When organisations exhaust their home markets and economic conditions are favourable, they may seek to expand into foreign markets to boost trade and profits.
Outline several models that could be used to expand into another market using real life examples to augment your answer.
The UK is the worlds sixth largest economy and grew by 1.7% in 2017. The UK’s economy has many uncertainties surrounding Brexit negotiating’s. The government has been negotiating terms on the country’s exit. The lack of clarity over the UK’s future of UK and EU trade regulations is likely to hinder consumption and investment. The fall of the pound has increased prices and the inflation rate has surpasses +3% in 2017, first time since 2012. (UK Economic and Political Outline 2018).
According to UK: Economic and Political Outline (2018),
government statistics states that investment is slowing down and businesses would rather wait for details over Brexit negotiations. Although, UK exports benefited from depreciated pound.
It has never been easy for an organisation to expand their business into foreign markets. It is vital for organisations to have a clear mission statement and understand what they are investing in. This will assessment will outline models that businesses will use to expand their organisations into foreign markets, examples will be used to support understanding.
Mode of Market Entry
Global competition and technological development have altered the way organisations conduct business. Pressures for organisations to expand their business has taken a sharp increase. Motivation is the first issue of relevance for firms to enter a foreign market, the decision itself. Organisations will expand into foreign product markets to exploit an advantage that a firm possess, to strengthen an existing one or develop a new one. The other issue of why an organisation will expand into a foreign market is if the mode of entry, this may just to increase profits. (Madhok, 1997).
Joint venture is a type of Foreign Direct investment, (FDI). FDI is when an organisation owns another organisation in a different country. Joint venture is one method an organisation can expand their company into a foreign market.
Joint venture is two organisations pooling together resources to create a new separate organisation. Entering a foreign market though joint venture has many different advantages such as shared costs and shared business knowledge. Joint venture is known as a resource sharing mechanism. Joint ventures are used by organisations for acquire capital for resources the need to operate within a foreign market. (Rudie Harrigan, 1986)
There is two types of JV, equity joint venture or contractual joint venture. Equity JV consists in a new company funded by two of more partnersand contractual JV is a contract regulation the ownership between for foreign and partner. (Bin, 2013).
To gain entry into the Chinese market, joint ventures have been most frequent mode of entry for small and medium-sized organisations. Li, 1999).
Although China has a lot of laws and regulations, organisations want to expand their business to the country, even-though it has very obscure tastes and preferences. The Chinese government expect business owners wanting to expanding into their market to theirs to undertake a joint venture with local businesses.
In August 2017, McDonalds announced plans to open new restaurants in China within the next five years. McDonalds announced the news after plans of joint venture with CITIC Ltd, Capital and Caryle capital. The organisation has full ownership of McDonald’s existing restaurants as well as the additional ones. The McDonald’s partner aim’s to help McDonald’s expand their footprint across China and would like to increase the proportion of its outlets in developing cities from 35% to 45%. (Rastogi, 2017).
Direct imports into a foreign market involves exporting directly to the customer buying the product, rather than using a third party distributor. The organisation is responsible for handling logistics of shipment, market research into the host country and invoicing.
Direct exports avoids all costs of a ‘middleman’ and allows the organisation to have control of sales and interact directly with clients. Avoiding costs of a middleman will allow the organisation to have greater profits. When a business imports directly to the host country, the organisation then develops greater knowledge and understanding of the country, this could lead to further expanding within the host country.
Direct exports comes along with many disadvantages, the organisation is held accountable for whatever happens. A local agent may be able to respond quicker to the client. Direct exports can come along with high costs, technology will need to be invested, staff will need to be trained and support services will need to be put in place. (Delaney, 2018).
The Chinese government wants to limit the cross-border flow of goods, to do this there has been a raise in customs fees and import taxes.
Many businesses may choose exporting as a method of expanding their organisation into a foreign market because it offers the lowest risk and the least market control.
Indirect exporting involves local intermediaries in the host country to facilitate the distribution process. Forms of indirect exporting methods include export trading companies, export merchants, confirming houses and nonconforming purchasing agents.
Direct exporting and indirect exporting share similar characteristics and are both low cost and low risk entry methods. Although they are both low cost methods, direct exporting may carry additional costs such as the set up and operation of representative offices. Direct exporting can offer a risk of low profitability and barriers to developing knowledge about the host country.
Organisations may decide to use the method cooperative exporting, where an organisation enter into an agreement for a foreign organisation to use its distribution network. Organisations may see this is a great way out entering into a foreign market as it will bypass barriers and risks associated with other market entries. Small to medium sized organisations may use this method because of the resource advantages and access to markets it offers. (King, 2015).
Before deciding to expand through e-commerce, an organisation must decide if people in that country will buy your product. Expanding online is a great method for small business owners as it comes with little to no costs. Expanding online gives organisations a taste of where there sales are coming from by assessing trends. Shipping to other countries also comes with taxation and customs costs. Amazon is a great way for small businesses to expand there market. When deciding to sell with Amazon organisations directly partner with Amazon and accept its shipping rates to transport goods to consumers in hundreds of different countries. Shannon Roddy, Amazon specialist with Marketplace seller, states that organisations can choose how much product they want to send into Amazon warehouses. To ship internationally, Amazon partner up with a third party company to get accurate product descriptions, establish regulations and currency conversions. Depending on the level of service provided, a small fee may be charged. (D’Angelo, 2018).
According to (Dalney, 2018),
online sales of imported goodshave grown by 63% in 5 years to 2015, reaching 638 billion Yuan ($98 billion) and is accounting for 17% of China’s online total sales.
Ben Grist, a 22 product design student on placement year started selling personalised gifts from wall stickers to canvas prints on a plat-form similar to Amazon, ‘Not On the High Street’. The student now employees 14 staff and has clocked up sales of more than £1 million. (Bearne, 2015).
Many organisations may also want to expand their business using social media platforms such as Facebook and Twitter. There are 2.307 billion active social media users worldwide, this is almost one third of the worlds population. Using a social media platform compared to websites allows users to follow and share content the business may share. Social media is a great way for any organisation to target their audience, where they are already spending most of their time. Social media allows organisations to engage with their audience by commenting and liking, this then creates an element of trust. (Curiel, 2016).
Franchising is known as a licensing agreement between the franchisor and the franchisee, the former grants permission for the use of the trademark ideas in lieu of some other consideration by the franchisee. This is a format organisations use to expand their business into foreign markets. Franchising offers advantages such as having managers motived to making their individual stores succeed. Franchising allows the owner to have local knowledge, these people can be local members of the community. Franchising is one of the preferred strategies of expanding globally as it provides flexibility. (Baena, 2012).
Organisations wishing to expand internationally, may want to sign a master franchising agreement. This mode of entry refers to the agreement between the franchisor and an independently owned sub-franchisor (master franchisee) to develop a specific number of franchises for the right to use the business format for a certain period of time within a region. The Sub-franchisees open all units by themselves. A huge advantage of master franchising is that the local partner will have understanding of the political and bureaucratic problems. This also gives the organisation a step in the right direction with cultural differences and help develop markets through advertising. (Baena, 2012).
Subway, the world’s largest sandwich shop started franchising in 1974 and today is the largest restaurant chain of 44,892, operated by franchisees. The first Subway started in Saket, New Delhi in 2001 by an Indian franchise and has 590 plus franchise operated restaurants across 70 Indian cities. The partners made the Subway Brand accessible to the culture. Over the years Subway has seen a change in the consumer behaviour and regulatory requirements, which the local partner was able to deal with. (Sabharwal, 2017).
Compared to Subway, a failed franchise is Blockbuster. Blockbuster went bankrupt in 2010. Netfleix is now $28 billion dollar more than ten times than what Blockbuster was worth. Blockbuster went bankrupt because it wasn’t staying up-to-date with technology while Netfleix took over the world. As the internet and social media took over, Blockbuster’s revenue was made up on charging customer late fees on the return of their product while Netfleix charge customer subscriptions each month allowing customers to watch whatever they want whenever on multiple devices using an internet connection.
Greenfield investment is when an organisation sets up a plant in a host country to produce goods locally whereas acquisition of a local firm and its production capacity. According to International Review of Economics and Finance, states that greenfield investment is a viable option to many organisations if the investment is large. Although greenfield investment is great way of expanding into foreign markets it can be less profitable than exporting. (Raff et al Ryan et al Stahler, 2006).
Establishing a new plant in a host country may be preferred to an existing plants through takeovers and mergers, this is because it gives greater flexibility in choosing location. A new plant gives organisations the chance to build it according to size of operations and to install modern manufacturing processes, businesses may opt for this because an existing plant may come with various problems such as removal or labour practices and reorganization. (Davies, 2005).
A huge advantage to an organisation gaining entry into a foreign market through greenfield investment is the organisation has total control over products and services sold. The organisation has control over what quality the product/service is, rates of production and what rate the organisation cane expand their presence in the country. Greenfield investments enable easier and effective adaption into the market. (Davies, 2005).
A huge disadvantage to investing in the greenfield system is that it can soon become ‘brownfield’ within months. The speed that technology is growing is huge. Brownfield investment is an organisation or investor investing in an existing plant. Brownfield is mainly made up through merger and acquisitions. It can take a while for any organisation to settle into a new country, the greenfield system could make it difficult to retain capacity levels. (Lovino, 2017).
The Italian company CORMO opened its operation of production for furniture in Bjelvar through greenfield investment. In 2009 the company opened another production hall and went from 33 employees to 50 in Bjelvar. In 2008 the organisation has a total of 400 employees and 188 partners. Greenfield investment was a success for CORMO. (CORMO, 2009).
As Brexit remains uncertain for businesses operating in the UK, with thousands of jobs under threat alongside question marks over tariffs and investment. The Independent states that interest rates would likely rise before 2020. The UK is now among the worst performing economy, having been the best performing prior to the referendum. So how can Brexit affect businesses? Businesses in the UK may get raw materials from a foreign country. Since free trade between the UK and the EU will no longer exists, the costs of your supplies will rise. This will effect a businesses supply chain. Organisations may gain entry into a foreign market as costs may be cheaper. After Brexit, higher trade costs and tariffs would likely decrease investments in the UK. (Anon, 2018).
In this assessment, it was stated how organisations entered foreign markets using different strategies. This assessment used real life organisations to back up information to provide evidence. Joint venture and direct exports were discussed, outlining advantages and disadvantages. Online presence was outlined and the use of social media, alongside franchising. This assessment discussed greenfield investment and how it was a viable option for organisations to expand into a foreign market. Brexit was outlined and to what affect it would have on businesses operating in the UK.
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