Market Entry Strategies that Facilitates Entry of Companies into the International Markets - Coursework Example

Name Institution Professor Course Date International Business and Management Market Entry and IHR Strategies that Facilitates Entry of International Companies into the International Markets Executive Summary For numerous reasons, organisations adopt modes to penetrate foreign markets and seek for novel distribution channels. International organisations can enter into foreign markets via different strategies where each strategy offers distinctive benefits and costs. Selecting the appropriate market entry strategy is paramount. The selected strategy must achieve a company’s international expansion objectives. Drawing from systematic literature review and situational analysis of different companies, this report highlights the entry strategies commonly used by international firms to explore new international markets. The report provides definition of each strategy and evaluates their advantages and disadvantages. The report identifies and evaluates key HR strategies used by international companies to recruit for their foreign subsidiaries. The report provides international firms with adequate knowledge regarding market entry strategies besides determining the best strategies. More so, the report proposes the best HR strategies applicable by international firms to recruit foreign subsidiaries. The report indicates how different entry strategies differ with risk, cost and the extent of control exercised over them. It concludes that market entry and IHR strategies set the podium for international companies’ success in their advancement into foreign markets. Selecting appropriate strategies saves on time and money, offer strategic advantages besides lowering the dangers linked to international operations. When selecting entry strategies, companies should consider major internal aspects that comprises of core competencies and financial risk that an organization wishes to take. Table of Contents Table of Contents 3 1.0 Chapter One 1.1 Introduction The improvement of the globalisation procedure open novel markets besides novel prospects for an augmented operational effectiveness for the international companies. While selecting the appropriate market entry strategy, a company must select a strategy that facilitates accomplishment of its international expansion objectives. The opening of international markets towards decentralised economy formulated novel consumer categories besides a novel challenge for international companies, confronted with an essential effort of learning to serve and operate in a manner that corresponds to cultural and territorial fragmentations. The call to establish permanent sustainable business centre instigates the amplification of the knowledge procedure besides the advancement of scores of strategical options aimed at successful approach to the international markets. Understanding available market entry strategies for international companies is therefore important. Entry strategies set the podium for international companies’ success in their advancement into foreign markets. Selecting the most appropriate strategy is beneficial because it saves time and money, lowers the dangers linked to international operations and provides strategic advantages. The choice of entry mode into foreign markets has obtained considerable attention in the business world. Several studies have explored aspects that influence the choice for different market entry strategies. This report underscores the market entry modes commonly used by international companies. It provides an explanatory model for the choice of entry strategy and HR strategies utilised by international firms to recruit for foreign subsidiaries. The paper underscores how international human resource strategies facilitate the entry strategies. 2.0 Chapter Two 2.1 Entry Modes In gaining entry into an international market, a company can select from a nominal investment option to a choice that calls for great investment. Different entry modes provide numerous prospects to international companies to adapt different modes to enter international markets. The entry strategies that international companies can choose from include licensing/franchising, joint ventures, foreign direct investment and foreign manufacture and exports. An entry mode refers to an institutional arrangement that permits the entry of a firm’s technology, products, services, management, human skills and other resources into a foreign nation (Wagner 2009, p.3).. 2.1.1 Exporting Exporting entails marketing of services and goods from one country to another. According to Neeelankavil (2009, p.146), exporting is a simple market entry strategy employed by large, small and medium-sized companies. Exporting can be direct or indirect and can include intracorporate transfers. With respect to indirect exporting, the company falls in the hands of the local agents and holds little control over the process. In addition, no organisational capacity building and learning takes place within the firm. With regard to direct exporting, the company is in control of exporting procedure and attains exporting experience through this engagement. Nevertheless, the company holds little or no control as to what takes place in the foreign market. In intracorporate transfers, companies entail collaborative agreements with other companies to produce export products. Small companies do not attain adequate economies of scale given the size of the home market or the insufficiency of the accessible marketing or management sources. Through intracorporate transfers, companies attain increased economies of scale and establish broader product concept. Large international companies that have successfully used the export entry mode include Philips, Toyota, Siemens, Panasonic and Boeing. Similarly, large service organizations such SAP, Goldman Sachs, Deutsche Bank and AIG sell abroad their services to different parts of the world (Neeelankavil 2009, p.147). Other international companies that successfully apply the export entry strategy include the Germany Schering AG (See Figure 1). Given that an export strategy can be successful or unsuccessful, India’s solar manufacturers could not compete with the country’s imports because of the collapse of the policy of developing capacity for exports markets. Following the failure of the industry’s export strategy, the firms were left huge costs and incapacity to compete with foreign commodities (Hall 2014). Figure 1: Schering AG Market Entry Strategy Source: Trapczynski (2013). Advantages and disadvantages Export entry strategy is applicable to small firms that lack management knowledge or resources to engage in a wholly owned subsidiary, but consider the potential to sell in certain market via exports (Neeelankavil 2009, p.148). For both small and large companies, exports present a prospect to sell services and goods in other nations, augment their revenues, increase profitability, gain economies of scale in their home operations, and obtain experience, increase productivity besides testing the market for additional advancement. An export entry strategy assesses markets, evaluates competition, identifies prospective distributors, identifies potential market and develops a marketing program (Allen 2006, p.28). Exporting is valuable to companies as it diversifies risks; revenue loss, and economic downturn in the home market could be compensated via extra profits and revenues from exports. The export entry mode experiences low financial exposure, permits gradual market entry, facilitates acquisition of knowledge regarding local market and preventing restrictions on foreign investments. However, exporting leads to higher transportation costs and results in comparatively lower return compared to other market entry strategies. Other disadvantages of export entry mode include vulnerability to NTBs and tariffs, logistical complexities and potential conflicts with distributors. 2.1.2 Licensing and Franchising Licensing is when a company or the licensor leases the right to use its intellectual property that includes brand names, trademarks, copyrights, patents, work methods or technology to a another firm referred to as the licensee, for a fee. Under the licensing agreement, a company grants rights to intangible property such as designs, patents and formulas to another organisation for a certain period in exchange for a fee ( Neeelankavil & 2009, p.162. Franchising agreement, on the other hand, allows an independent entrepreneur or firm referred to as franchise to run a business under the name of another firm referred to as franchisor, for a fee. Franchising refers to a contractual partnership between two lawfully independent businesses (Bilewicz 2006, p.17). A franchisor licenses gives right to the franchisee to sell certain services or goods through application of trademark, configuration, name, and through the franchisors organisational concept. Through this entry strategy, the franchisor lowers his risks given that the franchisee performs autonomously on the international market. Some organisations set up numerous franchise operations via a single business partner who then decides to subfranchise. This facilitates establishment of other outlets in one country without involvement of many individual operators. For instance, Holiday Inn holds numerous franchise hotels across the world owned and controlled through local entrepreneurs. Most of licensing and franchising operations are applicable in the service sector. An example of a firm with successfully licensing and franchising include, clothing brands such Ralph Lauren Polo shirts and Vanderbilt jeans licence their designs for production by companies in nations where they hold no distribution arrangement. A good example of a failed licensing and franchising is the Avis Service Inc a subsidiary of rental car company. The entry mode failed because Avis failed to assist franchisees find sites for quick-lube business. Avis also rejected the sites citing them unsuitable and too expensive thereby making the franchisees to demand refunds ( Sherman 2011, p.169). Advantages and disadvantages Licensing and franchising hold low growth costs and comparatively low risks. Nations that are beneficiaries of franchising enjoy high-income levels and a high number of entrepreneurs. (Neeelankavil 2009, p.163). Licensing and franchising provide rapid means of market penetration. This is because the investment requirements are minimal, and the strategy helps companies in extending their markets with the risks of expansion handled by the franchisee or licensee. The strategy offers valuable technological benefits to the franchisor. For instance, Israeli Sol-Gel Technologies offered a valuable ultraviolet-absorbing technology applicable in skin care products to the U.S.A Merck & Co (Neeelankavil 2009, p.163). Licensing and Franchising hold reduced financial risks and low-cost way to evaluate market potential. This entry mode does not involve NTBS, tariffs and other restrictions on foreign investment. It offers knowledge of local market. However, franchising uphold more control than with licensing. On the other hand, franchising and licensing hold limited market prospects or profits. Licensor or franchisor depends on the franchisee and licensee and there are potential conflicts with the licensee and franchisee. This is evidenced in the case of Avis Service Inc. More so, this entry mode creates a probability of establishing future competitor. 2.1.3 Foreign direct investment Foreign Direct Investment entails establishing novel facilities or purchasing existing assets in foreign nations. The former entails the Greenfield strategy while the later entails acquisition strategy (Harzing 2002, p.211). FDI involves a transfer of resources as well as acquisition of control. This implies that the subsidiary does not hold any financial obligation to the parent firm (John & Gillies 1996, p.266). Foreign companies accomplish this through obtaining a local company, or establishing a facility on a leased land. For instance, Canon, Olympus, Toyota, Unilever, Siemens in the United States are successful wholly owned subsidiaries of their parent organisations (Neeelankavil & 2009, p.168). Vietnam is a good example of a country where FDI fails at the financing stage due to lack of a friendly business environment by the government. According to Jarvis (2009, p.414), Vietnam is not for the faint of heart because of the series of prevalent economic and political obstacles that increases the rates of foreign business failure rates. International firms that have failed in Vietnam include the New York’s Elliot Associates. Advantages and Disadvantages Acquiring local company takes a shorter period than setting up one. This type of entry strategy comes with difficulties in shifting resources to a foreign operation (Neeelankavil 2009, p.168). Companies involved in FDI lessen the likelihood of developing local competitors given that wholly owned subsidiaries deny resource accessibility to competitors. Although the risks and investments of FDI are high, they tap the complete potential of the new market. FDI involves high profit potential, maintenance of control over operations, acquisition of local market knowledge and they do not involve NTBs and tariffs. FDI, on the other hand, take time to execute an aspect that makes joint ventures and franchising more preferable by international companies (Levi 2007, p.50). This entry mode comes with high financial and managerial investments, increased exposure to political risk, and vulnerability to foreign investments restrictions. More so, FDI involves greater managerial intricacy. 2.1.4 Strategic Alliances and Joint Venture A strategic alliance is a business arrangement where more than two firms decide to cooperate for mutual benefit. The benefits linked to strategic alliance include ease of market entry, shared risk, shared expertise and knowledge, synergy and competitive advantage. A joint venture on the other hand, is a form of strategic alliance where more than two firms come together to create a novel business entity that is lawfully distinct and separate from its parents. Advantages and Disadvantages Joint ventures are controlled through contract laws as opposed to property or corporate business laws. In this view, JV do not pay and file income taxes, hire employees, engage in contracts and own assets. However, co-venturing parties share the expenses, assets, revenues and risks. Joint ventures lower investments, share risks, avoid tax barriers and exploit the market potential. Joint ventures allow companies to exploit local regulations. For instance, to attract foreign companies to create joint ventures, nations may provide incentives through discounts on utilities and tax breaks. Joint ventures also use complementary resources and skills from the partners. For example, the U.S Motorola formed a joint venture with the Indian WiPro Technologies. Together the two companies offer computing mobility and manage services that tap into the Motorola phone technology with the WiPro software Technologies expertise. 2.1.5 Special Entry Modes Special entry modes include turnkey projects, contract manufacturing and management contract. Companies that outsource most or their entire manufacturing requirements to other firms use contract manufacturing. Management contract entails an agreement where firms offer managerial helps, specialised services or technical expertise to a second firm for monetary return. A turnkey project is a contract where a firm agrees to completely design, equip and construct a facility and then submit the project to the buyer. Turnkey projects are found in processing and engineering industries. These projects allow companies to earn extra return on its assets. However, the projects are of restrained durations with no permanent market presence. Out of turnkey projects, a company may develop a future competitor. 2.2 Key HR Strategies International companies encounter major challenges while recruiting employees for their foreign subsidiaries. These challenges include cultural disparities, legal systems, training and developing, economic level, employee mix and compensation. These challenges call for effective recruitment strategies. The strategies commonly used by international firms for recruitment include ethnocentric staffing model, polycentric staffing model and geocentric staffing model. 2.2. 1 Ethnocentric Strategy Morschett, Klein and Zentes (2015, p.512) assert that an ethnocentric staffing model consider parent-country nationals as the most sufficient for higher-level positions in foreign nations. This view is based on the assumption that home-country nationals are most productive in executing corporate strategies in foreign locations and are better trained, educated and more skilful. With ethnocentric strategy, major decisions are made at a firm’s headquarters and few foreign subsidiaries hold autonomy. Studies indicate that Japanese international companies are inclined towards ethnocentric approach particularly when recruiting MDs in overseas subsidiaries ( Gekonge 2013,p.170). The automobile industry and financial sector hold the highest percentage of parent-country nationals as MDs. 2.2.2 Polycentric Strategy The polycentric model stresses the heterogeneity amid different regions and, therefore, prefers the application of host-country nationals (DeNisi & Griffin 2015, p.55).Staffing every country with local managers limits the opportunities of employees to acquire international experience. According to Vance and Parik (2015, p.197), a major disadvantage of a polycentric staffing policy include lack of effective information flow and effective interaction amid MNC HQs and the foreign subsidiary prompted by cultural and language disparities. 2.2.3 Geocentric Approach Companies that use the geocentric approach recruit the best talent for essential jobs from throughout the world operations and external environments regardless of their nationality. This strategy works well in industries whose services or products entail minimal cultural differentiation such as the high-tech electronics or automobile industrial. For instance from 2003, Google has held its global programming competition to identify top engineering talent for probable company employment. The best talents were selected from Poland, Japan, China, Russia and Belarus (Vance & Parik 2015, p.197). This approach promotes global leadership development prospects for HCNs. Implementation of this strategy is challenging because of bounded rationality. The approach is expensive because of relocation expenses and compensation adjustment needs. 2.2.4: Linking Entry Modes and IHR Strategies The staffing models used by international firm to recruit personnel can facilitate entry strategies (Pellegrino & McNaughton 2015, p.458). For instance, the ethnocentric model that recruits PCNs facilitates the FDI. Through filling the major managerial positions in an international firm with PCNs, firms are able to set-up or purchase assets in foreign nations. PCNs have the expertise and knowledge to facilitate establishment of new firms or purchase of assets. The PCNs understand the operations of the parent firm better compared to HCNs. PCNs help in maintaining the values of their company thereby easing the entry process. More so, PCNs understand the right way to do business. Firms like Toyota, Takeda and Toshiba that employ an ethnocentric approach are well established as wholly owned subsidiaries in foreign nations. With respect to polycentric staffing model, this approach facilitates entry of international companies. The fact that the polycentric approach assumes that managers from host nations are as good as those from the parent-country, smoothens the entry process. The HCNs hold knowledge of their nations, understands the values, attitudes and preferences of the local market. The HCNs are aware of the disparities in consumer tastes and preferences and they adapt their products and try to develop local image of the firm. In addition, hiring HCNs saves on cost thereby facilitating entry into foreign markets (Ahlstrom & Bruton 2009, p.188). Lack of dependence on the parent company facilitates establishment of subsidiaries with the support of HCNs. Firms that use the polycentric staffing model experience less challenges when entering foreign markets. By recognising the expertise of the host nations, firms smoothens their entry process. This approach is more appropriate for strategic alliances and joint ventures. For instances, U.S. energy firms operating in Asia use the Polycentric staffing model. As regards, geocentric that puts PCNs, HCNs and third-country nationals in the same category promotes a number of entry modes including exporting, joint ventures and strategic alliances to mention but a few. Hiring the best talent promotes entry of firms in the international markets. Geocentric model promote entry of firm in foreign nations through increased cross-border interactions, knowledge sharing and cross-cultural learning promoted by HCNs (Vance & Paik 2010, p.198). This approach provides a greater prospect for developing general MNC mindset and identity as well as a broader development of key global competencies. However, this approach can hinder entry of MNCs in nations where the government require certain levels of HCN managerial and professional presence in their host country operations. Firms such as Google are widespread and successful because of their application of geocentric staffing perspective. 3.0 Conclusion and Recommendations The analysis indicates that the success of a firm’s international operations depends profoundly on the choice of entry mode into a foreign market. The report confirms that the performance and survival of foreign subsidiaries depend largely on the choice of entry mode. Firms enter foreign markets under different conditions and guided through external and internal aspects of a company. The choice of market entry strategy for international companies depend on the size of the company, product or services, market size, regulatory setting, growth potential, competition, political and economic factors of the host nation and financial position. It is evident that International HR strategies influence the success of the entry mode into foreign nations. For instance, the ethnocentric models promote FDI, polycentric and geocentric model promote joint ventures and strategic alliances. To ensure the most appropriate entry mode, companies should conduct careful assessment of their weaknesses and strengths besides a detailed external environmental evaluation that take account of the market potential. Firms should adapt the geocentric approach to staffing as it facilitates easy market entry given the cross-border interactions and wider establishment of major international competencies. Firms should align their market entry strategy with their business objectives. Companies should consider major internal aspects that comprises of core competencies and financial risk that an organization wishes to take. 4.0 Reference List Ahlstrom, D & Bruton, G 2009, International management: Strategy and culture in the emerging world, USA, Cengage Learning. Allen, M 2006, How to export import. New York: Lotus Press. Bilewicz, E 2007, The optimization of market entry strategies focused on market entry barriers in China. New York: GRIN Verlag. DeNisi, A & Griffin, R 2015, HR 3, UK, Cengage Learning. Gekonge, C 2013, Emerging business opportunities in Africa: Market Entry, Competitive Strategy, and the Promotion of Foreign Direct Investments: Market Entry, Competitive Strategy, and the Promotion of Foreign Direct Investments, UK, IGI Global. Hall, M 2014, ‘ Failed export strategy killed Indian manufacturers’, PV Magazine, Retrieved from http://www.pv-magazine.com/news/details/beitrag/failed-export-strategy-killed-indian-manufacturers_100015288/#axzz3q8ELiFqw Harzing, A 2002, ‘Acquisitions verses Greenfield investments: International strategy and management of entry modes’, Strategic Management Journal, vol.23, pp.211-227 Hotter, S 2013, International joint ventures in Brazil’s markets. Brazil: GRIN Verlag. John, R & Gillies, G 1996, Global business strategy, UK, Cengage Learning. Levi, B 2007, Market entry strategies of foreign telecom companies in India. India: Springer. Morschett, D, Klein, H & Zentes, J 2015, Strategic international management: Text and cases, UK, Springer. Neelankavil, J 2009, Basics of international business. New York: M.E Sharpe. 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