International Business Entry Modes

Introduction An international insertion panache is an institutional agreement necessary for the door of a communitys crops, engineering science and human capital into a foreign pastoral or grocery. The reluctance of firms to change entry expressive styles once they ar in place, and the difficulty abstrexercising in doing so, substantiate the mode of entry determination a key strategic issue for firms operating in at presents rapidly internationalizing merchandise place.The choice of mode al imprint see on home(a) characteristics (eg firm size, international experience) and international characteristics (eg the sociocultural remoteness between the host rural argona and the home country) as well as the trade-off between desired mode characteristics ( adventure adverse, train and flexibility). The diagram under conveys 3 broad categories of modes of entry, and their fundamental trade offs.Further to the issues discussed above, no matter which of tercet of the m erchandise modes the shaper physical exercises in a market, it is important to think approximately what level of mindsh atomic number 18 the shaper occupies in the mind of the trade partner, as at that place has been a strong proven correlation between mindsh be levels and how pull up stakesing the exporting intermediary is to place on ac caller brand in drift of another, or how likely the intermediary is to defect. Good mind sh be will see on scoring well across the tierce drivers of loading and trust, collaboration and mutuality of interest & common purpose.Control Key and denomination Text and Graphics.Export Modes Baring in mind the factors discussed above we will out re start out review the different types of entry modes, beginning with export modes, as they are typically the modes phthisisd in initial entry to international markets, as they require a busteder financial investment than other modes and behind be viewed as a toe in the water for in experien ced and smaller firms or where at that place may be ventures (eg political, frugal environmental) preventing FDI. The three major types of exporting are indirect, direct and cooperative.Indirect export modes are modes in which the exporting manufacturer manipulations independent organizations located in a producers country, they imply the use of an export buying agent, a broker, an export house, a trading familiarity, or a piggyback. Indirect export modes may be portion for firms with limited- rather than long term- international intricacy objectives. For example, if international sales are primarily used as a means of disposing of surplus outturn. The lack of contact with firms abroad will abide limited information to develop a plan for international intricacy.In the use of such modes, in that location is limited go out over the marketing immingle (other than mathematical product). A direct export mode may be more than than trance in gaining a little more deter mine, in which the manufacturer sells directly to an importer, agent or distributor in the foreign home run market. The local party will use up the advantage of existing scattering networks, and will depict good local market k directledge. However, a company must be careful in entering into contracts as they elicit be difficult and costly to terminate, and post go wrong when on that point is a conflict in interests (e. . it may sell rivals goods or competing product lines). Similarly, in that respect is a serious disincentive for the agent/distributor in that if it performs well and develops the market, it risks being replaced by a subsidiary of the principal. negociate modes As a firm gradually evolves towards more foreign based trading trading operations, arbitrate modes will become more suitable modes of entry. This will likely accept firms possessing some sort of competitive advantage that are unable to figure out this advantage because of resource constraints.Inte rmediate modes take the form of contract manufacturing, licencing, franchising, a reefer venture or a strategic alliance. Contract manufacturing- where manufacturing is contracted to an orthogonal foreign partner provides a downcast risk and potentially low-down cost mode of entry. Benetton and Ikea are a good example of companies who successfully rely on a contractual network of small afield manufacturers. Benetton has over 80% of its output outsourced to 450 contractors (located in low cost production countries such as India and China).As a result of the money saved on labour, Benetton bay window sell products 20% cheaper, helping it to maintain a low cost position in comparison to competitors. Of course, this method may not be appropriate for every company as on that point is a loss of knowledge and intellectual property sets, and the transaction costs complicated must also be considered. Licensing differs from contract manufacturing in that more cheer chain functions fix been transferred to the licensee. In outsourcing production and downstream activities a licensor irm potbelly concentrate on its core competences and and so will remain technologically superior in its product development- for example Apple licenses its brand to manufacturers of accessary products, and the BBC licenses rights to broadcast TV shows around the world. However a lack of retain over licensor operations and consequently quality may lead a company to use franchising (a sub variant of licensing) in which the franchisor gives a right to the claime against a payment, EG a right to use a total logical argument concept/system, including the use of trademarks/brands, against some agreed royalty.Franchising not only provides a greater degree of control than licensing, but It laughingstock also be seen as low cost and low risk as the certify are the ones investing in the necessary equipment and know-how. This entry mode has been seen to mystify great successes for com panies such as McDonalds who now franchises 25000 restaurants globally. However, it should be noted that there is still a lack of full control over franchisees operations, which can result in problems with cooperation, communications, quality control etc, and a risk of damage to the companys international reputation if some franchisees do (free-riding).Another intermediary mode that will allow greater control is a joystick venture, in which 2 parent companies create a raw child company. This high degree of control and local knowledge is a clear advantage of such an entry mode. The shared knowledge and resources gained by a JV as compared with tout ensemble owned subsidiaries will start many advantages such as economies of scale. However of course there is a loss of confidentiality and flexibility, and the use of double management will raise questions slightly how the company is split- 50/50?If 50/50, it is difficult for the board to subscribe stopping points, if at all Hier archical modes of entry allow the highest degree of control for a firm, while at the same time, the highest degree of risk as the firm completely owns and controls the foreign entry mode. To take hold a alone owned subsidiary a firm can either consider an existing company (acquisition) or build on its own operations from scratch (greenfield/brownfield investment). An acquisition will provide rapid entry, access to scattering channel, an existing customer base.This may be the only feasible mode of establishing a base in the host country in alter markets, or where there are substantial entry barrier and therefore little room for a revolutionary entrant. Of course, as with intermediary modes, there is the issue of contracts, negotiation and the different management styles between companies. If difficulties (eg no appropriate acquisition) are encountered with acquisitions, it may lead firms to prefer to establish greenfield (new facility) and brownfield (existing facilities) oper ations.Out of the two- greenfield is seen as an expedient option because the new plant will involve the latest applied science and equipment, avoiding the problem of trying to change the traditional practices of an established concern. Although this is a high-risk investment for a company involving slow entry into the foreign market, the returns are long term and the firm has control over the entire operation. shutting It cannot be stated categorically which alternative is the best.There are many immanent and external conditions which affect this choice and it should be emphasized that a manufacturer wanting to engage in global marketing may use more than one of these methods at the same time (Petersen and Welch, 2002). Such mode packages may take the form of a concerted use of some(prenominal) operation modes in an integrated, complementary focussing. Zara is a good example of this- in markets where the hierarchical model is used, there is high growth potential and congenat or low sociocultural standoffishness between the home country of Spain and intent market.The intermediate modes (usually joint venture and franchising) are mainly used in countries where the sociocultural distance is congressly high. For example in 1999, Zara entered into a 50-50 JV with the German firm OTTO Versand, which had experience in the diffusion sector and market knowledge in one of Europes largest markets, Germany. Whereas franchising is used by Zara in high risk countries which are socio-culturally distant or have small markets which allow sales forecast such as Andorra, Puerto anti-racketeering law or the Philippines.International Business Entry ModesIntroduction An international entry mode is an institutional agreement necessary for the entry of a companys products, technology and human capital into a foreign country or market. The reluctance of firms to change entry modes once they are in place, and the difficulty involved in doing so, make the mode of entry decisi on a key strategic issue for firms operating in right aways rapidly internationalizing market place.The choice of mode will depend on internal characteristics (eg firm size, international experience) and external characteristics (eg the sociocultural distance between the host country and the home country) as well as the trade-off between desired mode characteristics (risk adverse, control and flexibility). The diagram downstairs conveys 3 broad categories of modes of entry, and their fundamental trade offs.Further to the issues discussed above, no matter which of three of the export modes the manufacturer uses in a market, it is important to think almost what level of mindshare the manufacturer occupies in the mind of the export partner, as there has been a strong proven correlation between mindshare levels and how willing the export intermediary is to place on company brand in calculate of another, or how likely the intermediary is to defect. Good mind share will depend on scor ing well across the three drivers of lading and trust, collaboration and mutuality of interest & common purpose.Control Key and word Text and Graphics.Export Modes Baring in mind the factors discussed above we will now review the different types of entry modes, beginning with export modes, as they are typically the modes used in initial entry to international markets, as they require a lower financial investment than other modes and can be viewed as a toe in the water for in experienced and smaller firms or where there may be risks (eg political, economic environmental) preventing FDI. The three major types of exporting are indirect, direct and cooperative.Indirect export modes are modes in which the exporting manufacturer uses independent organizations located in a producers country, they include the use of an export buying agent, a broker, an export house, a trading company, or a piggyback. Indirect export modes may be appropriate for firms with limited- rather than long term- international expansion objectives. For example, if international sales are primarily used as a means of disposing of surplus production. The lack of contact with firms abroad will provide limited information to develop a plan for international expansion.In the use of such modes, there is limited control over the marketing shamble (other than product). A direct export mode may be more appropriate in gaining a little more control, in which the manufacturer sells directly to an importer, agent or distributor in the foreign orchestrate market. The local party will bring the advantage of existing dispersion networks, and will provide good local market knowledge. However, a company must be careful in entering into contracts as they can be difficult and costly to terminate, and can go wrong when there is a conflict in interests (e. . it may sell rivals goods or competing product lines). Similarly, there is a serious disincentive for the agent/distributor in that if it performs well and develops the market, it risks being replaced by a subsidiary of the principal. Intermediate modes As a firm gradually evolves towards more foreign based operations, Intermediate modes will become more suitable modes of entry. This will likely include firms possessing some sort of competitive advantage that are unable to ferment this advantage because of resource constraints.Intermediate modes take the form of contract manufacturing, licencing, franchising, a joint venture or a strategic alliance. Contract manufacturing- where manufacturing is contracted to an external foreign partner provides a low risk and potentially low cost mode of entry. Benetton and Ikea are a good example of companies who successfully rely on a contractual network of small foreign manufacturers. Benetton has over 80% of its production outsourced to 450 contractors (located in low cost production countries such as India and China).As a result of the money saved on labour, Benetton can sell products 20% chea per, helping it to maintain a low cost position in comparison to competitors. Of course, this method may not be appropriate for every company as there is a loss of knowledge and intellectual property rights, and the transaction costs involved must also be considered. Licensing differs from contract manufacturing in that more comfort chain functions have been transferred to the licensee. In outsourcing production and downstream activities a licensor irm can concentrate on its core competences and therefore will remain technologically superior in its product development- for example Apple licenses its brand to manufacturers of abetter _or_ abettor products, and the BBC licenses rights to broadcast TV shows around the world. However a lack of control over licensor operations and therefore quality may lead a company to use franchising (a sub variant of licensing) in which the franchisor gives a right to the franchisee against a payment, EG a right to use a total pipeline concept/syst em, including the use of trademarks/brands, against some agreed royalty.Franchising not only provides a greater degree of control than licensing, but It can also be seen as low cost and low risk as the franchise are the ones investing in the necessary equipment and know-how. This entry mode has been seen to generate great successes for companies such as McDonalds who now franchises 25000 restaurants globally. However, it should be noted that there is still a lack of full control over franchisees operations, which can result in problems with cooperation, communications, quality control etc, and a risk of damage to the companys international reputation if some franchisees underachieve (free-riding).Another intermediary mode that will allow greater control is a joint venture, in which 2 parent companies create a new child company. This high degree of control and local knowledge is a clear advantage of such an entry mode. The shared knowledge and resources gained done a JV as compared with wholly owned subsidiaries will bring many advantages such as economies of scale. However of course there is a loss of confidentiality and flexibility, and the use of double management will raise questions active how the company is split- 50/50?If 50/50, it is difficult for the board to make decisions, if at all Hierarchical modes of entry allow the highest degree of control for a firm, while at the same time, the highest degree of risk as the firm completely owns and controls the foreign entry mode. To have a wholly owned subsidiary a firm can either start an existing company (acquisition) or build on its own operations from scratch (greenfield/brownfield investment). An acquisition will provide rapid entry, access to distribution channel, an existing customer base.This may be the only feasible way of establishing a base in the host country in alter markets, or where there are substantial entry barrier and therefore little room for a new entrant. Of course, as with intermed iary modes, there is the issue of contracts, negotiation and the different management styles between companies. If difficulties (eg no appropriate acquisition) are encountered with acquisitions, it may lead firms to prefer to establish greenfield (new facility) and brownfield (existing facilities) operations.Out of the two- greenfield is seen as an positive option because the new plant will involve the latest technology and equipment, avoiding the problem of trying to change the traditional practices of an established concern. Although this is a grownup investment for a company involving slow entry into the foreign market, the returns are long term and the firm has control over the entire operation. finding It cannot be stated categorically which alternative is the best.There are many internal and external conditions which affect this choice and it should be emphasized that a manufacturer wanting to engage in global marketing may use more than one of these methods at the same tim e (Petersen and Welch, 2002). Such mode packages may take the form of a concerted use of some(prenominal) operation modes in an integrated, complementary way. Zara is a good example of this- in markets where the hierarchical model is used, there is high growth potential and relative low sociocultural distance between the home country of Spain and butt end market.The intermediate modes (usually joint venture and franchising) are mainly used in countries where the sociocultural distance is relatively high. For example in 1999, Zara entered into a 50-50 JV with the German firm OTTO Versand, which had experience in the distribution sector and market knowledge in one of Europes largest markets, Germany. Whereas franchising is used by Zara in high risk countries which are socio-culturally distant or have small markets which allow sales forecast such as Andorra, Puerto anti-racketeering law or the Philippines.