International market entry strategy and different modes of entry.

International market entry strategy and different modes of entry analysis.

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Introduction:

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.

International market entry strategy:

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.

Modes of entry:

According to the nature of businesses, there are following modes of entry into international market:

  • Direct exporting:

    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

  • Licensing:

    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.

  • Franchising:

    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:

    • Create your own successful business or brand
    • Allow other business owners to let them open branches of your business known as franchises in other markets.
    • These businesses will pay some amount in form profit sharing or commission.
  • Partnering:

    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.

  • Joint venture:

    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).

Advantages of choosing different modes of entry:

In this section, there will be discussion on various advantages of different entry modes to the businesses:

  • Advantages of using a franchising strategy:

    Following are the benefits of franchising that makes the business think of using this strategy for expanding in new market:

    • Speed of growth:

      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.

    • Motivated management:

      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.

    • Capital:

      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).

    • Increased profitability:

      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.

  • Advantage of choosing exporting as a mode of entry:

    The advantage of exporting to enter into the International market is that

    • No investment in new business:

      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.

    • Agreements to sell products:

      The firms have the opportunity to distribute or sell their products in the other country through the agreements with the companies of other countries.

    • Global coordination:

      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.

  • Advantage of joint ventures as a mode of entry:

    Expansion in foreign market through joint venture provides following advantages:

    • Economies of scale:

      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).

    • Innovation:

      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).

    • Brand recognition:

      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).

  • Advantage of Partnering as a mode of entry

    • Easy access to capital:

      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).

    • Less regulations:

      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.

    • Flexible legal structure:

      In partnership, there is always flexible structure which can be changed according to the changes in the business situations (Business.tas.gov.au, 2019).

  • Advantage of Licensing as a mode of entry:

    • Creates new business opportunities:

      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.

    • Freedom to adopt new marketing approach:

      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.

    • Risk reduction:

      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.

Article By:

David Richard

Having a masters degree in Technology Management from the University of Illinois, David Richard works as a Management faculty in the University of Toronto. Being a technology freak, he does not like to be shacked, so he keeps on experimenting new ideol

David Richard

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Disadvantages of choosing different modes of entry:

  • Disadvantage of using a franchising strategy:

    • Increasing cost of business:

      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.

    • Increased restrictions:

      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).

    • Difficulty in selling business:

      The franchisor does not have the permission to sell the business without the permission of principle company.

    • Inflexible:

      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.

  • Disadvantage of choosing exporting as a mode of entry:

    • Governmental restriction and high tax tariffs:

      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.

    • Risk of exchange rates:

      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.

    • Requirement of high degree of skills, time and investment:

      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.

    • Less customer communication:

      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.

  • Disadvantage of joint ventures as a mode of entry:

    • Unequal involvement:

      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.

    • Imbalance and culture clash:

      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.

    • Hard to exit contract:

      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.

    • Diversion of focus from individual business:

      When the joint venture companies will focus on new venture, there are chances of diversion from the major goals of their own businesses.

  • Disadvantage of Partnering as a mode of entry:

    • Unlimited lability:

      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).

    • Chances of disagreements:

      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.

    • Any partner can have left the business:

      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).

  • Disadvantage of Licensing as a mode of entry:

    • Risk of theft and misuse of license:

      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).

    • Increasing dependency:

      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.

    • Reputation risk in market:

      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).

    • Limited timing:

      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.

Conclusion:

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. 

References
  • Adage.com. (2013). McDonald's Changes Name to 'Macca's' in Australia. Retrieved 30 December 2019, from https://adage.com/article/creativity-pick-of-the-day/mcdonald-s-macca-s-australia/239193
  • Business Town. (2019). 12 Advantages and Disadvantages of a Joint Venture - BusinessTown. Retrieved 30 December 2019, from https://businesstown.com/12-advantages-and-disadvantages-of-a-joint-venture/
  • Business.tas.gov.au. (2019). Partnership – advantages and disadvantages - Business Tasmania. Retrieved 30 December 2019, from https://www.business.tas.gov.au/starting-a-business/choosing-a-business-structure-intro/partnership-advantages-and-disadvantages
  • Gaille, B. (2018). 14 Licensing Advantages and Disadvantages. Retrieved 30 December 2019, from https://brandongaille.com/14-licensing-advantages-and-disadvantages/
  • Jeewa, N. (2019). 8 Strategies to Enter a New Foreign Market. Retrieved 30 December 2019, from https://www.bubblestranslation.com/8-strategies-to-enter-a-new-foreign-market/
  • Siebert, M. (2015). The 9 Advantages of Franchising. Retrieved 30 December 2019, from https://www.entrepreneur.com/article/252591
  • Toppr-guides. (2019). Joint Venture - Definition, Advantages, and Characteristics. Retrieved 30 December 2019, from https://www.toppr.com/guides/business-studies/private-public-and-global-enterprises/joint-venture/