Introduction
With the rising levels of internationalization and globalization, business executives are faced with complex strategic decisions. One of the most difficult decisions that they are left to grapple with is the mode of entry that the firm will use to explore their target foreign markets.
Studies show that as many businesses seek to exploit new markets, international competition stiffens and companies are unable to make sense of how to enter some markets because of the perceived risks (Tielmann, 2010). Therefore, selecting an appropriate entry mode is an indispensable ingredient for effective decisions involving investment into overseas markets.
An entry strategy refers to a method that a firm utilizes to commence business in a foreign market or country (Mcloughlin & Aaker, 2010). Since the method selected is a decision involving top business executives, strategies arising out of these decisions are institutional arrangements that facilitate the movement of a company’s products, human skills, technology, human skills and other resources to enter a foreign market (Lymbersky, 2008).
A business that has decided to explore the potentials of a foreign country has the duty to assess various entry modes before deciding to adopt one or a combination of strategies. The choice, however, depends with the extent to which the company assesses the potential risks against the potential benefits of entry. Firms may choose to enter foreign countries using either of the six entry strategies. These include licensing, franchising, joint ventures, exporting, and strategic alliances (Lymbersky, 2008).
The classification of entry modes is based on different models. The first classification model is based on the degree of ownership that the company intends to adopt as it pursues a foreign market (Mcloughlin & Aaker, 2010). Entry modes that require firms to take a high or considerable degree of ownership are called equity modes. On the other hand, non-equity modes include exporting, licensing and franchising (Lymbersky, 2008).
Discussion of Market Entry Strategies
Export strategies
Exporting is considered one of the entry modes that are less resource intensive. This strategic entry approach is an alternative to small and medium size businesses that seek to exploit the external markets without making capital investments.
According to Tielmann (2010), exporting is a learning opportunity that businesses can utilize to understand the external markets while taking advantage of the opportunities presented to them by the market. This mode is the easiest and less risky approach of entering a foreign market (Peng, 2009).
This is because it requires the least resource allocation and has little to no effect on marketing programs of a firm. A business that chooses to enter a market using exportation can achieve several benefits. First, it is able to enter a market rapidly since there are no investment requirements to facilitate the establishment of key business operations (Doodle & Lowe, 2008). Therefore, exporting strategies allow businesses to establish new customer relationships within an intention to meet the growing global demand for its products (Root, 1998).
Exporting strategies can be direct or indirect exporting. In the case of direct exporting, an exporting firm is in direct relationship with customers in the foreign market. Whether a business chooses direct or indirect exporting, the outcomes are the same. Using this entry mode, a firm is linked to one or more agents in the foreign market.
For a company to pursue this mode, it has to have experience in international marketing. The advantages of this mode are increased sales, gaining of market information, control over the business operations, and the experience of the exporting company (Doodle & Lowe, 2008).
On the other hand, direct exporting has disadvantages such as increased cost. A firm incurs high transportation costs when exporting its finished goods (Peng, 2009). Where trade relationships between domestic and foreign countries are not well founded, a firm exporting goods may incur high tariffs. Since markets are spread far apart, a firm has no control over what happens in those markets (Doodle & Lowe, 2008).
Strategic Alliances
As the name suggests, a firm that adopts strategic alliance identifies another company from a foreign market with which they will work to explore the market. In strategic alliances, firms pool their financial resources, expertise and capital resources and share benefits and beat risks, as well (Root, 1998).
Where a firm decides to use strategic alliance, it accepts to share its knowledge of production and marketing with the other firm. Therefore, a firm seeking strategic alliance in foreign markets benefits from the understanding of the local market by a foreign firm. A company is able to use existing strategic advantages of a foreign country to beat the market. Losses are borne by both parties in the alliance, a company is able to spread it risks (Neelankavil & Rai, 2009).
On the other hand, strategic alliances mean that a firm exploiting foreign markets has no complete control over the operations of the business. In addition, such an entry strategy can breed competition and eventual split because of self-serving interests (Neelankavil & Rai, 2009).
Joint Ventures
A Joint venture happens in cases where a firm seeks to have a share of the stock in the foreign firm. A joint venture is a futuristic business relationship in which firms agree to share equity and risks.
These firms also choose to have equal participation in the management of business operations and decision-making process (Root, 1998). Therefore, joint ventures are closely-knit business relationships that aim at creating long-term profit sharing business association between a local and a foreign firm (Tielmann, 2010).
The merits of a joint venture are less restriction for participation, saved capital and reduced risks since a foreign firm acquire significant resources such as local expertise, market intelligence and other immovable resources. A firm achieves close relationships with the foreign government and key organizations such as labor unions and consumer associations (Neelankavil & Rai, 2009).
For countries that require formal entry procedures, joint ventures are the best approach to entering foreign markets. A firm in this arrangement understands all the legal requirements of establishing and running a business in a foreign country (Luo, 1999).
This is because the firm is subjected to a strict evaluation to meet all requisite requirement set up by domestic governments. Although a company is able to capitalize on the strategic advantages of a domestic firm, it has limited access to profits and dilutes the role of its management (Root, 1998).
Licensing and franchising
In licensing a domestic company arranges a licensing contract with a foreign firm allowing that firm to have control over certain intellectual or property rights. Here, a domestic firm agrees to pay for these rights what is called royalty or a given percentage of the total sales returns. The rights may vary depending with the type of agreement, the product or brand that has been patented, designs or trademarks (Luo, 1999).
The main advantage of licensing is that a foreign firm incurs the lowest entry costs as it enters the new or foreign market. There is the spread of business risks and a foreign firm can utilize the success factors of the domestic firm to build its portfolio (Root, 1998).
One of the disadvantages of licensing is that a firm has limited control over the operations in the foreign markets. In addition, since the domestic firm assumes control over the rights of use of brands and designs, it may reestablish itself as a competitor.
Franchising is the buying and selling of rights to conduct business in a prescribed way. Most business activities of under this mode of entry are standardized. Many experts of international marketing have referred to franchising as a specialized licensing. This mode is mainly used among service firms wishing to have long and strict commitments to each other (Gillespie & Hennessey, 2011).
The advantage of this method of entry is that it allows for a rapid or exponential expansion with low costs. Experts in international trade have argued that franchised firms have some degree of control over the operations of domestic firms (Root, 1998). Disadvantages of franchising are loss of potential profits as well as loss of control over the activities in foreign markets (Tielmann, 2010).
Conclusion
Regardless of the strategic entry mode that a firm may choose, it is crucial to undertake a critical appraisal of the external risks and opportunities present in foreign markets being targeted (Gillespie & Hennessey, 2011). There is no single entry mode that can be said to be perfect since the application of each strategy depends with the market risks, costs, and benefits each strategy and the objective of the firm seeking foreign presence.
References
Doodle, & Lowe, R 2008, International marketing strategy: analysis, development and implementation, Cengage Learning, London.
Gillespie, K., & Hennessey, H. D 2011, Global marketing. Australia, Cengage Learning, South-Western.
Luo, Y 1999, Entry and cooperative strategies in international business expansion, Quorum, Westport.
Lymbersky, C 2008, Market entry strategies text, cases and readings in market entry management, Management Laboratory Press, Hamburg.
Mcloughlin, D., & Aaker, D. A. 2010, Strategic market management: global perspectives, Wiley, Hoboken, N.J.
Neelankavil, J. P., & Rai, A 2009, Basics of international business, M.E. Sharpe, Armonk.
Peng, M. W 2009, Global strategy, South-Western/Cengage Learning, Mason, Ohio.
Root, F. R 1998, Entry strategies for international markets, Jossey-Bass, San Francisco.
Tielmann, V 2010, Market Entry Strategies International Marketing Management, GRIN Verlag, München.