In this report, I am going to identify five market entry strategies, the positive and negative aspects of these strategies, and finally, assess which one of these strategies would be the most suitable for a company that wants to enter a global market.
When an organization decides to enter a global market, there are a variety of strategies it could utilize. Location costs, internalization factors, financial variables, cultural factors such as trust and psychic distance, market structure and competitive strategy, adaptation costs (to the local environment), and the cost of doing business abroad all play a role in determining the organization's global market entry decisions.
Exporting:
Exporting is the most traditional and well established form of operating in global markets. Exporting can be defined as the marketing of goods produced in one country to another country (When you make your product in your home country and ship it abroad).
Exporting can be further categorized as Direct or Indirect Exporting. Direct Exporting involves selling your products or services directly into your foreign market without the need of an export agent. Indirect Exporting involves selling your products or services directly into your foreign market through an export agent.
Lynton Exports is an example of an Exporting business; it is one of the UK's leading Exporting companies specializing in shipping and marketing the United Kingdom's most popular grocery items from the chilled and frozen sectors. Their main brands from the United Kingdom include: Pot Noodle, Colmans, Homepride, Heinz Pickles, PG Tips, Fudges Biscuits, Ragu, Marmite, Hellmans, Ambrosia, Hartleys, Oxo, Batchelors, Fray Bentos and many more.
As an entry strategy, Exporting has several advantages. In comparison to other methods, exporting is fairly simple, and has limited financial risk. There is an opportunity to increase sales and economies of scale as products have a wider range of acceptance in the global market. It is usually the first entry strategy used by organizations as it is a good initial step for exporting, and gives them the opportunity to get into, and learn overseas markets before further investment.
On the other hand, Exporting does have its disadvantages, and these include the possibility of requiring additional financial resources to cover transporting costs and any potential problems that may arise with export agents. In addition, exporters lose control once they've shipped their products. They may have made an agreement with the agent in regards to the distribution of their products, but there is no guarantee that the agreement would be adhered to. Furthermore, products may need to be modified in order to meet foreign criteria; catalogues, leaflets and any other product stationery may need to be translated into foreign languages.
Joint Ventures:
A Joint Venture can be defined as an enterprise in which two or more companies work together and share ownership and control over product rights and operation. Within a Joint Venture, two companies use each other's competencies to fulfill a certain purpose and make a profit or loss in the agreed ratio.
In Sept 2005, Skype, the Global Internet Communications Company formed a joint venture agreement with Tom Online, China's leading wireless Internet provider. The point of this joint venture was to allow an even deeper level of integration between Skype's award winning software and services with TOM Online's 70 million plus wireless Internet users.
As an entry strategy, a Joint Venture has several advantages. There is the ability to combine the local in-depth knowledge with a foreign partner with know-how in technology or process; it also provides joint financial strength, and allows each company to have access to greater resources, including technology and specialized staff. There is also the opportunity to split risks with the venture partner, meaning less pressure on a single company, and the companies can use each other's competencies to make profit together.
As an entry strategy, a Joint Venture is avoided by most companies due to the various complications it may lead to. However, there are some instances when companies that have the ability to take the risk involved in entering a new market still decide to enter into a Joint Venture. This is often as a result of the government policies laid out in many emerging markets. For example, The Chinese government has a policy that says foreign companies have to enter joint collaboration with state owned companies in order to establish their businesses there.
However, the disadvantages still stand which a foreign company has to deal with to make its venture successful. Some of these are:
The difference in culture and managerial style
Neither company has full control
There is a potential for conflict or disputes
Partners may have different views on expected benefits
You may be giving away too much information, and creating or helping out competition
Lack of assuming responsibility by the partners may lead the collapse of business.
Other than the disadvantages stated above, there are other risks associated with starting a joint venture. One of the risks is the complication at the time of exit, i.e. when a foreign entrant decides to leave the market and hence, the joint venture. A very important aspect of an entry strategy is to also have an exit strategy. The nature of this entry method often results in a very complicated exit strategy and this is not even under the complete control of the foreign company. The second major risk is associated with the safety of a company's intellectual property (IP). It is definitely more difficult to control the access to one's technology when one is not the only entity in charge.
Furthermore, the theft of IP by the local partner is also an issue to deal with, especially in countries rife with piracy, like China. This probably explains why the majority of companies which enter markets where wholly owned subsidiaries are allowed, prefer that route over a joint venture.
Franchising:
Franchising is one of the most popular methods of market entry. It can be defined as a specialized form of Licensing, and is the right given by an existing business that has an established name (Franchisor) to another business (Franchisee) to sell goods or services using its name.
Some of the common features of Franchising are as follows:
Burger King was founded in 1954 by James McLamore and David Edgerton, and began franchising in 1959. It has continued to grow internationally, with more than 12,200 restaurants in 76 countries to date.
The advantages of Franchising are:
You have the rights to use the company's name, meaning less hassle as you don't have to start a new business from scratch
Limited financial risk because some else is paying the startup costs
Marketing collateral and support
The people starting up the franchise get the Management knowledge, the brand, all the secret ingredients etc.
The disadvantages of Franchising are:
You have no control over the running of the business
There is a limit in the amount of money you can make
You're unable to include your own ideas into the business
Licensing:
Licensing is a common method of foreign market entry, and can be defined as the right given by an existing business that has an established name (Licensor) to another business (Licensee) to manufacture, distribute and sell goods or services using its name. It is quite similar to the franchising.
7Up and Pepsi are a good example of licensing. In 1987, Britvic acquired a license to make 7Up and Pepsi.
Licensing involves minimal expense and involvement. The only cost is the signing of the agreement and policing its implementation.
The advantages of Licensing are:
Linkage of parent and receiving partner interests means both get most out of marketing effort
Profits are not tied up in foreign operation
The disadvantages of Licensing are:
Limited form of participation - to length of agreement, specific product, process or trademark
You're unable to include your own ideas into the business
Potential returns from marketing and manufacturing may be lost
You may be giving away too much information and in a way, and creating or helping out competition
Requires considerable fact finding, planning, investigation and interpretation.
Those who decide to license would be better off keeping their options open for extending market participation. This can be done through joint ventures with the licensee.
Strategic Alliance:
A Strategic Alliance can be defined as two companies from two different countries working together to achieve a specific purpose. They're not buying equity, or putting money together but they're working together.
The intent is to find a long term sustainable solution
Need to have clarity of what you're trying to accomplish
What do you want to achieve?
What is your culture? Are you an organization that adapts to change or one that has the same management for a number of years
Some of the common features of a Strategic Alliance are as follows:
For example if Greenwich School of Management decided to do a program with the University of South Africa. They wouldn't buy each other's schools or put money towards anything, but they'd work together, and as a result Greenwich School of Management could have better success in South Africa, and the University of South Africa could have better success in United Kingdom.
Advantages of a Strategic Alliance:
Local help
Working together and learning from each other, so you're getting free information that could be mutually beneficial
Students would gain more knowledge about the universities, meaning more of them would possibly go abroad and become international students
Disadvantages of a Strategic Alliance:
You may be giving away too much information and in a way, and creating or helping out competition
There is a potential for conflict or disputes
Foreign Direct Investment:
Foreign Direct Investment can be defined as when someone invests their own money into starting up a business and in turn, have 100% ownership and control.
Some of the common features of Foreign Direct Investment are as follows:
Advantages of Foreign Direct Investment:
You have 100% ownership and control
You own all the profits
Disadvantages of Foreign Direct Investment:
It's very risky, if anything goes wrong there is a potential to lose your entire investment
Many organizations prefer to establish their presence in foreign markets with 100% ownership through wholly owned subsidiaries. Under this method, organizations obtain greater control over operations and higher profits since there is no ownership split agreement. However, such entry method requires large investments and faces higher risks, especially in the political, legal and economical arenas. There are two approaches for the wholly owned subsidiaries entry method; one is through acquisition and the other through greenfield investments.
The best mode of entry into the global market in my opinion is Exporting, because it gives companies the opportunity to get into, and learn overseas markets before further investment.
