A defining objective for international businesses is to expand into new markets. Crossing the geographical boundaries of a country to expand their base into new market segments across oceans or borders. This expansion can take many forms, such as expanding products, services, capital investment or exchange, labour, technology, and IP such as patents, trademarks, and copyrights.
Entering a new country or market comes with its own set of pros and cons and a risk of failure. Deciding on a strategy and mode of entry is critical for the success of business expansion. However, before deciding on a mode of entry, businesses must put on paper their strategic goals and broad plans for a successful entry strategy.
Entry strategy includes two broad categories:
1. Strategic Alliances
A partnership between two brands, one domestic and one international with a defined scope of work and commercials.
For instance, when a business in India partners with a firm in France to expand its operation in France. This lowers the risks as both partners are invested in making the new initiative a success.
2. Standalone entry
This is when a business decides to go all in with its capital investments in a foreign market.
What are the entry modes in international business?
There are many modes of entry available to businesses that can be categorized into the following three:
1. Export mode
It means entering a new market through export mode which includes:
i. indirect and direct exporting
ii. direct agent/ distribution
iii. direct brand subsidiary and others.
2. Contractual entry mode
This mode falls under the strategic alliance strategy. It includes working with one or more of the following:
i. licensing,
ii. franchising,
iii. technical agreements,
iv. service contracts and/or management contracts
v. construction/ turnkey contracts
vi. co-production contracts and others.
3. Investment entry mode
Investment entry mode strategy may be standalone or form a strategic alliance, depending on the route an organization takes by entering a:
i. sole venture
ii. merger and acquisition (M&A), or
iii. joint venture
Common modes of global expansion currently in practice
There is no one defined path for international expansion. An organization may choose one and shift to another mode later. For instance, many organizations start with an exporting business setup, diversifying further with licensing. Furthering their journey with an investment entry mode. Here are a few common modes of expansion into international markets:
1. Export and Import
This is a common, established, and traditional method of international expansion.
Exporting refers to the sale of goods/services to an organization in a foreign country while the purchase of foreign goods for sale in the domestic market is known as importing. There are two relevant ways to export and import:
i. Direct import/export refers to when an organization handles all necessary paperwork for shipping and financing. And deal directly with foreign suppliers and purchasers.
ii. Indirect import/export refers to when an organization uses a middleman to manage and handle the paperwork and negotiations.
Advantages:
– Since it is not required to set up any production units in a foreign country, there is low investment.
– The degree of risk compared to other modes of entry is low.
– Offers a quick entry into new markets.
2. Licensing and franchising
Another two very common forms of business expansion in global markets are licensing and franchising.
Licensing is when an organization grants a license to another organization from a different country to use its intellectual property like brand name, patent, trademark, technology, copyright, etc. For instance, Pepsi is produced and distributed globally by local bottlers under the licensing system model.
Franchising is a contractual agreement wherein one parent organization grants rights to another firm to establish the same business set up at a different location internationally. For instance, McDonald’s and KFC are known to follow the franchising model to expand their global operations.
Advantages:
– Allows fast entry into international markets
– Low risk compared to other modes in a standalone entry strategy
– The cost of entry is low as compared to a standalone or solo venture.
3. Alliances and Partnerships
Alliances and partnerships are mutually expansive in nature with a defined scope of work. They are contractual agreements between a domestic and an international organization that allows both businesses to achieve their goals.
This mode of entry is ideal and more compatible when the local partner from an international market is a reputable name in its country. For instance, Cisco formed a strategic alliance with Fujitsu when it ventured to enter the Japanese market to develop routers. Cisco co-branded its entry into the Japanese market with Fujitsu’s trusted name in IT equipment and solutions.
This entry mode is also popular when legal policy regulation makes it a mandate. For instance, In India, previously non-Indian organizations seeking to do business in India required foreign firms to partner with a local firm. Today foreign expansion in India is possible via Joint ventures, wholly owned subsidiaries, etc.
Advantages:
– It’s highly advantageous for small and mid-size firms to enter new markets without heavy investments.
– A local partner often aids in bridging the differences in culture, market, practices, law, regulations, etc, in a foreign land.
– Ease of access to market information in new markets.
– Shared risk, costs, and investment.
4. Mergers and Acquisitions (M&A)
Another common mode of entry is M&A. It means a legal transaction and contractual agreement where one firm gains control of another by way of purchasing its stock or paying a purchase price in the case of private entities. The acquisition may also be of a certain IP, product diversification, management, etc.
M&A works well when an organization is seeking to scale its operations in international markets. It offers an established name in the market with set supply chains, distribution channels, and marketing efforts. Entry into a foreign market becomes easy and quick.
Advantages:
– They give quick and established access to a brand in new markets
– Low risk with the acquisition of an established enterprise.
– Ease of access to various resources, market information, supply chain, etc.
5. Greenfield ventures
A greenfield venture allows a business to open a wholly owned subsidiary in a foreign market. This is a slower entry mode for international expansion with high risk and high return. The slow timeframe is due to many stages that include investment and setting up of manufacturing plants, land acquisitions, licenses and permits from local authorities, construction or site development phase, training, and market entry.
They are called Greenfield ventures for they require new construction across manufacturing, operating, and management infrastructure. Automobile, pharmaceutical, and communication brands often use this mode of entry in new international markets.
Advantages-
– It offers brands direct ownership of their operations with a high degree of control.
– Works best as a long-term international expansion strategy
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