The report looks at the entry strategies available for an organization wishing to internationalize. It describes the internationalization strategy; the risks associated with it, and give examples of the type of businesses that are suitable for each type of strategy.
Globalization is the process by which regional, economies, societies and cultures have become integrated through a global network of communication, transportation and trade.(Wikipedia 21 nov,2010) Advancements in technology like the internet, television and other communication tools have driven markets to be more integrated. Customers demands the world over, are becoming more similar with each day, hence the convergence of markets.
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Unlike in the past, a person in India can buy a product from any part of the world; it does not necessarily have to be made in India. The procurement of products or services from an independent supplier or company owned subsidiaries located abroad for consumption in the home country or third country is called global sourcing. CAVUSGIL at al. (2008) international business 1st edition. New Jersey; Pearson Prentice Hall.
This ability of individuals and companies to buy products from any part of the world has taken competition to a different level because a firm in Zambia has to take all companies in the world producing products similar to its own as competitors despite geographic dispersion.
With competition being on a global scale, firms cannot afford to just serve one market. They have to either offer its current products to a new market, or come up with new products for its current, or for a new market in order to mitigate risk of loss if conditions become adverse in one market.
Before a company internationalizes, it must first assess if it is ready, and which countries have attractive markets. It must follow the order of:-
- Analyzing its readiness to internationalize,
- Assessing the suitability of its products and services for foreign markets,
- Screening countries to identify attractive target markets,
- Assessing the industry market demand for its products or services in the selected target market
- Selecting qualified business partners, like distributors and suppliers, and
- Estimating the company’s sales potential in the target market.
CAVUSGIL at al. (2008) international business 1st edition. New Jersey; Pearson Prentice Hall.
The process where a company decides to increase its current market is called market penetration. Market penetration as a strategy has low risk because the firm is operating in a market it is familiar with, and selling products that customers already know. This strategy is supported by a lot of advertising and promotional activities; for example a firm can lure customers to buy more of its products by offering a promotion of ‘buy 1 and get 1 free’. This type of promotion is common especially for products that are sold in grocery stores or supermarkets.
A firm can also increase market share by offering its products at prices lower than its competitors’. This strategy can only work if a company has low costs due to purchasing, production or distribution economies of scale.
A firm can increase its market share by acquiring smaller competitors in the industry. This strategy is ideal when a product reaches its maturity stage and the market is saturated and profit margins are low due to high competition. SABMiller took over Grupo Empresarial which was its competitor in South America, to become the second largest player in the market. The main strategies that firms use to internationalize are outlined below.
If the market in which a firm is currently operating is saturated or adverse conditions develop, it can consider offering its products in a different market- selling across its national borders in this case. The first option that a firm can choose is to export its products. Exporting means to ship goods or commodities to another country for sale, exchange, etc. With exporting, the firm produces goods in its home country and sells them abroad. (www.dictionary.com 20.20hrs, 13.11.10). a firm simply has to find distribution partners in the country where its exporting, to supply that particular market. The firm has little control in the international market, and it does not commit time or resources for the international market, it simply ships its products to that country and from there they are at the mercy of the distributor. An example of a company that exports its products is Zambia Sugar PLC (ZMSG). It produces the sugar from Mazabuka, its headquarters in Zambia, supplies the home market and exports the excess sugar to the European Union.
The problem with exporting is that the firm has little control over its product, and it is not there physically to position its product in the market. How successful it is in the international market depends on the distributor, and also how good the product is for word of mouth to work as a way marketing.
Exporting is mainly used by firms that do not have the resources to set up a physical presence in an international market. Additionally, management does not have to commit time to manage operations in the international market as it is all left in the hands of the distributor.
Firms also export because of unsolicited orders from abroad. An example is of Vellus Products, Inc. this is a small company based in the United States that makes pet grooming products. CAVUSGIL at al. (2008) international business 1st edition. New Jersey; Pearson Prentice Hall. This company got orders from Taiwan, England etc. -countries where it had no establishments.
Firms that are considering setting up a physical presence in an international market can use exporting as a way of testing the market. If the products sell well in the international market, then it can go ahead and set up its infrastructure.
INTERNATIONAL COLLABORATIVE VENTURES
Another way a firm can internationalize is through international collaborative ventures. A collaborative venture is a partnership between two or more firms, and includes equity joint venture as well as, project based nonequity ventures. CAVUSGIL at al. (2008) international business 1st edition. New Jersey; Pearson Prentice Hall. For example, the Japanese electronics company Sony Corporation and the Swedish Telecommunications company Ericsson formed a joint venture in 2001 to form a new company called Sony Ericsson. The reason for the venture is to combine expertise to produce superior products. Both companies have stopped making their own mobile phones and focus on the joint venture. http://wiki.answers.com/Q/Examples_of_joint_ventures). This type of venture is an equity venture, where no one party possess all of the assets needed to exploit an available opportunity(CAVUSGIL at al. (2008) international business 1st edition. New Jersey; Pearson Prentice Hall.)
A non equity or project based venture is a partnership formed specifically for a project which has a well defined timetable, without creating a new legal entity(CAVUSGIL at al. (2008) international business 1st edition. New Jersey; Pearson Prentice Hall.) ZCON and group 7 CONSTRUCTION are two companies that have come together to work on a project of setting up a shopping mall in Zambia. The project has a well defined time table and the two companies know when they are supposed to end the partnership.
This is a project based and usually non equity venture with multiple partners fulfilling a large scale project. It is normally formed with a contract with well defined rights, roles and obligations. (CAVUSGIL at al. (2008) international business 1st edition. New Jersey; Pearson Prentice Hall.)
Licensing is an agreement in which the owner of intellectual property grants another firm the right to use that property for a specified period of time in exchange for royalties or other compensation. (CAVUSGIL at al. (2008) international business 1st edition. New Jersey; Pearson Prentice Hall.) This is another method a firm can use to internationalize. The firm becomes the licensor in this case and firm in that uses its intellectual property is the licensee. The licensee pays a fee called royalties to the licensor for using the intellectual property. The licensor from time to time, chips in to advise the licensee and provide support. The licensor has a bit more control over its products in the international market using this method. The risks of internationalizing a higher using licensing compared to exporting. An example of a license agreement is of the company coca-cola. It is found in most, if not all countries of the world, but in most of them it operates under license. A local bottling company can produce and distribute coca-cola products on the licensor’s behalf.
The advantage of this strategy is that it does not require investment in the international market, but it is a source of cash through royalties paid in.
This is an arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties, or other forms of compensation. (CAVUSGIL at al. (2008) international business 1st edition. New Jersey; Pearson Prentice Hall.) . the firm allowing another , the use of its business system is called the franchisor while the one using the firm’s business system is the franchisee. with franchising, the franchisor has to be more committed as compared to licensing, in supporting the franchisee, because the entire business system (production, marketing, sales name and right for products patents and trademarks) is being used. The franchisor has to fully monitor the operations of the franchisee and make sure they are in line with the agreed procedures of operating. Examples of firms that have franchise agreements are McDonald’s, Subway, Debonnair’s Pizza.
This is an arrangement where the focal firm or a consortium of firms plans, finances, organizes, manages and implements all phases of a project abroad and then hands it over to a foreign customer after training local personnel. (CAVUSGIL at al. (2008) international business 1st edition. New Jersey; Pearson Prentice Hall.)
BUILD-OPERATE-TRANSFER ARRANGEMENTS (BOT)
This is an arrangement in which the firm or a consortium of firms contracts to build a major facility abroad, operate it for a specified period, and then hand it over to the project sponsor, typically the host country government or public utility. (CAVUSGIL at al. (2008) international business 1st edition. New Jersey; Pearson Prentice Hall.)
This is an arrangement in which a contractor supplies managerial know how to operate a hotel, resort, hospital, airport or other facility in exchange for compensation. (CAVUSGIL at al. (2008) international business 1st edition. New Jersey; Pearson Prentice Hall.)
This is where a focal firm (the leasor) rents out machinery or equipment to corporate or government clients abroad (leasee). (CAVUSGIL at al. (2008) international business 1st edition. New Jersey; Pearson Prentice Hall.) this is common in the aircraft business where manufacturers lease out the aircraft to airline companies.
FOREIGN DIRECT INVESTMENT (FDI)
The most involving method of entering an international market is through foreign direct investment. With this method, a firm either sets up its infrastructure in an international market (Greenfield investment) as opposed to acquiring an existing company. (CAVUSGIL at al. (2008) international business 1st edition. New Jersey; Pearson Prentice Hall.) a firm builds new manufacturing, marketing, or administrative facilities.
Alternatively, a firm can acquire another, already existing firm and takes over its operations in the market. An example of this is Airtel in the telecommunications industry, under the Bharti group. It recently took over all Zain operations in the African market.
With FDI, the firm commits its time and resources fully in the international market. It has a physical presence and has direct access to the firm’s stakeholders.
FDI is the riskiest of all the types of internationalization strategies because of the level of resource commitment. The firm faces;
Cultural risk. This is where a cultural miscommunication puts some human value at risk. A firm has to try to study and understand the culture in the country where it chooses to set up operations.
Country risk. Any changes in the political, legal, economic or environmental aspects in the country that would have adverse effects on the operations and profitability of a company.
Currency risk. This is the risk of adverse fluctuations in exchange rates.
Commercial risk. This is a firm’s potential loss from poorly developed or executed business strategies, tactics or procedures.
Currency risk. A firm faces the risk of loss of profits due to fluctuating exchange rates. The devaluation of a currency can have a negative impact on a company’s profits.
All of the above risks affect firms that use FDI as an entry strategy, unlike the other forms of entry that are only affected by one or two of the risks.
The main features of foreign direct investment are that;
It has greater resource commitment
It implies global presence and operations
It allows the firm to achieve global scale efficiency
Firms involved In FDI strive to behave in socially responsible ways.
When selecting an FDI location, a firm must look at a number of factors;
The country it wishes to invest in should have a market large enough to support its growth and give enough returns for the firm to continue operating. China for example, is a large market because of its population, and top of that, it’s an emerging market so it has a lot of growth opportunities.
The country should be close to the firm’s targeted customers to reduce on distribution expenses. Proximity the firm’s source of raw materials is also important
The country should have low political, cultural, and currency risk as compared to other FDI country options.
Economic factors such as tax, interest and exchange rates, are important factors for the firm to consider because they’ll determine the level of availability of cash for company operations.
Before a firm decides which type of entry strategy it wishes to use, it has to consider the amount of resources it is willing to commit and the level of risk It Is willing to take. How good a strategy is, is determined by the goals the firm wants to achieve. Different industries favor different entry strategies. for example a firm may want to reduce its costs so it can consider investing in countries endowed with natural resource that are input materials for the firm, it can invest in a country with low labor cost.
Industrial- emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies, particularly movement of materials and goods between and within boundaries.
Financial- emergence of worldwide financial markets and better access to external financing for borrowers
Economic- realization of a global common marketplace based on the freedom of exchange of goods and capital.
Informational-increase in information flows even between geographically remote areas. This is a technological change including fiber optic communications, satellites, telephone and internet.
Competition- survival in the new global business market calls for improved productivity an increased competition
In conclusion, there is no best way of entering an international market. It all depends on the type of products an organization produces, the resources it is willing to commit in the new market, the risks it is willing to take, and the barriers that are in the new market
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