Critique of the Various Methods of Market Entry

Subject: Business Critique
Pages: 3
Words: 601
Reading time:
3 min

A retail firm wishing to expand its activities into the international markets is faced with numerous options for market entry. These options include international mergers and acquisitions, organic growth, franchising, joint ventures, in-store concessions among others. Franchising, a market entry mode often adopted by firms in the food industry such as McDonald’s and Coca Cola, involves a special mode of licensing where the franchisor licenses a business system and other property rights to an independent foreign company. The franchisee operates the business under the franchisor’s name and in return he pays to the franchisor a specific amount of fee, running royalties, and other forms of monetary compensation for using the franchisor’s brand name.

Since the franchisor provides the business system, technologies, and infrastructure to the franchisee, the policies in the franchisor company however faulty they may be, dominate and regulate business operations across the franchisees. This kills the innovative spirit of the franchisees who are expected to strictly comply with the policies of the franchisor company rather than developing new ideas which may boost the profitability of the company. The franchisor is also expected to provide certain guarantees and minimum rent generations to satisfy the franchisee, failure to which may result in low performance and lack of cooperation from the franchisee. Further, the fact that successful franchising depends on the relationship between the franchisor and franchisee and the subsequent behavior of the franchisee renders the overall market entry mode highly vulnerable to changes that may arise in the initial agreement, power, and external factors among other issues.

A firm may engage in collaborative ventures such as equity joint ventures, project-based nonequity ventures, consortium, and cross-licensing agreements. A joint venture is an equity-based form of market entry where two or more companies seek to establish a legally independent company to enjoy economies of scale. Joint ventures are popular among companies that intend to expand their market share beyond national boundaries. The entry model is heavily dependent on the social and financial compatibility of the foreign partner with the local firm. This requires local companies to establish joint ventures with foreign firms that possess complementary strengths and weaknesses profile failure which may result in business failure.

Joint ventures are effective in establishing long term relationships with partners in foreign target countries. However, such business associations are often subjected to numerous legal restrictions by the host country’s government which substantially increases operational costs and limits the potential market share. Joint ventures further provide an opportunity for local firms to venture into markets with different economic systems and market environments. The entry mode provides opportunities for local firms to actively participate in the foreign markets. However, government regulation and policies coupled with other political risks may significantly limit the company’s performance in the foreign country.

As earlier discussed, there exists a wide range of market entry modes available for retail firms seeking to internationalize their operations. The choice of entry depends on a wide range of factors such as the degree of competition in the host market, availability of organizational resources for organic growth in the target country, potentials for appropriate value addition, risks, and costs associated with the market entry mode among others. In their theory about internalization, Johanson and Vahlne suggested various stages of foreign market entry. A firm that lacks any experience regarding international business will prefer a low-risk investment mode such as licensing or exporting. Firms with a wide range of experience in international business have reduced perceived risk hence will tend to prefer market entry modes such as joint ventures or foreign subsidiaries which requires major investment and usage of equity in foreign markets.