Every business selects its target market to provides its goods and services but the business did not limit itself to that target market and try to expand it as the business grows. Like our own company, we deal globally and global factors impact our business as we provide Global Assignment Help service and we cater to students from across the globe. Now a day, businesses are trying to enter in the international market so that they can enhance their revenues by expansion. When a business needs to enter the international market, it has to select an entry mode which will be favourable according to the nature of business. A business has to fulfil many obligations such as licensing etc. to enter such market. This report will provide view on various modes of entering international market along with the advantages and disadvantages of each entry mode.
In this article, the discussion regarding international market entry strategy is done. The article provides detailed knowledge regarding international market entry strategy is given. In addition to this, different modes of entry such as direct exporting, licensing, franchising, partnering and joint venture are also described in this article along with the advantages of selecting different modes of entry.
To expand their business and to reach the customers in global market, many businesses started to enter foreign markets. However, there are different ways to enter the international market as no single strategy would fit better to all the companies due to difference in their nature of business, size and revenues etc. Besides, there are number of factors that can influence such as tariff rates, transportation cost, adaptation cost etc. The selection of strategy thus, depends on all these factors.
According to the nature of businesses, there are following modes of entry into international market:
In this mode of entry, the businessman directly exports the final goods to the other country with the help of distributors and agents. Such distributors and agents represent the interest of business in other countries. It will not be false to refer them as the face of company in foreign market (Jeewa, 2019). Thus, while entering the international market through this mode, it is necessary to select the agents and distributors very carefully. Further, this is the simplest strategy among all the entry modes under which the staff is hired in international market. To illustrate, in order to enter Japanese market, the business can opt to the export the goods in Japanese store
Under Licensing mode of entry, the company has to maintain contact with foreign business to make them agree to sell the products of your business. However, it is not easy to convince the foreign business for dealing in your products as there will be chances of failure. However, a business who is earning good revenues can easily convince the foreign company and sell their license by following various governmental or legal rules to continue the business in that market (Tradestart, 2019). Selling license in foreign market does not mean that you lose control over the other business but means to give rights to sell the goods to other business for limited period in foreign country. Thus, this strategy is a sophisticated arrangement where the business can provide goods to large market if the new licensee have control over large market.
For rapid market expansion, franchising is the famous process that is generally used in North America. However, it is also used in other parts of the world too and this strategy works well in case of repeatable business model such as food outlets etc. In order to expand business through franchising, there is need of two caveats in the model which are the business must have strong brand recognition in the existing market that can help in setting business internationally and then, there is need to think of future competition in the new market (Jeewa, 2019). Thus, there are three simple steps to enter the foreign market through franchising:
There is no proper definition of entering foreign market through partnering. It can be contracting with foreign partner that will either help in marketing of your business in other country or invest in your business for setting it in that market (Tradestart, 2019). While partnering, one has to consider the potential of the partner that he could actually help your business grow. A good and experienced partner can help in making grip over large market easily. In Asia, it is compulsory to have partnering to enter the market. Further, partnering is a beneficial strategy where the culture and business style etc. are different. Thus, local marketers can help the new company to adjust according to new environment easily.
It is a specific type of partnership in which in which a third and independent party is formed. Under this, two businesses agreed to share the risk as well as profits in equal ratio and do their business in a particular market. There is mostly 50- 50 share of the partners in new business but their companies stay separate (Jeewa, 2019).
In this section, there will be discussion on various advantages of different entry modes to the businesses:
Following are the benefits of franchising that makes the business think of using this strategy for expanding in new market:
Competition is the major nightmare to all the entrepreneurs as they can only afford to open only one business unit at a time. Thus, franchising is the only way through which the business can ensure to expand in new market (Siebert, 2015). It ensures speedy growth of the business in many countries at once and also help to encroach strong position in market before competitors. It is speedy as it provides benefits of leveraging the finance as well as human resources in other country.
Franchising allows the owner to avoid the issues related to managers and other key members in the new country. As these people have direct interest in the business they act as a motivational force for business.
The major problem faced by businesses to expand in new market is lack of necessary capital. Under such conditions leveraging is the only option where franchisor provide all the required capital without any risk of debt etc. (Siebert, 2015).
The benefits of financial and HR leverages, franchises can easily run profitable business. Further, the franchisor also supports the business in evert term such as training, payroll, site selection etc. that leads to positive results.
The advantage of exporting to enter into the International market is that
The firms do not need to invest in manufacturing of the operations in the new countries. They can just sell their products in the new market through the stores or any other alternative.
The firms have the opportunity to distribute or sell their products in the other country through the agreements with the companies of other countries.
firms can share the cost of development with their host companies as well as firms have the capability to involve with the global strategic coordination.
Expansion in foreign market through joint venture provides following advantages:
Under this, capacities of individual companies are utilised by new business and can also scale up its capacities. Further, it also provides competitive advantage to new business with economies of scale (Business Town, 2019).
New business can upgrade its products and services according to current technological developments. It also uses various innovative marketing tools and also helps to decrease the overall cost as well as better quality products (Toppr-guides, 2019).
Every joint venture creates its own name in new country that helps to maintain a distinctive look in the country. To illustrate: McDonald’s is known as “Macca” in Australia which is a famous name in all over the country (Adage.com, 2013).
When two or more partners started a business, it becomes easy to get the capital at lower cost as they usually invest personal funds in it. Further, partner with greater borrowing capacity can help in acquiring easy funds for business (Business.tas.gov.au, 2019).
When a business expands in other country with partnership, there are less regulations to be followed by the new business. The partners in that country handle all the tasks for the new expansion.
In partnership, there is always flexible structure which can be changed according to the changes in the business situations (Business.tas.gov.au, 2019).
Under licensing, business can take advantage of new opportunities within the lower cost. A company get the license and start selling the goods without any tension of manufacturing the goods (Gaille, 2018). The business can get benefit of the reputation of existing business.
As the new licensee have great knowledge about the market than licensor, he can use it to market the products so that new products can be easily adopted by customers in that market.
There will be fewer risk as licensee can market products according to its knowledge and licensor have the benefit of getting its products sold without any difficulty.
The principle business has to continuously invest in the franchisee business for its management, servicing, HR hiring etc. There may also be the agreement of purchasing the goods of the franchisor.
The principle business have the power to control all the activities of international business and there is no freedom to change the business model according to local market needs which may pose risk to business (nibusinessinfo.co.uk, 2019).
The franchisor does not have the permission to sell the business without the permission of principle company.
The business structure of new franchisee is inflexible as they are restricted to change it even in the changing business conditions. This may cause loss to the business and also prevent business to have competitive advantage.
A business has to deal with many governmental restrictions from the domestic as well as international country to enter in new market (Delaney, 2019). There are chances of increasing tax rates on exporting the goods to other country.
There are always risk of fluctuations in the exchange rates which may affect the business adversely. There are chances of losses to the business when the value of foreign currency decreased where new market is expanded.
Exporting requires power people who have the skills and experience to deal in international market. Further, there is also requirement to devote necessary time to decide many activities such as target market, initial buyers of products etc. (Delaney, 2019). This mode of entry requires high amount of initial investment for expansion.
As there will be indirect selling of the products in international market, the company may not get the instant feedback from the customers and thus, there are less chances to bring improvements in the products.
All the companies in joint venture does not necessarily devote equal efforts in the business and may not have equal responsibilities. This may also arise conflicts between the companies.
There are chances of imbalance due to difference in experience, investments etc. in the joint venture by the companies. This will have ultimate impact on the effectiveness of new business (Business Town, 2019). Further, the differences in culture and business operating style of companies in different countries can affect the degree of co-operation and there as business operators will have different beliefs and values.
As under joint venture, the contract is even though being for the temporary period but is restricted (Business Town, 2019). No partner can leave the contract until the completion of objective of joint venture.
When the joint venture companies will focus on new venture, there are chances of diversion from the major goals of their own businesses.
In this type of expansion strategy there is always unlimited liability where the main partners are responsible to pay any kind of debts if the business was not profitable one. Thus, every partner of business will be “jointly and severally” responsible for all the debts to be payable by the business (Business.tas.gov.au, 2019).
There is high risk of disagreements and conflicts between the partners upon various managerial decisions. Under such circumstances, there are chances of reverse results of business outcomes.
In partnership, partners have the right to breach the partnership bond and left the business. In such a case, there is need to revalue all the assets and liabilities which may a costly affair for the business (Business.tas.gov.au, 2019).
There are chances that the licensee party may misuse the licensee for its personal benefit. However, the licensor can instruct on how to use it and conduct the business, but it is impossible to observer everything (Gaille, 2018).
A business has to depend on other for expanding its customer market and thus, all the limitations of that business becomes the limitation of new business and the competitor of licensee becomes the competitors of new business.
Any kind of mismanagement in this strategy can lead to risk to both parties. There are also chances of risk of reputation to the business due to quality issues and further product development (Gaille, 2018).
This type of entry mode is majorly for a limited period and there are possibilities that business may not reap profits within that limited period.
Internationalization has become the common business practice to expand business in other countries but the strategy or mode of entering new business may differ on the basis of the nature of business. There are five major modes of entry in the international market and each method has its own advantages and disadvantages. The explanation of all the methods highlighted that a firm may use franchising only when it has unique brand values and go for partnership if have international recognition.