As marketers, we talk about making decisions about an organization’s entry mode. However, before we start, let us list the learning goals for this article. Firstly, the goal is to understand what an entry mode decision is and how it’s connected to the rest of the internationalization process.
Secondly, why this decision is important and subsequently how we can go about making an informed choice by looking at some of the factors that influence our decision. We will also provide an overview of the different entry modes available for us to choose between. So let us begin so how is the entry mode decision connected to the rest of the internationalization process when an organization goes from marketing their products and services only on the home market to also target one or several foreign markets in different countries or regions? We talk about an organization’s internationalization process.
The internationalization process starts with a choice of which foreign markets to target. We call this the market selection process. Ultimately, we will define our marketing mix the four of the 7ps for the foreign market. The marketing mix we use on the foreign markets may vary to the one we use on the home market. We would address issues regarding standardization, and/or adaptation of the marketing mix.
However, before deciding on the marketing mix, we need to address how to organize our entry to the foreign market. We discuss, which entry mode to use and many factors will influence our decision. Choice of entry mode is what we will address in this article. So why is choice of entry mode important and how can we go about making the right choice? Let us use an example. This French business, located just outside of Paris, produces French cakes and desserts in these modern production facilities, well-educated confectioner’s, develop recipes and create delicious cakes and desserts ready to be sold and distributed to cake, loving customers.
The cakes and desserts are frozen immediately after production and are then distributed to a variety of catering companies, restaurants and cafes, around France. So what might impact French cakes choice of entry mode to a foreign market? French cakes internal situation will have an impact. Some external factors about the particular country, region and market of choice will influence that decision.
Some conditions related to possible outsourcing of activities are dressed in transaction, specific factors and, finally, French cake preferences for the different characteristics of the various entry modes will also affect their choice. As we will address these four sets of factors for French cakes, we will use this visual to indicate in which direction the different factors appointing us. Some factors might indicate and move towards internalization, in other words, that using a hierarchical mode is appropriate.
Other factors might indicate that a move towards externalization using an export mode is more suitable and some may indicate a more moderate approach and thereby point in the direction of an intermediate mode. So let us apply this visual to our example with French cakes. As we address the four sets of factors. French cakes have set their eyes on the UK and their initial idea is to enter the country by setting up a sales and production subsidiary in the UK.
The characteristics of hierarchical modes are high, set up costs, a production site and sales force carry a large investment high-risk, as there is no guarantee that the initial large investment will pay off and low level of flexibility, as the large investment will make it difficult to quickly Pull the plug on the UK adventure should business not prove to be as successful as hoped, a high level of control, as French cakes would hold on to complete ownership of all value chain activities being in the position to make all decisions about target groups, distribution, blogs And so forth, let us address the first set of factors: the internal factors.
Let us use this visual as we evaluate French cakes, internal factors, and let us see if this will indicate a move towards internalization, as French cakes are considering. French cakes is a small company, their resource availability is low and therefore a large investment would be risky. They have no international experience, making use of an external partners, expertise might prove advantageous. The cakes and desserts are not technically complex and, although their cakes and desserts are good, French cakes doesn’t carry a large product.
Differentiation advantage in terms of, for example, brand image. An evaluation of French cakes. Internal factors has revealed an indication towards externalization and not towards internalization. As French cakes initially suggested, French cakes also has another suggestion meet mr. Thompson. Mr. Thompson is a uk-based agent. He would be happy to represent French cakes and sell their products to appropriate intermediaries around the UK.
Using mr. Thompson would be using a direct export mode. The characteristics of export modes are low costs, as French cakes would not need to setup any facilities, start production or hire staff low risk, as the investment is low. French cakes will not be taken a great risk with this setup, a high level of flexibility. As the ties to the UK market will be limited, it would be fairly easy to pull the plug on the UK adventure.
Should business not prove to be as successful as hoped, but also a low level of control? French cakes will have little control of how mr. Thompson markets and sells their cakes and desserts. Will he choose appropriate sales blogs? Might he favour possible competitors due to a more advantageous Commission rate, and will he miss opportunities that French cakes would have been able to take advantage of if they had had their own sales staff in the UK? Let us address the second set of factors: the external factors.
These are factors that address the foreign market of interest, in our case the UK market for cakes and desserts. Let us use the same visual as before, as we evaluate the UK market for French cakes and see if they indicate a move towards French cakes. Second suggestion of using an agent, although the UK is geographically close to France, research will tell us that the socio-cultural distance is considerable.
This would indicate that having a partner with local knowledge could prove to bridge this gap. French cakes have researched the UK market and concluded that the market is of a decent size and that it is growing at a moderate pace. Currently there are no trade barriers standing in the way of exporting boots to the UK. French cakes have discovered that the competition is intense. This would add to the level of risk should they wish to use a hierarchical mode.
Therefore, this indicates a move towards externalization. Research has also shown that there are large number of relevant intermedia is available. Mr. Thompson is just one of many options in this field. Although the market has experienced growth, brexit is believed to call some general instability and uncertainty in the market, so an evaluation of the external factors has also revealed an indication towards externalization.
This supports French cakes. Second, suggestion of using an agent French cakes are still considering both options: 1a sales and production, subsidiary and and agent. The decision isn’t made until a thorough investigation of all four sets of factors have been carried out. Some factors might prove to be a showstopper, making other factors less important when making the final decision. So let us move on to the third set of factors.
The transaction specific factors these address to what extent outsourcing ie using an independent partner to carry out certain functions, is advantageous and safe. Let us use the same visual as before as we evaluate and see if they indicate and move towards French cakes, first or second suggestion. The know-how and product benefits connected with the cakes and desserts are not considered difficult to transfer and explain to an independent partner French cakes consider it unlikely that an independent partner will show opportunistic behavior marketing and selling their cakes and dessert will not reveal secret recipes.
So an evaluation of the transaction specific factors has also revealed an indication towards externalization. Let us move on to the fourth and final set of factors: the desired mode characteristics. We will evaluate French cakes wishes in terms of the main characteristics of the different types of entry modes – French, cakes of express that they can’t afford to be too risky. They have no desire to be in complete control of the operation.
They see the UK adventure more as a first and trial-and-error step in their internationalization process. Therefore, they are also very keen on a high level of so that they are able to pull the plug on their UK adventure. Should business not prove to be as successful as hoped? An evaluation of these and the other three sets of factors indicate a move towards externalization, which support French cakes second option of using a UK agent, a direct export mode.
Now we have evaluated four sets of factors that will influence French cakes decision of entry mode. We have addressed the internal factors, the external factors regarding the UK market, the factors evaluating outsourcing suitability and which mode characteristics, French, cakes desire, conducting a systematic evaluation of all four sets of factors has enabled us to recommend a suitable entry mode for French cakes.
We have now established what an int remote decision is and why we need to know about it. We have also gained knowledge of how to evaluate four sets of factors which will help us decide on a suitable entry mode and we have established the connection to the rest of the internationalisation process. So, let’s move on organizations might choose one or a combination of different intermode during their internationalization process to one or several foreign markets.
The different entry modes will not be discussed in detail in this article, but let us just provide an overview. Export modes include direct export, cooperative export and indirect export. Direct export is the mode we recommended for French cakes in the example used in this article. Intermediate entry modes include joint venture strategic alliance, franchising licensing, contract manufacturing and management contracting and finally, with the highest level of internalization, the hierarchical nodes, transnational organization, region, centers, sales and production, subsidiaries, resident sales representative or subsidiary, and domestic based sales, representative sales and production subsidiary is The mode initially considered by French cakes in our example.
In summary, we have now obtained an understanding of the what why and how event remote decision, and finally, we have provided an overview of the different types of entry modes. Do you want to learn more about entry mode decision-making, market entry strategies and each of the different entry modes, the internationalization process and global marketing? In general, I recommend that you read global marketing 7th edition by 7th Rawlinson.
My name is Tina Wade. Thank you for reading
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