When a company makes the commitment to go international it must be chosen an entry strategy. This decision should reflect an analysis of market potential, company capabilities, and the degree of marketing involvement and committed management is prepared to make. A company's approach to foreign marketing can required minimal investment and be limited to infrequent exporting with little thought given to market development. Or a company can make large investment of capital and management effort to capture and maintain a permanent, specific share of the world markets. Both approaches can be profitable. (Ghauri, P et al, 2006)
Why firms go abroad?
There are several reasons for firms are going abroad. There might be problem with huge competition in domestic market, factors of production, country rules and regulations, taxation and so on. Due to those above problems organizations want to do their portfolio business in different country. The Established Chain Model suggests four different of going abroad:
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No regular export
Export via representatives (e,g; agent)
Production/manufacturing subsidiary. (Ghauri, P et al, 2006)
Factors influencing Market entry strategies(Ghauri et al,2006):
Source: Ghauri, P, Cateora, P (2006) International Marketing, (2nd edition) McGraw-Hill Education, p278.
With the continuing growth in international trade, understanding the risk associated with doing business in a particular country is more important than ever to MNEs of all sizes. This provides the practicing manager with a tool to assist in more informal decision processes or to provide an analysis framework for a more structured approach. Depend on the different market condition the organization face different sorts of risk on their international marketing. That's why firm do the PESTLE analysis for gather information about market condition of the perspective country they want to go for business.
The PESTLE model
PESTEL stands for Political, Economic, Social, Technical, Environment and Legislative. It is a strategic planning technique that provides a useful framework for analysing the environmental pressures on a team or an organisation. The PESTLE model provides users with a series of headings under which users can brainstorm or research key factors.
Political risk can be defined as the possibility that political forces will cause drastic changes in a country's business environment that will adversely affect the profitability and other goals of the firm (Hill, 1994). It has been shown that the level of political instability and democracy are directly related to political risk (Balkan, 1992). Political instability measures the amount of social unrest and democracy relates to the levels of participation and competitiveness in the political process. Other key determinants of political risk include the prevailing attitude and general disposition toward MNEs as well as the current legal standards (Phillips-Patrick, 1991). A high level of political risk can result in a change in property rights (Phillips-Patrick, 1991) that could lead to expropriation in the extreme. Additionally, social unrest could make the firm's assets worthless without even expropriating them. Political risk is the first of the two soft or subjective risk categories. The major issues considered for political risk are the type and stability of the government (Ting, 1988) and the overall business environment (O'Leary, 1983).
Economic risk can be defined along the same line as political risk. It is the likelihood that economic mismanagement will cause drastic changes in the country's business environment that will adversely affect the profitability and other goals of the firm (Hill, 1994). Economic risk is considered in all of the major country risk profiles. The relevant factors to consider include inflation, domestic money supply management, interest rate, wage rates, minimum wages, working hours, unemployment, exchange rates and per capita growth as well as debt servicing issues.
Socially consider the country's cultural norms and expectations, health consciousness, population growth rate, age distribution, career attitudes, emphasis on safety, global warming. When the management of an MNE considers a country, the decision-makers are interested in aspects of the country that are not always captured by the traditional approach to country risk. Adding a category for socio-cultural risk will provide MNEs with relevant market entry information that is missing in the other risk categories (Herring, 1983; Kwon & Konopa, 1993. Cultural factors that affect business communication various countries interact in business-related activities on a daily basis. These differences in culture prove to be obstacles in business communication. Factors such as language, gestures, holidays and dress codes play a major role in business communication. There is a conflict between a desire to borrow from another culture and the neutral inclination not to pollute one's own culture by borrowing from others. France offers a great example of this conflict. One hand they accept such US culture as The Oprah Winfrey Show on television and dine on all American gastronomic delights such as the Big Mac and Kentucky Fried Chicken. (Maarten. H, 1992)
Always on Time
Marked to Standard
new technologies create new products and new processes. Technology can reduce costs, improve quality and lead to innovation. These developments can benefit consumers as well as the organisations providing the products. For example, mobile phone technology, social networking websites. There are also changes to barriers to entry in given markets, and changes to financial decisions like outsourcing and insourcing (Aguilar, F.J. (1967).
Legal: It is all about the country legislations. This may impact employment, access to materials, quotas, resources, imports/ exports, taxation etc for the foreign investors (Aguilar, F.J. (1967).
In this factor includes cost implication, public opinion, sales and location aspects. Many of these factors will be economic or social in nature (Aguilar, F.J. 1967).
After go through this analysis a firm might be chose their different marketing entry mode strategies of their perspective countries. Those are discussing below:
Market Entry Strategies:
Once the firm decides to enter a foreign market, the questions arise as to the best mode of entry. Firms can use six different modes to enter in to foreign market; exporting, turnkey project, licensing, franchising, establishing joint venture with a host country firm or setting up a wholly owned subsidiary in the host country. Each entry mode has advantages and disadvantages. Managers need to consider these carefully when deciding which to use:
Many manufacturing firms begin their global expansion as exporters and only later switch to other mode for serving a foreign market. This means of foreign market development is the easiest and most common approach employed by the company taking their first international step. Exporting has two distinct advantages. First, it avoids the often substantial costs of establishing manufacturing operations in the host country. Second, exporting may help the firm achieve experience curve and location economics. Exporting has number of drawbacks. First, exporting from the firm's home base may not be appropriate of lower cost locations for manufacturing the product could be found abroad. A second drawback to exporting is that high transportation costs can make exporting uneconomical, particularly for bulk products. Third drawback is that the threats of tariff barriers by the host country government can make it very risky. Forth drawback is problem with local marketing agents. (Hill, C. 2009)
“Anita Roddick used this approach to source naturally occurring ingredients for Body Shop's ranges of toiletries and cosmetics and made domestic purchasing from deprived regions of the world a feature of Body shop marketing activities”. (Doole etal, 2008)
Firms that specialize in the design, construction, and start-up of turnkey plants are common in industries. In a turnkey project, the contractor agrees to handle every detail of the project for the foreign client, including the training of operating personnel. Turnkey projects are most common in the chemical, pharmaceutical, petroleum refining and metal refining industries, all of which use complex expensive production technologies. Turnkey project has a key advantage which is ability to earn returns from process technology skills in countries where FDI is restricted. It has also couple of drawbacks. Those are creating efficient competitors and lack of long- term market presence. (Hill, C. 2009)
“Oil Company is the great example of turnkey projects. The government of many oil rich countries have set out to build their own petroleum refining industries, so that the restricted in FDI in their oil and refining sectors. But because many of this countries lack of petroleum refining technology, they gain it by entering in to turnkey projects with foreign firms that have the technology”. (Hill, C. 2009)
A licensing agreement is an agreement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period and in return, the licensor receives a royalty from the licensee. Intangible property includes patents, inventions, formulas, processes, designs, copyrights and trademarks. Licensing has an advantage which is low development costs and risks. It has some drawback as well. Those are lack of control over technology, inability to realize location and experience curve economics, inability to engage in global strategic coordination (Hill, C. 2009).
“Anexample of a successful licensing agreement is Yak Pak. This is a small fashion bag manufacturer that recently has benefited from licensing agreements with Levi-Strauss & Co. and Williamson-Dickie Manufacturing Company (maker of Dickies). Their challenges have been similar to that of Sonic Solutions”. (Hisrich, PhD et al, 2005)
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Franchising is the rapid form of licensing in which the franchiser provides a standard package of products, systems, and management services and the franchisee provides market knowledge, capital and personal involvement in management. Major advantage of franchising is low development costs and market risks. However there are few disadvantages as well. Such as, lack of control over quality, inability to engage in global strategic coordination (Ghauri. P et al, 2006).
McDonald's is an example of brand franchising. McDonald's, the franchisor, grants the right to sell McDonald's branded goods to someone wishing to set up their own business, the franchisee. (http://www.mcdonalds.co.uk)
A joint venture entitles establishing a firm that is jointly owned by the two or more otherwise independent firms. Establishing a joint venture with a foreign firm has long been a popular mode for entering a new market. There is benefit to do joint venture; it provides a less risk way to enter in to markets that pose legal and cultural barriers than would be the case in the acquisition of an existing company. There are couple of disadvantages in joint venture, those are lack of control over technology, inability to engage in global strategic coordination and inability to realize location and experience economic (Ghauri, P et al, 2006).
“An example of joint venture of Renault, the French auto-maker, is partnering with Mahindra and Mahindra, the Indian tractor and SUV maker, to launch its ‘Logan'. It has developed the Logan especially for emerging markets”. (K.Merchant, 2004)
Foreign Direct Investment:
Foreign direct investment (FDI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment. (www.quickmba.com)
Walt Disney Co. faced the challenge of building a theme park in Europe. Euro Disney chose direct investment in its European theme park, owning 49% with the remaining 51% held publicly (www.quickmba.com).
Ford Motor Company of Canada is where the Mustang meets the maple leaf. A wholly owned subsidiary of Ford Motor, Ford of Canada is that country's longest-running automobile maker. The company was founded in 1904 when, with a $125,000 investment. (http://www.hoovers.com)
The Case of Coca-Cola in China (Published in the Asia Pacific Business Review, Vol. 9, No. 1, Autumn 2002, pp. 39-58)
In the presence of high transaction costs due to market imperfections, it is normally less expensive for multinational corporations (MNCs) to conduct their business activities in new markets through their internal corporate structures rather than by relying on the markets. According to Teece (1983), there might be lack of notion-specific knowledge of host country, such as the nature of local market (including culture, business practice, contracts, etc). Based on a case study of Coca-Cola's entry into the Chinese market, the applicability of internalization theory to explaining the entry mode choices of MNCs in develop countries. Internalization theory reveals the economic rationale that was behind the changes in Coca-Cola's modes of entry as it moved from franchising to joint ventures (JVs) with selected local partners, and more recently to the combination of JVs and franchising.
So, based on different situation not only Coca-Cola but also different organization can change their market entry mode for doing in international marketing.
Through out my above analysis on foreign entry modes that, the firm want to expand their business because of maximize their profitability. But before that firm need to analysis the over all environment of the perspective market, then firm can choose entry market. May firm need to change their entry mode during their operation of the host country due to environmental change, or firm can use more than one entry modes for expansion.
Hill, C. (2009) International Business (7th edition) McGraw-Hill Higher International Edition.
Ghauri, P, Cateora, P (2006) International Marketing, (2nd edition) McGraw-Hill Education.
Published in the Asia Pacific Business Review, Vol. 9, No. 1, Autumn 2002, pp. 39-58
K.Merchant, ‘Renault/Mahindra to Launch Logan in India', Financial Times, 23 November 2004, p. 28
Published in the Asia Pacific Business Review, Vol. 9, No. 1, Autumn 2002, pp. 39-58
Agmon, T., & Drobnick, R. L., (1992). Small Firms in Global Competition. Oxford
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O'Leary, M. K., (1983). Political Risk in Thirty Five Countries.
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Herring, R., (1983). Managing and Evaluating Country Risk/Prepared and Publishedby Business International Corporation.
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Maarten Huygen, ‘The invasion of the American Way', World Press Review, November 1992, pp28-9.
Hisrich, PhD, Robert D., Michael P. Peters, PhD and Dean A. Shepherd, PhD. Entrepreneurship. 6 ed. New York: McGraw-Hill Irwin, 2005.
AGUILAR, F.J. (1967)Scanning the business environment. New York: Macmillan.
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Rogers, J (1999) Facilitating Groups Management Futures Ltd. London.
Havergal, M & Edmonstone, J (1999) The Facilitator's Toolkit Gower Publishing Ltd. UK.
Question 02: Franchising is a common method of entering service market abroad. What is the special attraction of international franchising to both partners?
The History of Franchising
Over the past three decades franchising has blossomed into a major business form, and recent accounts of trends forecast great growth expectations also coming decades, especially in international franchising setting (Dant and Nasr, 1998). Franchising began back in the 1850's when Isaac Singer invented the sewing machine. In order to distribute his machines outside of his geographical area, and also provide training to customers, Singer began selling licenses to entrepreneurs in different parts of the country. For example, McDonald's. McDonald's currently has the most franchise units worldwide of any franchise system.
Arrangementwhere oneparty(the franchiser)grantsanother party (thefranchisee) the right to use itstrademarkortrade-nameas well as certainbusiness systemsand processes, to produceandmarketa good orserviceaccording to certainspecifications. Franchisee is a person or entity to whom the right to conduct a business is granted by the franchisor or licensor. Franchisor is a company owning, controlling the rights to grant franchises to potential franchisees (www.franchoice.com).
Advantages of Franchising
According to Peterson and Dant (1990) examine the advantages of franchising among 250 US franchisees in service industry. The subjects were asked to indicate the level of agreement with the following potential reasons for choosing the franchising route: ‘lower development cost', ‘established name', ‘lower operating cost', less management involvement', greater independence', ‘better investment', training by the franchisor'. Except for lower operating cost and less management involvement, the respondent generally expressed agreement with the other reasons. It was found in inexperienced franchisees endorsed the applicability of advantages more emphatically than their more experienced counterparts.
Disadvantages of Franchising
Like lots of advantages franchise has few disadvantages as well. Those are lost interdependence, high advertisement fees, specified operation hours, franchisors' review activities, purchasing requirements, and territorial limitations (Bernstein, 1968-1969), lack of self-actualization and security (Ozanne & Hunt, 1971).
Types of Franchising Business Model:
Franchising is a very popular way that many use to grow their already successful businesses, and a few end up going global. Firm need to get the right product and the right business in the right area, but if you achieve that and build the right model, then form can create a very successful franchise opportunity. There are four types of such business:
1. The Product Franchise.
With this the manufacturer uses the franchise agreement to determine how the product is distributed by the person buying the franchise. A retail company can be provided with a franchise to distribute, for example, a range of tyres. The franchisee can utilize the brand name and the trademark owned by the manufacturer to distribute or sell the car tyres. The owner of the store will pay the manufacturer a franchising fee or agree to purchase a minimum inventory to sell on to their customers. The manufacturer gets the income from the purchase of the retailer, and/or the franchise fee, and the retailer gets the benefit of the brand and experience of the franchisor. (www.ezinearticles.com)
2. The Manufacturing Franchise.
The franchisee is permitted to manufacture the products under license and sell them using the originator's trademark and name. They also get the benefit of the national advertising of the product they manufacture. The company owning the product gets the franchise fee and sometimes a fee for every unit sold. Examples include the food and beverage industry. (www.ezinearticles.com)
3. The Business Franchise Venture.
The franchisee purchases and distributes the products for the franchise owner. A client base is provided by the product owner for the franchisee to maintain. Vending machines are a classic example of this, where the franchisee purchases the vending machines and distributes and services them, taking their share of the takings of the machines. (www.ezinearticles.com)
4. A Business Format Franchise
This opportunity is very popular, and involves providing the franchisee a proven business model using a recognized product and brand. Training is provided by the franchise owner and assistance in setting up the business. Supplies are purchased from the franchisor and the franchisee pays a royalty fee. Frequently the franchisor will sell the franchisee the products or raw materials to provide the same quality of product. Most well known fast food franchises are of this type, and also many jewellers and other ubiquitous High Street names. (www.ezinearticles.com)
Finland with population of 5.2 million people seems to be a rather slow starter, but otherwise no exception from the global trends. Finnish franchising culture bring the business format franchising concept in late 1970s. The national association of franchising was established in 1988 and whish rapid growth continued until the 1990s.Over the last few years Finnish business move to franchising for gain more drive. According to Finnish Franchise Association statistics there were 84 business format franchisors with approximately 1700 franchised units in 1988, which employed nearly 15,000 people and yearly turnover 1.1 billion GBP. Franchisor and franchised outlays in retail trade and café & restaurants are respectively 45 and 20 per cent. Still the growth of business format franchising is lower than, for instance, the others closest countries like Sweden, Scotland with same size of population (Dant and Nasr, 1998).
Franchisees are more motivated:
In survey of franchisee motivation, over half of their 728 franchisee respondents in the USA and UK saw running franchise as operating an independent business, although with strings Stanworth, Kaufmann and purdy (1995). Very few franchisees think they are running by someone else. Those who new in business or never do self-employment they are guided by the franchisor. The franchisee asked for buy a franchise, a high proportion stresses reasons such as ‘a proven business system' and ‘a known trade mark'. The chance to be ‘your own boss' or personal interdependence' was nevertheless selected by 26 per cent of the US and 28 per cent of UK respondents. Those who had not been self-employed were more likely to see ‘being your own boss' or ‘independence' as the main motivation. Furthermore, Stanworth et al(1995) suggested that ‘independence' was likely to be a motivation for those who have already experienced self-employment. Instead, they are more likely to opt for economic security. This fits well theories suggesting that motivational driver of franchisees will change as they become experienced and more successful. Reporting on advantages, Diaz and Burnick (1969, p18) have argued that, ‘It is apparent that franchisees were attracted to franchised business because of ‘franchise package'. This franchise package is related to the notions of learning process and capabilities transfer.
Franchisees get a proven business format:
Today, franchising is helping thousands of individuals be their own boss and own and operate their own business. Franchising allows entrepreneurs to be in business for themselves, but not by themselves. There is usually a much higher likelihood of success when an individual opens a franchise as opposed to a mom and pop business, since a proven business formula is in place. The products, services, and business operations have already been established. Another strategy is through the transfer of technology and business, often from the developed countries to the developing economies countries. Such technology transfer arguably would promote franchisee. (Augustien, A et al, 1996)
Support from the Franchisor:
The support that a franchisee should expect to receive from his/her franchisor depends on such variables as the type and size of the franchise organization. However there are some basics that a good franchisor will provide.
When franchisee first begins your franchise business, the franchisor should provide training on the main aspects of running the business. The training program should be quite comprehensive. It should include the procedures to follow such as accurate book and record keeping, methods on finding and keeping good employees, as well as guidance on how to obtain customers. The program usually lasts anywhere between a few days and a few weeks depends on the franchisor size. Typically in smaller franchise businesses, the franchisor does the training. In larger franchises, a specific instructor within the organization is dedicated to the franchisee. Whatever method is used in training, franchisors should be diligent about ensuring that new franchisees feel comfortable operating the business before he/she is left alone to manage the franchise. The franchisor may also be willing to train the franchisee's manager. (www.franchises.about.com)
It is very important for the franchise to be housed in a prime location in order to have the best chance of success. The franchisor or assigned personnel within the organization should work closely with the franchisee in selecting the best property for the franchise. The franchisor should also provide guidance regarding lease negotiations. In some cases, the franchisor may have already performed the research necessary to find a prime location. Since the franchisor invested a decent amount of resources in order to complete the site search, it is likely that a good decision has been made on your behalf. After all, the better your business performs, the more the franchisor will also benefit. (www.franchises.about.com)
Marketing and Advertising
As a franchisee you should receive a comprehensive marketing plan for your business for the time period from the grand opening through the following 3-6 months. Although it will be necessary for you to contribute to a national or regional advertising fund, the franchisor should also guide you regarding the local marketing efforts that would be beneficial. Due to the high level of interest in your success as a franchisee, the franchisor may also supply you with customized professional marketing materials. These could include posters, brochures, banners, direct mail postcards and many others. (http://franchises.about.com)
A good franchisor will always provide ongoing assistance. Part of the guidance includes a comprehensive operation manual. Although the manual should outline all aspects of running your business, there is always a chance that you will have other questions as you go along. Franchisors should provide efficient means of communication for addressing questions or concerns. Many times there is an 800 numbers or hotline depending on the size of the organization. In addition some franchises will provide additional training and educational opportunities as processes and procedures within the organization are updated. (www.franchises.about.com)
it is best to do as much research as possible before selecting the franchise a firm would like to be involved in so that you are aware of specifically what support and services the organization will provide. Included firm own investigation should be conversations with other franchisees within the organization. Chances are if they have been satisfied with the franchise support system, a firm will be as well.
http://www.franchoice.com/franchise-information-guide/what-is-franchise/definition-of-franchising (08 April, 2010)
http://franchises.about.com/od/buyingafranchise/a/franchisor-support.htm (08 April, 2010)
http://ezinearticles.com/?Different-Types-of-Franchise-Businesses&id=1162651 (08 April, 2010)
http://ezinearticles.com/?Different-Types-of-Franchise-Businesses&id=1162651 (08 Apr. 10)
http://franchises.about.com/od/franchisebasics/a/what-franchises.htm (08 Apr.10)
Dant, R.P. and Nasr, N.I. (1998), ‘Control Techniques and Upward Flow of Information Distant Market: Conceptualization and Preliminary Evidence', Journal of Business Venturing, 13 (1), pp3-28
Peterson, A and Dant, R.P. (1990), Option from the Franchisee Perspective: Empirical Insights from a Service Franchise', Journal of Small Business Management, 28 (3), pp46-61.
Diaz, R.M. and Burnick, S. (1969), Franchising, New York, Hastings House.
Stanworth, J., Kaufmann, P.J., and Purdy, D. (1995), ‘The Blenheim/University of Westminster Franchise Survey: A Comparison of UK and USA Data', International Franchise Research Centre, Special Studies, N:o 5, March, London, University of Westminster Press.
Bernstein, L.M. (1968), ‘Does Franchising Create a Secure Outlet for the Small Aspiring Entrepreneur?', Journal of Retail, 44 (4), pp21-38
Ozanne, U.B. and Hunt, S.D. (1971), The Economic Effect of Franchising, report prepared for the Small Business Administration and Select Committee on Small Business, US Senate, Graduate School of Business, Wisconsin.
Journal article by Augustine A. Lado, George S. Vozikis; Entrepreneurship: Theory and Practice, Vol. 21, 1996