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Theories for Suitable Market Entry Strategy

2474 words (10 pages) Essay in Business Strategy

08/02/20 Business Strategy Reference this

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Outline several models that could be used to expand into another market using real life examples.

 

“Global marketing focuses upon leveraging a company’s assets, experience and products globally”, according to Keegan (2002), which in the business world today, is evident as globalisation has an increasing influence on management decisions, procedures and the culture of the business. It has never been easier to expand into foreign markets today, which can be evidenced through the openness to it due to liberalisation and deregulation.

Through a rise in technology, with communications continually increasing globally, it is without doubt that individual economies have merged into the international image. Economies which were formerly detached from each other, are now shaped more by each other’s movements and procedures, and the situation in the global markets which can therefore help them to form their own policy dealings.

In addition, a look at the appropriate figures, for example The World Development Report by the World Bank, evidently indicates that the world is becoming progressively interdependent for its economic progress. Indicated through 1954, in America, imports were only one percent of GNP, but in 1984 they had risen to 10%.

The awareness of market entry mode choice derives from the theory of international investment. It was considered as a problem with distinctive feature, extent, form and pattern of international production (Southard 1931; Hymer 1960; Caves 1971 and 1974; Dunning 1958 and 1977). Then it was examined as a critical subject in international marketing by many economists and marketing professionals. Wind and Perlmutter (1977) reasoned that the choice of market entry mode has an excessive bearing on international operations and can be held as “a frontier issue” in international marketing. Root (1994) asserted that the choice of market entry mode can be said to be one of the most critical strategic decisions for multi-national enterprises and companies to make. It concerns forthcoming decisions and performance in foreign markets, and it requires a concomitant level of resource assurance which is challenging to transfer from one to another; particularly from high level to low level. Kumar and Subramaniam (1997), highlighted that the choice of market entry mode is a critical strategic decision for companies aiming to conduct business overseas.

As explored by Meyer, Estrin, Bhaumik, and Peng (2008), a company can expand into foreign market by use of the following methods: exporting, licensing, joint venture or direct investment. The entry mode that a multinational company chooses has implications; as Zekiri and Angelova (2011) explored, for example, how much resources the company must commit to its foreign operations, the risk that the business must tolerate as well as the degree of control that the company can exercise over the operations on the new market.

The method of ‘exporting’ is commonly used by companies; indirect or direct. As many countries fail to present an adequate amount of opportunity to support local production they use exporting as it permits a company to manufacture its products centrally for numerous markets and therefore to obtain economies of scale. Invensys Energy Systems (NZ) Ltd. Is an example of a firm guided by exporting. This is a typical case of a small to medium sized specialized business in a small home-based market (New Zealand) and marketing niche products globally.

Indirect exporting is when a firm interacts with foreign markets through a domestically located intermediary. The key advantage for using a domestic intermediary is through that entity’s education of foreign market environments. Predominantly for businesses with slight or no experience in exporting; use of domestic intermediary offers the exporter with accessible expertise. The most common forms of intermediaries are brokers, combination export managers and manufacturers’ export agents. Browne & Dreyfus works as the market connection, accordingly distributing exporting skills with some minor companies that find it problematic to uphold their own exporting administrations. Despite their efficacy for small companies, indirect exporters represent a small fragment of the over-all global marketing.

Direct exporting refers to when a firm uses an intermediary located in the foreign market. An exporter must communicate and interact with a large number of foreign contacts, maybe one or more for each the corporation intends to enter. Pacific world corporate; a small manufacturer, based in California, of artificial finger nails and nail care products. The company started to export its products in 1992. Even though the company is still small, with only thirty five employees, the brand is now one of the greatest widely distributed artificial nail brands in the world. With export 15 percent of sales and increasing rapidly, it is said that the export share is projected to reach 25 percent over the next few years. The business believed that it was successful by forming long-term relationships with distributors, agents and other associates.

This market entry strategy is ideal for new companies who do not have adequate capital and resources to take risks. It is also easier for the firms to recruit agents or distributors who will take control of exporting and promoting the new product in the new market. This is a cost effective method through the use of online promotion that is easily accessible for businesses to market their products.

Yet, a significant challenge in this method is the fact that companies may not have the ability to respond to customer communications as fast as a local agent, as there is no direct physical contact with the customer which also leads to the risk of non-payments.

Another method of entry into foreign markets is licencing. In simple terms, licensing is a contractual arrangement. A company allocates the right to patent; which protects a product, technology or procedure, or trademark; which protects a product name, to another firm for a fee. The use of licencing as a method of market entry allows a company to gain market existence without a major investment.

Companies use licencing for numerous reasons. The company may not have the data or the time to participate more actively in international marketing. The market potential of the target country could possibly be too small to support a manufacturing venture. A company with restricted properties and resources can benefit by retaining a foreign associate to market its product; both sides would sign a licencing contract of agreement. The method of licencing saves capital since no further investment is needed and allows scarce managerial resources to be focused on more profitable markets.

Countries where the political or economic condition appears unclear, a licencing will avert the possible risk linked with investments in fixed facilities. In other countries rules and regulations favour the granting of licences to self-governing local manufacturers as a way of building up an independent local commerce. In such cases, a foreign manufacturer may choose to set up with a proficient licensee; regardless of a large market size, for the reason that other forms of entry may not likely.

Sanofi, a French pharmaceutical corporation, has advanced in a major use of licencing. As a new entrant into drug trade, the business grasped that it could only do a controlled amount of research developments if it had to generate them from the lab to trial and ultimate market entry. Sanofi consequently decided to engage in active licencing, allowing further pharmaceutical corporations to market its newly discovered medications. Because of licencing and sharing, Sanofi was able to advance in many more research and development strategies. With this plan, Sanofi proceeded to twenty-fifth place in pharmaceutical industry and accomplished sales of $3.5 billion.

A different method of entry of is joint venture; a partnership between two firms or people. Under a joint venture procedure, the foreign business requests an external associate to share stock ownership in the new element. The participation of the cohorts might vary, with some companies taking either a minority or majority stance. Generally, the two businesses remain detached from each other, but operate together on one venture to be successful. In the majority of cases, international firms choose totally owned subsidiaries for motives of control, when a joint venture partner secures share of the process, the international firm can no longer function self-sufficiently which occasionally leads to inefficiencies and disagreements over accountability for venture.

Even with the possibility of problems, joint ventures are popular because they offer significant advantages to the foreign company. By introducing a partner, the business can part the risk and danger for a new venture. The JV partner might too have vital skills or acquaintances of worth to the international company. In addition, the partner may embody notable local business interests with suitable government links. A firm with innovative product technology might correspondingly advance in market access through the JV direction by working with businesses that are equipped to dispense its products.

Several international companies have entered Japan with JVs. Throughout the 1960s and 1970s, the Japanese market was considered a tough environment, unlike other industrialised markets as rules and regulations firmly measured and controlled equity involvements in ventures. Japan is one of the world’s leading mobile telephone markets; in reference to innovation as well as size. Japan’s market is characterised by relatively low levels of penetration compared to Europe. It is a high growth market as investigated by Emerald (2004). Vodafone identified Japan as a potential market, viewing it as a way to increase their global market share by entering another foreign market (Dodourova, 2003). However, once they did enter the Japanese market, they failed to build up trust within their new market, using David Beckham in their advertising campaign rather than a Japanese actress, Norika Fujiwara.

Joint ventures have some risks, as they often go wrong and are difficult to exit. Initially, there is the risk of buying the wrong business or investing too much capital into the business.

One more method of entry into foreign markets is direct investment. The World Bank defines foreign direct investment as “the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor” such as factories and machines, e.g. Nissan, a Japanese firm, building a car factory in the UK. Foreign direct investment is when you directly invest in facilities in a foreign market. It involves a lot of money to deal with the expenses such as premises, technology and staff. In current years, foreign direct investment has also expanded to consist of the purchase of assets and shares which give investors a management awareness in a business. This method can be done either by establishing a new venture or developing an existing company. It should be said that foreign direct investment must be distinguished from portfolio transfers; transferring financial capital to foreign bank accounts, which is referred to as indirect investment.

Most foreign direct investment is embarked on by companies and multinational corporations who ultimately aim to benefit from some of the advantages, which includes the lower labour costs in other countries. India is one of the biggest inheritors of direct investment for this reason. Companies also wish to take advantage of immediacy to resources and material, rather than the act of transporting them around the world which also involves an expense. In addition, there is also an opportunity to therefore use local knowledge and date to help break into domestic markets. In return the recipient country, such as India, can therefore benefit and gain for knowledge and expertise of professionals of a foreign multinational.

However, like every method, there are disadvantages and risks to using this method. Direct investment does not always benefit recipient countries, as it ultimately enables foreign multinationals to gain from ownership of materials and resources, with little evidence of wealth being distributed throughout the society within; acting as a form of exploitation. In addition, multinationals have been criticised for the poor working environments in foreign factories such as Apple’s factories set up in China or Nike factories in Bangladesh.

Ultimately, market entry strategies can have an extensive influence on an organisation’s global strategy into foreign markets. Choosing the best and most suitable entry strategy is a complex decision-making process which involves various considerations. Which entry strategy to choose greatly depends on countless strategic factors like ease of exit, speed of entry, cultural factors and competitors.

Reference List

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  • Caves, R. E., ‘Industrial Corporations: The Industrial Economics of Foreign Investment’, Economica 38 (Feb., 1971).
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  • Zekiri and Angelova (2011) Factors that Influence Entry Mode Choice in Foreign Markets. European Journal of Social Sciences – Volume 22, Number 4, 572.
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