Models of Entry into International Business
International business or Global marketing is growing at a fast rate and there are more than 180 nations-sates in the world with different market and profitable potential. However for an organization to earn sufficient income in the global market it needs to know the right time and form of market entry mode whilst entering International market (Hill, 2003). Therefore this essay will focus and assess the need for an organisation to use a range of modes of entry while entering the international market. In due course it will give an overview on International marketing literature review, views on variety of entry modes, entry selection criteria, examples based on cased studies and conclusion.
General Understanding of International marketing refers to marketing of goods and services from one country to another. Producing and marketing of products in more than one country is also termed as international or multinational marketing. But according to Mc Auley (2001) International marketing can be defined quite simply as “the performance of business activities that direct the flow of a company’s goods and services to consumers or users in more than one nation for a profit” much similar to domestic marketing. However Kahler (1983) argues and identifies that “International marketing differs from domestic marketing for one basic reason: it involves doing business with individuals, firms, organizations, and/or government entities in other countries”. The author further argues that the difference between international marketing and domestic marketing is environmental in nature. Organisations have to accept and deal with it as the way differences exist. Global customers do have the same basic needs for food and shelter but, existence of habitual differences, differences in cultural lifestyle, climatic changes and physical environmental changes also make a huge difference in marketing activities.
For instance, Ford Motor Company manufactures cars in USA but they export and sell in Germany in spite of having a manufacturing unit in Germany for the German market. (Kahler,1983). Now this is one way of tapping an international market and exporting goods and services. However, there are various range of modes of entries that an organisation can choose while entering international markets these are further identified in detail.
As per Kahler, (1983) some of the basic entry modes are Direct exporting, Indirect exporting, Foreign Licensing, Joint Venture, Wholly-owned subsidiary, Turnkey Operation and Management Contract. Further explained in detail.
Indirect export is as a process involving exporting activities without any involvement of the manufacturing firm. Domestic based intermediaries such as export houses, trading companies, courier/express services, export management companies, piggybacking, brokers and jobbers and overseas agent distributors are involved to perform the exporting activities Mc Auley(2001). In contrast Terpstra and Sarathy, (2000) highlights that in Direct exporting firms are independently concerned with market contact, market research, pricing of the products, export process documentation management and physical delivery. These entry modes have an advantage of low investment and substantial scale economies in terms of sales volume. But high transportation cost and control over foreign marketing are the concerns (Hill, 2003).
Keegan and Green (2005, pp295) state that “Licensing is a contractual arrangement whereby one company (the licensor) makes a legally protected assets available to another company (the license) in exchange for royalties, license fees, or some other form of compensation. The licensed assets may be a brand name, company name, patent, trade secret, or product formulation”. The author further states that the other form of licensing is Franchising. It “is a contract between a parent company-franchisor and a franchisee that allows the franchisee to operate a business developed by the franchisee in return for a fee and adherence to franchise-wide policies and practices”. Low or no investment and scattered risk are the benefits for firms. However, lose control over marketing activities for licensing and quality control for franchising is a major drawback (Hill, 2003).
Joint ventures is like tying a knot with the foreign operating firm, wherein the company which is going international has enough equity to have a voice in the management but cannot completely control the foreign operating firm (Terpstra and Sarathy, 2000). Features like overcoming legal and cultural barriers and access to local distribution system work as advantages for joint venture. However, ownership and control have remained an issues to a certain extent (Cateora and Ghauri, 2000). As per Paliwoda and Ryans Jr (1995) “Co-production arrangement strategies involve long-term relationships between partner firms and typically are designed to transfer intermediate goods such as knowledge and/or skills between firms in different countries”.
Paliwoda and Ryans (1995, cited in Kogut and singh, 1988) described acquisition as purchasing sufficient amount of stock in a foreign existing company to acquire control and Green-field Investment as investment or establishment of a new firm to start-up investments in new facilities which are wholly owned or represent a joint venture between two or more parties. Acquisition is easy to execute with the quickest way to establish presence in market place and less risky then green-field investment. On the other hand green-field helps organisation to build new culture from scratch and thus create a value in the market place. But formation of “hubris hypothesis” (Managers over estimating their ability to create a value) and in clash between the cultures of the acquiring and acquired firm for acquisition mode and uncertainty of risk over earning potential for green-field mode are the shortcoming (Hill, 2003).
But Paliwoda and Ryans Jr, (1995) argues that the above mentioned and other entry modes are clustered and classified in three main categories. Firstly Export Mode which includes Direct and Indirect exports. Second Contractual and Investment modes consisting of different activities such as licensing, franchising management contracts, turnkey contracts, non-equity joint ventures, and technical know-how or co-production arrangement. Firms approach towards such kind of contractual arrangement is based when firm is possessing some sort of competitive advantage and are unable to exploit this advantages because of the restrictions placed on them. Lastly Investment mode includes, Acquisition and mergers or Greenfield (start-up) investments. These clustered market entry modes have different characteristics in terms of control, risk involved, resource commitment, flexibility and ownership, which form as advantages and disadvantages for choosing entry modes shown in Table 1 (Appendix1 ) (Paliwoda and Ryans 1995).
But it is more significant to identify the stimuli and several other traditional reasons why organisations approach international market. According to traditional method these Stimuli are categorized as push and pull factors (Internal and External factors) entirely depended on the firm’s internal attribute.
Internal factors constitute of organisation with the owner as a key decision maker who has a strong desire to spread cost and risk may influence the organisation to approach foreign markets. Similarly, receiving an unsolicited order, saturated domestic market, competitive pressure and export motivated programs are the external factors which may instigate companies expanding international. For example, a firm with an unique product manufactures excess capacity of goods and has a specific company advantage over the competitor, then it may induce the firm to enter an international market (Mc Auley, 2001). After considering motivational factors, it is much important to know, why organisations consider different aspects and factors whilst choosing the right market entry mode.
According to Agarwal and Rarnaswami (1992) trade-offs between risks and returns are the main factors influencing the choice of entry mode i.e. firms are bound to choose an entry modes which offers the highest risk-adjusted returns on investment. But over a period of time with experience and technical know-how, firms focus on the main factors that determine right entry modes. They are an advantage of Firm Ownership, Location advantage, advantage of a Market Place and Internalisation advantages of integrating transactions within the firm relating to low control over the firms which may be considered as superior since it allows to earn high economies of scales but also involves high cost expenditures and risk of tapping the right partner .
On the other hand Sarkar and Cavusgil, (1996) highlight in depth points needed to be considered when choosing the entry modes. These are Product-Market factors; (Issues related to asset specificity technology issues and marketing complications), Firm/Foreign venture specific factors; (Firm size and international experience, ownership structure level of diversity and specific competencies) Host-Market factors; (Political and Economic issues operating risk, infrastructure and technological strength) and Market Potential home-market factors (market size, growth rate, product acceptance, product life cycle and managerial expertise). More specifically it constitutes of Cultural factors; Global industry structure; Global corporate objectives; Relational dimensions of inter-firm collaborations; Firm’s bargaining power with respect to foreign governments; and Political leverage of the home country government shown in Diagram1 (Appendix).
However Agarwal and Rarnaswami (1992) states that these factors are based on the theory of: Low resource (investment) and consequently low risk/return alternative. High investment and consequently high risk/return alternative. Lower investment and low risk, return, and control commensurate and Low investment and low risk/return alternative.
However Root (1994,6) says that there are three fundamental rules applicable while deciding an entry mode such as NaÃ¯ve Rule- which considers only one way approach (adopted from the market “We only Export / We only License”), Pragmatic Rule- based on the market experience adopting of low risk entry mode and finally the Strategy Rule – suggests a use of right entry mode through entry comparison matrix.
After considering the immense analysis on above specific factors and taking into account the objective of further expansion, foreign manufacturing or extended use of domestic manufacturing facilities. Search for relevant information sources is carried out, resulting in to evaluation of acquired data, thus showing feasible entry strategies and company resources matching their proposed marketing plan is developed. Considering the only one market the entire analysis will be focused on it. Kahler(1983)
However each entry mode has a significant implication to the firm, it is important to know the different aspects of the entry mode to be chosen, to be able to achieve the main objective why organisations use different entry modes. This is further explained by various case studies as examples based on the above factors and theories.
1st Example: PepsiCo (NYSE: PEP) and PepsiAmericas, Inc. (NYSE: PAS) one of the world’s largest food and beverage companies operating in nearly 200 countries and employing more than 168,000 people worldwide jointly acquired Sandora, LLC in June 2007 through Acquisition, (“Sandora” is a leading juice company in Ukraine) where in Pepsiamerica Inc. holds 60 percent interest. Strategy (Entry Mode) of acquiring the firm is based on expanding its business portfolio in Europe, Asian continent and to enter the market prospect, PepsiCo has also been able to use collaborative ventures in different markets. Since Sandora, LLC has the powerful sales distribution network and two modern production facilities located in Nikolaev. Acquisition is an effective and appropriate strategy to achieve the goal of holding strong competitive position in the international market. Due to the strong asset power, PepsiAmerica is able to leverage the capabilities and experience of the Sandora team and manage the day-to-day operations of the business. This establishes higher control and by PepsiCo overseeing the brand development they obtain higher market presence. (Pepsiamerica.com 2007) [Accessed 20 March 2009]
2nd Example: PepsiCo Inc., Unilever and Starbucks Coffee Co. inked a licensing agreement for the manufacturing, marketing and distribution of the coffeehouse chain’s super premium Tazo Tea ready-to-drink beverages in the United States and Canada in September 2008. Now Tazo’s ready-to-drink line is a part of Pepsi/Lipton Tea Partnership, which expands the joint venture between PepsiCo and Unilever, based in Englewood Cliffs, N.J. The bottled beverages, which currently are sold in Starbucks and other outlets, are made available nationwide through the PepsiCo bottling system started in mid-October. This results that Foodservice and Seattle’s Best Coffee, through licensing achieved patent rights from PepsiCo. It can also be seen that Starbucks gained medium ownership rights in the partnership. This move puts Seattle’s Best Coffee in a prime position to take their successful Tazo bottled-tea business to an even higher level.”
3rd Example: In January 2008 once again SUBWAY was ranked as the no1# Global Franchises chain on the list of Top Americas Global Franchises. There are more than 29,000 SUBWAY restaurants in 86 countries worldwide, including 6,000 conveniently placed in non-traditional locations, and 5,000 stores outside of the USA and Canada. The reason for choosing franchisee strategy to enter global market is because it involves medium-high risk, resources, ownership and medium control & flexibility which help the firm to share the profit and losses.
4th Example: Siemens Enterprise Communications went in to a joint venture with Gores Group, LLC, which includes 51% ownership and 49% ownership by Siemens Enterprise Communications (also known as SEN). The joint venture continued under the Siemens brand, included two of Gores portfolio companies, Enterasys and SER Solutions. Intellectual property rights including patents and technology licenses of all entities are combined. The venture is well capitalized with Gore and Siemens investing 350 Million Euros for further innovation and integration across portfolio companies, and brand value on a global level. Siemens will continue to be a customer and part of the go to market strategy with other Siemens entities, including Siemens One to facilitate cross company involvement. This business transformation is expected to drive growth and expand its footprint and product portfolio and to drive growth in key parts of the business in the International and North American markets. Here Siemens Enterprise has a medium-high resource commitment i.e. 49% ownership and risk involved. Control over the other company is also relatively average, however it is advantageous for both the firms to extent their portfolio and earn revenue in the market
5th Example: In March 2005 Honda the Japanese car giant manufacturer decided to export cars from China to Europe through their newly established Export only car factory based in Guangzhou China. Decision was based on the fact that the factory is targeting the European, as well as the Asian market, confirming the long-held threat of new competition in a tight market from the low-cost manufacturing giant of the Far East. China’s export-led boom has excluded the auto industry, as the government limited foreign investment in the industry to 65pc holdings is another reason for adopting exporting. Here external factors like Japanese domestic competitive market and manufacturing cost factors play a significant role in choosing the export mode strategy. Organic growth and manufacturing of cars in the European county and other Asian country would have been a costly decision for the firm. As well there is always the risk of uncertainty involved for future market. Therefore this is a wise and effective decision of entry mode.
Companies in general prefer to enter International markets that rank high in attractiveness, low market risk and where they can enjoy a competitive advantage. But as literature review reveals the fact, that International marketing is a much wider concept and it differs from domestic marketing. However core principal of marketing remains significantly satisfying global customer need. In order to reach out to the customer need, organisations adopt strong efficient range of entry strategies to meet the demand market place. Organisations with their incredible managerial know-how and resource capabilities apply these business literature theories to explore the markets. By and large these theories do assist firms a right approach and to certain extent minimise the risk involved. But as analysed earlier every strategy has its own loop holes, advantages and disadvantages. Therefore it can be hypothesised that there is no perfect black and white workable mode of strategy which can be accepted and implemented by an organisation to secure success. As experienced in the above 1st example PepsiAmerica & PepsiCo tapped the Ukraine market through acquisition, but it was also possible for the company to capture the market through contractual mode: franchising, which involved low investment and higher control over the distributor. In 3rd example: Subway has always been using the NaÃ¯ve rule in contractual strategy of only Franchising to expand internationally. Which involves higher exporting of in house material and assets from America, and higher importing tax levied in foreign country. It can be suggested that Subway can choose the investment mode such as acquisition of foreign local sandwich factory possibly in any free trade zones and enjoy the tax free or low tax benefits on their import and export activities.