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Multinational enterprises (MNEs) have the crucial decision of choosing the kind of market entry mode while venturing into an international market. According to Canabal and White (2008), a market entry option is a planned method that an organization desires to use in delivering goods and services to a particular target market. MNEs evaluates the entry options based on their costs, risks, and the degree to which the organization will have over the foreign market operations. Efrat and Shohan (2015) notes that a company venturing into the international market has a wide variety of market entry modes from where to choose one.
Market entry modes are institutional arrangements that an organization decides to organize and conduct its international business transactions.
Burgel and Murray (2000) notes that market entry modes fall under equity and non-equity modes. Equity entry methods require the company to commit many resources in return for a higher degree of control on operations and higher return on investment. However, they have they attract higher market exit costs while the risk of exposure is high.
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Contrary, the non-equity model requires the company to commit petite resources in return for a lower degree of control over the company's foreign market operations and lower returns on investment. Besides, the non-equity modes incur little exit costs and low level of exposure to risk.
According to Ekeledo and Sivakumar (2014), different market models will work only for particular markets. Under no conditions would one entry way apply to all foreign markets. As such, direct exporting entry method may use in one market while joint venture will be most suitable for another market. They also suggest how numerous factors including tariff rates, marketing and transportation costs, and the degree of adaptation that the product requires in the foreign market will inform a company's entry mode. As such, there requires a critical cost analysis of each of the entry modes and how the expected sales would offset these costs.
Accordingly, the paper evaluates the different entry methods open to a firm venturing into a foreign market. Additionally, the paper will assess how the choice of entry mode will influence the enterprise's marketing strategy.
A company has numerous entry options in entry equity methods. First, a company may choose joint venturing to enter a foreign market. As De Villa, Rajwani, and Lawton (2015) notes, joint venturing entails two or more firms working together on a particular project or establishing a new venture where both parties share the control of the operations. Most companies use joint ventures while entering the foreign market to take advantage of the partner's knowledge of the local market. Joint venture results when an investor in a particular international market show interest in a local company (De Villa, Rajwani, & Lawton, 2015).
On the other hand, a local firm may acquire interests in an existing business. A joint venture between Sony Ericsson and Virgin mobile best exemplifies a joint venture. Ekeledo and Sivakumar (2004) highlights sharing of risks, collective financial strength, and knowledge of local markets by the partner as the principal advantages of joint ventures entry option. On the other hand, the entry is disadvantageous due to shared control of management thereby increased chances of conflicts of interest. Secondly, recovering capital if one partner decides to exit proves to be an almost impossible task. Lastly, different perspectives of the expected benefits amongst the partners increase the chance of managerial conflicts.
Secondly, foreign direct investment is also a market entry option available to a firm venturing into an international market. According to Ekeledo and Sivakumar (2004), the preference occurs when a firm decides to have direct ownership of facilities need for the production of a product in a foreign market. Most companies establish a wholly owned subsidiary is the most expensive option but gives the company full control of operations.
Most American companies such as Apple, General Motors, and Starbucks have adopted FDI as their options in entering the Chinese market. According to Forbes (2010), American firms injected into China $3.6 billion in the year 2010 in the form of FDI. Besides a company that chooses FDI as the market entity option may use Greenfield operations or acquisitions approach according to Agrawal and Ramaswami (1992). A company that wants Greenfield operations constructs new operational facilities in the foreign market from the ground. Apple and Starbucks adopted the approach while venturing into China.
On the other hand, a firm that chooses acquisition buys the target company's ownership stake to assume full control of the operations (Dikova & Van Witteloostuijn, 2007). Windows acquisition of Nokia's mobile phone manufacturing operations best exemplifies FDI using acquisition approach. John (2013) suggests that FDI is advantageous as it increases the MNEs market power, optimal utilization of resources, tax benefits, and minimization of risks. However, the option has disadvantages including obsolete technology and demoralized labor in some of the acquired unit.
Moreover, a firm may choose its entry option from non-equity entry modes. First, MNES may elect to export as its strategy of entering a foreign market. According to Burgel and Murray (2000), exporting entails the sale of domestically manufactured goods in another country. Firms that adopts exporting can reach their customers quickly while they gain an understanding of the foreign market for any future expansion endeavors. Exporting may be direct or indirect.
A firm that chooses direct exporting have the full responsibility of selling its products directly to the consumers in the foreign market (Dikova & Van Witteloostuijn, 2007). Apple is renown in the use of direct exporting to sell its iPhones in North America and the European Union through the establishment of Retail stores. On the other hand, a business may choose indirect exporting where it would reach its customers through intermediaries. Samsung foreign market operations best exemplifies indirect exporting.
The company sells its products in foreign markets through intermediate traders. The option is advantageous as the risks are minimal that operating in the overseas market and there is an opportunity to learn the international market. However, the option's major drawback is that the enterprise is at the mercies of the foreign agents.
Additionally, MNEs may choose to license as a way of entering an international market. According to Kim and Hwang (1992), licensing requires the MNE allow a firm in the international market use its technology and other skill and manufacturing trademark to make similar goods and services as the licensor. The move allows the foreign company commit less substantial resources though the move enables the dissemination of technological know-how to potential competitors in the international market.
The phenomenon is evident in China where licensing by phone makers such as Nokia disseminated phone making technology leading to the rise of counterfeit phones and rise of competitors such as Techno Mobile and Infinix Mobile phone manufacturers (Francioni & Musso, 2010). Firms such as Merck and Upjohn have other organizations in the world manufacturing and selling pharmaceutical products under their license agreements. Moreover, other companies such as McDonald's, KFC, and Nestle have license agreements with organizations in China to have them produce goods and services using their intellectual property rights.
Furthermore, a firm may choose franchising as a non-equity mode of entering a foreign market. According to Kim and Hwang (1992), franchising is akin to licensing though it has longer-term commitments. Under franchising, a foreign firm authorizes a local firm in the international market to make use of its intellectual rights and operating systems to manufacturing goods and services. However, the franchisee has to abide by the rules set by the foreign firm regarding the way it does business.
Moreover, the MNE has the autonomy of assisting the franchisee in the ongoing operations of the company (Schuster & Holtbrugge, 2012). However, the franchisee has to pay a full percentage of its revenue to the foreign firm as loyalty. Starbucks Coffee and McDonald's uses the approach to extending their services to some European countries and India. The option is advantageous to the local firm due to freedom of employment, proven trademark, and reduced risk of failure. However, the MNEs may have the quality its products compromised due to the franchisee's small technical expertise.
Besides, MNE may choose management contract as its non-equity mode market entry option. As Schuster and Holtbrugge (2012) suggests, management contract entails MNEs contracting its operational control to a separate enterprise at a fee. The approach is standard in markets such as North Korea where the government restricts other entry methods. A company that uses the method to entering foreign marketplace hands over technical operations, personnel management, marketing services, and accounting operations (Schuster & Holtbrugge, 2012).
Moreover, the company may also deliver training and development to the contracting firm. Sakarya, Eckman, and Hyllegard (2007) terms the move as prudent as the foreign business is free from the risks of investing in an international market and the company does not have to commit many resources to setting up production facilities. However, they decry several drawbacks of the approach such as loss of manufacturing, limited control over the production process, and risk empowering new competitors.
Lastly, a multinational enterprise may choose turnkey projects as a strategy in entering the foreign market (Rasheed, 2005). Rashid (2005) suggests that turnkey project is a non-equity market mode where a developer undertakes the care of all the aspects of a project on behalf of the buyer until the completion of the project. Upon the completion of the project, the developer hands over to the purchaser for a fixed cost. Rasheed also suggests that the approach best suits markets where the government prohibits foreign direct investments. Moreover, an enterprise in the field of steel milling, cement and fertilizer manufacturing, and oil refining should consider the approach while entering international market in developing countries.
According to Canabal and White (2008) most firms marketing strategies lies in the fundamental tenets of the marketing mix that aligns with the enterprise's overall strategic decisions. The entry mode that a company adopts in entering foreign markets has profound effects on its global marketing programs (Johnson & Tellis, 2008). From Johnson and Tellis perspective, it is possible to prove that the choice of marketing mode may influence the level of adaptation or standardization of market mix of a company. The choice of entry mode may stimulate or preclude a company from adopting a particular marketing program.
First, indirect marketing limits a firm's ability to adapt marketing programs. A company that takes indirect exporting delegates marketing responsibilities such as sales and promotion to an external organization such as export agents or foreign distributors. According to Douglas and Craig (1995), companies that adopt the entry option have limited objectives of entering into an unfamiliar. Therefore, the firm gives up owning the complete marketing program and takes a standardized approach. If the business adopts a standardized approach, the external agent has the autonomy of adapting to some of the aspects of the parent company's marketing programs or develop free programs of their choice.
However, the foreign company will control product aspects such as quality and performance. Therefore, as Griffith (2010) concludes, indirect exporting will compel a company to have a consistent marketing policy adapted to promotion, price, and distribution guidelines. For instance, Samsung only controls the price and the quality of product while exporting its products to foreign markets. The company uses distributors and agents to get its products to the consumers. However, the company plays no role in determining how the dealers get the products to the customers. Promotion, advertising, and sales remain the role of the external agents.
On the other hand, direct marketing operations compel an enterprise to adopt a particular marketing mix. Companies that uses direct exporting establishes own sales organizations that exports the company's functions and marketing mix (Theodosiou, Katsikeas, 2001). Therefore, the company has the obligation of collecting and acquiring detailed information from the customers as well as information on the competitors' strategies in the foreign market. Therefore, the company will develop a comprehensive local marketing strategy that will employ better marketing mix tools (Canabal & White, 2008).
As a result, the company will use marketing strategies that are under significant control by the parent company's headquarters. Theodosiou and Katsikeas (2001) also notes that adopting direct entry modes requires a company to extend its marketing strategy to desire to learn deeper the local market leading to a more autonomous marketing strategy. Apple best exemplifies the extent to which direct exporting influences a company marketing strategy. The company undertakes the sale of its products in the European Union and Japan through Apple stores. The company conducts thorough research of the local people's culture, taste, and preferences.
The company uses the information to design its store to meet the particular market's culture and preferences. Moreover, the company marketing strategy incorporates promotional, advertising, and distribution mechanism. Therefore, Villar, Pla-Barber, and Leon-Darder (2002) conclude that direct exporting compels a firm into adopting product policies that exceed the price, promotion, and distribution strategies.
On the other hand, Canabal Oand White (2008) suggests that contractual entry modes have inhomogeneous effects on a company's marketing strategies. For instance, franchising will make the foreign company adopt to a more standardized market approach. The standardized approach implies that the foreign firm's marketing strategy will cover fundamental aspects such as price and quality while most other duties such as promotion and advertising remaining with the franchise.
On the other hand, contract manufacturing mode leaves the contracting firm with the full authority to undertake all the marketing operations (Canabal & White, 2008). Therefore, the option has no significant role in determining the type of strategy that the contracting enterprise uses to market its products. However, joint ventures the local partner play an important role in the marketing of the products due to the greater understanding of the local market (Canabal & White, 2008). As such, the marketing strategy the company decides to adopt features co-operation between the firms with activities such as advertising, promotion, and sales falling under the jurisdiction of the local partner.
Therefore, Johnson and Tellis (2008) suggests that franchising and contract manufacturing entry modes will compel a company to adopt more consistent marketing strategies where the foreign firm has more authority in marketing operations. However, joint ventures forces the foreign company to adapt its marketing strategy to meet the expectations of the local business due to content and structure of the contract (Canabal & White, 2008).
According to Johnson and Tellis (2008), Greenfield entry gives the company autonomy to use a consistent marketing strategy on that of the home country. However, mergers and acquisitions may require the investing firm to use a marketing strategy that adapts much of the bought company. According to Canabal and White (2010), Greenfield operations requires the company to establish new marketing operations in the foreign market. The company lacks local expertise hence requiring the company to have and elaborate marketing mix. Besides, Douglas and Craig (1995) suggests that Greenfield operations facilitate an organization's need to develop a globally integrated system of marketing thereby leading to a more standardized marketing approach.
Conversely, mergers and acquisitions entry modes imply that the organization may find an existing customer base, brand name, cooperate reputation, and distribution channels. As such, it's marketing approach is likely to adopt the acquired firm's skills, assets, and marketing programs to design its marketing strategy. However, the existing marketing infrastructure makes harder to integrate the acquired business to the parent enterprise that may be the scope of the marketing strategy (Johnson & Tellis, 2008).
Empirical studies present organizations desiring to enter a foreign market with numerous entry modes. If the market is not highly valuable to the portability of the firm, direct exporting, franchising, licensing, and contract manufacturing offers serve as the best entry modes. On the other hand, if the foreign market offers a competitive advantage, foreign direct investment, mergers and acquisitions, Greenfield investments and turnkey projects offers serves as the most viable for a company.
Besides, the choice of the entry mode will eventually affect its marketing strategy regarding adaptation and standardization of the marketing plan. Direct exporting, management contract, Greenfield operations, and franchising increases the likelihood of a standardized marketing approach. On the other hand, mergers and acquisitions, indirect exporting, and joint ventures compel an organization to use adaptive marketing approach to accommodate the partner's marketing assets and skill sets.
Choosing the Right Market Entry Mode for International Expansion. (2023, Mar 21). Retrieved from https://studymoose.com/a-discussion-on-choosing-the-market-entry-mode-while-venturing-into-an-international-market-essay
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