This research is undertaken to identify, analyze and evaluate the various market entry strategies in global markets. Specifically, the research will examine exporting, franchising, acquisition, merger, wholly owned subsidiaries and joint ventures. Furthermore, the research will also analyze entry strategies implemented by a number of multinational corporations operating in different industries. Finally, the research will conclude with the factors that need to be examined and investigated before entering a global market.
Multinational firms deciding how to enter or operate in a global market must carefully and precisely take into consideration many critical factors including the local business environment in addition to the firm’s own core competencies.
An entry mode is defined by Wild & Wild (2012) as “the institutional arrangement by which a firm gets its products, technologies, human skills, or other resources into a market.” (Wild & Wild, 2012, p.358)
Wheleen & Hunger (2010) stated that research had indicated that growing globally is linked with the organization’s profitability.
This means that firm’s who are looking for ways to increase their long-term profitability, are now looking for profitable and appropriate markets to offer their products and or services. A firm can select from a number of strategic options the most appropriate method for entering a global market or establishing production plans in another nation. Zekiri & Angelova (2011) argued that Firms that want to internationalize must decide on a fitting mode of entry into a foreign market in order to make the best use of their resources. “The age of globalization has both facilitated and necessitated businesses to move towards the internationalization of organizations of all sizes.” (Wood and Robertson, as cited in Zekiri & Angelova, 2011, p.573).
There are many different modes of entering into foreign markets. Each mode has its strengths and weaknesses in general terms. However, Zekiri (2011) explained that each single multinational firm would be more attracted to a type mode depending on their backgrounds, nature of the company, strategic objectives as well as the resources. In many cases, there are many obstacles that companies have to meet while deciding to enter other markets, for example; safety, environmental, packaging, labeling, patents, trademarks and copyrights, are factors that businesses depend on being successful. Moreover, It should be stated that the local business environment in terms of political, technological, legal, environmental, and cultural factors should be deeply studied to assess the attractiveness of the target market. This argument is also supported by Zekiri & Angelova (2011) as he stated “it is difficult to understand the business environment in a country without studying the current political system and institutions, government policies, and a variety of data and other information on the country’s economy.” (Zekiri, 2011, p.573)
Kotler & Armstrong (2008) as well as Chung & Enderwich (2001) explained that some of the benefits associated with operating on international basis are the increased profits and sales growth, the chances of achieving both economies of scale and location economies. Zekiri & Angelova (2011) also added that many firms are operating on international basis for better opportunities and profit potential in emerging markets such as (India, China, Brazil and Russia) As globalization now is fostering international operations as nations are being more open to trade and foreign investment opportunities.
Global Market Entry Strategies: Advantages and Disadvantages
According to many researchers including Wheleen & Hunger (2010), Kotler & Armstrong (2009), and Chung & Enderwich (2011) exporting is one of the most basic and simplest entry strategies as it minimizes the risk and experiment with a specific product. Shaver (2009) defined exporting as “the production of goods at home that are sold in foreign markets.” (Shaver, 2009, p.1047) in other words, products are shipped from the home country to other countries for marketing. Wheleen & Hunger (2010) stated that the company could either choose to handle all critical functions itself or could contract these functions to export management companies.
The main benefits of exporting are its simplicity and low cost of investment and risk. Consequently, exporting could be seen as the first entry method used by organizations in order to obtain knowledge of the foreign market. Other advantages of exporting are increased utilization of the domestic plant, thus using idle capacity and reducing unit costs through economies of scale. Exporting also helps in diversifying markets, which reduces the company’s exposure to domestic demand instability.
On the other hand, the disadvantages of exporting include high transportation fees trade barriers, tariffs, quotas, and problems with local agents. In addition, exporters have lower control of distribution and local agents. Moreover, Shaver (2009) noted that companies engaging in exporting could face the potential risk of exchange rate fluctuations, and could be subject to custom duties and taxes in the importing counties.
Zekiri & Angelova (2011) although exporting costs are relatively low compared with the other entry methods, to enter and develop these markets exporters usually incur costs to gain exposure, set up sales and distribution networks, and attract customers. Furthermore, cultural barriers could forces companies to modify or redesign their products including labeling and packaging for the purpose of meeting consumers’ preferences/tastes and local requirements. From on own point of view, which was not discussed by any of the previous authors and researchers, is that exporting is hindering a firm’s ability to quickly respond to the changing needs of target consumers.
Franchising is one of the global entry modes that has been widely used as a quick method of global expansion, most notably by multinational fast food and retail chains such as (KFC, McDonalds, Starbucks). According to Wheleen & Hunger (2010), under a franchising agreement, the franchiser offers rights to another party to open a retail store using the franchiser’s name and operating system. In other words, by the payment of a royalty fee, the franchisee will obtain the major business know-how via an agreement with the franchiser.
Franchising is most commonly used in a number of American service industries, such as McDonald’s, KFC, and Starbucks etc. from an own point of view, franchisers are constantly demonstrating their ability to adapt and modify their product offering to suit local tastes and preferences. This is especially true in McDonald’s, which offers different menus in different nations. McDonald’s brand is still internationally consistent, but service staff and menu choices can be modified to local needs. According to Roland Berger & Tata strategic management group (2009) McDonald’s in India was able to create localized products where it did not serve hamburger meals as some religions in India prohibits the consuming meat. Instead McDonald’s served vegetarian and chicken meals that gained the favorability of most Indian consumers.
Holmes (2003) stated a major disadvantage associated with entering global markets via franchisee agreements. Firstly, he stated that franchisers might find it difficult to manage a large number of franchisees in a variety of national markets. The major issue in franchisee agreements is that product and service quality in addition to promotional messages among franchisees will not be consistent or similar from one market to another. Another major disadvantage discussed by Wild & Wild (2012) is franchisees can experience a loss of organizational flexibility in franchising agreements. “Franchise contracts can restrict their strategic and tactical options and they may even be forced to promote products by the franchiser’s other division. Dahlstrom, Duncan, Ramsay, & Amburgey (2004) explained that when PepsiCo used to own the global fast-food chains Pizza Hut and KFC, it used to force franchisees to sell its beverages to their consumers which gained the criticism of many franchisees worldwide.
As Wheleen & Hunger (2010) explained a fast way used by heavy multinational corporations in different industries to operate into a desired and profitable global market is through “purchasing another company already operating in that area.” One of the benefits that he clearly discussed is the synergistic benefits could be acquired if the firm acquires another company having strong complementary product lines and a good distribution network. Lahovnik (2011) argued that acquisitions have been the most popular growth strategy for decades in the US economy.
He explained that the 1990s and 2000s also featured a markedly increased volume of European mergers and acquisitions. Economic growth, deregulation and the development of the common European economy accelerated the acquisition process in EU countries. He also noted that the number of acquisitions has also risen in economies in transition. Horizontal acquisitions are the most popular and most frequently pursued acquisition type. From the strategic perspective, the key questions are whether and how an acquirer will restructure the company, and how this will contribute to the acquired company’s competitive advantage.
For instance, According to UPI (2012) Boeing is continuing to advance its defense logistics support portfolio with the acquisition of California Company Miro Technologies, a Boeing supplier. UPI (2012) further explains that Miro was a privately held software company specializing in enterprise asset and supply chain management; maintenance, repair and overhaul services; and performance-based logistics management. It will become part of Boeing’s Global Services and Support business within Boeing Defense, Space and Security. “Boeing’s services and logistics business has grown significantly in recent years and Miro has been a trusted technology partner during that time.” (Parasida, as cited in UPI, 2012)
Specifically, the acquisition expands GS&S product offerings for linking and fusing data from existing systems to improve mission readiness and to reduce sustainment costs. Some of the major advantages that acquisitions provide to multi-national firms are the following. First, Riley (2012) stated that firms could have quick access to resources both physical and human as well as potential skills and competencies. Secondly, economies of scale could be achieved which helps spread the risk through wider range of products and greater geographical spread. However, from an own point of view, the main drawback of acquiring other companies from a different nation is the clash of cultures.
From instance, when Wal-Mart decided to enter the European market through Germany it acquired two `German retailers however, the two acquired companies had a totally different corporate culture which prohibited Wal-Mart from integrating its corporate culture into the newly acquired companies. Therefore, from an own point of Wal-Mart’s entry in the German market through acquisition could have been more successful if Wal-Mart carefully studied the various German retailers and appropriately chose a profitable German retailer that is characterized with a culture that is not highly differentiated from Wal-Mart’s corporate culture and can be integrated easily into Wal-Mart’s. Also the acquired companies should have given Wal-Mart a unique opportunity to effectively compete with the aggressive competition in the Retailing industry and offer a unique and innovative value proposition that is not offered by others.
According to Investopedia (2010) In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a “merger of equals.” Both companies’ stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. Schamotter (2012) stated that the mergers could benefit both companies in various ways. Firstly, A merged company can reduce many of its expenses. Budgets for things like marketing might be shared, while the new, larger company enjoys greater purchasing power, which lowers the costs of raw materials and other necessities. More often than not, a merger results in staff layoffs as positions become redundant in the new single entity.
Merged companies can also share office space and eliminate duplicate manufacturing facilities. Secondly, Schamattor (2012) explains that by merging, the new company is theoretically provided with access to more customers. This is true if the individual companies had been demonstrably successful in separate markets, as opposed to roughly equally competing in the same one. For example, according to the BBC, the merger of the German automaker Daimler Benz with the American automaker Chrysler Corp. allowed the new company, Daimler Benz, to access markets in both Europe and North America. Merged companies can offer a greater range of products and services. Because these may be complimentary, the merged company may be able to capture more consumers than they would as individual entities. Moreover, the research firmly believes that merged companies can access a diversified set of intellectual capital through different human skills and competencies that could be used as a platform from continuous innovation and new product development.
On the contrary, mergers could harm both companies if a clash of culture does exist. Just like acquisitions, a firm merging with another firm from a different culture could lead to decline in the firm’s performance, unsatisfied employees, and more importantly loss of shareholder’s value and decline in the market performance. These arguments are supported by both Wild & Wild (2012) and Chung & Enderwich (2011) as they both argued that lack of cross-cultural competence is the barrier to an effective and long-term mergers.
In some situations or circumstances, many multinational firms prefer to share ownership of an operation rather than complete ownership. Joint ventures differs from mergers in the sense that in joint ventures “a separate company is created and jointly owned by two or more independent entities to achieve a common business goal. The partners could be private firms, government agencies, or public companies (companies owned by the government). For example, BP was forced according to the law in Egypt to form a joint venture with the Egyptian General Petroleum Corporation (EGPC) has made our joint venture, GUPCO, an industry leader and one of the largest oil and gas operations in the entire region. Moreover, BP Egypt has another joint venture with United Gas Derivatives Company (UGDC), owns and operates the largest natural gas liquids (NGL) plant in Egypt.
Wild & Wild (2012) discussed some of the advantages of joint ventures. First, they argued that companies do rely on joint ventures to reduce risk. In other words, a company can use a joint venture to learn about the local business environment before operating solely. Secondly, they argued that companies can use joint ventures to penetrate international markets that are other wise off limits. Some governments do design and implement laws that force foreign companies to share ownership with domestic firms.
Finally, “a company can gain access to another company’s international distribution networks through the use of joint ventures.” (Worley & Worley, 2012, p.374) Among the disadvantages of joint ventures, conflict of ownership might arise between the two parties. Also Worley & Worley (2012) added that conflict can also arise from disagreements over how future investments and profits are to be shared. Secondly, they are stated that loss of control over a joint venture’s operations can also result when the local government is a partner in the venture. Where governments could decide to nationalize the company and takes full ownership of the venture.
To conclude, the choice of the entry mode has many important strategic implications for a firm’s long-term operations. Firms do spend a large sum of money and devote much of their time in determining the most efficient and effective way to enter the desired global market. From an own point of view, which is also supported by the work of Worley & Worley (2012), Zekiri & Angelova (2011) and Kotler & Armstrong (2008) one of the critical activities that needs to be conducted before the entry choice is to analyze and evaluate both the opportunities and threats present in the local business environment of the host country.
The culture, which is the set of values, beliefs and norms greatly differ from one country to another and could negatively or positively influence the firm’s performance. Wal-Mart’s failure in Germany was the result of the lack of intercultural competence. The political and legal environment could serve as an opportunity or threat for a specific firm. For example, political instability in a target market increases the risk of investment. Certain import regulations such as high tariffs, or low quota limits can discourage a firm to export its products to this country. Also local content requirements by governments could force multinational corporations to use local resources which might not be meeting the quality standards.
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