Company Entry Modes - Essay Example

Running Head: INTЕRNАTIОNАL BUSINЕSS МАNАGЕMЕNT Company Entry Modes Name Course Tutor Date Introduction If a company is seeking to enter into a new market, a venture or an investment opportunity, there are a number of issues that management should put into consideration before making the crucial strategic decision. Out of the various modes a company can use, evaluation on the best option should be done in an in depth manner for maximum benefits to be reaped. The company should look critically look at the pros and cons of every potential option and weigh the benefits against the detriments. Before choosing, the company should realize that every option has strong dominant aspects. The decision should be based on what kind of business the type of business accompany is conducting and which form of entry best suits its business portfolio. Among the most common entry modes into markets includes exportation, franchising, licensing, acquisitions, joint venture among other ways (Tielmann, 2010). This paper will look at the various ways a company may use to enter new markets and their corresponding pros and cons Modes of entry There are several modes of entry that a company may use to enter new markets. These modes depend on the size, ability, business, and policies among other aspects of the company. In general, there are six entry modes that a company may use to enter in markets especially foreign ones. Licensing Licensing involves a licensee and a licensor coming up with an agreement which is meant to benefit the two parties. Licensors sell their know how to the licensees where they are to do the type of business the licensor does. This is usually for an agreed amount of time which may be renewed afresh after expiry. The license agreement gives the licensed party the right to use patents, formulas, copyrights, designs, trademarks and processes belonging to the licensor. The licensor earns royalties on the licensing agreement. Licensing is a preferable mode of entry where the company is unsure of the market conditions of the ne markets. It is a less risky way as it assures a guaranteed amount of income from the licensee. It is advisable when there is uncertainty about the foreign market in terms of political, economic and general stability. As a primary entry mode, licensing is a slow and steady way of establishment in a foreign country. It is also beneficial when the company cannot meet capital obligations that may come with setting up business in a foreign country. Such costs are left to the licensee. It is also an appropriate strategy in countries where entry polices is restricted. Over time the company may establish itself and even get patents in the foreign country. . However, licensing calls for giving up a huge stake in control. The licensee takes control and the licensor has little or no say or they are guided only by the agreement. Coordination may become a problem especially where the licensee lacks technical skills in the related field. It is also a risky mode as it exposes the licensee to competition. It may also ruin the reputation of brand in a foreign country if partners are incompetent. Franchising Franchising is very similar to licensing in many ways. The franchisee gets to have the know how of the franchiser and pays an agreed amount of royalties. The franchiser utilizes the franchisee’s trademarks, patents, copyrights and other assets. The difference with licensing is that the franchiser has more control and the franchisee must agree to certain conditions laid down by the franchiser. It is a common practice in the service industry such as McDonalds of KFC. Just like licensing, the company avoids development plans and high risks associated with entering new foreign markets. This way, the company can carefully study the market and make informed decisions on other entry options (Windsperger, 2005). The franchisee is bound by strict rules and requirements from the franchiser. This may be disadvantageous to the franchiser. There is always the risk of disagreements and legal battles if one of the partners in the agreement breaches their contracts. Even with franchising, control levels are not the same as some crucial decisions are left to the franchisee. The franchising company also risks having crucial information getting o the wrong hands. Joint ventures Joint venture are formed when two or more independent companies join together to form a single venture. Jointly, partnering companies can have more influence and position in the market. Pooling of resources together minimizes the risks and also enables companies to utilize their expertise in their areas of knowledge. Joint ventures are usually separate from both parties. They are usually held on an equal basis, though, this depends on the terms of agreement that parties come up with. The level of control is dependent on the amount of investment that a company puts into the venture. The bigger investor gets more control. All partners in a joint venture share costs and benefits accruing from it. Entry risks involved are also shared among the partners and no one partner can suffer all the losses. Companies involved also complement each other in order to get the maximum advantage from the venture. Joint ventures are also in a good position to penetrate foreign markets by gaining knowledge from local partners. Local firms are strategically significant in joint ventures as they boost the confidence their partners. Local partners are capable of influencing the government authorities and affect the social political operating environments of the venture. It is a popular entry mode into markets as its benefits have been proven past ventures all over the world. The complexity of joint ventures may cause conflicts between the parties especially regarding issues such as shareholding ad control. It is difficult to maintain a smooth relationship all through. Conflicts may also arise in relation to expansion strategies. Different partners may have different expansion strategies and this may be a cause for disagreement where the stronger partner leads an unstable venture. It is significant that partners come up with crucial terms of agreement and a conflict resolution ways to keep the venture afloat. Wholly owned subsidiaries This means that the company owns a venture entirely in anew market. There are several ways that a company could fully own ventures in new markets. For instance, for a Greenfield venture, the company establishes a new legal entity from the beginning. Secondly, a company can acquire another firm fully and take full control. It is strategic especially when an already established firm is acquired. The acquiring company may use its strategic position to promote its agenda in the new market. In a fully owned venture, the company has full and tight control in running the venture. The company can make its own strategic plans and take charge of its activities. It does not have to relinquish any rights, control and other crucial aspects (Welch, Benito, & Petersen, 2008). All profits and benefits are accrued to the company. However, these advantages are accompanied by several disadvantages. The cost of establishing ventures in new markets is very high and is accompanied by high risks. Such ventures may face challenges associated with entering new business environments with high uncertainties. There is a high risk of entering into an uncertain political, cultural and economic environment. Exporting Another major way of entering into other markets is through exportation. The company sells locally produced products to foreign countries. It is a major way of taking advantage of deficiency in foreign markets. It is convenient a less risky compared to full ownership of ventures. Exporting is suitable for companies that do not have substantial experience in the international markets. The exporting way is, however, coupled with some complexities and involves hiring third parties such as agents and customs. A lot of documentation and legal requirements are also needed. Therefore, the exporter only gets a small portion of the benefits. Operating costs and levies also take a large chunk off the proceeds. Exporting is lucrative when the exporting company establishes itself and understands the foreign markets and strategizes better entry modes (Davis, Kimmer, & Hassard, 2012). Factors that affect entry mode strategies Apart from choosing the appropriate entry mode, there are factors that have to be considered when a company intends to enter into other markets. Some basic and crucial questions need to be answered. A decision on which markets the company should enter should be evaluated. It should be considered whether the company wishes to expand in its operations or it is just looking to invest t in new ventures. Either way, the long term benefits are the main decision making guidelines. Looking at the markets in depth should consider factors such as political and economic players that influence the way businesses are carried out. The long term benefits that can be gained from entering other markets significantly depend on the size of the markets, wealth and purchasing power in such markets and the level of competition that is likely to be faced in the new markets. Using these criteria, the company can rank possible options by looking at attractiveness and long term benefits (Chen & Mujtaba, 2008). Timing is another important aspect that should be considered when entering new markets. Timing should be strategically done so that the company does not enter too early nor too late. Early entry could be a risky venture as there are no proven examples of potential volatility or prosperity in such markets. Early entry could be a huge gamble that could lead to immense benefits or massive losses. Early entry could see the company become an early mover. This way it can set up strongly and hold a huge chunk of the market before competitors join in. it is also a great strategy for preventing entry from competitors. The disadvantage, however, is that huge amounts of resources are spent in knowing the market and there is a high risk of failure. Late entry, on the other hand could see the company entering into a highly competitive area and hence prove to be futile. It is advisable for entry after a few firms have done it to enable evaluation of their performance and also learn from their mistakes. The issue of costs is one of the major determinants of entry modes in any markets. Costs are weighed against profits and benefits that could be associated with a specific mode. Direct costs are costs that would be incurred in terms of setting operations running in the new venture. The company should also consider opportunity cost which is the benefit that would be foregone by choosing an alternative entry mode. Cost of money in terms of currency stability and fluctuation is another cost aspect that is crucial. Government and administrative policies of foreign countries regarding entry is also important (Chen & Mujtaba, 2008). In general the internal and external environments of the underlying the company will affect the entry strategy. Internal environment relates to size, experience, and asset base. Greater experience in the international market gives companies a competitive advantage when entering new markets. Other factors include local political, legal and cultural factors. The market specifics will also affect entry. In the external environment, target country market factors are important. Their production factors, political social, economic, government regulations and policies will also determine the entry mode (Davis, Kimmer, & Hassard, 2012). Conclusion It is the ultimate goal of every company to grow to international levels. If this goal is reached, the company has to strategise on the entry strategy it is going to take in order for it take full advantage of entry. It may take years for a company to reach a point where entry to another market is necessary. There are many options that a company can choose from but this will depend on the type of business and the scale of expansion it is looking to achieve. The type of business will also determine the best entry mode to take. Businesses dealing with perishable commodities are good for the exportation mode of entry while ventures such as fast foods are better franchised. Manufacturing and processing industries can be formed through joint ventures or can be fully owned. Apart from suitability of the entry mode, factors in both the local market and the foreign market will also affect entry. This is in relation to political, social economic, cultural and administrative aspects. Other crucial factors are timing, costs and expected benefits References Chen, L., & Mujtaba, B. (2008). The choice of entry mode strategies and decisions for international market expansion. Journal of American of Business , 322. Chen, L., & Mujtaba, B. (2008). The Choice of Entry Mode Strategies and Decisions for International Market Expansion. Journal of American Academy of Business , 233. Davis, J., Kimmer, K., & Hassard, C. (2012). Global Business Entry Modes. Retrieved August 7, 2013, from http://poster.4teachers.org/view/poster.php?poster_id=386446 Tielmann, V. (2010). Market Entry Strategies. Munich: GRIN Verlag. Welch, L. S., Benito, G. R., & Petersen, B. (2008). Foreign Operation Methods:Theory, Analysis, Strategy. Camberley: Edward Elgar Publishing. Windsperger, J. (2005). Economics And Management of Franchising Networks. Berlin, Heidelberg: Springer. Read More