MARKET ENTRY MODES FOR INTERNATIONAL MARKETING

Transcription

1 MARKET ENTRY MODES FOR INTERNATIONAL MARKETING Introduction International marketing is the application of marketing principles in more than one country. International marketing is also termed as global marketing. Efrat and Shoham (2013) define international marketing as exchange of goods or services between two different countries. Globalization and technological advancement are among the main reason behind many companies adopting international marketing. Moreover, the need to increase economies of scale and the need to reduce dependence on one country are also main factors behind the increase in internationalization of organizations, reports Jones (2009). This report studies the important modes to enter in to the international market. Mode of entry means the channel used by accompany to enter in to international market. The different modes of entry such as exporting, joint venture, foreign direct investment, strategic alliances etc. are discussed in the report. Review of literature International marketing means the practice of the marketing strategy of a company internationally. Through internationalization a company is able to grow and expand more swiftly, observes Jones (2009). International marketing help the company to widen its market by introducing new customers to their products. Brand loyalty and new relations are created through internationalization. It helps the domestic business to know new products and technology, and it help the company to reduce the cost of production. Globalization helps the company to entry in to international marketing. It ensures the free flow of goods and services globally. Before entering to the international marketing a company needs to consider some factors that are affecting the business. It includes depth of competition, economies of scale and the nature of the business etc. The changing environment also affects the internationalization, technology advancements, economical and political condition etc. before making the entry decision. Moreover, the suitability of organizational strategy, structure and culture of the organization with respect to the selected mode of entry needs to be assessed before market entry, observes Efrat and Shoham (2013). International marketing process theories Some theories exists in relation to the market entry modes for international marketing which helps the organizations to understand how various factors affects the internationalization process and thus select the required mode of entry suitable for the company, states Kumar and Siddharthan (2013). Some of the important theories are discussed below: 1

2 Uppsala model of international entry According to Hennart and Slangen (2014) a company first starts from low resource commitment mode such as exporting or franchising by entering in physically close countries and slowly expanding to far places. After gaining knowledge and experience from the foreign markets, the company adopts more risky modes of operation such as joint ventures. The model explained that the lack of knowledge is the main limitation of international marketing operations. Transaction cost analysis theory Selection of appropriate model of entry is one of the important criteria for international marketing. With respect to the transaction cost analysis, the costs are created by the asset or investment when making foreign entry, states Efrat and Shoham (2013). Assets include both physical and human resources while selecting the modes of entry the company consider transaction cost. Eclectic theory Eclectic theory focuses on FDI (Foreign Direct Investment). It concentrates on FDI model internationalization. International production and sales will influence the business. First the company attain competitive advantage on its national market and then makes asset utilization, observe Efrat and Shoham (2013). It helps the company to gain the competitive advantages in the international market also. It helps the company to attain more profit in the international marketing. These are the three important theories considered before entering to the international market. Market entry modes As per the consideration of these theories the companies select the appropriate mode of entry. The various mode of entry to international marketing are discussed below. Exporting Exporting means the selling goods and services produced in one nation in another nation. It helps the producing nation to add its output. According to Seyon (2009) exporting allows a firm to swiftly enter in the global market. The financial policy of the government influences the trade practice. Export is an economic transfer of large scale products from one country to another country with some trade restrictions. Direct exporting means goods are directly sent to the customers. This trade helps to create customer relation and they create secure business, observes Seyon (2009). It helps to avoid intermediaries and avoid profit sharing. Exporter directly controls the price and controls all activities. 2

3 Indirect exporting means trading through domestic intermediaries. Indirect exporting needs less amount of investment, states Seyon (2009). Intermediaries are experienced persons or agencies they have high customer relation which help the exporter to cover mass area. Licensing Licensing is an agreement or legal permission to engage in action which is a trade. Licensing provides a company to produce and or sell its products to other countries, reports Tielmann (2010). Licensing is a faster way to increase the growth of the company. It also helps the company to expand their non licensing product also. Licensing on the other hand allows a licensee to use a particular trade mark. Franchising Franchising is an agreement in which the franchisor provides the franchisee with the right to use their patents, brand names or sell their products or services, reports Tielmann (2010). Trade mark, trade name or business systems are shared for a recommended fee plus a certain percentage of profit. In other terms it is a business model in which a single brand name is used by different owners. A parent company allows others to use the company s strategies and trade mark. Franchising is an inexpensive way of expansion other than opening stores. Wholly owned subsidiaries A wholly owned subsidiary is a company completely owned by the parent company. So the parent company has total control to manage and diversify its risk, reports Tielmann (2010). However, the parent company must bear all losses and risks, so this is a riskier form of market entry. Joint venture Joint venture is a form of internationalization. For completion of specific task various companies pool their resources together to form joint ventures, reports Tielmann (2010). It may be for a new project or business. The participant companies share profit, loss and cost of production. Foreign companies prefer domestic companies for joint ventures. The foreign companies introduce new technologies and business practices in to joint venture, reports Anderson and Gatignon (2014). The companies use this strategy to share strength, minimize risks and increase the competitive market advantage. Strategic alliance A strategic alliance is a business agreement between two or more parties to collaborate where all parties remain independent firms, reports Tielmann (2010). This method is mutually beneficial for the participant firms. Alliance helps a company to attain knowledge from other companies. Costs and risks of operation are shared by the participants. It helps 3

4 in large scale operation. It helps a domestic company to enter in to the market with less investment. Foreign direct investment An investment made by a company or entity based in one country, into a company or entity based in another country, reports Tielmann (2010). Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. These are the important modes for marketing for international marketing. According to the suitability of the company the mode of operation is selected. Case study of Coco-Cola In this section the market entry mode of Coco-Cola in different countries such as China, India and Peru are discussed. Coca-Cola s market entry in China Coco-Cola entered the Chinese market firstly through franchising model of entry in This was low risk entry based on the Uppsala theory of internationalization, observes Javalgi et al. (2011). In the second stage Coco-Cola formed joint ventures with bottling plants in China. This helped Coco-Cola to reduce its cost of operation and gain market share in Chinese market. The main reason behind Coco-Cola entering Chinese market was the high customer attraction due to the immense population of China. Franchising mode was selected due to Chinese government making restrictions to the company. Due to governmental policy of China, Coco-Cola was compelled to engage in joint venture with Chinese local plants, states Javalgi et al. (2011). Availability of cheap labour and ever increasing population of China were two factors that prompted Coca-Cola s entry in China. Coco-Cola also developed new branded products suitable for Chinese people to gain more market share, reports Javalgi et al. (2011). Figure 1. Coca-Cola market share in China in 2010, 2011 and 2012 Source: Wall Street Journal (2013) 4

5 In 2012, Coca-Cola had market share of 24.6% in Chinese market, reports Wall Street Journal (2013). Hence it can be argued that Coca-Cola s entry in China was successful. Coca-Cola s market entry in India Coca-Cola entered in Indian market by forming wholly owned subsidiary named Coca-Cola India Private Limited. Wholly owned subsidiary means that Coca-Cola had complete ownership and control over the company, observes Moyi (2013). After forming the subsidiary, Coca-Cola acquired Parle s soft drinks business thus becoming the largest soft drinks producer in India with a market share of around 60%. This also helped in reducing the competition of Pepsi in Indian market. Figure 2. Indian soft drinks market share in 2013 Source: Business Today (2013) Presently Coca-Cola has 56.7% market share in Indian market, reports Business Today (2013). This is shown in Figure 2. Currently the subsidiary manufactures and sells products in India by collaborating with Indian local retailers and other marketers and thus reaching customers all over India. Indian Government policy to adopt globalization and liberalization helped Coca-Cola to enter in to Indian market. Coca-Cola acquires more employees from India and ensures free flow of goods. It helps the company to attain more customers, local resource availability. The company enlarges its business through Indian entry. And develop brand loyalty among customers through various products observes Moyi (2013). And the company gets raw materials and other materials from Indian market economically. They get high level sales in India through good sales promotion. Coca-Cola s market entry in Peru In Peru Coca-Cola used strategic alliance entry mode. The strategic alliance was formed with Inca Kola- the leading soft drinks brand of Peru. Customers in Peru are really interested in 5

6 Inca Kola so the strategic alliance helps Coca-Cola to reach local customers easily. According to Wharton University (2012) case study, Coca-Cola s acquisition of 30% shares of Inca Kola was crucial factor in the formation of this strategic alliance. Inca Kola is currently the largest soft drink company in Peru with 30% market share whereas the market share of Coca-Cola is 20%. Coca-Cola has however attained the rights to market Inca Kola outside Peru and thus market Inca Kola in neighbouring countries such as Chile, Ecuador etc. The strategic alliance helps Coca-Cola in many respects. It helps the company to acquire financial and other resources more easily. Moreover, the customers associate Coca-Cola with Inca Kola which provides advantage in promotions. The availability of cheap labour is another factor which prompted the strategic alliance between Coca-Cola and Inca Kola, observes Wharton University (2012). The major themes emerging from the literature International marketing is a big aspect of business in today s globalized marketplace. Market entry is the most important step in the process of internationalization, reports Kumar and Siddharthan (2013). The importance of market entry modes is that they play a huge part in the success or failure of the company in the foreign market. An example of this can be seen in the case study with Coca-Cola s failed market entry in India in The importance of international marketing was discussed in the literature review section of the report. It was identified that the globalization and technological innovations were crucial factors in the increase of internationalization along with the need to increase economies of scale and the need to reduce dependency on one country for revenue (Jones, 2009). The case study of Coca-Cola also reveals that the main reason behind these companies adopting internationalization was to increase economies of scale and reduce the dependency on country of origin for revenue, reports Javalgi et al. (2011). The literature review of Uppsala model revealed that companies may change the mode operation in international markets over time i.e. firstly the organization may start with exporting but with enough knowledge and experience in the foreign market the organization may adopt franchising or strategic alliance as the mode of operation, argues Hennart and Slangen (2014). The case study of Coco-Cola provides backing to this assessment. Coco-Cola started its operations in China through franchises in However, the company has adopted joint venture and other forms of operations in China over time. Moreover, it was also identified that an organization may adopt different market entry modes in different countries. The main reason behind the selection of diverse market entry modes was identified as the differences in the market, political and social environments of nations. Moreover it was also identified that organizational culture, organizational structure, economic state of the organization and the organizational strategy directly impacted the selection of market entry mode (Efrat and Shoham, 2013). 6

7 For example the case study reveals that Coco-Cola adopted three different market entry modes in China, India and Peru. The market entry mode adopted by Coco-Cola in China was franchising. Various factors such as the rigid political system of China played a crucial role in the selection of this entry mode. Moreover, it was assessed earlier that the internationalization process of Coco-Cola in Chain was following Uppsala Model theory as the market entry began with low risk franchising and then matured into more riskier joint ventures (Javalgi et al., 2011). It was identified in the literature review that in franchising mode of entry the franchisor provides the franchisee the right to use their patents, brands etc. for a fee or royalty (Tielmann, 2010). But the franchising model adopted by Coco-Cola differs from the theoretical model as a main ingredient of the products were produced by Coco-Cola and then exported to China where the franchisees used this ingredient to produce the actual products. Hence it can be assessed that Coca-Cola s franchising mode of entry in Chinese market was not according to a theoretical model but the company adapted the mode of entry to suit its specific needs. From the figure 1 in the case study, it can be assessed that the market share of Coca-Cola in China as of 2012 was 24.6% which indicates Coca-Cola was able to grow substantially since entering the Chinese market. In India, Coco-Cola had operations till 1977 when the company was forced to stop operations in India due to changes in the governmental policies. Coco-Cola re-entered Indian market in 1993 by forming a wholly owned subsidiary- Coca-Cola India Private Limited (Javalgi et al., 2011). India adopting economic reforms and thus opening doors for international business was the main reason behind the decision to form wholly owned subsidiary in India. Tielmann (2010) observes in the literature review that wholly owned subsidiaries were a riskier form of market entry. When analysing Coca-Cola s market entry in India, it can be understood that the formation of wholly owned subsidiary in India was followed by the acquisition of Parle s soft drinks business. Through this Coca-Cola was able to gain around 60% market share of soft drinks market in India. Moreover, the company also was able to nullify the competition of Pepsi in the Indian market through this acquisition, observes Javalgi et al. (2011). Based on the figure 2 in the case study, the current market share of Coca-Cola is 56.7%. This shows that Coca-Cola s entry to Indian market by forming wholly owned subsidiary and then acquiring Parle s business was highly successful. Based on this assessment, it can be concluded that Coca-Cola s market entry in India do not follow any of the internationalization theories. Coco-Cola entered Peruvian market by forming strategic alliance with Inca Kola in The main reason behind the adoption of strategic alliance as mode of entry in Peru was that the Peruvians considered Inca Kola to be a national pride (Wharton University, 2012). So it was impossible for Coca-Cola to directly compete with Inca Kola in Peru. By forming strategic alliance with Inca Kola, Coca-Cola was able to slowly build its market share and revenue in 7

8 Peru. Moreover, Coca-Cola also acquired the rights to market Inca Kola outside Peru and thus increased its brand portfolio. Tielmann (2010) observes in the literature review that strategic alliances were formed between two independent firms for developing mutually beneficial processes and practises. But Coco-Cola s strategic alliance with Inca Kola was based on Coca-Cola acquiring 30% shares in Inca Kola, reports (Wharton University, 2012). This again shows that market entry modes not always are based on theoretical models. Conclusions The different market entry methods for international marketing were analysed in this report. From the literature review it was understood that many factors such as the political, economical and social environment of the prospective nation played a crucial role in the selection of market entry methods. The real life implementation of different market entry methods such as franchising, subsidiaries, strategic alliance etc. were analysed in the case study by taking the case of Coca-Cola. The findings of the case study were assessed with respect to theoretical models discussed in the literature review. From this analysis it was identified that real life implementations of market entry models differed greatly from theoretical models. Moreover, it was also identified that companies often adapted market entry modes to suit the specific needs of the company. References Anderson, E. and Gatignon, H., Modes of foreign entry - A transaction cost-analysis and propositions. Journal of International Business Studies. 17(3). pp Business Today, (2013). A rough summer. [Online] Available at: [Accessed 11 th December 2014]. Efrat, K., and Shoham, A., (2013). The interaction between environment and strategic orientation in born globals choice of entry mode. International Marketing Review, 30(6), Hennart, J. F. and Slangen, A. H. (2014). Yes, we really do need more entry mode studies! A commentary on Shaver. Journal of International Business Studies. 45(9). Javalgi, R. R. G., Deligonul, S., Dixit, A. and Cavusgil, S. T International market re-entry: A review and research framework. International Business Review, 20(4), Jones, M. V., (2009). Internationalization, entrepreneurship and the smaller firm: Evidence from around the world. Cheltenham: Edward Elgar Publishing. Kumar, N. and Siddharthan, N. S., (2013). Technology, market structure and internationalization: Issues and policies for developing countries. London: Routledge. 8

9 Moyi, J years later: A look back at Coke s dramatic 1993 return to India [online] Available at: [Accessed 11 th December 2014] Seyon, B., Export-import theory, practices, and procedures. London: Taylor & Francis. Tielmann, V., Market entry strategies: International marketing management. Munich: Grin Verlag. Wall Street Journal, Coke deal juices its China business. [Online] Available at: [Accessed 11 th December 2014]. Wharton University, Branding lessons from Inca Kola, the Peruvian soda that bested Coca-Cola. [Online] Available at: [Accessed 11 th December 2014]. 9