Review of the Market Entry Modes

Review of the Market Entry Modes INTRODUCTION When we look at the development of world business, it can be easily noticed that recent years have witnessed a growing intensity of competition in virtually all areas of business, whether in domestic or international areas. In today`s changing and developing world, it has been getting more and more important and at the same time becoming difficult day by day to expand your business` borders. For this reason, it has also been getting more and more important to make the decision of going internationally and choosing an appropriate entry mode. The perception of this importance can be related to the answer of this question; â€Å"how come international business is important especially for domestic companies?† International business is that kind of trade that gives increase to the economy of the world. In this the demand and supply and the prices are influenced by the global issues. For instance, the change in political conditions in Asia can raise manufacturing cost and cost of labour of an American company which is in a country in Asia. This would then result in rise in the price of the product that you need to purchase from a local mall. If there is a decrease in cost of labour, on the other hand then you can have to pay relatively less price on the product. (Hussey, 2008) It is also another advantage of going internationally that it gives an opportunity to developed countries to use their resources effectively like technology, capital and labour. Since a large number of the countries already have natural resources and different inputs such as labor, technology, land and capital, they are likely to produce many products more efficiently and sell them for cheaper prices than other countries. A country can obtain an item from another country if it cannot effectively produce it within the national boundaries. This is the specialty of international trade. In same way a country can obtain an item from another country, for the reason of that product can be produced in its own country but with worse conditions such as lower quality or higher cost. Global trading also allows the different countries to participate in global economy encouraging the foreign direct investors. These individuals invest their money in the foreign companies and other assets. Hence the countries can become competitive global participants. Entering a Foreign Market Before entering international marketing, if we reflect on our perception what marketing means itself, we will face a few important definitions. According to Chartered Institute of Marketing, marketing is a â€Å"Management process which is responsible for identifying, predicting and providing customer requirements profitably†. (Lowe and Doole, 2001) Marketing involves; providing customer needs and wants, finding out best ways and methods to provide these needs and wants, orienting the firm towards the process of focusing on that satisfaction, meeting organizational objectives. In this way, it becomes important for the company or organization to prepare itself to achieve competitive advantage in the market. The company then needs to work on taking this advantage in the market. The company then needs to work on taking advantage by manipulating controllable functions of marketing, within the uncontrollable marketing environment which is directly affected by SLEPT factors, i.e. Political, Economic, Socio-Cultural, Technological and Legal. (Lowe and Doole, 2001) When domestic and international marketing are compared, it is argued that†what differences there are between these two markets â€Å". Actually, the key elements are still same. The concept is not likely to change to any market degree when a company moves from a domestic market to an international market. However, two main differences can be defined. First, of them, there are different approaching levels depending on international scope, and second, the company will be likely to face complexities and difficulties as the result of international marketing environment factors as it mentioned above. (Lowe and Doole, 2001) General Review of the Market Entry Modes For the majority of companies, the most important international marketing decision that they are most likely to take is how they should enter new markets, as these decisions which they make will directly affect every part of their business for many years in the future. There are advantages and disadvantages with each market entry method and critical in the decision-making process are the firms assessment of the cost and risk associated with each method and the level of involvement the company is allowed by the government, or want to have in the market. These factors determine the degree of control it can exert over the total product and service offer and method of distribution. (Chee and Harris, 1993) There is, however, no ideal market entry strategy and different market entry methods might be adopted by different companies entering the same market and/or by the same company in different markets. The Alternative Market Entry Modes The variety of alternative market entry methods are shown in figure below, depending on international involvement from virtually zero, when the company only makes its products for others to export but effectively does nothing itself to market its products internationally, to total involvement, where the firm might operate wholly-owned subsidiaries in all its key markets. (Chee and Harris, 1993) The market entry decision is taken within the company and it is determined related to the companys objectives and attitudes to international marketing and the confidence of its management teams to operate in foreign markets. In order to select most appropriate and effective market entry strategy, it is essential to take into account some point including; the company objectives and expectations relating to the size and value of predicted business, the size and financial resources of the company its existing foreign market involvement the skill, abilities and attitudes of the firms management for international business the intensity of the competition in target market, the affect of existing and expecting tariff and non-tariff barriers the nature of product considered for international entering the areas of competitive advantage, such as trademark or patent protection the timing of entry in relation to the market and intensity of competitive situation However, this list of entry modes is likely to be meaningful when the other factors which affect the entry mode and are very specific to the companys particular situation. For instance, the regulations of laws of the host country might be a barrier for a company to own 100 percent of an operation in that country. All companies should identify, analyse and monitor these external factors and consider their potential affect on their products/services. Although these external factors take place outside of the firms management teams control, they all must be taken into account as much as internal factors. (Chee and Harris, 1993) According to Terpstra and Sarathy (1994), alternative methods of foreign market entry can be summarized basically as shown below; Production in HomeMarket Foreign Production Sources -Contract Manifacture -Licencing -Assembly -Joint Venture -100 Percent Ownership and / or Indirect Exporting -Trading Company -Export Management Company -Piggyback, etc. Direct Exporting -Foreign Distributor -Agent -Overseas Marketing Subsidiary STARBUCKS IN CHINA In 1999, when Starbucks invested into China, the company entered the joint-venture agreement with three big local partners: Beijing Meida Coffee, Shanghai Uni-President Starbucks Coffee Ltd and Maxims Caterer (Asia Pulse, 2006). On the one hand, the company was able to meet requirements from the Chinese governments regulations and lower the risk and level of investment when entering a new market. In return, Starbucks sacrificed its control over development of those individual companies while only earning loyalty fees (ibid). As a result of joining the World Trade Organization (WTO) in 2001, Chinese government has loosened regulations on foreign investment, especially the removal of restrictions on foreign investment. Since then, share of local partners is no longer required for foreign companies (ibid). Consequently, Starbucks has paid out more than USD 21, 3 million to gain its share to 50 percent in Shanghai Uni-President Starbucks Coffee. Similarly, the company increased its stake s in Maxims Caterer to 51 percent and control over 50 percent of stock in Beijing Meida Coffee (Harris, 2007). Such forward integration gives Starbucks more control over its expansion which will be more aggressive in the near future (ibid). Besides, Starbucks is also concerned with coffee sources and prices. Currently, for the Chinese market, Starbucks imports coffee beans from its suppliers all around the world (Reuters, 2007a). Since these suppliers have been controlled tightly by the companys specialists, Starbucks can assure the quality of its products in China. However, Starbucks needs to pay import duty. Depending on the type of coffee, this duty may vary from 10 to 30 percent (Friedlnet, 2003). To make the problem worse, coffee prices have jumped from 89.36 US cents per pound in 2005 to 113.20 US cents per pound in 2007 and is expected to grow higher in 2008 (Reuters, 2007a). This may consequently influence the price of Starbucks product and influence Starbucks performance. I n America, as a result of the increase in price of dairy product, Starbucks raised the price of its coffee drinks by 9 cents and 50 cents for its whole bean coffee in 2007 (Reuters, 2007b). This is the second time Starbucks raises its prices. The first time this happened was in 2006 when Starbucks raised 5 cents for all of its drinks (USA Today, 2006). To prevent such potential price change in the future, Starbucks has been working with coffee farmers in many parts of China and trying to help them meet the company standards. Jinlong Wang, president of Starbucks greater China, expressed that â€Å"China does produce some quality coffee and sourcing from China would start very soon, maybe in a couple of year† (Reuters, 2007a). Starbucks also plan to build a roasting plant in China. This backward integration when applied successfully in the future, will give Starbucks a huge competitive advantage. After initial success with more than 540 stores across China, Starbucks is striving hard to expand its operation and turn China into the biggest overseas market in near future. However, the Chinese market has many differences to other market that Starbucks has entered. Average coffee consumption in China is projected to increase by 20 to 25 percent each year. Therefore, much more opportunity is waiting for Starbucks in the near future. Despite its success, Starbucks should continuously monitor changes from the external environment and prevent unfortunate incidents such as in 2000 when Starbucks was kicked out of the Forbidden City, a symbol of Chinese Culture (CNN, 2000). Failing to monitor and respond properly, China can be a graveyard for Starbucks ambitions. IMPORTANCE OF CHOOSING AN EFFECTIVE INTERNATIONAL MARKETING STRATEGY In today`s competitive international world, one of the most significant tasks for many companies which are preparing itself to enter a foreign market is to make the right decision about how the company should enter a foreign market. One reason for this is that this decision is likely to influence every part of its business for a long perid of time in the future. However, there are advantages and disadvantages of every single foreign market entry modes. For the aim of selecting the most appropriate and effective foreign market entry strategy, it is essential to take into account some point including; (Chee and Harris, 1993); the company objectives and expectations relating to the size and value of predicted business, the size and financial resources of the company its existing foreign market involvement the skill, abilities and attitudes of the firms management for international business the intensity of the competition in target market, the affect of existing and expecting tariff and non-tariff barriers the nature of product considered for international entering the areas of competitive advantage, such as trademark or patent protection the timing of entry in relation to t he market and intensity of competitive situation Recommended Strategies In fast-changing Chinese cities, finding locations that will embody the right lifestyle is more like gambling than science. Real-estate know-how is a hallmark of Starbucks worldwide, but the computerized mapping databases that are used to test a potential street corner in the United States would be little help in Chinese cities. Starbucks must continue to use joint ventures or license other companies to own and operate Starbucks stores as this philosophy differs from its domestic approach, where the stores are largely company-owned. The idea is that an experienced local partner can help identify locations, sift through tax issues and give Starbucks stores a more local community appeal. Once the market is established Starbucks will be given an opportunity to purchase a controlling interest in the partnership, which will then allow them more control and management of the overall operation and direction of the business. As Starbucks adds a whopping six stores a day on average, the company must continue to carefully consider everything from the direction of commuter traffic zipping by a potential drive-thru site to how many people are pounding the pavement on a busy urban block. As of Oct. 3, Starbucks had 12,440 stores worldwide, including 7,102 company-operated stores and 5,338 licensed locations. Starbucks must continue to open new locations as their market continues to grow. At some stage there are limits to their expansion, but to date the company has not seen any signs that they are near that optimal point or number. A major concern would include anything from a drop in quality to the brand losing its luster. Despite potential saturation and plans to add many more stores in China. Starbucks insists that it sees very little cannibalization of its existing business when a new store opens. In fact, the company says, one reason would-be customers dont end up buying a Starbucks drink is because the line or wait is too long. One solution is to open up another store nearby. Besides adding stores, drive-thru and kiosks throughout the world, Starbucks also has plans to make itself ubiquitous even in places where it cant squeeze in a store. It is getting ready to launch Starbucks-branded vending machines, which will let people buy warm lattes and other drinks in a nine-ounce can for $2.50. And thats in addition to the business it already does selling bottled cold Starbucks drinks and coffee beans in more traditional food stores. In closing if you see a mall in the United States today itll probably be there two years form now but, a year passes by in a Chinese location, and you almost wont know your way around there any more. Ive witnessed this first hand when I travel to China on business. This is just how fast the Chinese economy and market is growing and Starbucks is looking to convert 1.3 billion tea drinkers to coffee lovers. The key attribute to attain this surmountable goal is to continue the expansion plan in China and other countries in Asia. 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