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One of the biggest realities of our lives is the fact that we are living in a world were the walls of our homes, virtually, no longer exist. We live in an open, interdependent and interconnected world, where living in isolation and maintaining privacy is no longer possible. Globalization, lifting of trade barriers, revolution in information technology and many other factors has brought people closer than ever in the history before. Quite reasonably, globalization had a great impact at the corporate world as well. Even if companies want, they cannot contain themselves into their domestic markets since the desire to grow and grow constantly have made them obsessed with international expansions. Consider these examples. Exxon Mobil is an American firm, which receives more than 75 percent of their yearly revenues from operations in rest of the world. Finnish employees no longer form the majority at Nokia’s head quarter, which is a Finland based company; surprisingly, employees from China and India dominate the numbers. Honda, a Japanese automobile maker, has its biggest production plant in Ohio. 3M would lose more than 53% of its revenues if the American government asks them to restrict their operations within the United States (Johnson & Turner, 2009). Ford would find itself in big trouble if there were some disturbance in America-Brazil relations because Ford manufactures most of its cars in Brazil. BMW directly finds itself affected with any changes in the economy of South Africa or India because of the presence of its manufacturing plants there. McDonalds earns 63 percent of its income from operations outside the United States of America (David, 2010). Therefore, the point here is more and more companies, everyday, are trying to increase their scope of operations in terms of geographical markets. However, in the process of expanding globally, one of the most important decisions that firms have to undertake is deciding on the market entry mode. Quite reasonably, deciding on the market entry mode is important because it is the base on which rest of the operations would be conducted throughout the life of that expansion. Since there are varying levels of control, risk, involvement, nature of competition, investment and market costs, speed of entry and profit potential in each option, therefore, the decision for the same has to be made after great thought, decision, analysis, market research and debate.
This paper is an attempt to explore, analyze and examine these different modes of entries in foreign markets, looking at their advantages and disadvantages and “best fit” situations. The remaining portion of the paper would try to bring the previously mentioned concepts in practice by shedding some light on the best-fit market entry mode for an automobile firm in Czech Republic.
Market Entry Modes
Even a glance at the literature available on international marketing and specifically market entry modes and strategies would reveal that there are differences between authors and management experts on how they group these modes and strategies. Furthermore, as the time passes and market place becomes more competitive, firms are trying to use new, complex and innovative entry strategies. However, important here to note is that the underlying idea or the basic concept is the same. Therefore, in light of the most of the material present on this topic, market entry modes can broadly be grouped into four categories, which are exporting, licensing/franchising, Joint ventures/ Strategic alliances and Full ownership/direct entry (Onkvisit & Shaw, 2008).
One of the oldest, well-established and traditional forms of entry in any foreign market is through exporting. According to its definition, exporting is the process of selling goods and services produced in one country to various other countries. As mentioned earlier, there are many ways in which marketers divide and classify exporting mode. One-way of doing the same is classifying it as “occasional exporting” and “active exporting”. Occasional exporting is a passive way of exporting with low level of involvement in the process. The company decides to export from time to time, when needed, demanded or whenever, it appears feasible to the company. However, with active exporting the company actively engages in the process and takes on the responsibility to export throughout the year. However, a more acceptable and superior way of classifying them is in groups of “direct exporting” and indirect exporting” (Johnson & Turner, 2009).
Amongst all the possible market entry modes, indirect exporting is the way that offers minimal risk, minimal level of involvement, however, at the same time, the returns or profit potential also remains low. Most companies that would want to entry in the market in any form would initially “test the waters” with indirect exporting. The whole idea of indirect exporting is to sell goods with intermediaries in between which can take the responsibility of dealing with the company and the rest of people. For example, domestic based export merchants, who buy the products of the company and assume the responsibility of taking care of the rest of the deal. Domestic based export agents try to deal with foreign purchases and in return, they are paid a commission. Cooperative organizations, which are usually under public sector, governmental or administrative control would deal with foreign purchasers on behalf of many exporters. Lastly, there are export management companies as well which would manage the company’s exports in return for a fee or a small share in the profits (Onkvisit & Shaw, 2008).
Once they have gained experience, many firms try to jump into the arena of direct exporting by eliminating all the intermediaries and dealing directly with the final purchasers. Despite the fact that exporting in general, is the lowest risk, lowest control and lowest involvement option available in all strategies, yet comparatively with indirect exporting, it increases the risk, control and involvement. Companies are now own their own to understand their purchases, contact them, negotiate with them, understand their culture and needs, unsaid and unheard signals and others. Companies may end up mistakes in the same if they do not have the expertise, knowledge and experience; however, it is tempting because careful execution may increase the profit potential. Firms may also have to develop an overseas sales force, travelling export sales representatives, overseas sales branch or subsidiary, foreign-based distributors or agents, set of international contacts or an export department solely to look after the exports of the company (Johnson & Turner, 2009).
When firms try to assume more responsibility, want to take higher risks and control in return for high returns they try to enter into contractual agreements with others for their entry in the foreign market. Since comparatively with all other methods, the responsibility is low, therefore, it is also regarded another troublefree and simple method. Following are different variations of the contractual mode (Hollensen, 2009).
The licensor simply issues a license to a foreign company so that the company can gain access or use the selling rights of the product, trademark, patent, trade secret, and manufacturing process. The same is done in exchange of a fixed fee, certain percentage of profit margin, or royalty. It aims at creating a win-win situation for both the partners since the licensor gains entry in the market for a very little risk and level of involvement and the licensee gains the rights to use or sell the product for a little fee.
Firms like Hyatt and Marriot sell management contracts to foreign hotel owners to run their hotels in the name of their company’s brand for a fee. In fact, the company may even assure to buy some stake in the assets of the foreign hotels as well (David, 2010).
As the name suggests, when exporting seems to be an expensive option, the company would hire a local manufacturer and ask him to initiate the production on behalf of the company.
Another very common form of contractual agreements is franchising. For example, KFC has franchised its operations in Pakistan to a Dubai based company name Cupola that runs its businesses in Pakistan in exchange for a share in the profits. KFC has offered Cupola complete control over using the brand, inventories, and raw materials and in return, Cupola is taking the responsibility of operating all the franchises (Johnson & Turner, 2009). However, in case of an incompetent franchisee or licensee, the company may find damage and destruction to its brand name. Furthermore, if appropriate legal terms and conditions are not defined, then the contractual partner may emerge as a competitor either in the domestic market of the company or, when the company decides to end the contract and enter in the market by itself. Furthermore, important here to note is that contractual agreements are the best way when the company is looking for comprising on their profit margins in return on low level of hassle, control, involvement and investment (Cateora & Graham, 2007).
Joint Ventures / Strategic Alliances
Consider these examples. “Ready to drink” tea and coffee, which is currently being sold in huge amounts in Japan, is a result of joint venture between Nestle and Coca Cola. In order to become a dim ant force in selling baby diapers in Italy and United Kingdom, Procter & Gamble and Fater, which are rivals in the rest of the world, decided to join their hands and work together. When Unilever wanted to enter in the Chinese ice cream market, it has no choice but to work together with Sumstar, a public sector Chinese company (Shenkar & Luo, 2008). As evident from these examples, many players in the international market would use the method of joint ventures in order to operate in different markets. There are various reasons for the same. First, for many countries, joint venture may be the only mode of entry. Second, the company might lack the financial, intellectual, physical, managerial or other resources to undertake the venture all alone. Third, merger of two firms may offer them the chance to emerge as the market leader in that market (Lymbersky, 2008).
However, there are many problems with joint ventures at the same time, which need to be addressed in order to make sure that the ventures are successful. First, firms often find themselves fighting over the use of retained earnings, a partner may believe it should be reinvested, other may think that it should be used to pay more dividends. Second, cultural problems always arise when firms from different cultures are trying to work together. Pre-requisite knowledge about other cultures is extremely important. Third, the partners may not be able to trust each other in terms of using and sharing important internal information. Fourth, problems also arise when a partner tries to end the joint venture since terms of the same have not been decided yet. Fifth, partners always try to ensure that their own competitive, bargaining and negotiative position could be strengthened, at times by putting the joint venture at stake.
It is also important to note that as compared to the modes of exporting and contracts, joint ventures allow the firm to exercise greater control, earn more profits in return for more risk, higher investment and higher level of involvement (Czinkota, et.al., 2010).
Lastly, the most way, which offers the maximum possible control, maximum profit potential, maximum level of involvement, requires maximum investment and which is the most risky is full direct acquisition. Quite clearly, the firm decides not to merge or collaborate with anyone or accept any intermediaries in between but to do it on your very own. There are various modes of entering any market directly. A firm may decide to buy and set up his very own new planet, right from scratch. It is also known as “green field investment. The way would be in which the firm may decide to acquire the resources, name and operations of any existing company in the market. Direct investment is a decision taken in situations when the market appears to be big enough to offer advantages of economies of scale, government and other stakeholders are very friendly, the market is huge enough that saturating point would come after many years and until then the profit potential or the ROI is high or the company is sure that it has or it would be able to have to good, favorable and friendly image in the country. Again, important here is to note the fact that high returns which this mode of entry offers is only and only in return of the high risk that the mode incorporates (Wagner, 2009).
Example of Czech Republic
As mentioned in the introductory phase of the paper, that now the paper would use the Czech Republic’s automotive industry as an example to apply the concepts presented above.
Czech Republic and its Automotive Industry
Surrounded by Poland, Germany, Slovakia and Austria, Czech Republic is land locked country located in the central Europe. The country came into being in 1993 and since then it has been a member of NATO, OCED and EU. With high incomes, GDP per Capita, stable economic growth and overall better economic outlook, Czech Republic is a developed country, which has attracted many investors over the years (OCED, 2010).
The automotive industry of Czech Republic is one of the most important sectors of the Czech economy where it has witnessed a lot of foreign investment. Technologically advance infrastructure, high incomes, stable economy and changing consumer preferences means that the industry offers some serious prospects fro growth. Currently Skoda is leading the automotive industry of Czech Republic (Pavlínek, 2008).
Best Entry Mode and Justifications
Political and Legal Factors: – It is mainly due to favorable political-legal macro environmental factors that it joint ventures appear to be more feasible as compared to licensing or exporting. Firstly, the government of Czech Republic is extremely enthusiastic and serious about increasing and encouraging foreign investors to enter the Czech market and invest in it. Therefore, the government offers various incentives, which include corporate income tax relief, job creation grants, training grants, transfer of land on discounted rates, discounts of purchasing land for businesses and others. Secondly, the government is taking all possible steps for improving the infrastructure in the country, which will further increase the demand for automobiles in the country. Third, the government of Czech Republic is also considering adopting Euro by the 2013-2014 (OCED, 2010).
Economic Factors: – Czech Republic is high-income country and one of most developed and industrialized countries of European Union. Stable Economy, healthy inflation rates and ranks 26th in the world in terms of GDP per capita, Czech Republic has a strong banking system. Furthermore, it has been ranked high on the factor “ease of doing business”. Despite the fact the economy shrinked due to the current crisis with negative GDP growth rates, but the country has plans for even more aggressive growth as the economy recovers in order to make up for the lost growth in the recession. Therefore, the country offers many prospects of growth (OCED, 2010).
Social Factors: – Unlike other European countries, 71 percent of the Czech Population is the age bracket of 15-64 years. Since these are the people who are the prospective buyers of automobiles, there are chances of extensive growth (OCED, 2010).
Technological Factors: – Czech Republic has been ranked as the 4th country in world in terms of attractiveness for automotive research. Furthermore, the country has a huge pool of skilled labour, both in managerial and technical fields. The country has high level of IT spending which is around 3.2 percent of the GDP when the EU average is around 2.72 percent (Czinkota, et.al., 2010).
Rivalry: -Another reason for the same is due to high rivalry amongst the current players in the industry. Players like Skoda, Fait, Toyota, Ford, Citron, Renault and others are almost balanced with each other, which fuels the rivalry. However, if a competitor of considerable, even moderate financial and technological strength decides to enter with a joint venture, then it would disturb this balance of the industry by making the partnership emerge as the biggest firm of the industry. Quite understandably, the same would help in decreasing the threat of rivalry in the market (Czech Invest, 2009).
Economies of Scale: – Without any doubts, automotive industry is one those where historically, firms have always tried to rake advantage of economies of scale by large-scale production. However, presence of many players and their own different production houses means that none of the player has been able to take complete advantage of it. However, with a joint venture, both the companies would be able to produce together and produce more, thus reaping the benefits of economies of scale (Pavlínek, 2008).
Cost of entry: – Entering in any automotive industry of the world requires considerable amount of investments as compared to many other industries. Moreover, with increasing investment, increases the overall risk in operations as well. Therefore, it is advisable to get to establish partnership with other firms so that the cost of entry could be reduced and at the same time, substantial level of control over the operations could be gained as well (Czech Invest, 2009).
Access to distribution channels: – Distribution channels hold immense importance for any industry, however, for automotive industry marketing and distribution channels are of above average importance. Customers are greatly influenced by the distributors, therefore, access and partnerships with them is really important. However, presence of well-established existing players means that any firm, which tries to enter directly the automotive industry, would have to face a tough time, at least in its initial days, for getting access to the distribution channels. Joint venture with an already established partner in the market would mean that the firm would not have to put considerable amount of energy in this regard (Pavlínek, 2008).
Cultural barriers: – Quite reasonably, Czech Republic has its own culture, which has not been researched very much since it has been less than two decades since it became an independent country. Any new entrant in the market would face cultural barriers, however, with joint venture, the player which is already working in the market and has know about he dynamics of consumer behaviours and market conditions would offer substantial help in overcoming this barrier.
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