MODE OF ENTRY OR INTERNATIONALIZATION
P. Subba Rao
(2012) Firms or companies deciding to go abroad are faced with the dilemma on
which mode of entry to use. This can be avoided by considering the following
factors;
- Ownership arrangement (Ownership of resources etc)
- Location Advantages (Manufacturing plant is located in the host country)
- Internationalization Advantages (Firms does the distribution of its goods and services by itself and not through contractual arrangement with others)
Four General Ways to Develop Markets on Foreign Soil
- Exporting (Indirect Export, Direct Export, Intra-Corporate Transfer)
- Licensing (International Licensing)
- Franchising (International Franchising)
- Special Mode of Entry (Contract Manufacturing, Outsourcing, Management Contract, Turnkey Projects etc)
- Entering into joint venture arrangement with one or more foreign companies
- Mergers and Acquisition
- Licensing patent/Trade mark rights to companies abroad
There are
disadvantages as well as advantages to consider when contemplating these
different strategies.
EXPORTING
Exporting is the
simplest and widely used mode of entering foreign markets. There are different
forms of exporting such as; Indirect Exporting, Direct Exporting and
Intra-Corporate Transfer.
Indirect Exporting
In this type of
exporting, firms can either export their products either in their original form
or modified form to a foreign country through another domestic company or
through other independent distributors.
Direct Exporting
Direct Exporting
is selling the product in a foreign country directly through its distribution
arrangement or through a local firm of the host country.
Intra-Corporate Transfer
Under this
arrangement, products are sold by the firm to its affiliated company in another
country.
Factors for Consideration – Exporting
- Firms and companies that are thinking of exporting to other countries should consider the following factors;
- Government policies - in relations to export, import, foreign exchange and export financing etc.
- Marketing factors - such as images, distribution channels and network, customer preferences.
- Logistics – physical distributions, packaging, warehouse, storage facilities, transportation, and freight costs etc.
- Distribution issues – local distribution network, foreign distribution network etc.
Advantage
of Exporting
- Exporting is the easiest and most frequent used method of entering international markets – Financial risks/losses can be minimized.
- Companies can also undertake indirect exporting.
Disadvantages
- Exporter knows very little about consumer-use patterns
- Exporter may have little influence over product pricing
International
licensing occurs when a country grants the right to manufacture and distribute
a product or service under the licenser’s trade name in a specified country or
market.
Examples - Granting foreign firms right to technology,
trademarks and patents
Advantage
of International Licensing
It allows
domestic firms to avoid certain obstacle.
Example: Companies can use licenses when their own money is
scarce, when foreign import restrictions forbid other ways of entering a market
or when a host country is apprehensive about foreign ownership.
Disadvantage
of International Licensing
May be the least
profitable way of entering a market because it is seen as a supplement to
manufacturing and exporting activities.
Two Types
of Licensing;
Franchising –
occurs most often in fast foods, soft drinks, hotels and car rentals.
Management Contracts – The companies with low level technology and managerial expertise may seek the assistance
of a foreign company to provide technical assistance and managerial skills.
JOINT
VENTURE ARRANGEMENT
Company forms a
partnership with one or more companies already established in the host country.
Local firm
provides expertise on the intended market while multinational firm is better
able to accomplish general management and the marketing task.
This method of
international investing has accelerated dramatically in the past 20 years
Biggest
Incentives - Joint Venture Arrangement
It reduces
company’s risk by the amount of investment made by the host country partner.
Other Potential
Advantages are;
It may allow the
marketer to use the partner’s pre-existing distribution channels
It may allow
firms with insufficient capital to expand internationally
It may let the
marketer take advantage of special skills possessed by host country partner
MANUFACTURING
OPERATIONS
- Benefits to manufacturing abroad can be the avoidance of high import taxes
- The reduction of transport costs
- The use of cheap labour
- Better access to raw materials
This method is
optimal when the foreign demand for a product justifies the costly investment
required. Often products from the same facility are sent to other country even
back to the original home country for distribution.
UNCERTAINTY – GLOBAL ENVIRONMENT
International
marketing requires managers to make decisions that are within the firms’
control.
Decisions on
which product to market.
What price to it
should command?
The optimal
promotion strategy.
The best
distribution channels.
Must react to
factors in the home country which might affect their ability to do business.
CHALLENGES
– GLOBAL ENVIRONMENT
Firms marketing
abroad face many of the same challenges:
- Domestic Politics
- Domestic Competition
- Economic Conditions
There are
certain issues that are beyond firms and company’s control and some of them are
listed below;
- Domestic policies on foreign trade.
- Business environment in the host country – laws, politics, economy and competitions.
- Host country geography.
- Infrastructure.
- Currency.
- Distribution channels.
- State of technological development.
- Cultural differences
CHALLENGES
– LEGAL AND POLITICAL ENVIRONMENT
Companies
operating abroad are bound by both the laws of host and home countries
- Legal systems around the world vary in content and interpretation
- Laws can affect many elements of marketing strategies (form of product restrictions or specifications)
- Unstable political situation can expose businesses to numerous risks
- Changes in laws and regulations require firms to make modifications to existing marketing strategies
- Economic conditions and levels of economic development vary widely around the world.
- Standard of living – has a huge impact on the size and affluence of a particular target market
- Understanding of trade agreements between countries as well as on local and regional economic conditions.
Example: many companies have to re-evaluate international
marketing strategies as international financial crises affected the economies
of Southeast Asia, Russia and Latin America in 1997-1998
Competition
fierce overseas than at home (new entrants etc).
Companies that
are truly global competitors employ long-term international marketing strategy
to overcome the uncertainties associated with conducting business abroad.
Their long-term
strategies enable them to weather short-term economic or political crises, such
as the currency devaluation etc in host country.
CHALLENGES -
SOCIO-CULTURAL VALUES
Defining culture
is always been difficult. Kroeber and Kluckholn (1952) found 164 definitions of
culture. Some of the common characteristics of these definitions are that:
- Culture is prescriptive - in that it prescribes those forms of behavior that are acceptable to people in a specific community
- Culture is learned - as people are not born with a culture but are born into a culture. The norms of the culture are acquired as people are raised in and exposed to the culture.
- Culture is dynamic - as not only does it influence our behavior but our behavior influences the culture reflecting its interactive nature.
- Culture is subjective - because people attribute meaning to issues on a subjective basis and these subjective meanings develop within the context of the culture.
Culture is
therefore a very important aspect of international marketing because elements
that compose it affects the way consumer thinks.
- The language a population speaks
- The average level of education
- The prevailing religion
- Other social conditions
All above
conditions affect the priorities of the population and the way they react to
different events.
Example of multinational corporations that have been in the
forefront of developing international brands that cut across local cultural differences
are:
- Coca-Cola
- IBM
- McDonald’s
- CNN
- Disney
Advertising and
marketing campaigns that built these international brands took a Universalist
approach.
CHALLENGES
- ENVIRONMENT AND TECHNOLOGY:
The way people
in different countries uses the resources and technology available to them
often shift drastically from culture to culture.
Most people are
accustomed to ways of looking at the environment and the use of technology
particular to their own culture.
Issues of
Environment
Five major areas
of attitudes toward a nation’s physical characteristics and natural resources
likely to result in cultural environment presuppositions are:
- Climate
- Topography
- Population size
- Population density
- The relative availability of natural resources
The five sources of environmental differences surface
when:
People
communicate on a wide
spectrum of business-related subjects.
Population
size and availability
of natural resources influence each nation’s view toward export or domestic
markets
Population
density and space usage influence
the development of different cultural perceptions of how space and materials are used.
CHALLENGES
- SOCIAL ORGANIZATION
Social
organization as it affects the workplace is often culturally determined. Care
must be taken not to assume that one’s own culture is universal on such issues
as;
- Nepotism and kinship ties
- Educational values
- Class structure and social mobility
- Job status and economic stratification
- Religious ties
- Political Affiliations
- Gender differences,
- Racism and other prejudice
- Attitude toward work
- Recreational or work institutions
CONTEXTING AND FACE-SAVING
Communication
depends on the context in which the communication is set. The more information
sender and receiver share in common, the higher the context of the
communication and the less necessary to communicate through words or gestures.
Communication,
then, can be seen as being high or low in contexting.
No two cultures
share the same level of contexting. Thus, in any cross-cultural exchange, one
party will act as the higher contexted and one the lower contexted.
AUTHORITY
CONCEPTION
The view of
authority in a given society affects communication in the business environment
significantly as it shapes the view of how a message will be received based on
the relative status or rank of the message’s sender to its receiver.
NONVERBAL
BEHAVIOR
Broken down into
six areas:
- Dressing
- Body language
- Eye Contact
- Touching Behavior
- Body Space
- Para Language
Example of
dressing – A woman’s
decision to wear her best suit would be lost in a culture in which no woman
wear business suits. Similarly with swimwear.
MANAGEMENT
CHALLENGES
Changes in
Management Orientation. Perlmutter (1995) developed a typology whereby firms
could be classified according to the orientation of their management;
- Ethnocentric orientation - Involves a belief that the home country is superior and that the approach used in the home country should be applied to every other country.
- Polycentric orientation – Reflects the approach that each country is different and that no country is necessarily inferior to another. The home country approach is viewed as largely irrelevant and, to be successful, product must be specifically tailored to the differences in each country.
- Regiocentric orientation – Views the region as the market and integrated strategies are developed for the region that takes into account both similarities and differences between the home market and region. The world outside the region may be viewed from either an ethnocentric or polycentric standpoint.
- Geocentric orientation – Involves a world marketing strategy based on recognition that countries have both similarities and differences. The entire world is viewed as a market and a strategy developed accordingly.
Management of
increasing number of companies began with ethnocentric orientation, moved to
polycentric and onto regiocentric or geocentric orientation.
As business
turned more and more to an integrated world market to meet its needs, the
difficulties of communicating at a global level have become increasingly
widespread.
Lack of
understanding deriving from ethnocentrism or ignorance of culturally based
assumptions erroneously believed to be universal can readily escalated to
unproductive conflict among people of differing cultural orientation
SOURCE:
International
Business 3rd Edition (2012) P. Subba Rao
Marketing Management 11th Edition (2003) Phillip Kotler
International Business Environment (2009) Francis
Cherunilam
No comments:
Post a Comment