Foreign market entry strategies Essay

â€Å"Firms which participate in the business system as partners complement the company and its suppliers, thereby increasing the value to customers†. Explain your understanding of this view and provide examples to reinforce your arguments. For a company, entering new foreign markets may be achieved in a variety of ways. Each of these ways places its unique demands on the company in terms of organizational and financial resources. Most of the times, entering international markets is not a matter of choice but of necessity to remain competitive in new or established markets by meeting the consumer’ needs and values. The decision to go international represents an important commitment, to go into a new line of activity, this being the reason why it should be taken step by step: obtaining information, analyzing them, formulating alternative action plans, (Tookey, 1975) and of course find the right partners that match the company brand image and values. The international business system model is focused on the advantages determined by the internationalisation process and less on the development process of the internationalisation of companies. The main scope obtained by applying the Uppsala Model is predicting the company’s evolution on foreign markets. Two elements are at the basis of the model: the notion of essentiality attributed to the process and the notion of physical distance. The internationalisation of a multinational company takes place step by step, according to the Uppsala Model, which minimises the risks regarding the new market (Johanson; Wiedersheim-Paul, 1975). Therefore, the company is being involved gradually (investments, control and profit), getting to the point of creating a production subsidiary which ensures also the selling of the products on the new market. The stages of the internationalisation process are presented in Appendix 1. The concept of physical distance, the second element the Uppsala Model is based upon determines the companies to select, in a first stage, the neighbour countries in order to reduce the cultural, economical, political differences. According to this approach, the bigger the physical distance, the bigger is the incertitude about the new market and bigger the risks associated to this market. In the view of the globalisation phenomena, there are numerous criticisms about the â€Å"physical distance† notion. Many papers have developed the subject of the company’s internationalisation; a special place holds J. Birkinshaw who analysed the problems regarding the role of the subsidiaries and the evolution of the mandated in the internationalisation process at the multinational’s level. Therefore, Birkinshaw and Hoods (1998) have shown that creating a subsidiary can be explained on the basis of the interactions between the decisions of the mother-company, the initiatives o f the subsidiary and the specific conditions existing on the new market. The model developed by Birkinshaw (1997) is based on three variables: The relation headquarters – subsidiary; the subsidiary’s initiatives and the local environment. Regarding the internationalisation process, the company has more options (see Appendix 2) The first choice is represented by the development of the existing markets and it is being used by companies that are acting on highly competitive markets; the second choice – the company can choose to develop its activity on new markets, similar to the ones they are already acting on – in this case, they are usually choosing to export their products; the third strategy is developing a new line of products similar to the ones they already have and which will be sold on similar markets- in this case the company can choose between strategic alliances: creating a joint venture or licensing. . Management’s involvement in export operations is different, as we talk about passive exporters (when selling abroad is induced by the demand existing on the foreign market, meaning that the business is initiated by the importer) or active exporters (when the operation is initiated by the seller, which has an export strategy and a suitable business plan (Popa, 2006) From the operational point of view, exporters can be indirect exporters(with the participation of trading houses), when it isn’t necessary to create an organizational structure specific to the export activity or direct exporters, which is made by the producer, which is creating services or departments for international business. The determinants of export behaviour are experience and uncertainty effects; behavioural and firm-specific influences and strategic influences. 1. Experience and uncertainty effects Knowledge and learning regarding the exporting activity may be possessed or accumulated by the company in time. Experience has a key role, as firm’s involvement in international markets is most of the time a gradual process. During the early stages of exporting, firms have a more concentrated foreign market focus, while increased involvement in foreign market encourages diversification to a wider range of markets. As a firm’s knowledge of an export market increases, the uncertainty factor diminishes. This knowledge allows the identification of concrete opportunities, as distinct from theoretical that may be apparent from objective knowledge. 2. Behavioural and firm-specific influences Recent theories of exporting are strongly influenced by the behavioural theory of the firm, which stresses decision-maker characteristics, organizational dynamics and constraints, ignorance and uncertainty as key variables in decision making. Exporting has been described as a development process based on a learning sequence involving six stages Bilkey and Tesar, 1977): Stage 1: the firm is not interested in exporting Stage 2: the firm supplies unsolicited business, doesn’t examine the feasibility of active exporting Stage 3: the firm examines the feasibility of exporting in an active way Stage 4: experimental exports on neighbour countries Stage 5: the firm becomes an experienced exporter Stage 6: the firm explores the feasibility of exporting to additional countries of greater business distance. According to Welch (1982), the export commitment is influenced by four groups of factors (see figure 4): pre-export activities, direct export stimuli, latent influences on the firm and the role of the decision-maker. 3. Strategic influences The opinion among researchers and managers is divided on the issue of the relation between the firm size and export success. Still, the importance of a positive managerial attitude to exporting and the necessity of committing managerial and financial resources to the internationalization process are crucial to the success of the firm, irrespective of size. As a mode of international market entry, strategic alliances allow the firm (Bradley, 2002): †¢ Access to assets not readily available in the market †¢ Access to technology and markets †¢ The smaller firms can have access to technology and new products †¢ The larger firms can have access to markets †¢ Synergetic effects in the partner firms. Choosing the way to enter a foreign market represents an important part of the foreign direct investment strategy. The companies should select the new market, decide upon the types of operations that are about to be developed on these markets and decide the type of entry –green field investments, acquisitions, joint ventures. Choosing the way to enter a foreign market was also explained through cultural and national factors. Many studies have been concerned about this topic: †¢ Kogut and Singh (1988) after researches have concluded that a big cultural distance between the country of origin and the host country have as a result choosing joint ventures or green field investments. †¢ Gatignon and Anderson (1988) have shown that an important socio-cultural distance, measured with the help of the Index developed by Ronen and Shenkar (1985) – goes to the partial propriety right. †¢ Gatignon and Anderson (1988) have concluded that multinational companies avoid having 100% owned subsidiaries in high risk countries. †¢ Cho and Radmanabhan (1995) have shown that companies from Japan are not willing to make acquisitions in developing countries. Choosing the joint venture as a mechanism to enter new markets (especially the developing countries and the ones with centralised economy) is usual ly a second-best option for the companies from developed countries. Still, the companies show through this the major interest for the local market; the participation in the joint-venture could be qualified as a foreign direct investment. Many times, this mechanism represents the only way to be present on a certain market. Licensing in international markets: License is the purchase or sale by contract of product pr process technology, design and marketing expertise (Bradley, 2002). It involves the market contracting of knowledge and know-how. International licensing takes place when a company provides, for a certain fee-royalty, a technology needed by another company in order to operate a business in a foreign market. Licensing of this firm involves one or more of these elements: †¢ a brand name †¢ operations expertise †¢ manufacturing process technology †¢ access to patents †¢ trade secrets. Licensing may be attractive when host countries restrict imports or foreign direct investment, or when the market is small and when the prospects of technology feedback are high. Franchising to enter international markets: Franchising is a derivative of licensing. In franchising a business format is licensed, not a product or a technology. Trademarks, trade names, copyright, designs, patents, trade secrets and know-how may all be involved in different mixtures in the „package† to be licensed. Franchising is a form of marketing and distribution in which the franchisor grants an individual or company, the franchisee, the right to do business in a prescribed manner over a certain period of time, in a specified place (Ayling, 1986). A franchise is, according to International Franchise Association (IFA), the agreement or license between two legally independent parties which gives: †¢ a person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor) †¢ the franchisee the right to market a product or service using the operating methods of the franchisor †¢ t he franchisee the obligation to pay the franchisor fees for These rights †¢ the franchisor has the obligation to provide rights and support to franchisees. Types of Franchises There are two main types of franchises: product distribution and business format. Product distribution franchises simply sell the franchisor’s products and are supplier-dealer relationships. In product distribution franchising, the franchisor licenses its trademark and logo to the franchisees but typically does not provide them with an entire system for running their business. The industries where you most often find this type of franchising are soft drink distributors, automobile dealers and gas stations. Some familiar product distribution franchises include: Pepsi, Exxon, Ford Motor Company. Although product distribution franchising represents the largest percentage of total retail sales, most franchises available today are business format opportunities. Business format franchises, on the other hand, not only use a franchisor’s product, service and trademark, but also the complete method to conduct the business itself, such as the marketing plan and operations manuals. Business format franchises are the most common type of franchise. The United States, today reported that the 10 most popular franchising opportunities are in these industries: fast food, retail, service, automotive, restaurants, maintenance, building and construction, retail—food, business services, lodging. The many advantages and disadvantages of owning a franchise should be carefully evaluated before deciding to purchase one. Throughout all these different foreign market entry strategies, by understanding every characteristic detailed we can conclude that partnership can be at the core of international marketing decisions and enable possibilities of internationalisation. Partnerships can be structured in various ways depending on their purpose. Wholly foreign-owned enterprises, non-equity/contractual/co-operative strategic alliances, equity strategic alliances/joint ventures, and franchises, are basic types of formal partnerships. There are numerous other types of informal partnerships including; joint marketing & promotion, joint selling or distribution, technology licensing, R & D contracts, design collaboration, production agreements, and other synergies. Consequently, the ideal partner in a business partnership is one that has resources, skills and assets and values which complement the company. The partnership has to work financially and contractually, but it is also essential that a partner’s areas of strength and weakness are known and that an assessment is made of what actions would be needed to achieve an appropriate level of operational fit between the cultures of the two organisations. To meet the market needs effectively and in a sustained way, the business partnership must be based on a systematic and transparent agreement between the client and the partners (common values). That agreement provides the basis for a partnership deal and has to be sufficiently strong to engage the sustained commitment of both parties but also sufficiently flexible to enable the partnership to be responsive to changes in market needs and conditions. Being at the forefront partners are an extension of the company capability, image and valu es perceived by the consumer, therefore, complement the company by increasing the value to customers. For instance, Sony is an international and reputed company for its high standards range of TVs. Today, within the UK market, Sony position itself as a seller of durable and high end products by practicing a selective distribution. Their products are mostly found at Sony Centres (Sony own shop) or PC Currys World, exclusive partner (distributor) chosen by Sony well known in the market and sharing similar values such as expertise in the audiovisual area or guarantee of quality products and services. It reflects well a relevant and consistent image of the values conveyed by both organisations to the customers.