In today's modern environment of Globalisation, cultural diversity in the workplace is becoming more and more prominent. Before, it was believed that the national culture had a big impact in the choice of entry mode. However, many things have changed since then, and important developments have been achieved by humankind. This process has brought the digital revolution and the access to large integrated markets. With this, businesses considering foreign expansion have to decide which markets to enter, decision that is part of a whole process of evaluation that includes analysis of the markets and choice of mode of entry.
In order to decide whether the commonly held belief that there is no single market entry strategy which is appropriate in all circumstances is true, this part of the paper will first give a critical analysis of the factors influencing the choice of entry mode; and then it will analyse the selection of entry choice to enter a country, its advantages and disadvantages.
Factors Influencing choice of Entry Modes
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Te choice of entry mode depends on many factors such as culture. However, the expansion of globalisation changed this point of view. According to Lassere, culture is just a small part of what really affect the decision of the companies to enter a foreign market. Actually, he affirms that the choice is based on the combination of: (1) The ownership dimension, wholly own operations in which the foreigner has full control or entering into partnerships; (2) The investment intensity dimension implies investing in assets and competences or limiting operations to some areas. (Lasserre, 2007)
Figure 1 shows the many factors affecting the entry choice such as market attractiveness, strategic objectives, country risks, internal capabilities, government policies and timing.
By now, it is clear that national culture is not really a factor that influences in great measure the choice of entry mode. On the contrary, the figure above specifies the real factors that affect this choice. In consequence, whether a company choose Greenfield, acquisition or joint venture, is not a matter of national culture but of the advantages and disadvantages that it can get from the entry mode chosen. The advantages and disadvantages of entering a country with a specific entry mode are explained later in this paper.
Local resources, assets and competencies to gain and sustain competitive advantage
Other entry modes
Political and operational risks
Costs/benefit analysis and ROI
Figure 1. Factors Influencing Entry Modes
Entering a Country with a Specific Entry Mode
Entering a country through Greenfield
Greenfield is used by companies when they want to have total control of the operation. However, the level of risk is very high in part due to the great deal of mobilisation of resources and competencies. It is also, the most expensive one for the management time expended and the resources used to implement it. For this reason, the company has to be completely sure of what they are doing and the choices that they are making. It is time consuming and the company needs to be sure that the market is going to work for their goods/services (Doole et al., 1999).
Other risks undertaken by the company when the decision of entering a market is through Greenfield is the high cost in terms of the reputation of the firm in the international and domestic market, including shareholders, customers and staff of the company (Doole et al., 1999).
Japanese companies, as the article affirms, have had a special interest in this entry mode and is has taken years to successfully implement it, but the rewards in profit and high market shares are risk worth taken (Doole et al., 1999).
Entering a country through acquisition
Acquisition is one of the most important foreign investment modes. According to Tayeb, acquisition is one of the biggest foreign direct investment in terms of value of assets and employees (Tayeb 2000). Acquisitions permit the buyer a very quick entry to the market. In some aspects, it is a very crucial point for companies because of the problems of implementing other modes, particularly Greenfield investment, usually not associate with acquisitions, such as lack of knowledge about the market (Hill, 2008).
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Acquisitions are also important for technology firms because it is crucial for them to survive in the modern turbulent environment and they required new technological improvements or patent rights. However, they can only reach patent right with either paying for them or acquisition of pattern owner firms (Hill, 2008). Therefore technology firms usually go for acquisitions during their overseas expansions. Other important point is that acquisition gives the firms institutional support, network of suppliers and chance to reach experienced work force capacity (Bradley, 1999).
Entering a country through Joint Venture
A Joint venture is also a very important entry mode for companies. It can be described as a legal obligation for companies because to enter the market, sometimes would be required a domestic partnership. Bradley argue that joint ventures are usually motivated by the desire of the at least one to use the agreement as means of international expansion. He also added that Joint venture is easier to implement because is fastest than acquisition and Greenfield to enter the market and receive a payback (Bradley 1999).
Hill argue that in an international environment, firms need to get knowledge about local partners, host countries conditions, culture, language and political system and, therefore, joint venture gives the companies countless benefits. Moreover, it is hard to proof that these benefits will affect national culture during the market entry choosing process. Doole et al. the extent of reasons that affect the choice of entry mode, they claimed that companies have chance to direct participation in the market and a better understanding of how it works. (Doole et al. 1999)
Upfront investment, financial and managerial
Speed of entry
Control of market (Customer knowledge)
Political risk exposure
Potential financial return
Table 1. Comparison of Entry Modes
Table 1 shows a comparison of entry modes in which becomes clear why no entrey strategy is appropriate in all circumstances, it depends on many factors that have to be considered and studied in each particular case.
In the modern environment of Globalisation, change is a fact and the multicultural workforce has to work on it so the organisation, like a 'ship', can continue its journey towards success. Managing change and delivering it properly to the workforce will make the difference between failure and success.
Globalisation has brought expansion of the markets, increase of the cross-border trade, technological advancements, increase of foreign direct investment, and others. The companies all over the world have had to adjust to these changes to succeed in the business environment and, with the increase in competitiveness, they have had to find the advantage that makes them better in what they do implying internationalising their business by entering new markets.
The theory related to entry mode is significant and shows a clear pattern of utilization in certain countries. However, it has been proved that there is no entry strategy which is appropriate in all circumstances. This decision is affected by many factors explained in this paper and depends on the needs and characteristics of the entry strategy planned by the company.
Business Format Franchising and its use as an International Market Entry Strategy
The market entry strategy is the most important choice for organisations when they want to expand their business to new markets. As Mintzberg (2003) stated, the most significant decision is how to enter this market since this will affect every aspect of their business in the years to come. Choosing the right market entry strategy is an integral part of the organisation's international operations.
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Each market entry strategy has pros and cons. Managers need to consider these carefully when deciding which one to use. One of the strategies that has created a 'boom' in recent years, especially in the US, is franchising. This strategy allows a company to secure a more permanent long-term place in international markets through becoming directly involved in the process of entering a foreign market (Doole et al., 2004).
This essay will depict a brief overview of the main characteristics of business format franchising. Then, it will look into the advantages and disadvantages of using franchising in an international business environment. Finally, it will attempt to determine the importance of the use of business format franchising as an international market entry strategy.
Franchising involves long-term commitments in which an established organisation allows a business owner to trade under the name of an established brand while retaining ownership of its business. The organisation is known as the franchiser and the business owner is known as the franchisee. The later, pays fees to the franchiser for the right to sell its products or services (Morrison, 2006).
According to Hill (2009), the franchiser will provide assistant to the franchisee to run the business through the whole period the agreement and will receive a royalty payment which is a percentage of the franchisee's revenues.
Franchising is a very useful market entry choice when an organisation wants to develop its brands on a global scale through another business. Usually the intention of the franchisee is to customise the product for the local market (Iyer, 2009). This is the importance that franchising has as an international market entry choice.
Business Format Franchising
Business format franchising is the growing sector and includes many types of businesses behaving as a complete business system. Under this type of franchise, an organisation grants the rights to distribute a product or service to a franchisee in all sorts of businesses like: services; hotels and catering; business to business; business and domestic services (Doole et al., 2004).
Through this market entry choice, the franchiser provides the franchisee with all the aspects of the business including the licensing of a trademark, the appearance of the location, provides training, format manuals and the system for operating the business. After the basic arrangements are done, the franchisee will take care of operating the business and customising it according to the local market (Doole et al., 2004).
Characteristics of Business Format Franchising
In this format, the franchise can take the form of a single-unit or multi-unit franchising. In a single-unit the franchisee will be responsible for just one unit. On the other hand, in a multi-unit franchise the franchisee might be responsible for developing a territory and opening a determined number of units; or can operate a master franchise that is able to subfranchise to other businesses, as it happens in international marketing. In this last case, the franchisee will be the 'franchiser' of the subfranchises (Doole et al., 2004).
Having a franchise brings a variety of benefits for the business person, not only in terms of the business but as an entrepreneur in today's business world. The franchisee is the one responsible for the success of the units that owns and the profits, with the difference of having the financial support and credibility of the brand to start the business (Knights et al., 2007)
Advantages of Franchising
According to Hill (2009), Doole et al. (2004) and Morrison (2006), these are the main advantages of franchising:
The franchisee can sell the franchise back to the franchiser who will sell it on. The franchisee will run with minimum risk in case the business does not work.
The franchisee has the strength of the established brand to start the business which increases the chances of succeeding in the market.
The franchisee will not assume on its own the costs and risks of opening the franchise in the foreign market.
The franchisee will start receiving profit from its operations as quick as possible.
The franchiser will expand its global presence quicker with costs and risks lower than entering itself the international market.
The franchisee can sell on the franchise to another business owner at a profit.
If one franchise is successful, the franchisee could take one more unit and become a multi-unit franchise.
Disadvantages of Franchising
Disadvantages for the Franchiser
According to Knight et al. (2007), when the franchise is located in a foreign country the franchisor will not be able to control every detail of the franchise and many elements of the brand and the business will be affected. The franchisor will lose control over:
The performance of the franchises: a poor performance could damage the image of the brand in the market.
The knowledge and processes: the franchisees could use them for their own benefit and transfer them to their own businesses changing the competitive environment for the renewal of licenses.
The knowledge about market changes: decisions making of the franchiser in relation to the adaption of its products and the development of new ones in the changing market could get affect.
The production process: the franchiser cannot make any decision in relation to the efficiency of the employees to obtain maximum revenue out of their work.
(Knight et al., 2007)
Disadvantages for the Franchisee
If the franchiser wants to monitor the franchisee, the financial costs and managerial time that it will carry will affect the logic of the bargain (Knight et al., 2007).
The franchisee does not have the same freedom for decision-making over the business that an independent owner has (Morrison, 2006).
The franchisee has to follow the rules in the franchising agreement.
The constrains to manage the business might be an inconvenient for the franchisee
The franchiser receives fees paid for franchising and can also receive a percentage of the profits. The franchisee might feel that the revenues are not enough.
(Doole et al., 2004)
Examples of successful franchises
A clear example of franchises can be found in the fast food industry. Companies like McDonald's, Burger King, Pizza Hut, Subway and many others, have franchises all over the world, however, they usually sell a range of different products in each market. (Hill, 2009)
Business format franchising is a market entry strategy that has proven to be a great choice when organisations are planning to enter foreign markets. All the advantages and disadvantages of franchising that have been discussed in this paper demonstrate the importance of it as an international market entry strategy. Any type of organisation can start franchising its products or services to businesses in international territories to expand its operation to new markets. From the viewpoint of the franchisee, it is a great opportunity to run a business with the financial support and minimum risk covered by the franchiser.
Since the franchise is like an already made business 'off the peg', no matter in which country it is established, everything down to the smallest detail will be provided by the franchiser, giving security to both parts. It is an incredible opportunity for any business person that wants to own a business, and the best thing is that it is only a matter of making the decision.