How Firms Attempt To Address the Challenges Facing Them - Adopting Different Modes of Entry - Coursework Example

INTERNATIONAL BUSINESS By Name Course Instructor Institution City/State Date How Firms Attempt To Address the Challenges Facing Them As They Enter Foreign Markets by Adopting Different Modes of Entry Introduction A firm that seeks to expand into a foreign market should make crucial strategic decision regarding the suitable entry mode for that market. The most adopted modes of entering foreign market include sole venture, licensing, exporting, and joint venture. Since these modes encompass the commitments of resources, the mode of entry chosen by the firm cannot be changed easily without losing a considerable amount of money and time. Therefore, the selection of entry mode is a strategic decision that is very critical. When exploring a foreign market, the firm’s expansion strategy is used to select the best entry mode. Given that nearly all business organisations are seeking to establish themselves globally, the process of global expansions creates need for the development of effective global marketing strategy so as to explore capabilities and resources, identify opportunities at the global level, and use the core competencies to facilitate the implementation of overall global strategies. The choice of foreign market entry mode may considerably influence the overall results. The entry mode selected by a firm has implications on the resources committed by the firm to its foreign operations, the associated risks, as well as the level of control exercised over the new market operations. The purpose of this paper is to demonstrate analytically how firms attempt to address the challenges facing them while entering foreign markets by adopting different entry modes. Analysis As mentioned by Agarwal and Ramaswami (1992, p.4) a firm should choose the mode of entry whose risk-adjusted return on investment is very high. Still, the choices made by the firms could depend on the need for control as well as availability of resources. Control can be described as the need for the firm to influence decisions, methods, and systems within the foreign market. Agarwal and Ramaswami (1992, p.4) assert that control is important to enhance the competitive position of the firm and also enables it to capitalise on the returns on its skills and assets. On the other hand, resource availability denotes the firm’s managerial and financial capacity to serve a certain foreign market. Normally, a greater foreign venture ownership results in a higher operational control but risks are often higher because of the higher resources commitment and assumption of decision-making responsibility. Therefore, exporting is considered a low investment mode of entry since it offers the firm with operational control, but fails to offer marketing control which is crucial for firms that are looking for market. On the other hand, the sole venture mode is considered to be a high risk/return alternative, which offers the firm a high level of control. After the firm has identified a foreign market that provides high opportunity for profit and growth, Kim (2008, p.356) posits that firm should take into account the level of strategic commitments and entry. That is to say, a large-scale entry of a foreign market requires the firm to commit a substantial amount of resources in order to capture the advantages of the first-mover, which are related to switching costs, economies of scale, as well as demand pre-emption. When a firm decides to enter the foreign market as a late-mover, it must get ready to handle disadvantages associated with late entrance. In the late 1990s, for instance, when the retail market of Korea was opened to foreign firms, the domestic players who were highly competitive had already saturated the market. Therefore, Wal-Mart entrance into the Korean market failed to gain a rapid entry because the entrance was somewhat on a small scale. Wal-Mart entered the Korean market without defining its strategic commitments for that market; therefore, the company was less prepared to effectively develop a localisation strategy because of lack of clear projection regarding the amount of investment required for the company to grow in the Korean market (Kim, 2008, p.356). Therefore, Wal-Mart had serious shortfalls since the Korean consumers’ taste and preferences was significantly different than those of the American consumers. Furthermore, its store locations could not generate adequate customer traffic because they were not positioned strategically. In addition, Wal-Mart’s low price and low cost competitive advantage was not appropriate in the Korean consumption as well as competition context. In view to the Wal-Mart Case, it is evident that multinational companies normally face different challenges while entering the foreign market. Some of these challenges are attributed to government limitations, culture differences, as well as problems related to human resource management. For instance, when entering the Chinese market, firms are inclined to face challenges in attracting and retaining skilled and dedicated managerial personnel. A number of multinational companies have solved the HRM problems by introducing various strategies for employee retention. Still, some countries like China have inadequate talented employees because of different system for recruitment and selection between China and the foreign companies; unfeasible education system; and high rate of expatriate failure due to culture shock. According to Wu (2008, p.173) multinational companies are addressing these problems by focusing more on the process of recruitment process to ensure quality staff. Furthermore, companies have formulated internal training courses with the objective of improving the employees’ skills and abilities. Strategic alliance is an entry mode for foreign companies used by multinational companies because it facilitates market entry through sharing of competitive advantages, synergies, and risks. According to Moen et al. (2010, p.21), when competitive knowledge is shared through strategic alliance, a firm is inclined to face increased competition rather than cooperation, especially if the partner is acting opportunistically. For this reason, all the firms engaged in strategic analysis must create safeguards to oppose the unintended information transfers that could limit their operations transparency. When a strategic partner is poorly selected, the different operation areas such as pricing strategies, distribution, promotion, and sales could be negatively affected. Arasa and Gideon (2015, p.367) point out that the foreign markets entry may happen in two ways depending on the firm’s manufacturing facilities location. Therefore, the firm could either use exporting strategies (distributing products from the production facilities to the target country), or non-exporting strategies (transferring resources in terms of human skills, capital, technology, as well as enterprise into the foreign market). There are various entry strategies into foreign market: licensing agreements, exports, joint ventures, acquisitions, as well as Greenfield start-up investments. Arasa and Gideon (2015, p.368) posit that non-equity strategies such as licensing agreements and exports is suitable because it protects the firm from transactional hazards and country risks, but facilitate less organisational learning. On the other hand, entry strategies that need low commitment are chosen by firms seeking to overcome the foreign market’s unfamiliarity; for instance, establishing a subsidiary enables the firm to access the knowledge of the foreign market as well as access a market position that has already been established. Acquisition entry strategy offers the firm some level of instant embeddedness and enables it create a network of ties with the host country agents, clients and suppliers. Exporting is considered appropriate when the customisation is unnecessary, the foreign market has low trade barrier, and the costs of production on the home country is low as compared to the targeted foreign market. Direct ownership strategy offers the firm a high level of control while operating in the foreign market and enables it to learn the competitive environment and consumers, as well as the market at large (Twarowska & Kąkol, 2013, p.1008). Acquisition is considered suitable when the market can be control easily; the synergy and absorptive capacity of the acquirer is high. Green field entry is suitable when the firm fails to find an appropriate target for acquisition, embedded competitive advantage as well as in-house local expertise (Arasa & Gideon, 2015, p.370). When IKEA entered into the US market in 1985, it faced a number of challenges, which mainly was attributed to lack of attention to the wants and needs of the locals. The customers in the US desired for large household items and furniture kits. Because of performing poorly in the US market, the management of IKEA decided to introduce a standardised product strategy that was considered to be adequate to respond to the needs and wants of the local markets. As a result, the company’s sales in the US market significantly increased (Twarowska & Kąkol, 2013, p.1009). A number of studies as cited by Rothaermel et al. (2006, p.60) have provide evidence suggesting that cultural distance between the host and home country may considerably influence the process of business expansion. Therefore, a company that intends to enter a foreign market must choose between non-equity-based and equity-based entry modes so as to ensure that capabilities and resources transfer is as smooth as possible (Hernandez, 2011, p.6). Conclusion In conclusion, this paper has demonstrated analytically how firms attempt to address the challenges facing them while entering foreign markets by adopting different entry modes. As mentioned in the essay, the choices made by the firms to enter a foreign market could depend on the need for control as well as the availability of resources. The most adopted modes of entering foreign market include strategic alliance, licensing, exporting, joint venture, foreign direct investment, and so forth. Lack of attention to the wants and needs of the locals is the main reason why some of the companies such as Wal-Mart and IKEA performed poorly in Korean and the US market, respectively. These challenges can be solved by introducing a standardised product strategy, formulating internal training courses, and creating a network of ties with the host country agents, clients, and suppliers. References Agarwal, S. & Ramaswami, S.N., 1992. Choice of Foreign Market Entry Mode: Impact of Ownership, Location and Internalization Factors. Journal of International Business Studies, vol. 23, no. 1, pp.1-27. Arasa, R. & Gideon, L.N., 2015. 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