Critically analyze the role of strategic marketing planning in relation to an organizations’ decision to enter new markets in a global marketing environment. Justify your choice of strategies with examples to support where possible.
A critical issue in international market entry strategy is the selection of an appropriate entry mode. Although some important studies have analyzed entry mode choice in the service context (see, e.g., Agarwal and Ramaswami 1992; Bouquet, Hébert, and Delios 2004; Erramilli and Rao 1993; Li and Guisinger 1992), they analyze specific service sectors and thus fail to address the heterogeneity problem of the service sector as a whole.
In the current dynamic and competitive environment, entry mode choice is a decision based not only on efficiency (transaction cost minimization) and value based (development of capabilities) considerations but also on other aspects, such as strategic motives of internationalization or the firm’s competitive position in the global environment (Aulakh and Kotabe 1997; Harzing 2002; Hill, Hwang, and Kim 1990).
In addition, the high costs of integration that economic theories stipulate may not be strictly true for many service firms. For example, professional services are characterized by low capital intensity (Erramilli and Rao 1993). For many service firms, the switching costs may be comparatively small because valuable assets rest more on human capital than on physical assets; thus, investment patterns observed in the manufacturing sector could be different in the service sector (Carman and Langeard 1980).
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The key issue in entry mode choice is the compatibility between the firm’s existing capabilities and those it needs to be successful in a particular market (Johanson and Vahlne 1977). As Madhok (1997) proposes, an operation seeking the development of capabilities to create future value will result in a greater proclivity toward collaborative ventures. Firm-specific capabilities, such as firm size, international experience, and tacit know-how, may also play a role.
Larger and more experienced firms typically favour full control modes. Furthermore, the tacitness of know-how that is involved in the market entry may limit its transferability to another firm without loss of value (Kogut and Zander 1993). These circumstances increase the efficiency of resource utilization and the effectiveness of its in-house transfer (Madhok 1997). The strategic motivations and competitive pressures underlying market entry and the particular nature of services may be relevant for the entry decision.
Firms tend to use higher control modes to coordinate more effectively strategies in a multinational network (Hill, Hwang, and Kim 1990), to extend market power by entering new markets, and to exploit market knowledge when following domestic clients or competitors to foreign countries (Li and Guisinger 1992). Strategic motivations, such as setting up a strategic outpost for future expansion, setting up a global sourcing site, and achieving economies of scale by concentrating the important activities in a limited number of locations, may also lead firms to rely on full control entry modes (Harzing 2002).
Consistent with the work of Dunning (1993), we argue that the introduction of strategic dimensions into the analysis of entry mode choice is essential in a world characterized by increasing globalization and the proliferation of cross-border collaborative alliances. Firms are increasingly competing in global rather than national markets. Furthermore, researchers have claimed that entry mode options for manufactured goods cannot be transferred to services because of service firms’ idiosyncrasies (Erramilli 1990).
First, services are largely intangible and cannot be touched, transported, or stored. Second, services tend to be inseparable, so production usually cannot be separated from consumption. Third, services are perishable and thus must usually be consumed at the time of production. Finally, services are heterogeneous, so each service encounter is unique and highly customized (Zeithaml, Parasuraman, and Berry 1985). When entering new markets, foreign investors must cope with the unpredictability of an investment in a politically, economically, and culturally different environment. To mitigate this uncertainty within a TCA framework, firms have been advised to retain flexibility and avoid high levels of ownership (Williamson 1975).
Firms should reduce their ownership levels, seek locally based assets, and solicit the participation of local partners (Anderson and Gatignon 1986; Hennart 1991; Hill, Hwang, and Kim 1990). One major source of uncertainty is cultural distance. Perceptions of significant cultural distance between the country of origin and the target country in terms of culture, economic systems, and business practices have been found to support the use of modes that involve smaller resource commitment (Johanson and Vahlne 1977).
Setting up in an environment with a culture that is different and unfamiliar to the investor increases the difficulty. Another factor of uncertainty is host-country risk. Hostcountry risk reflects uncertainty about the continuation of current economic and political conditions and government policies that are deemed to be critical to the survival and profitability of a firm’s operations in that country (Agarwal and Ramaswami 1992). A highly volatile environment will result in firms that want to minimize exposure to risk through entry methods that offer the necessary flexibility in the face of environmental variability (Erramilli and D’Souza 1995; Kim and Hwang 1992).
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By reducing resource commitment in risky environments, firms minimize their financial exposure in cases in which they can be adversely affected or forced to cease their activity by unforeseen events (Hill, Hwang, and Kim 1990). Therefore, in countries with unstable political and economic conditions, firms should avoid full-control modes and seek shared-control modes.
Under TCA assumptions, the risk of undesired dissemination of a firm’s specific advantage or proprietary asset is an important transaction cost. These expropriation hazards can limit the potential rent an investor may obtain for the exploitation of its specific assets in a foreign investment (Lu and Hebert 2005). Brand name, reputation, marketing skills, and the firm’s strength in sales are key specific assets for international firms. These assets are especially vulnerable to problems related to divulging information to or the misuse of information by third parties.
Brand development and sales strength are established over many years and are rooted in a firm’s culture, systems, and routines. The less control the firm exercises, the more exposed it will be to its partner’s possible hostile or opportunistic actions. Given that the process of creation and maintenance of product differentiation requires time, the undesired dissemination of commercial capabilities to third parties could become the subject of possible misuse and could damage a Size.
The establishment of wholly owned subsidiaries abroad entails significantly higher resource commitments and carries greater risk than other options. Consequently, larger firms have a greater ability to expend resources and absorb risks than small and medium-sized ones and thus are more likely to select high-control and resource commitment modes (Agarwal and Ramaswami 1992). Firms can obtain the necessary resources for investments internally through their own cash flow or externally from financial markets. International activities are time consuming and demanding of managers, and small firms are not always able to sustain the high information costs that are required.
Thus, consistent with OCP logic, limits on the availability of financial, managerial, and political resources implies the need for small and medium-sized firms to engage in entry modes on the basis of risk and commitment minimization. Therefore, we expect the following relationship: Type of International Strategy. Regarding the pursuit of international opportunities, we can distinguish between two broad types of strategies: a global strategy and a multi-domestic strategy. In a global strategy, firms typically attempt to take advantage of the homogeneity of tastes and preferences of customers across countries through a standardized product or service offering.
Interconnections among markets also enable these firms to seek substantial integration and economies of scale on a global level. In general, these characteristics reflect a firm’s ethnocentric orientation (Pelmutter 1969), which implies
(1) The development of international operations in the same way as in the market of origin,
(2) The transmission of information and knowledge from the parent company to affiliated companies, and
(3) The maintenance of a national identity by having people from the country of origin fill management posts in international operations. Thus, service firms that employ a global strategy prefer full-control entry modes to achieve a high level of coordination, synergy, and asset transfer among units. In turn, firms that adopt a multi-domestic international strategy compete mainly at the local level, adapting products and business policies to local markets.
Local subsidiaries typically enjoy considerable autonomy with their own commercial and production infrastructures. Such firms are comfortable with shared-control modes, such as joint ventures, which allow greater flexibility (Hill, Hwang, and Kim 1990; Tallman and Shenkar 1994). Their organization is often poly- The Impact of Strategic Factors Strategic Variables That Influence Entry Mode Choice 75 centric (Pelmutter 1969). Because international operations are viewed as a group of independent companies, control and evaluation methods are determined at a local level, and communications between the parent company and the subsidiaries are limited.
In conclusion, service firms with a multi-domestic strategy are more likely to rely on shared-control modes than firms with a global strategy. Therefore, we propose the following hypothesis: One of the most important strategic decisions managers of multinational corporations have to make is the selection of entry mode into a foreign market. How firms enter foreign markets has been a topic of interest for many researchers in international business and marketing (Agarwal and Ramaswami 1992; Caves and Mehra 1986; Gatignon and Anderson 1988; Stopford and Wells 1972).
The growing globalization of markets during the past two decades has become one of the most crucial issues in business today, representing numerous challenges and opportunities for domestic and international markets (Klein, Ettenson and Morris 1998; Darling and Arnold 1988). As national boundaries continue to disappear, more businesses seek opportunities abroad (Klein et al. 1998). Ettenson and Gaeth (1991) suggest that to compete successfully in this global market, managers need to have a thorough understanding of what consumers in different countries and cultures prefer.
Although the knowledge of what consumers prefer in terms of foreign products and services is an important one, we argue that understanding the level of animosity (war, economic, cultural and religious) of the intended host country is as important and could lead to the success or failure of multinational corporations. Entry Mode Selection The firm’s international experience and product diversification play an important role in entry mode selection (Stopford and Wells 1972). Woodcock, Beamish and Makino (1994) argue that cultural and other national differences between the host and home countries appear to influence entry mode selection. Caves and Mehra (1986) found entry mode selection to be influenced by several industries and firm-specific factors such firm size, advertising intensity, research intensity, industry growth and industry concentration.
All types of entry modes are contingently influenced by locational, ownership and internationalization advantages (Kim and Hwang 1992; Agarwal and Ramaswami 1992). Animosity and Entry Mode An extensive survey of the literature indicates that one of the main areas neglected in strategy research is the impact of animosity (war, economic, cultural and religious) on entry modes. As the opening quote indicates, the clash of civilizations will only increase because differences among civilizations are not only real, they are basic.
Huntington (1993) argues that differences in history, language, culture, tradition and, most importantly, religion will be the driving forces for conflict and history is full of examples of wars that have been fought based on religious and cultural differences. If religious and cultural differences can lead to armed conflict and atrocities, it is plausible that religious and/or cultural animosity toward a nation or culture might also affect how entry of foreign businesses is viewed and evaluated. Hofstede (1983) points out the role that cultural differences play by stating: The national and regional differences are not disappearing; they are here to stay. In fact, these differences may become one of the most crucial problems for management in particular for the management of multinational, multi-cultural organizations, whether public or private (p. 75).
The impact of national culture of the host and the home country has been investigated by a number of researchers (Hennart and Larimo 1998; Erramilli 1996; Barkema and Bell 1996; Shane 1994; Kogut and Singh 1988). Hennart and Larimo (1998) stated that there are two ways through which culture can influence ownership policies: 1) the country’s national cultural characteristics, such as its power distance and uncertainty avoidance can affect the preference of multinational corporation strategy or entry mode and 2) the cultural distance between the home base of the multinational and the target market can influence MNC’s entry mode.
Hennart and Larimo (1998) found that the lower the power distance and the uncertainty avoidance indices of the home base of the investing firm, the greater the likelihood that it will enter the United States with shared-equity ventures. They also found that the greater the cultural distance between the home base of the investors and the United States, the more likely that they will enter the United States through shared-equity ventures.
Erramilli’s research (1996) revealed that the greater the power distance characterizing the firm’s home country culture, the greater the likelihood that the firm will seek majority ownership in foreign subsidiaries and the greater the uncertainty avoidance characterizing the firm’s home country culture, the greater the likelihood that the firm will seek majority ownership in foreign subsidiaries.
Kogut and Singh (1988b) found greater cultural distance between the home country and the host country to increase the probability that Greenfield joint ventures would be preferred to wholly owned Greenfields and to controlling acquisitions. Additionally the greater the level of uncertainty (avoidance in the home country of the investor), the greater the preference for partly or wholly owned Greenfield investments over acquisitions (Kogut and Singh 1988b). The longevity of foreign ventures was found by Barkema, et al. (1996) to be negatively related to the cultural distance between the home and host country.
More recent studies like Arora and Fosfuri (2000) found that cultural distance reduces the propensity of a firm to set up a wholly owned subsidiary rather than using licensing to exploit technological competencies in a foreign country. Although these studies provided a wealth of information regarding certain elements of culture and its impact on foreign entry modes, none of them address the issue of cultural and religious differences that may lead to the civilization clash described by Huntington (1993).
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This paper attempts to fill this gap by providing a theoretical argument regarding the impact of war, economic, cultural and religious animosity on entry modes. War, Economic, Cultural and Religious Animosity Klein et al. (1998) conducted a study in China to investigate the impact of animosity on intention to purchase foreign goods. Klein’s model, which developed scales to measure war and economic animosity (defined as remnants of antipathy related to previous or ongoing military, political or economic events), demonstrated the negative impact of these constructs on Chinese purchase intentions related to products from the source of this animosity.
From that study Klein et al. proposed the construct of animosity between nations and concluded that consumers who harbour war or economic animosity toward a specific country are likely to choose not to purchase products manu- Marketing Management Journal, Fall 2005 factured in that hated country. They also found that consumers who are unwilling to buy products from the hated country may find it perfectly acceptable to buy products from friendly countries and showed how the animosity construct is different from the ethnocentrism construct. Kalliny and Hausman (2004) extended the Klein et al. animosity model by adding cultural and religious animosity constructs.
Religious animosity is defined as one’s intolerance of and antipathy toward another person, country or nation because of religious differences while cultural animosity is defined as one’s intolerance of and antipathy toward another person, country or nation because of cultural differences. Kalliny and Hausman (2004) found that cultural and religious animosity impact consumers purchase decision in regard to foreign products. Those who harbour cultural or religious animosity toward a country are more likely not to purchase products fi-om that hated country. Nijssen and Douglas (1999) tested the animosity model in The Netherlands and found support for the theory.
They also found that those who are more willing to travel to foreign countries to have a more positive attitude toward foreign products. Shin (2001) tested the animosity model in Korea and found support for it as well. Country Risk Root (1987) identified four types of risks that play a significant role in MNC’s entry decision. These risks include political risk (instability of political system as in some African countries), ownership/control risks (expropriation), operations risk (local content requirement), and transfer risk (remittance control).
These risks usually play a significant role in determining the amount of resources that MNCs commit in a foreign market. For example, when these risks increase, MNCs may choose to commit the smallest amount of resources to increase their ability to exit quickly when needed. This argument may suggest that licensing or exporting may be the most desirable entry. Companies usually choose the entry mode based on risk/return or cost/control trade off effects (Goodnow 1985; Root 1987). The level of risk can be moderated by the type of control attained (Kwon and Konopa 1992) and although several authors suggested that these risks can be substantially reduced by limiting ownership in a foreign venture (Brandley 1977; Korbin 1983; Vemon 1983), the situation gets more complicated when we talk about war, economic, cultural and religious animosity.
These animosities complicate the issue because if consumers who harbour any of these animosities are not willing to purchase products made in the hated country, then the multinational firm may be forced to consider other options to overcome the animosity problem. Kwon and Konopa (1992) provided the following comparison between exporting and foreign production in regard to risk:
1. Foreign production requires relatively more resource commitment (initial investment, operating costs) than exporting,
2. Foreign production entails relatively greater risk exposure than exporting,
3. Foreign production provides relatively greater control of market than exporting, and
4. Foreign production provides an expectation of a relatively higher rate of return than exporting. International Entry Modes and Propositions Tse, Pan and Au (1997) argue that most past studies on foreign entry mode strategies of MNCs have adopted one of two theoretical approaches, the transaction cost approach or eclectic framework approach proposed by Dunning (1980, 1988). The transaction cost approach is based on the economic rationale that firms will minimize all costs associated with the entire value-added chain.
This approach stresses the importance of firm-specific variables (Agarwal and Ramaswami 1992; Erramilli and Rao 1993; Gatignon and Anderson 1988; Kogut and Singh 1988). Dunning’s (1980) eclectic framework integrates several strands of international business theories on cross-border business activities. Dunning (1980) argues that international business activities are influenced by three types of factors: host country-specific factors, ownership specific factors, and intemalization factors. The host country-specific factors deal with country risks and location familiarity (Hill, Hwang and Kim 1990), while ownership-specific and internalization factors focus on the industry-specific and firm-specific variables.
Of interest in this paper are the four primary international entry modes of joint venture, wholly owned subsidiaries, exporting and licensing. Researchers investigated the choice of entry modes of multinational corporations in regard to control and resource commitment. Several authors suggested that each of these entry modes is consistent with a different level of control (Calvetl984; Caves 1982; Davidson 1982; and Root 1987).
Control is defined as the authority that the investing corporation has over operation and strategic decision making. Resource commitment is defined as dedicated assets that cannot be redeployed to alternative uses without loss of value. Hill, Hwang and Kim (1990) argue that while wholly owned subsidiaries can be characterized by a relatively high level of control and resource commitments, the opposite can be said of licensing agreements. With respect to joint ventures, the levels of control and resource commitments vary with the nature of the ownership split. Alliances For purposes of this paper, joint ventures and strategic alliances are treated equally.
The formation of alliances is a crucial one because a firm can enter a foreign market by itself or by forming an alliance with another firm to reduce investment risks and enhance its competitive advantage. Kogut (1988, p. 319) defines joint venture as, “a joint venture occurs when two or more firms pool a portion of their resources within a common legal organization.” Tse et al. (1997) argue that firms are motivated to form alliances with other firms to reduce investment risks, share technology, improve efficiency, enhance global mobility, and strengthen global competitiveness.
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According to Pan and Tse (1996) foreign firms form an alliance with Subsidiary There is no doubt that globalization has increased competition and moved it from the domestic level to the global level. Due to this new level of competition, MNCs have found it necessary to look for the least expensive resources of production to stay competitive. This has forced some MNCs to look for cheaper resources outside the home country. To take full advantage of cheap labour and raw materials, MNCs may choose to set a subsidiary in a desired host country. Birkinshaw (1997) defines Before You Go, You Should Know: Kalliny and LeMaster subsidiary as any operational unit controlled by the MNC and situated outside the home country.
The subsidiary ownership decision could be a very complex function of several factors including country characteristics, industry characteristics, product characteristics and firm characteristics (Erramilli 1996). The initiative for setting up a subsidiary lies in the identification of an opportunity to use or expand the MNC’s resources (Birkinshaw 1997). The theory of internationalization argues that firms expand globally to realize the value of intangible assets (Buckley and Casson 1976).
Subsidiaries often have unique capabilities and critical links vwth local customers and suppliers and in such situations the ability of the subsidiary to pursue local opportunities and subsequently to exploit them on a global scale is an important capability (Bartlett and Ghoshal 1986; Harrigan 1983; Hedlund 1986). On the other hand, problems encountered by the new subsidiary can affect the entire corporation (Newbould, Buckley and Thurwell 1978). U.S. multinationals were found to have a predominant preference for wholly owned subsidiaries (Stopford and Wells 1972).
Weinstein (1974) found that 62 percent of the subsidiaries were either fully- or majority owned. Gatignon and Anderson (1988) observed that American multinationals had an intrinsic tendency to prefer wholly owned subsidiaries. Although American companies prefer subsidiaries, setting up a subsidiary is more risky than other forms of entry (Yip 1982). For example, when setting up a subsidiary, the entire cost is absorbed by the MNC. In addition, the subsidiary may lack information necessary for success in a particular environment or culture. History is full of examples where companies lost their business to expropriation, confiscation or destruction especially during time of conflict. Consider what happened to the Jews’ businesses in Egypt when the national government was established in 1952.
Many American companies lost their investment when communist regimes were established in countries like Cuba and others. We argue that during times of conflict, the hated country will be more likely to be targeted by citizens and governments. 23 Wild, Wild and Han (2003) argued that the events of September 11, 2001 have literally changed the world. They base their argument on a study that was conducted in the United States and nine Muslim countries where it was found that the majority of U.S. citizens feel that the Muslim world does not respect the American culture and vice versa.
There is a sense of animosity and we think that this sense of animosity will play a role in the foreign entry mode selection. It is plausible to think that companies will take into consideration the level of animosity in the host country and devise their entry strategy accordingly. Based on this argument we propose: Proposition 2: Other things being equal, in countries where war, economic, religious and cultural animosity is low, country risk will be low and multinational companies will be more likely to prefer committing a high amount of resources and therefore a subsidiary mode of entry would be preferred. Exporting is the marketing and direct sale of domestically produced goods in another country.
There are several reasons as to why companies may choose to export. For example, exporting does not require that goods be produced in the target country so no investment in foreign production facilities is required. Exporting allows companies to increase their samples by targeting and selling in foreign markets. Moreover, exporting helps companies diversify their markets, reduce their vulnerability to lags in domestic demand, extending product life cycles, using idle capacity, and reducing unit costs through economies of scale.
Exports also help sharpen competitiveness, broaden contacts, and enhance understanding of global markets and cultures. In addition, the nation benefits from exporting because increased exports create jobs, spur economic growth, bring in tax revenues, and improve the balance of payments (Food Export USA). Marketing Management Journal, Fall 2005 Before You Go, You Should Know: Kalliny and LeMaster Although exporting has many advantages and may seem very appealing to companies especially those that are faced with a saturated home market, exporting has several disadvantages. One of the main issues exporting companies face is the decision of adaptation versus standardization.
When companies are faced with a situation that calls for adaptation, this may increase the cost of the product. Exporting companies may have to develop new promotional materials which may add to the cost of the product and companies that are engaged in exporting may incur added administrative costs. Moreover companies may have to wait longer for payments and finally, exporting companies may have to obtain special export licenses (Food Export USA 2004). As can be seen from the above points, exporting can be a complicated process and may not be easy.
The situation gets even more complicated when cultural and religious animosities are added to the equation. As discussed above these animosities do impact consumer preference and purchasing intentions. Kwon and Konopa (1992) argue that the foreign entry mode choice depends not only on the characteristics of the firm but also on the characteristics of the foreign market. Goodnow (1985) and Root (1987) viewed the characteristics of the firm and the product as internal factors and the characteristics of the foreign market as external factors.
We argue that the level of cultural and religious animosities would fall under the external factors because they are part of the foreign market characteristics. Moreover, we argue that these animosities will play a role in the decision of the exporting country as to where to export and what to export to which country. For example, Saudi Arabia and Kuwait banned Barbie toys from their markets calling them a threat to morality and complaining that the revealing clothes of the “Jewish” toy are offensive to Islam (CBS News 2003; Gulf Marketing Review 1996). The banning of the Barbie toy reveals the cultural and religious animosity between the West and the Arab countries and shows their impact on purchasing intentions.
Our rationale is based on the reasoning that companies engaged in producing products that may be viewed negatively by the foreign consumer should find a local element to help in decreasing the negative aspects that is caused by animosity. Thus we propose: Proposition 3: Other things being equal, the level of cultural and religious animosity will play a role in determining how the foreign product is perceived by foreign customers. Proposition 4: Other things being equal, in countries where war, economic, religious and cultural animosities are high, exporting will not be the preferred entry mode. Licensing is the process by which the right to use intangible intellectual property is granted by one party (licensor) to another (the licensee).
Licensing permits a company in the target country to use the property of the licensor and such property usually is intangible (e.g., copyrights, patents, trademarks, and so forth). The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance needed. There are a number of advantages for using licensing for the licensor and the licensee. Licensing allows many businesses to enter international markets through creative use of intellectual property rights in partnership with other companies. The low level of risk taken by the licensor for licensing requires little investment on the part of the licensor.
Licensing allows companies to maximize income by expanding market opportunities without large capital expenses. A benefit to the licensee may include rapid entry into a market using technology developed and tested by others (Food Export USA 2004). Although licensing may have a number of advantages, it also poses certain risks to the licensor. When an MNC grants a license to a foreign enterprise to use firm specific know-how to manufacture a product or market a product, it runs the risk of the licensee disseminating that know-how, or using it for purposes other rch into the efficacy of formalised marketing planning (Thompson 1962;
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