“When organisations exhaust their home markets and economic conditions are favourable, they may seek to expand into foreign markets to boost trade and profits".
Foreign market entry strategies are considered critical for organisations looking to expand their operations to countries abroad, often requiring significant commitments and financial dedication to such projects. In today's economic, political and technological situation the expansion into new markets has never been as attractive to organisations. Jansson (2007) defines an entry strategy as a business gaining access to new customers, in new markets by the way they market their products and services.
A variety of researchers discuss several reasons as to why firms intend to go abroad. Thomson et al. (2005) mention firms may enter into foreign markets to gain access to new customers, resulting in generating more revenue. Also discussed is the improved competitive position of the company within the market. External factors such as free trade agreements allow countries to carry out economic activities “without restrictions or barriers such as import and export tariffs,” (Johnston et al., 2011). The removal of trade barriers and the emerging middle class has also contributed to the urge of progressing into new markets. A company's business may also be dispersed across a wider market, meaning economic slowdown will not be able to put the company at risk if this is in place, (Thomson et al., 2005). A variety of internal factors serve as drivers for organisations to globalise, including branching into new markets. The desire for a firm to improve its economic position includes the promotion of market expansion, technology advancement and the major communication cost reduction. Other factors involve supply chain management and strategical alliances (Albaum and Duerr, 2008).
From the organisation's point of view, expansion into foreign markets can only be successful if there is a clear vision in place throughout the whole organisation, with a dedicated specialised team committed to seeing the process from start to finish. Market commitment and knowledge are essential for this process, with the degree of commitment becoming higher, the more resources in question, (Johanson and Vahlne, 1977). Market knowledge of opportunities and/or problems is essential to initiate decisions, as well as knowledge on the specific market in question. This includes knowledge about relevant parts of the environment, local competition, distribution channels, and payment conditions. This essay will investigate the various foreign market entry strategies used by a business to enter foreign markets. Both advantages and risks of each method will also be discussed.
Foreign market entry strategies
As discussed by Kotler and Armstrong (2012) in the principles of marketing, franchising is a foreign market entry mode, where a semi-independent business proprietor, also known as the franchisee, pays royalties and fees to the franchiser. This results in the franchisee being allowed to use a company's trademark and sell the services or products. Often, the terms and conditions of a franchise package contract consist of staff training, location approval and equipment used. This foreign entry strategy is used most common and is largely successful when expanding cross-border.
There are many advantages associated with franchising an organisation. These include being a solution to the capital and managerial constraints faced by an expanding business. Franchising provides an efficient way to obtain the managerial expertise needed for expansion. Potential franchisee's place a significant amount of their personal time and assets into their own unit, these individuals are only likely to purchase a franchise if they feel confident in their own managerial abilities. Finding financial support for setting up a franchise is also easier to find and acquire, due to banks and similar lending institutions providing convenience to setups. Banks prefer to finance a reputable organisation rather than a new business (Salar and Salar, 2014). Also, research has shown that only 7% of franchise owners fail within the first three years, this is compared to over 90% of new business startups (Whichfranchise.com, 2018).
Pizza Hut, McDonalds and Subway are just a few examples of successful organisations using franchising as their foreign entry mode. Founded in 1965 in the United States, Subway used franchising as their entry strategy and now operates in one hundred and seven countries, with over forty-two thousand units (Subway, 2014). Subway is now one of the world's largest top ten franchises and is the perfect example to show how franchising allows for rapid expansion for an organisation.
Whilst franchising is a successful and popular method for foreign market entry, there are risks involved. These may include loss of brand quality through standards not being sustained, and lack of local knowledge which an organisation may fail to possess in the country they are entering. An example of this can be seen with Starbucks, who failed to penetrate the Israeli market and was forced to close operations within two years (Glowik, 2017). Due to Starbucks failing to recognize local consumption behavior, local competitors prepared for Starbucks to enter, improving their own business presence in the local economy and offered new products, essentially franchising themselves (Barnea, 2011).
A joint venture is a business, or business activity that two or more people/companies work on together (Cambridge Dictionary, 2018). Although legal agreements are essential to create and sustain joint ventures, if it is to prosper, organisations involved should have practical, evolving relationships and positive interaction. Common objectives about acceptable levels of rewards and risks of the possible market and technology involved are also required (Kotler and Armstrong, 2012). Joint ventures will thrive if the organisations involved are able to learn from each other and they both have a united goal as a result of this venture.
Joint ventures motivate market power and will influence how a firm competes with other organisations in the same industry. Partners can ally with potential rivals to block a common competitor (Dong and Glaister, 2006), which may be achieved by purchasing an existing firm in the province, or starting a new venture. Another beneficial factor of joint ventures includes risk and cost reduction as neither company involved is responsible for the full risk or cost involved. One firm may manage the operations of the project, whilst the other focuses on contributing capital (Johnson and Houston, 2000). Firms may also share their industry expertise and excising manufacturing facilities.
Toyota and BMW, Google and NASA, and Kellogg's and Wilmar Ltd are all globally successful due to international joint ventures. More specifically, the Kellogg Company wanted to provide their global brands of Kellogg and Pringles to the Chinese market. This was achievable with a 50:50 collaboration with Wilmar International Limited (Wilmar, 2018). Wilmar is an Asia leading company, based in Singapore with over 450 manufacturing plants (Wilmar, 2018), and provided their expertise of sales and distribution network.
Risks associated with joint ventures can largely be due to local government who may impose restrictions due to threats on local competitors and threats to the environment. Pollution is a risk often faced by joint ventures, as if it spreads outside the designated area, it cannot be managed and hence reflects badly onto the project itself. Dependent on the scale of the new expected project, cash flow between partners may hinder or eliminate projects altogether. This is a result of poor income, and expense management not following a forecasted plan.
Exporting can be defined as sending goods/services across national borders for the purpose of selling and realising foreign exchange (Business Dictionary, 2018). Bradley (2005) speaks about exporting in general terms, as the quickest and easiest mode of entering a foreign market. There are three types of exporting, these include indirect exporting, direct exporting and finally cooperative exporting. Exporting is generally used by an organisation to gain knowledge and experience of the new potential market. When an organisation decides on this foreign market entry mode, they must also choose the level of commitment, resources, and risks involved (Chung and Ederwick, 2001). Exporting is becoming more popular globally, due to the removal of trade barriers, and the cost of transport decreasing (Shaver, 2011). However, firms are helpless without the commitment of the distributor.
Indirect exporting is the lowest risk entry mode, as there is no exposure to the foreign market. Effectively the organisation is selling their product/service to an agent who then sells it on (Kotler and Armstrong, 2012). As discussed by Cavusgil (2004), organisations choose indirect exporting as an entry strategy to see if the new market is receptive of their product/service. If successful the organisation may increase their presence and commitment in the associated market.
Direct exporting can be described as the producer selling directly to the buyer, located in a foreign country. This method requires very little to no knowledge of the foreign market from the manufacturers. The Austrian energy drink Red Bull is an example of where direct export was used as a foreign market entry strategy. Red Bull entered the Australian market and is now the leading energy brand in the country, holding a 36% market share.
Cooperative exporting is the final type of exporting that an organisation can use to enter a foreign market. As discussed by Kotler and Armstrong (2012), firms using this approach, enter an agreement with another local, or foreign firm to use its distribution network. Cooperative exporting generally is mutually beneficial for both firms involved, and instead of competing, firms complement other products sold. Wrigley, the US chewing gum company, successfully entered the Indian market using cooperative exporting. An agreement was gained with Parry's, a confectionary company, resulting in Wrigley gaining access to over 250,000 outlets (Kotler and Armstrong, 2012).
Kotler and Armstrong (2012) also discussed in the journal of marketing, licensing is a cross-border agreement that permits firms in the target country the rights to use the property of the licensor. It is essentially a licensing fee and ongoing royalty scheme is set up for this foreign market strategy, this is negotiated based on the percentage of licensee's sales (Keegan, 2018) The length of a license usually depends on the investment needed to enter the chosen market, this may be longer in order for the licensee to recover the initial investment (Gillespie and Hennessey, 2016).
Licensing is commonly chosen due to it being low risk, has high investment return and is a preferred market entry strategy by local governments. Gillespie and Hennessey (2016), discuss licensing may be used for less attractive foreign markets, the potential country may be too small, so a new manufacturing operation may not be supported. In counties where the political or economic situation is uncertain, this entry strategy avoids the potential risk associated with investing in fixed facilities. Commercial and political risks are absorbed by the licensee. Governments favour this strategy as it is a means of building up the local industry. Two successful examples of firms using licensing as their entry mode are Walt Disney Co. and Microsoft. Microsoft offers flexible licensing programs that give firms access to many of the technologies in its own products. This offers flexible access to any Microsoft product or service, delivering a unified experience (Microsoft, 2018).
Although licensing can be a very successful foreign market entry strategy, there are risks involved just like other strategies. These include substantial dependence on the licensee to provide revenues and therefore royalties, as well as the uncertainty of product quality. Once a license has been agreed, royalties are only paid if the licensee can perform an effective marketing job. As discussed by Keegan (2018), if the local company's marketing skills are less developed, revenues from licensing may suffer accordingly. Concerning the loss of product quality, a company's image may suffer if a local licensee markets a product of substandard quality. To avoid this, firms must seek licenses based on previous production knowledge and reputation for quality (Brouthers, 2013).
It can be argued, that the monumental Brexit is likely to have serious consequences for companies around the globe. However it may also create international business. Specifically, as discussed by Cumming and Zahra (2016), the United Kingdom will be free to directly negotiate mutually beneficial conditions for companies in the USA and Canada for example. Costs such as operations are likely to decrease, due to tariffs/barriers imposed by the EU being possibly streamlined or removed. Cumming and Zahra also argue the declining value of the proud could encourage international expansion, especially through exports. However, Brexit is likely to reduce foreign investment, which previously was found to lead to a higher productivity. It is estimated that membership with the EU adds 2.25% to UK GDP via foreign direct investment (Dhingra et al., 2016)
From the various methods outlined above, no one entry strategy is considered to be superior to another. When choosing the internationalise operations, any organisation will need to finalise optimum levels of commitment, flexibility and financial support they are willing to dedicate to their project. The present business market can be considered volatile, due to an increase in competition, technology advances and globalisation. This has opened many market opportunities for businesses and therefore influenced them to go international. Exporting is considered a less risky strategy, while on the other hand franchising can provide some risks to a firm. The process for choosing a foreign market entry strategy can prove quite difficult, and hence why any strategy can prove successful if implemented in the right circumstance.
Albaum, G. and Duerr, E. (2011) International marketing and export management. 7th ed. New York: Prentice Hall.
Barnea, A. (2011) Lack of Peripheral Vision - How Starbucks failed in Israel. Journal of Marketing Management, 3 (4) 78-88.
Bradley, F. (2005) International Marketing Strategy 8th edition Prentice Hall, London.
Brouthers, K. (2013) Institutional, Cultural, and transactions cost influences on entry mode and performance. International Business Studies. 44, 203-221.
BusinessDictionary.com. (2018) What does export mean? Definition and Meaning. Available at: http://www.businessdictionary.com/definition/export.html [Accessed 15 Nov. 2018].
Cambridgedictionary.org. (2018) Joint Venture. Available at: https://dictionary.cambridge.org/dictionary/english/joint-venture?q=Joint+venture [Accessed 18 Nov. 2018].
Cavusgil, S. (2004) Differences among exporting firms based on their degree of internationalization. Journal of Business Research, 12 (2), 195-208.
Chung, H. & Enderwick, P. (2001) Investigation of Market Entry Strategy Selection: Exporting vs. Foreign Direct Investment Modes, Journal of Management, 18, 443
Cumming, D. and Zahra, S. (2016). International Business and Entrepreneurship Implications of Brexit. British Journal of Management, [online] 27(4), p.688. Available at: https://onlinelibrary.wiley.com/doi/pdf/10.1111/1467-8551.12192 [Accessed 15 Nov. 2018].
Dhingra, S., Ottaviano, G., Samspon, T. and Reenen, J. (2016) The consequences of Brexit for UK trade and living standards. London: London School of Economics and Political Science, p.9.
Dong, L. and Glaister, K.W. (2006) Motives and partner selection criteria in international strategic alliances: perspectives of Chinese firms, International Business Review, 15, 577-600.
Gillespie, K. and Hennessey, H. (2016) Global marketing. 4th ed. New York: Routledge.
Glowik, M. (2017) Global Strategy in the Service industries: Dynamics, Analysis and Growth. New York: Routledge.
Jansson, H. (2009) International business marketing in emerging country markets. Cheltenham: Edward Elgar.
Johanson, J. and Vahlne, J. (1977) The Internationalization Process of the Firm—A Model of Knowledge Development and Increasing Foreign Market Commitments. Journal of International Business Studies, 8 (1), 23-32.
Johnson, S.A. and Houston, M.B. (2000) A re-examination of the motives and gains in joint ventures, Journal of Financial and Quantitative Analysis, 35 (1), 67-86.
Johnston, R. J., Gregory, D. and Smith, D. M. (2011) The Dictionary of human geography. Oxford: Blackwell Reference.
Keegan, W. (2014) Global marketing. 8th ed. Harlow: Pearson.
Kotler, P. and Armstrong, G. (2012) Principles of marketing. 14th ed. Boston: Pearson Prentice Hall.
Microsoft.com. (2018) Introduction | Microsoft Volume Licensing Programs. Available at: https://www.microsoft.com/en-gb/licensing/licensing-programs/licensing-programs [Accessed 15 Nov. 2018].
Salar, M. and Salar, O. (2014) Determining Pros and Cons of Franchising by Using Swot Analysis. Procedia - Social and Behavioral Sciences, 122, 518. Available at: https://www.sciencedirect.com/science/article/pii/S1877042814014025 [Accessed 13 Nov. 2018].
Shaver, J. (2011) The benefits of geographic sales diversification: How exporting facilities capital investment. Strategic Management Journal, 31 (10), 1046-1060.
Subway. (2018) History. Available at: https://www.subway.com/en-US/AboutUs/History [Accessed 13 Nov. 18].
Thompson, A., Strickland, A., Peteraf, M., Janes, A., Gamble, J. and Sutton, C. (2005) Crafting and executing strategy. 14th ed. London: McGraw-Hill.
Whichfranchise.com. (2018) The Definitive Franchise Guide for 2018. Available at: https://www.whichfranchise.com/resources.cfm#advantagesOfFranchising [Accessed 13 Nov. 2018].
Wilmar-international.com. (2018) Wilmar International – Who are we. Available at: http://www.wilmar-international.com/who-we-are/milestones/2012-2/ [Accessed 13 Nov. 2018].
...(download the rest of the essay above)