The purpose of this report is to describe the process of expansion of a company into a new country. In order to achieve this objective, the report will first discuss market entry options available to the company. Then the report will discuss strategic options that a company has to take into consideration when entering a foreign market. Finally the report will recommend an entry mode for the company based on strategic considerations and discuss the entry mode in detail.
There are number of entry modes that a company can adopt to enter a foreign market. The company has to select the most appropriate mode by reviewing its own objectives, existing international involvement and the competitive environment (Doole and Lowe, 2012, p.219). Doole and Lowe (2012, p.219) argue that different entry modes have differing levels of involvement, risk and control (figure 1).
Figure 1: Risk and control in market entry (Doole and Lowe, 2012, p.220).
The company has to demonstrate its competitive advantage through the entry mode, in order to compete with existing local or multinational competitors. The entry mode has to aid the company’s objective to gain the local market share and to grow its market share worldwide.
Many companies are currently operating a franchisee model in an overseas market, which is proving to be successful. By adopting a franchisee model (direct exporting), the company can manage the risk better while maintaining control over product quality, service standard and brand image. The option of adopting any of the other three entry modes (direct investment, cooperation strategies and indirect exporting) has been discarded for the reasons that this would not provide sufficient market penetration (Keegan, Brill and Puri, 2013, p.241). The company would not have acquired any local brands in this scenario and would only be producing the flagship products and therefore not tapping into the mass market of standard product consumers. Secondly, the company’s product does not have a high enough brand positioning in the foreign market and therefore it is viewed that such a move would be risky (Hollensen, 2014, p.401).
The franchisee solution is the most appropriate, as through the franchise agreements with domestic entrepreneurs, it provides the company with the greatest market penetration and the time to build up the company’s premium quality product brand and introduce to the market when it is ready (Hollensen, 2014, p.403). If the company does not gain their market share in the foreign market quickly, it will face difficulties on establishing a large market share position in future (Keegan, Brill and Puri, 2013, p.243).
Entry mode for foreign market:
Franchising is a licensing agreement in which an independent person purchases a franchise and the franchisor grants them the legal right to use branding, trademarks and distribute products in return for a fee (Doole and Lowe, 2012, p.229). Franchising model appears to be a low risk method for the franchisee as well as a route to fast growth for the franchisor; but this model is not without its risk. Some franchisors are too strict about the business model and locate franchises too close to each other, thus causing cannibalisation. At the same time franchisees also need to be controlled if they try to move too far away from the model (Doole and Lowe, 2005, p.294). By adopting franchising model, the company can maintain significant control over operations, provide the franchise stores with products, promotional materials and staff training, same as the way it runs its own business. As a result, the company will establish a steady and profitable income stream, while retaining much control. The local franchisees will have the opportunities to set up and manage their own business without high level of risk (Doole and Lowe, 2012, p.229).
In contrast, a wholly-owned subsidiary is the most expensive and risky mode of entry. However, a company can go for full ownership option if its’ products have long-term potential in a relatively politically stable country in order to maintain the level of control necessary to fully meet the company’s strategic marketing objectives (Doole & Lowe, coursework writing 2012, p.235).
The report finds that there are four market entry modes: direct investment, direct exporting, cooperation strategies and indirect exporting. Entry mode selected has to give the company a competitive advantage to gain the local market share and to grow its market share worldwide. The report recommends that franchisee model (direct exporting) is the most appropriate because it’s a low risk method and a route to fast growth, and many companies are currently operating a franchisee model in an overseas market. Though franchisee model is not without its risk; however if those risks are managed well, then it will enable the company to enter a foreign market and gain market share.
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