Table of Contents
- Executive Summary
- Methods for International market Entry
- Price for an Essay
- Joint Venture
- Foreign Direct Investment
- Experience in multinational business
- Growth of the industry in the target country
- Global industry concentration and competition
- Social, political, and economic risk in the host country
- Contractual risk
- Size of the venture
- Related Free Economics Essays
International market entry is an important exercise to any extending firm. It is usually faced by many challenges due to the differences between the environment that the business is located and the new market that the business decides to venture. There are many methods of entry that include exporting, franchise, licensing, Financial Direct Investment and joint ventures. All these methods have their advantages and disadvantages that are influenced by both the economic state of the firm and the state of the new market. In the case of Tata, most of these methods are favourable, but their usage are limited by the status of the United Kingdom market. The best method for market entry was exporting, as influenced by the market in the UK.
Market entry methods are among the main factors that the firm needs to examine before making the decision to expand the operations (Krishnarao & Mashelkar 2010). This makes it even more important when the firm is planning to enter into a foreign market. The aim of any business venture is to ensure there is minimum risk and it breaks even within the shortest period as possible since its entry, while making maximum returns on investments. These three factors are heavily influenced by the methods that the firm employs while entering the market. It is therefore paramount that the firm determines the best market entry method since each of the methods has its pros and cons. The best method should be picked and examined in relation with the prevailing environment of the new market. There are many methods that the firm can use to enter into a new market (Krishnarao & Mashelkar 2010).
Methods for International market Entry
This refers to the situation where the firm sells its products into another country (Lilly & Walters 1997). There are direct and indirect exports, where direct exports involve the mother company sell its products to the customers in a foreign country. Indirect exports refer to the situation where the mother company uses sales representatives or importing distributors to run the market in the host country (Lilly & Walters 1997). The representatives or distributors are recruited by the mother company and ensure that they carry out the advertising processes in their home country, make the necessary legal arrangements, and so on (Lilly & Walters 1997).
This method gives the entrant a very quick entry into the market. It also ensures that the resources are centrally located and concentrated for more intense production. Further, there are fewer expenses by the main company since the importer, located in the host country, caters for most of these costs. This eventually translates to lower risks in the foreign market. At the same time, management decisions are not affected by the new entry and the company does not deal with any of the export processes.
The main disadvantage is that there is no control over the sales and distribution channels. This leaves the mother company with little knowledge on the dynamics of the foreign market. Indirect market may lead to loss of a potential market, if the strategies applied in the beginning are not friendly to the customer.
Exporting is best used when the sales potential in the host country is low and there is little adaptation of the new product in the host country. It is also used when the host country has high production costs and when there are liberal import policies. It is also favourable in countries where there are high political risks. The UK environment would be favourable for this method, because there is high competition for vehicles from other companies. However, Tata should take advantage of their good relationship and language closeness with Britain to ensure that they quickly get established in the market (Datamonitor 2006b).
In this form of market entry, a host country allows a foreign company to operate within its borders (Windecker 2005). The agreement to trade in the country is made through the issuance of a license, where it is usually agreed that the mother company issues a license to another company in the targeted market. The licensee is allowed to use some of the rights of the mother company, such as trademarks, patents, technology, among others. The licensee usually gets money through the payment of royalties by the licensee, which is, in most cases, a certain percentage of the sales (Windecker 2005). There are also technical fees and lump sum payments, usually paid during the issuing of the license. The government of the host country is usually involved during the process in overseeing the channels of knowledge and intellectual property transfer. The government also regulates the market to ensure that the company does not bring unhealthy competition within its borders (Windecker 2005).
This method is usually used when there are barriers to import and invest in a certain country and when there is a good legal protection of intellectual property in the new market. It is also used when there is low sales potential, as well as when there is a huge cultural distance that the mother company needs to bridge in order to reach customers in the new market (Windecker 2005). Further, investors use this method when the licensee does not pose a threat of becoming a future competitor in the market.
This method enables the company to reach out to markets that are marred with entry difficulties. It also leaves the mother country with extra income when they would not have sold any of their products, but just through sharing of their knowledge. There is also a rapid expansion, where very little is invested and the company is not faced with any risks. At the same time, the company leaves room for future venture when the conditions, either internal or external, become favourable, especially in areas where trade restrictions could be strong. The products are also locally owned, because the company appears as a local firm, thus there is little political risk from the host government.
The method of market entry assumes a very low income because no goods are sold. Further, the quality of the product may deteriorate, since the licensee manufactures goods on their own and the mother company does not have any control over these goods. This could further lead to worsening reputation of the mother company and hinder entry to potential markets. Another big disadvantage is that when the licensee is very competent and has a good capital base, he can become future competitor in potential markets, or in markets where the main company has already ventured into.
Within the UK market, this method would not be ideal. This is because the industrial power for the Indian manufacturers and that of the UK manufacturers may differ, making the UK manufacturer a competitor in future. At the same time, the growth of a new industry within the European Union may see many difficulties due to the existing companies, such as Mercedes and BMW, among others (Datamonitor 2006b). Selling the knowledge in these EU countries may not be a very wise decision.
This refers to a setup where business owners in a new country market pay royalties and fees to the parent company, as they get identified through its trademark and all the business patterns of the mother company (Reynolds 2003). Unlike in the licensing method, a franchisee gets more rights from the mother company, including the actual running of the business.
This method has low political risk and low cost of investment. It also allows the mother company to expand into many other regions simultaneously. When the right people get the franchise, the main company may get high returns after a very short time.
The identified franchisees may become good in the market and later rise to become competitors. Further, due to the scarcity of franchisees in the new market, the main company may overlook many factors while looking for the franchisee and end up getting poor people, who would potentially set the company back in development. A wrong franchisee can be very destructive to the reputation and overall performance of a company.
This is a good approach in the UK market. Currently, there is a very high demand for low-consuming cars due to the high cost of fuel, and Nano having an engine capacity of 624 cc could be the answer to the maze. Further, there is a problem of limited space in the streets, which leads to congestion. In order to reduce the congestion rate, UK residents ought to buy more Nano cars, which only require 4 meters to turn. The only hindrance to this method is the fact that the UK vehicle market is mature and people are not willing to take up loans to buy cars, despite having a Personal Disposable Income of about 19%.
This form of market entry is aimed at five main objectives. They include risk sharing, technology sharing, entry into a market, conformation with the government regulations, and joint development of a product (Reynolds 2003). It enhances political ties between nations, as well as the channels of distribution. This form of market entry is usually preferred when the strategic goals of the partners converge with the divergence of their competitive goals. It is also used when the partners can learn from each other, while at the same time limiting the access to their proprietary skills. This method is also used when the partners cannot match the market strength of the industry leaders in terms of size, power, and resources. It is also favourable when there are import barriers in the home country, as well as the existence of large cultural barriers. It also works well in countries where there is potential market, yet the government restricts foreign ownership.
Before joint partners agree to join into ventures, they examine the ownership of the other partners, control of the firm, prices, resource base of the local firm, the extent of technology transfer, as well as the intentions of the host government. The two companies in the joint venture share the losses or profits.
The firms are able to bridge the cultural differences, as well as the restrictions on ownership. It also increases the capital base of the company, because two companies combine their resources, including knowledge. This increases the chances of expansion and innovations, which could further improve the products. Further, the foreign company is viewed as a local one, hence little effects from the political waves. At the same time, there is less investment needed to expand into other areas where there is a combination of company bases.
A joint venture is hard to manage and the partnership leads to loss of control of business due to the sharing of power. This leaves the company with a greater risk, added to the spillover of knowledge to a partner who could later become a competitor.
This method could be very favourable to Tata in their expansion plans, because there is a lot of political support to such ventures. However, it would face competition from other companies and it could be more risky than using the exporting method.
Foreign Direct Investment
This entry method involves the full entry of a firm into a new market. It is carried out either in the form of acquisition or through Greenfield investment (Reynolds 2003). Acquisition refers to the processes where a foreign firm buys out an existing firm in the new market. This method has become very popular due to the greater market power that is achieved by the entering firm. Most acquisitions are made to weaken the competitors. In this regard, larger corporations buy out their competitors, suppliers, distributors, or any other group that is fully involved in the distribution channel of the main company. This way, the company is able to increase its market reach.
Greenfield investment involves a company setting up a new firm that is fully owned by the mother company (Reynolds 2003). It is usually a very complex venture, which requires a thorough examination of the target market and its dynamics. The process of establishment is very costly and requires that there is maximum return on investment. Third parties such as consultants are involved in the establishment, where there is a clear network of all the stakeholders from the main company in the new company.
Direct ventures are popular when there are many import barriers into a given country, as well as some difficulties in pricing of assets (Reynolds 2003). It is also very favourable when there is a high sales potential in the new country, and the political risk is fairly low. It is usually encouraged by the host governments, because the new firms are a source of foreign investment that creates employment opportunities for domestic population. The companies might end up getting tax advantages.
This method allows the expanding company to have full knowledge of the new market and the dynamics that affect it, which would eventually enable the company to get the perfect product for that particular market. It also ensures that the knowledge on production remains confined to the firm only. The method also allows the firm to present itself as a local firm in its new market, hence little effects from the political turbulence.
Since there are high investments made, the expanding firm faces high risks in case the new market fails to meet the standards expected. This method also requires a lot of investment and commitment, which exposes the company to failure in managing the local resources in the host country.
The British government is very friendly to direct investors (Datamonitor 2006a). They would support the expansion of Tata into their country. However, this would be a very dangerous step for Tata because there is a lot of competition in the market. FDI requires huge investments and this would be a very risky step for Tata, especially when the expansion has not been necessitated by demand. It would be also important for the company to realize that the UK market is already mature and therefore move slowly before investing heavily into a new factory or making an acquisition (Datamonitor 2006a).
The process of getting the most productive dealers or sales representative in the UK should be thorough and careful. This is because poor representatives would lead to poor reputation of Nano cars. To venture into the UK market, Tata should first identify the best car dealers who are credible and who have won the trust of the people. The dealers should show their performance with new car brands, which would determine their credibility and potential through credible applications. From here, the board in Tata should determine the dealers with the best records and work with them. They would require their legal qualifications and tax capabilities. The company would also be required to determine the best prices and marketing strategies for the new Nano cars. Once the UK-based dealers have identified the publicity strategy that they find most effective, especially with new cars, they would then be assigned to sell the new cars.
Several factors determine the mode of entry into a market by the main company. They include, among others, the size of the firm in terms of resources and capabilities,
Experience in multinational business
Growth of the industry in the target country
Global industry concentration and competition
Social, political, and economic risk in the host country
Size of the venture
Taking these main factors into consideration before its expansion, Tata should use the indirect exporting methods. This would involve using importing distributors or sales representatives from the host country. This ensures a quick entry into the market and that the costs of marketing and importing are left in the hands of the importer (Reynolds 2003). This saves the main company money, while ensuring that there is a first-hand touch of committed sellers to the market. Since the representatives and the importers are in business, they do their best to make sure they make the highest sales. This increases the sales of Nano cars to the British public. With the high number of competitors in the UK market, Tata should ensure that any method that they use at first should have the fewest risks possible. As they introduce their new Nano, they should take caution and use the method that does not pose a big threat to their survival (Datamonitor 2006b). The manufacturing plant would remain in India, and they could be able to handle another market apart from the UK. Despite the expansion, Tata does not need to increase their management team by a large margin, because all decisions are made from a central point; only recommendations could come from Tata dealers in the UK.