In this assignment, you are required to write about the strategic advantages and disadvantages of different entry modes. Choose 2 modes of entry, and compare them. First, explain the theoretical background of both entry modes and how to enter the international markets. Then, give practical examples of how the two entry modes have been applied in practice by business(es).
Remember to present clearly the strategic advantages and disadvantages of each entry mode for specified companies and products, supported by examples and appropriate references.
With the rise of globalization, the organizations are entering into different markets globally. The global markets differ concerning many factors. A multinational company has to operate in more than one country. It is done to exploit the advantages of different global markets to gain a competitive advantage in the areas of marketing, research, and development, production, which are not available to the domestic competitors. For internationalization of a company, the selection of the right market for the company is very crucial. There are many factors which are needed to be considered while selecting the right market for the organization. These include the market size, cost of doing business in that market, the risk level associated with doing business in that market; the potential expected market growth, and the competitive advantage that it will bring to the company. Furthermore, the company also needs to assess how it is going to enter the market. For this purpose, the right approach to enter the market is very crucial. There are various modes of entries which are appropriate for different types of gains and contexts.
The modes of entry are of three types; Exporting, joint venturing, and direct investment. Under these three categories, further options are available. Like, exporting can be direct or indirect exporting. Licensing, joint ownership, contract manufacturing, management contracting comes under the joint venture category. And lastly, the assembly facilities, manufacturing facilities comes under direct investment. For international entrance, all of the mentioned modes of entry can be used. However, we are going to discuss two modes of entries; Licensing, and Joint Ownership.
Licensing
It is the type of mode entry in which a firm agrees upon entering into a foreign market by holding a license. The license is an instrument through which a company buys the right to use a company process, patent, trademark, its trade secrets and any other items of value which are protected by law for no use. It is a cross-border agreement. It permits a company to use the property under the name of the licensor. This type of mode of entry is commonly selected by an organization as it is low risk. It gives low exposure to the economic and political conditions of the market being entered. Moreover, it has a higher return on investment and is also preferred by the various local governments as well. It is one of the best ways to initiate business operations in a foreign country and opens convenient doors for low-risk manufacturing relationships. The relationship between both parties is dependent on the mutual benefits, which means that both party gains from this relationship.
The capital of the entering company is not tied in this type of entry in a foreign operation, and there are always options available to buy into partner exist, and provisions are there to take royalties in stock. It also facilitates avoidance of NTBs, tariffs, and various other restrictions on foreign markets. It further provides the knowledge of the local markets (Motohashi, 2015). There are also disadvantages associated with this mode of entry which includes the reduction of the potential profit with the outright ownership agreement. Furthermore, the outright ownership can affect the reputation and image of the brand because of the less control of the licensee. It has been seen that due to low control over the licensee, the licensee becomes a competitor in the future years. As it offers little exposure, it also exposes to limited opportunities and profits of the market. The entire business is dependent on the licensee (Paul, 2008).
Example | Starbucks:
There are many companies like PepsiCo, Coca-Cola who is using this mode of entry for internationalization. Starbucks has used this as an entry mode in entering into the New Zealand market. The main aim of using this as the mode of entry into New Zealand by Starbucks was many internal and external factors. The business environment of New Zealand was very unfamiliar to the company. The lack of knowledge of the market led it to prefer this mode of entry. For catering with this, the licensing with an experienced restaurant firm gave the company a way to gain knowledge of the market from its local partner. Furthermore, star bucks also preferred it as it lacked financial resources in the 1990s due to speedy growth and wanted its local partner to commit resources in the managerial area. The competitive market of the country was also very less competitive as compared to other which led Starbucks to prefer low controlling entry mode like licensing (Seattle Times, 2017).
Joint Ownership:
It is the type of entry mode in which an organization joins forces with a foreign investor to create a local business in which they have shared ownership and control. A company may need to get this mode of entry for several reasons. For example, it may need to share the risk of entering a new market with some partners. Or it can also consider it to leverage its position and strengthen it. However, it is evident that for this type of entry, the organizations involved in the joint venture must have common objectives. It also gives the benefit of the local partner’s knowledge of the local business and market. It also reduces the political risk and economic instability risk. However, the disadvantage of the joint venture is that the control of the local partner over the technology can become a risk. Furthermore, this may not realize the location economies or the experience curve. Another major disadvantage can be that it can lead to conflict (Reue, Devarakonda, & Klijn, 2010).
Example | Starbucks:
Starbucks has used the joint venture as the entry mode in entering the market of Spain. For adaptation of the internal and external factors of the Spain, culture, it preferred the joint venture. The reason behind is that Starbucks lacked the knowledge of the market in Spain. Furthermore, it the local partner’s knowledge of the market would aid in operating locally. Moreover, Starbucks wanted to have speedy expansion in the Spain market. It had planned to establish 100 stores over five years. The market potential and the competitive intensity of the Spain market also lead it to go to the joint venture. For this purpose, Starbucks selected the joint venture entry mode for fats expansion (González, 2016).
References
González, Á. (2016, January 22). Starbucks’ partner regains control of joint venture in Spain. Retrieved January 20, 2018, from https://www.seattletimes.com/business/Starbucks/Starbucks-partner-regains-control-of-joint-venture-in-spain/
Motohashi, K. (2015). Global Business Strategy: Multinational Corporations Venturing into Emerging Markets (1 ed.). Springer.
Paul, J. (2008). International Marketing: Text and Cases, Volume 2 (1 ed.). Tata McGraw-Hill Education.
Reue, J. J., Devarakonda, S., & Klijn, E. (2010). Cooperative Strategies: Alliance Governance (2 ed.). Edward Elgar Pub.
Seattle Times. (2017, December 16). Starbucks Licenses Company To Open New Zealand Stores. Retrieved January 20, 2018, from http://community.seattletimes.nwsource.com/archive/?date=19980224&slug=2736319
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