones include the following. Franchising Direct Investment Joint Venture Exporting And Licensing Reasons why multinational Companies choose different entry mode/strategies for different markets It is not a matter of argument that different multinational companies have explored different modes of entry as they enter different markets at different times. It is evident that different markets are not only different from the aspect that they are in different locations, but are different because of other dynamic issues that are within and without the company. These issues may include the culture of the people, the cost implication for entering the market i.e. the cost of labor. A clear example may be the cost of labor in China is relatively cheaper than that in China so the company may prefer not to use ‘export’ strategy but establish their manufacturing plant there. Other factors that may be very important to be considered with regard to entry into the new markets may include the legal structure in the foreign markets which affects foreign investments. Often different countries have varying legislation with regards to the laws under which the foreign ventures run their business under (Tielmann & Viktor 33). These and other reasons may just form the ice berg of the matter, however there are more detailed and critical factors that multinationals have to put to consideration before they land to a given entry mode (Johnston & Beaton 44). It is clear that the multinationals after giving consideration to these factors have the discretion to choose the best mode of entry to a new market. Therefore multinationals choose different entry modes in different countries for two main reasons: a. The changing market dynamics in different Foreign markets Entry into a new foreign market may not be an easy task as compared to expanding business in a domestic market. Different markets have different dynamics that calls for multinational may be not to export but rather establish a joint venture. A different set of dynamics in existent in foreign market may make a multinational company to opt for ‘direct investment’ as opposed to maybe ‘licensing’. The following factors (dynamics) in the foreign markets significantly affect the choice that multinationals would embrace entering a foreign market. The cost of Labor It is evident that the cost of labor varies from one given country or region to the other. The other evident fact to note is that multinationals are bog corporations which often need both the skilled and semi-skilled workforce to run their operations. Depending on the nature of the operations of these multinationals, they may be spilt to capital intensive multinational and the labor intensive. The issue of the cost of labor affects both companies since they both employ workers; however the labor intensive multinationals will highly be impacted by the cost of labor in the foreign markets they want to enter. It is evident that the costs of labor will affect the operations of the company and particularly the profit margins that the companies may be anticipating. In practice, multinationals would prefer cheaper entry modes into the foreign markets where the cost of labor is high (Petersen & Bent 37). In this case, a multinational upon conducting the market research and finding that the cost of labor is high may opt for ‘export’ as opposed to ‘direct investment’. This would be to minimize the cost of entry, so that the company can have ample time to penetrate in the market, break even and begin to make profits. The culture of the People The culture of the people in the foreign market may dictate the kind of entry strategy that a multinational company may have preference to. It is outspoken that people in different countries have different culture with regard to traditions, beliefs, and religion. Multinationals may be compelled to study the culture of the people in the foreign markets in choosing an entry strategy, for it is these people who are the potential consumers of the products that the company would produce (Lymbersky & Christoph). A clear case may be most Westernized market where consumers check where the product was manufactured before making a purchase. Most of these consumers holding other factors constant would have preference for locally manufactured products. This means they would shun off from export products. In this case, a multinational company may have to prefer ‘direct investment’ mode of entry as opposed to ‘export’ strategy (Tielmann &Viktor 43). The existent legal structure The existent legal structure that a country has upheld plays a big role in influencing the entry strategy that a company would employ. There are a number of legal provisions that may make some modes of entry be very costly to the multinationals. Other legal provisions also are inhibitive a number of entry modes that may be used by multinationals in entering into a foreign market. A clear example may involve high customs duty tax for imported products with low labor cost within the country. This will make a multinational company to evade the huge cost of tax which would make their products expensive as compared to the local market, and thus make penetration into the market very difficult. In this case the company will go for the direct investment entry mode (Hitt & Hoskisson 41). The economic and political philosophy The kind of philosophy that runs a country plays a big role with regard to determining which market entry would be effective. Different countries have their own philosophy which defines how their economies are run. However the two main philosophies are those in the Western countries and those from the East. The philosophies of ‘capitalism’ verses ‘socialism’ certainly affects the entry strategy that would be used. Countries which have embraced capitalism are more flexible as opposed to those in the East which have embraced socialism which comes with related business challenges. Multinationals which produce consumer goods that they would want market prices to be used through the interaction of demand and supply may find it difficult to enter into markets where the Government authority dictates the price of the products of the company (Kiruba & Levi 34). The technological state of the market The technological state of the market place also significantly affects the kind of strategy that a company would embrace in entering a new market. This affects particularly the multinational companies that are capital intensive. These companies require formidable amounts of technology to support their operations. Therefore for the countries which are technologically empowered, this the capital based multinational may opt for ‘direct investment’ whereas in the countries whose technological advancements are still low, the company may go for ‘joint venture’ mode to lessen the financial burden of establishing itself in the foreign market (Doole & Lowe 40). The market risk factors Through the marketing research different multinationals are able to assess the risk that they are may face as they enter new markets. These risks may be posed with regard to the political as well as the economic instability in the economy they are to invest in. In the cases where the risks are higher, these companies would opt for entry strategies that are relatively less costly. The preferred entry mode in such circumstances may include export, as opposed to modes with high risks such as ‘direct investment’ (Gilligan & Hird 32). b. The changing dynamics accrued to the change in times. Perhaps also to consider the different times that the multinationals enter into the foreign markets; it is clear that a lot happens with time in the market place. The market place has been proven to be one of the dynamic places, and thus markets transform from time to time. There is no market all over the world that has remained to the same. They keep on changing from time to time. This is cause by ether the internal or external factors that keeps on changing. The internal factors in this case may include the change of people’s lifestyle, income levels, population, domestic laws, tastes and preferences among others (Klug & Michael 37). On the other side we have the external factors that affect the markets such as the global change in information technology, international business policies, the changing global inflation rates, the changing exchange rates of the local currency with regard to the currency of the investor countries and so on. Time factors affect the mode that a multinational company may choose to embrace. Multinationals also embrace different entry modes at different times due to the following factors (Gillespie & Hennessey 43). Changing Technology from Time to Time Technology goes with relevancy and relevancy goes with the changing time. Multinationals often would have preference to specific entry modes in the foreign markets, and this is dependent on the technological change that has taken place. For instance steel producing countries used different technology to shape still bars 30 years ago as the case as now. 30 years ago steel manufacturing industries may have had preference for ‘direct investment’ due to the high labor force that may be cheaper in a foreign country, as opposed to date with the new technology that can shape the bars with little labor being required. This may make the company to have preference for ‘export’ products (Bennett & Blythe 31). The Population in the foreign market Population in a given time changes from time to time. Often, in many markets it has kept increasing. The amount of people in a given market may dictate the kind of strategy that would be required. This is because in deciding the kind of strategy that should be embraced; a multinational would want to embrace a strategy that will impact a bigger group of customers. In the context of large population, it may be fit to use a combination of strategies such as combining ‘franchising’ and ‘export’ (Bach & Benjamin 33). Changes in the company’s capital reserves Time comes with good fortunes and at times with bad fortunes. From time to time a business may do well with regard to its capital reserves. In the event that a company’s capital reserves drops, a multinational will have preference of cheaper modes of entry, even when they are known from time to time to use specific type of mode (Doole & Lowe 26). The changing Currency exchange Rates This significantly affects the entry methods that a multinational may have preference for. When the value of the foreign currency of the investors increase as compared to the local currency, then the multinational may prefer modes such as ‘direct investment’ as opposed to ‘export’. Starbucks Corporation Starbucks Corporation is one of the renown multinational that has for years invested in its coffee and coffeehouse chain across the many countries. Starbucks Corporation is based in Seattle, Washington, United States. It is rated to be the largest coffeehouse company in the whole world. It boasts of having over 17. 009 stores, which are spread across more than 55 countries, with over 11, 000 of these stores being found in the United States, over 700 other stores found in the United Kingdom, more than 1000 stores in Canada, over 150 have been established in Turkey, and other stores which have been established this year in China (Kate & Hennessey 35) The company’s expansionist ideology has made it over and over to venture into new markets through different entry strategies. Having most of its product being coffee beans, espresso-based hot drinks, pastries, snacks, drip brewed coffee, as well as hot and cold drinks, salads, hot and cold sandwiches and Panini; the company has taken key initiatives to expand its market presence as well as diversify most of its product to catch up the demands of the new markets, as well as the new demands of its loyal consumers. Great inventions and steadiness of growth in the foreign markets has even caused the company through its entertainment division to develop the known ‘Hear Music Brand’ which has made the company to additionally sell music, books, and films. The company has a diverse pool of products and this is why sell specific products according to the location of the stores (Bach & Benjamin 30). Starbucks Corporation has expanded its global presence through expanding to many markets in the last ten years. In 2011, the company took a bold step to put up its stores in the People Republic of China. The company has entered into new markets in the following ways. 1996: The company opened its first store outside North America through ‘direct investment’ mode of entry, when it opened a store in Tokyo, Japan. 1998; the company again through ‘direct investment’ opened additional stores in UK. They were followed by subsequent opening of stores, through its 60 outlets. 2002, Starbucks opened went on to open stores in Latin America, and Mexico in particular (Bradley &Frank 31). In 2003, through a ‘Joint venture’ with Seattle, it was able to open new stores; later on it bought the whole venture. The company was also involved in purchasing other stores such as Dietrich, the Dietrich Coffee stores. In November 2010, Starbucks raised its marketing, through opening the first Central American store in El Salvador's capital, San Salvador. This extended to 17th of March, 2011 when the company opened it’s a big store in Central America. It was the first store to be opened in Guatemala City, Guatemala. The year 2011, has been characterized by a number of bold steps that Starbucks Corporation has taken to with regard to entering new global markets. This began with its expansion to Norway, where it took the ‘joint venture’ entry approach by not opening its stores but instead it worked with Norwegian food shops through supplying them its products (Abonyi 41). In 2011 again, the company undertook a joint venture with Tata Coffee, which is the largest coffee store in Asia. This joint venture was to make the company be successful in selling its product to India later that year (Bautista & Rosillo 41). In March 2011, Starbucks moved through ‘direct investment’ when it opened its first location in Guatemala City, Guatemala. October 2011, was the latest expansion of the company to a foreign market. Starbuck moved to Beijing, China’s capital. It established a store in Beijing’s International Airport's Terminal 3. Conclusion All in all, it is remains important for multinationals to choose the right strategy that will enable them to rise. The kind of strategy that a company employs in its entry to a foreign market affects greatly how it will perform in this market. Foreign investment by multinationals calls for effective market research where the dynamics of the market can be looked at keenly before an entry strategy is arrived at. It is clear that when the right mode of entry into the market is applied then the company will easily penetrate into the market. References Abonyi, G. Linking Greater Mekong Subregion enterprises to international markets. New York: Bradley, Frank. International marketing strategy. London: Financial Times/Prentice Hall, 2002. Bach, Benjamin. International Marketing Entry Strategy for the Red//Green Company. London: GRIN Verlag, 2007. Print. Bautista, Rosillo. Firm strategies in international markets: the case of international entry into the US wine industry. 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