Industrialization Globalization Expanding

8/2/2019 Industrialization Globalization Expanding

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Industrialization Globalization Expanding

1. Rapid industrialization and globalization have led to firms expanding their services in

foreign countries. The most critical issue in international marketing strategy remains thechoice of entry mode. International business literature has considered licensing, joint

ventures and wholly owned subsidiaries (WOS) as the means of entering a new market. The

choice of market entry mode has an impact on international operations and is considered

important in international marketing (Zhao & Decker, 2004). The market entry decision

affects performance in future and hence there can be no single market entry strategy that

can be appropriate in all circumstances. Selecting the right mode of entry the first time is

important because there are no second chances. Wrong choices lead to lost market

potential and loss of important committed resources such as management time and money

(Rajan & Pangarkar, 2000).

To decide on the choice of entry mode requires a study of the internal and external

environment. The external environment or the macro environment includes the political and

economic factors in the host country, the government rules and legislation, the trade barriers

and the host country market environment. The internal environment or the micro-

environment includes the service factors, the corporate goals and objectives and the

corporate strengths and weaknesses. The location is equally important before an entry

choice can be made (Ekeledo & Sivakumar). Various factors that need consideration are the

firm size, technology transfer, market size, cultural distance, immigrant effect, international

experience, country risk and uncertainty, industrial barriers and firm advantages, foreign

exchange rate and host country currency (Zhao & Decker, 2004).

Foreign entry is also based on the characteristics of the parent firm, on the characteristics of

the operation in terms of size, on the relationship between the two, which means the nature

of transaction, on the situation of the industry entered or the degree of competition, and the

characteristics of the host country. Based on these, decisions are taken whether the entry

should be in the form of contracts or equity based. Based on different theoreticalperspectives and the level of control and commitment required, there are four different entry

modes - exporting, contracts (licensing) joint ventures (JV) or wholly owned subsidiaries

(WOS) (Brouthers & Hennart, 2007).

According to Rajan & Pangarkar (2000), licensing ventures are further characterized by the

levels of control, costs and competence. Firms opt for WOS when they want the maximum

control and are prepared for maximum risk and commitment (Brouthers & Hennart: 2007,

Agarwal & Ramaswami:1992) while licensing provides almost no control and joint ventures

provide an intermediate degree of control where control is the ability to influence operationaland strategic decisions of the foreign operation (Rajan & Pangarkar, 2000). The choice of


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foreign entry should be based on trade-offs between risks and returns. Control improves the

competitive position and maximizes returns on assets and skills. Resource availability also

influences the entry mode.

A firm's level of multinational experience and the market potential also influence the choiceof entry. According to Agarwal & Ramaswami (1992) the choice of an entry mode for a target

market is influenced by three determinants - ownership advantages of the firm, location

advantages of the market and the internalization advantages of integrating transactions

within the firm. Selecting an overseas location is based on segmenting the value chain and

relocating those parts that could benefit from inexpensive inputs - could range from raw

material, intermediaries or low cost labor (Henley, 2004). Cost factor is the main

consideration in overseas investment decisions. Various other factors that determine the

entry mode include the cultural distance, the parent firm's country of origin, and level of

economic development of the host country. Industry structure also affects the choice of entry

mode asserts Smarzynska (2000). It depends on the investor's endowment of intangible

assets relative to the industry average. Technological and market leaders have more

bargaining powers in negotiations with local firms and may be able to secure more favorable

terms in JV agreements.

DHL, the global market leader of the international express and logistics industry, was the first

to enter the Chinese market in 1980 (Business Wire, 2006). As an MNC, it decided to enter

into a joint venture and became the first express company active in China. General Motors(GM) brought R&D functions into China at the request of the government. When other

automobile companies were reluctant to drain technology and quality control, and confined

themselves to assembly of finished cars, GM took the bold initiative to tie up with the

government for R&D functions (Hara & Nakanishi, 2004). Today GM has local production,

has established an R&D function, as well as developed its own sales channels to create a

local sales function. Reconciling with the local government is an important factor for any firm

to enter a market. In response to liberalization and reforms in the emerging economy in

China, Motorola of US had clearly defined investment and insiderization policies (Hara &

Nakanishi). It established joint committee with the government Electronics Department. It set

targets for local content, carried out philanthropic activities including construction of

elementary schools. It concentrated on high-end users in mobile phones sector to handle

local competition. It could capture the sophisticated, wealthy, and young users due to its

innovative design.

Thus there is no single market entry strategy that can be applicable in all circumstances. The

decision would depend on various macro- and micro-economic factors, including the industry

and the size of the firm, the local culture and the host country partner capabilities.


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2. Business opportunities are available in plenty in the face of globalization and

multinationals penetrating foreign markets. Service is the essence of marketing today and

companies attempt to maximize this through agents or a network of people. Traditional

marketing has been replaced by different methods of marketing and franchising is one such

innovative marketing technique.

Franchising is a contractual vertical marketing relationship between a franchisor and one or

more franchisees (Grunhagen & Dorsch, 2003). Franchising is a form of business

arrangement that originated in France and means granting of right" or "an exemption"

(Inma, 2005). The franchisor in exchange for a fee provides a proven method of operation,

support and advice in setting up the system and guarantees continued support. The fast

food industry appoints franchisees and McDonald's is a typical example where 70% of their

restaurants worldwide are owned and operated by independent local men and women.

According to resource scarcity theory, franchising helps the company to raise capital and

gain knowledge of local markets while reducing managerial constraint apart from transferring

part of the risk to the franchisee (Inma, 2005). Small firms with managerial constraints use

franchising as a means to gain human capital. Most franchisees are knowledgeable about

the local market conditions and trends. Franchising helps to reduce high employee

monitoring costs substantially.

The motivation to be a franchisee or an agent is that just for a fee the franchisee gains the

expertise and simply manages the outlet featuring the corporate strategy of the franchisor.

The franchisees have to operate under regimented system of contractual agreements

(Clarkin & Peter, 2005). The franchisor has access to capital at lower risk, can share the

costs with the franchisee; rapid market penetration is possible at a comparatively lower cost

than establishing one's own distribution system (Hoffman & Preble, 2003). It thus results in

economies of scale with a motivated workforce and reduced monitoring and control costs.

Service firms use indirect mode of entry when they want to establish a local operation that is

wholly or partly owned by itself (Grnroos, 1999). A consulting firm, through a licensing

agreement, gives a local firm the exclusive rights to use the professional concept of the firm.

These have to be exclusive rights and amounts to franchising. In the hospitality industry, or

the lodging and the restaurant and fast food industry, franchising or licensing is the indirect

mode of entry that is preferred as capital investment is minimum. Expertise is exchanged for

a fee and both the franchisee and the franchisor benefit from the economies of scale. The

local service firms get the right to exclusive use of certain operational mode and the

franchisor benefits from the local knowledge of the franchisee. The franchisee also gets an

opportunity to grow with the new technology, concept or knowledge. While this method is the

least risky, the franchisor normally has very little control over the operations of the franchisee

despite agreements.


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In the field of higher education franchising has helped to broaden the range of courses on

offer, improve the status of college and widen the target market. Franchised courses are

regarded as the icing on the cake in the college because students and staff are so

committed (cited by Goodall, 1994).

Franchisors have to consider the social and cultural factors while appointing a franchisee.

The tastes and habits of the local population have to be taken into account as well as the

price sensitivity of the customers (Hoffman & Preble, 2004). While the Germans are quality

conscious, the Thais want their food hot and spicy. While the Americans prefer quick

service, the French prefer relaxed sit-down meals. Hence the international franchisors need

to familiarize themselves with the local culture and methods of conducting business without

which their businesses can fail. This knowledge is provided by the local agent or the

franchisee. The franchisor also benefits from the local regulations governing franchising

agreements or operational rules, the local taxes and regulations.

In the hotel industry brand extension plays a vital role. Franchising enables the hotel in the

international location to have a recognizable name of repute and attain the right to operate

business that has been tested (Holverson & Revaz, 2006). The franchisors offer

sophisticated information and communication technology (ICT) infrastructure to their

franchisees. They also provide access to new global markets and access to established

large corporate houses. They provide general marketing support, promotional assistance

and marketing research. The franchisees get these for a fee but they save on overall timethey would have otherwise spent in developing their hotel property and the market for the

hotel.

Thus franchising is a common method of entering the market in the services entry as has

been in the case of the fast food segment or the hotel industry or even in the field of higher

education. Both the franchisor and the franchisee gain through the agreement. The

franchisor gains by saving on set up costs and sharing of risks while the franchisee saves on

time and gains an established name on which to start business. The franchisor gets the

benefit of the local knowledge while the franchisee gains technology.

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Industrialization Globalization Expanding