After a company decides that it wants to go global, it must choose between three entry options: exporting, joint venture, or direct investment. Below is a figure that shows the three options and the choices within them:
As you can see in the diagram, the amount of risk, control, commitment, and profit potential also increases. As the entry options move from left to right, they become more difficult and risky for the companies.
As the first entry option, exporting is the simplest way for a company to enter a foreign market because it requires the least amount of change from the company. Exporting is the process of making a good in a company’s home country and then selling the products in foreign markets. Companies can then decide whether or not it is necessary to alter the products according to which markets they will be entering. Exporting can be done either indirectly or directly. The indirect form of exporting is handled through intermediaries, rather than direct exporting, which is handled by the company itself. The return on investment is greater for direct exporting but so is the level of risk for the company. The most relatable example of exporting for the residents of the United States is the excess of goods that we see with the “Made in China’ label on the bottom. All of the products with those stickers are made in China and exported to the United States, either indirectly or directly, depending on the product.
Lessening the simplicity but increasing the possible return, companies can enter into foreign markets through joint ventures. Joint venturing is the act of “entering foreign markets by joining with foreign companies to produce or market a product or service” (Kotler & Armstrong, 2012). As opposed to exporting, joint venturing requires that a company have a direct connection in the foreign market that it is entering into. The four types of joint venturing are licensing, contract manufacturing, management contracting, and joint ownership.
This form of joint venture requires that company enter into a foreign market with an agreement to license. Licensing comes with fees and royalty payments that pay for manufacturing processes, trademarks, patents, trade secrets, or any value associated with the items that the company produces. With this license, the company potentially looses control over the operations, creates a competitor, or gives up a portion of its profits.
Contract manufacturing is an option of joint venturing that requires that company forms a formal agreement with the company in a foreign market that will produce its good or service. This option gives the company less control over the actual manufacturing process of its goods or services, but also allows the company to begin the process of entering a market in a much faster manner.
Similar to exporting, management contracting is a form of joint venturing that allows a company to enter a foreign market by implementing its management services, as opposed to products. Hotel companies that wish to enter a foreign market often employ this style of joint venturing. Management contracting is less costly for the company entering the foreign market and still allows it to implement the necessary of control in the operating locations in the foreign markets.
Finally, the last way for a company to enter into a foreign market using a joint venture strategy is through a joint ownership agreement. In this strategy, two companies from two different countries join forces to start a new local business. As with any partnership, a joint ownership venture comes with problems when the two parties disagree. This tactic is useful and often utilized when political restrictions are involved or companies are lacking the necessary funds or resources.
The final way in which a company can enter a foreign market is through a direct investment. With the highest level of risk and control, direct investment is the process of a company creating its own facilities for manufacturing and/or assembly in a foreign country. Direct investment often holds many advantages if a company is highly profitable before entering the foreign market and can afford the high expenses. This method is often used as a tool to form better relationships and connections with the host country while operating with much lower costs. The risks associated with this method are government changes, differences in currency rates, and unstable foreign markets. I find that the most relatable example of this method can be drawn back to the investments that automobile companies make in other countries, like India, Asia, and North America. The Asian automobile brands Honda and Toyota have made large direct investments in North America, which has dramatically cut down on expenses and increased sales (565).
COMPANIES IN FOREIGN MARKETS
As a surprise to me, the presence of my favorite companies presence in foreign markets recently became apparent to me. I currently have a friend who is studying abroad in Nürtigen, Germany. As an extremely loyal Starbucks Coffee customer, my first question upon his arrival in the foreign country was “Is there a Starbucks there?” Surprisingly, there is! In correlation, one of the groups in my marketing class presented an entire topic on the possibility that Starbucks has in entering the Argentinian market. The team implemented a direct investment strategy and opened Starbucks locations directly in the foreign county. Additionally, the company was required to alter their products and prices based on the new market it was entering into, but its communications did not change due to the strong brand name that Starbucks has. This strategy is known as product adaptation.
In terms of the price, Starbucks would be required to convert its prices to accommodate the foreign market. Additionally, in order to remain a competitor with the already preexisting coffee retailers, Starbucks would need to decrease its prices dramatically. Starbucks would still gain a profit from its product but the initial margin would be much less than it is in the United States to accommodate the norms in the foreign country.
Finally, the group had to determine the proper distribution channels for its foreign market entry. As a coffee retailer that relies heavily on its in-store atmosphere, Starbucks Coffee would emphasize the step of having distribution channels with the foreign nation it enters into. The link of having distribution channels within nations allows the company to move with products directly from its entry points to the final consumers. The full delivery network for global markets is summarized in the graphic below:
Another example of a company that succeeds in and adapts to foreign markets is McDonald’s. A presentation from additional classmates on McDonald’s presence in foreign markets is attached in the References and Evidence tab above.