Market Entry Strategies Sam C. Okoroafo – Modes of Entering Foreign Markets Okoroafo produced an article detailing a four step strategic model that firms should take into account when deciding modes of entering foreign markets. The model consists of four steps: 1. Determine the feasible modes of operation (MOO) There are many modes of operation suggested by many different researchers; however, “Some countries may prohibit use of some MOOs for reasons related to achieving their economic objectives”.
This is supported by the suggestion of barriers to entry or threat of new entrants outlined in Porter’s Five Forces model. This is a factor that should be seriously considered by any firm producing alcoholic beverages as there are more likely to be legislation against the trade of such products. However, Australia has a bilateral agreement with the EU which suggests that importing wine into the Australian market should not be hindered by any laws or legislation such as tax or refusing entry into the market. 2. Arrange modes of operation in a continuum
The identified modes of operation “need to be arranged in a continuum of increasing risk and commitment” Okoroafo suggests that the firm needs to start with the mode of entry that is the least risky and requires the last commitment. 3. Choose a mode of operation substitution pattern There are two substitution patterns outlined in Okoroafo’s model the incremental approach or the non incremental approach. The incremental approach “can be used in markets where environmental factors and host government laws are favourable”. This would be the case for the European firm.
The non-incremental approach is “when the firm analyses environmental factors and it may see imposition of mandated countertrade as prohibiting it from exporting to that market”. If this was the case the firm would have to use firm specific factors to decide their mode of entry. 4. Choose a mode of entry Okoroafo suggested that “it is necessary to distinguish two types of variables” variables which are used to evaluate substitution of all modes “universal entry factors” or factors which influence specific entry modes, for example “Export-specific factors” and “licensing-specific factors”.
As the European firm wants to import wine it is likely that they will need to consider licensing specific factors in great detail. Methods of Entry Exporting Exporting could be considered as one of the easiest method of entering the market. The advantages to the firm of only exporting their products is that it has relatively low financial risk and low set up costs, however it should be considered as to whether the product would be cheaper to manufacture and distribute abroad due to the high costs of shipping such a heavy product as bottles of wine over to Australia from Europe.
It is likely that the company will want to use a local agent to sell their product as they will have local knowledge of the market and business contacts in Australia. However this could be disadvantageous to the European firm because it is a possibility that they could lose their brand recognition and authenticity that comes with European wine. Licensing, franchising and subcontracting
Advantages of licensing, franchising and subcontracting are that that it is also relatively low cost, similarly to exporting. There is also more control over the operation and distribution of the product, the firm can decide where and how their product is going to be retailed. In franchises, the franchisee also shares the risk of failure with the original firm, and they have a direct interest into the success of the brand. This is also coupled with their local knowledge and drive to expand their business.
However, licensing and franchising would mean that the European firm has less contact with their consumers than they would have if they were only exporting the products, this also means that they lose direct control of operations, such as quality control and standards. Although franchises means that the risk is shared, it also means that the profits are shared so the European firm would not see as much return on their product sales as they would have hoped. However, this method of market entry may be considered as the European firm will be new to the Australian market and will need some help in establishing their products and brand.
Joint ventures When setting up joint ventures and alliances, there is a detailed formal agreement which outlines who is involved in the business, who owns the assets, the management and control of the business, and termination of the venture. This means that there is shared risk, shared knowledge and expertise and ultimately a competitive advantage if two firms are in partnership with each other. However this might mean that the competition is reduced and therefore Porter’s National Diamond framework that suggests that rivalry and competition strengthens a business’ national advantage is weaker.
Strategic Alliances, mergers and Acquisitions A strategic alliance is defined in International business 5th edition (Rugman and Collinson) as “a business relationship in which two or more companies work together to achieve a collective advantage” The benefits of developing a strategic alliance for the European firm would be that they would be able to acquire knowledge of new markets and technology, develop closer links with their suppliers and customers and to reduce the pressure of competing with large competitors who are already established in the Australian market.
If the European firm was to consider a strategic alliance it is assumed that it would be with another Australian firm, however, they could identify another European firm who has been successful in the Australian market. Both of these options would have their advantages and disadvantages, if the European firm teamed up with another European firm then they would be able to combine their authenticity of European wine and use that as a unique selling point to the Australians.
However, if the European firm was to team up with an Australian firm they would be able to learn more about the Australian culture and market demands. Strategic Alliances have been criticised by a number of researchers who suggest that most alliances tend to fail or disintegrate over time; Ellis, (1996) noted that 60% of all alliances eventually fail. This is supported by research from Segil (1998), “the rate of alliance success is diminishing. Whereas KPMG (1999) suggested that up to “83% of mergers and acquisitions were unsuccessful in producing business benefit for shareholders.
These statistics need to be carefully considered before deciding whether or not to develop a strategic alliance with another firm. A merger is defined as “two organisations who agree to join together and pool their assets in a new business entity”. Whereas an acquisition is defined as the “joining of two unequal partners” Porter’s Acquisition Strategy (1987) suggests three factors that should be considered before embarking on an acquisition. The attractiveness, where ideally firms should have above average profits in their industry or industry segment.
This would make the European firm attractive for an acquisition as they are a global business offering their products around the world; therefore it is assumed that they are reasonably successful in their home country already. The cost of entry is another factor that Porter said firms should take into account before embarking on an acquisition. This includes the direct costs and indirect costs such as management time and integration costs. This is likely to be more costly for the European firm as they will inevitably have to relocate part, if not the entirety of their business into another country.
The third factor that should be taken into consideration is the competitive advantage. This takes into account synergy, where the resources are more effectively exploited by the merged businesses. Although there is significant evidence to suggest that partnerships with other firms such as strategic alliances, mergers and acquisitions are likely to fail there are ways to increase the chance of success, as adapted from Payne (1987), Shelton (1988) and Sirower (1997).
These measures include, evaluating the target firm’s competitive position, their culture for compatibility, ensure key resources can be retained after the merger, ensure a realistic price is paid for the target’s stock and plan the post merger process carefully. These measures are to ensure that if a merger does not succeed, the firm is still likely to be successful within the market, regardless of whether they are partnered with another firm. Issues in Cross Border Mergers
Issues that have to be taken into consideration before a firm from a different region or country merges with another firm are, the role of the government, advisors and their costs, national culture and business ethics, geography, strategic shareholdings, experience and global corporations. Barriers to Entry Levy Payments “Federal legislation requires the payment of levies by wine producers and exporters to help fund the activities of the Australian Wine and Brandy Corporation and the Grape and Wine Research and Development Corporation. Trade agreements “The Agreement between Australia and the European Community on Trade in Wine signed in Brussels on 1 December 2008 is a formal international agreement that regulates the trade in wine between Australia and the European Community. ” “The ultimate multi-lateral agreement is that involving all 148 members of the WTO. This organisation has been very effective in reducing tariff barriers around the world and also has developed a range of agreements relating to intellectual property, technical barriers to trade and quarantine restrictions. Foreign investment review agencies Australia has a foreign investment review agency that reviews applications for foreign direct investment and approves or disapproves the projects according to whether they benefit the local economy. This can be assessed by considering factors such as local employment, local sourcing of components, transfer of technology and the degree of local ownership (International Business 5th edition)