Modes of Entry into Foreign Markets - Coursework Example

Modes of entry into foreign markets Name Subject Professor Date Modes of entry into foreign markets Show how firms attempt to address the challenges facing them as they enter foreign markets by adopting different modes of entry. Use examples to illustrate your answer. Introduction Entry into foreign markets is associated with a variety of challenges that have to be dealt with if success is to be achieved. Some of the challenges include the need to carry out extensive research in order to learn aspects associated with the foreign market’s economy, consumer behaviours, trade agreements, policies and market trends. There is also a need to learn about the religion, culture, language and etiquette of the foreign market in question. There could also be some logistics challenges (Sharan, 2008, p. 367). The challenges are brought about by differences that exist among nations, economies, markets as well as human behaviours. This piece of work will give a critical discussion of the manner in which business organizations try to deal with the challenges that they face as they enter foreign markets. Much emphasis will be given to the adoption of various modes of entry. Modes of entry Adoption of different modes of entry has been seen as a way of dealing with challenges associated with entry into foreign markets. This is more so because every mode has some advantages and drawbacks and are more applicable in some circumstances than they are in others. An organization ought to choose the most applicable mode of entry based on the benefits involved as well as the degree of success to be achieved. According to Blomstermo, Deo Sharma and Sallis (2006, p. 221), there are different ways in which an organization can enter a given foreign market. There is no single market entry strategy that is suitable for all foreign markets. One could be the most apposite strategy in one market and not in the other. There are various factors that influence the choice of strategy at any given point. They include transportation and marketing costs, tariff rates as well as the required extent of product adaptation among others. In most cases, the above factors may raise an organization’s cost. Nonetheless, an increased sale of the products or services involved is likely to offset the cost, to the advantage of the organization. The options for entry made for organizations include, turnkey projects, licensing, franchising, foreign direct investment, and exporting. All these have some benefits and drawbacks which are largely influenced by trade barriers and transport costs, business risks, cost, firm strategy as well as economic and political risks involved. The appropriate entry mode varies by the circumstances as influenced by the above factors. Exporting This entails marketing and making sales of goods that are produced locally to another nation(s). It could take different forms such as indirect exporting for small enterprises and direct exporting for more experienced business companies. It is considered a traditional and well structured strategy of venturing into foreign markets. The fact that exporting does not necessitate that products are produced in the target nation means that investment in foreign production is not required. Marketing expenses are the major costs of exporting. Some of the fundamental players in the exporting process are the government, the exporter, the importer and the transport provider (Navarro, Acedo, Losada & Ruzo, 2011, p. 193). The benefits associated with exporting include the fact that it is less risky since manufacturing is done locally and not overseas. The costs of setting up manufacturing operations in the host nation are also avoided. Another advantage is that exporting goes a long way in assisting a business to realize experience curve location economies. On the other hand exporting also has some disadvantages. There are tariff barriers and high transport costs that could make the process uneconomical (Navarro, Acedo, Losada & Ruzo, 2011, p. 201). Also, agents in the target country may not necessarily act in the best interest of the exporter. Sharan (2008, p. 23). asserts that some of the circumstances that favour exporting as a mode of entry include the following. High political risks, distribution channels close to plants as well as liberal import policies. Other situations that make exporting appropriate for exporting are high target nation production costs and restricted sales potential in the target nation and where little product adaptation is needed. Licensing This is an entry mode whereby a company in one nation agrees to authorize a firm in another nation to make use of various business units of the licensor such as know-how, processing, trademark and manufacturing. A good example of the use of licensing is Coca Cola. The United Bottlers in Zimbabwe have the licence to produce Coke. Some of the benefits of licensing are that the firm shuns barriers to investment and capital is not engaged in foreign operation. It is also a good way to embark on foreign operations and start manufacturing relationships that are low risk in nature. The disadvantages are that there is limited form of participation, extensive planning, fact finding and investigation is required (Pehrsson, 2008, p. 138). There is also a likelihood of losing potential returns from manufacturing and marketing. According to Sharan (2008, p. 28), some of the situations that favour licensing are; barriers associated with import and investment, low sales potential in the target nation as well as large cultural distance. Also conditions such as inability of the licensee to become a competitor and possibility of legal protection in the target environment also favour licensing as a mode of foreign entry. Foreign Direct investment Direct investment is another mode of entry into a foreign market. It entails direct ownership of amenities in the target nation. There is transfer of resources such as technology, capital and human resource. Foreign direct investment could occur as an establishment of a new venture or acquisition of an existing enterprise. This system has the advantage of a high degree of control in the involved operations and hence a good understanding of the competitive market. Nonetheless, it needs high level of commitment and resources. A good example is that of Walt Disney Company where it decided on direct investment for its European theme park as opposed to licensing which it used on its entry to Japan. The general conditions that favour foreign direct investment include the following; low political risks, import barriers, high sales potential, small cultural distance and where assets cannot be reasonably priced (Dikova &Van Witteloostuijn, 2007, p. 1016). Franchising This is a process whereby firm owners pay royalties and fees to a parent company and in return get the right to identify with its trademark, make use of its business format and system and sell its goods or services. Some of the companies that have exercised this system include The Body Shop, Dominos Pizza and McDonald’s. Most firms that are characterized by a repeatable business model and can be easily transferred into other markets such as food outlets can utilize this system. Some of the advantages include low cost and political risk and simultaneous growth into various regions. It is however difficult to maintain control over franchisee and legal disputes are common (Nielsen & Nielsen, 2011, p. 187). There is also a high chance of franchisees taking advantage of the gained knowledge to become competitors. Turnkey projects This involves a contractor handling all details of a project for an international client. This includes training of operational personnel. Upon completion of the contract, the foreign client takes charge of a plant that is ready for full operation. Some of the benefits of turnkey projects are that a firm is in a position to attain great economic returns from the know-how needed to assemble and operate a technically intricate process. On the other hand, the mode has the disadvantage of having no long term interest in the foreign nation and it is also likely to create a competitor. Turnkey projects are appropriate in countries whereby a longer-term investment is likely to expose the company to unacceptable economical or political risks. Companies that offer services such as engineering, architecture, and environmental consulting make use of turnkey projects (Sharan, 2008, p. 31). A practical example is Toyota’s car plant in Adapazari, Turkey. The above conditions that have been discussed in favour of the different entry modes dictate the circumstances that may make one mode applicable in one situation and not in another based on the factors involved. The advantages and disadvantages of each mode of entry are also a substantial consideration in choosing the mode of entry. The benefits to be realized should always outweigh the disadvantages at any given point. Conclusion In summary, it is apparent that a company is likely to face challenges in its attempt to venture into international markets. One way of dealing with this problem is determining the best mode of entry at a given point, based on different factors. This is more so since the decision on the manner in which to enter a foreign market greatly influences the results to be achieved in the long-run. There are various ways through which success and expansion into a foreign market can be realized. They include direct investment, exporting, turnkey projects and licensing. Each mode of entry has some advantages and disadvantages and it is upon the leadership of an organization to choose the best suited at a given time based on the circumstances. References Blomstermo, A., Deo Sharma, D. and Sallis, J., 2006. “Choice of foreign market entry mode in service firms.” International Marketing Review, vol. 23 no.2, pp.211-229. Dikova, D. and Van Witteloostuijn, A., 2007. “Foreign direct investment mode choice: entry and establishment modes in transition economies.” Journal of International Business Studies, vol. 38 no. 6, pp.1013-1033. Navarro, A., Acedo, F.J., Losada, F. and Ruzo, E., 2011. “Integrated model of export activity: Analysis of heterogeneity in managers' orientations and perceptions on strategic marketing management in foreign markets.” Journal of Marketing Theory and Practice, vol. 19 no. 2, pp.187-204. Nielsen, B.B. and Nielsen, S., 2011. “The role of top management team international orientation in international strategic decision-making: The choice of foreign entry mode.” Journal of World Business, vol. 46 no. 2, pp.185-193 Pehrsson, A., 2008. “Strategy antecedents of modes of entry into foreign markets.” Journal of Business Research, vol. 61 no. 2, pp.132-140. Sharan, V., 2008. International Business 2/e, Concepts, Environment And Strategy. Delhi: Pearson Education India. Read More