What are the various methods of Internationalisation that could be adopted by any major retail Organisation in a developed country seeking to expand its Operations into large emerging Markets to maximise the chances of success and minimise the risks of failure?
Many companies, firms and even small and medium businesses from developed nations expand their operations in other countries using the entry mode strategies. However, most of the literary works that have been carried out focus mainly on the service industry and failed to analyze other sectors such as the retail sector in internationalization (Azuayi 2016). However, in this case, the analysis aims at finding out procedures of internationalization adopted by food retail companies in entering the emerging markets. Companies choose to operate globally for various reasons. For some the fierce competition in the domestic markets forces them to seek other markets globally. In other cases, the companies wish to expand, and the only way they can expand is by operating globally.
The focus of this study is to provide a study of internationalization strategies useful and relevant to Arla Foods (Arla 2016) in penetrating the international markets. The research explores number entry strategies as well as some theories from the international business. The the main focus is to find whether the developing nations such as Asia are viable for a food company such as Arla Foods from Denmark (Arla 2016). Data from other sources reveal that the international market has some weaknesses, however, despite the challenges; there are many viable opportunities from emerging economies. Arla uses export as the entry strategy to enter Asia, according to this method it is the best for a company such as Arla (Axford 2014). Export possesses very low risks and also the advantage in that it does not require huge funding thus making very effective and efficient.
For many decades, studies focused on economic theories to explain the theory of international trade. However, as of the 1970s, internationalization theories were introduced to help understand the concept of internationalization. Internationalization has been the focus for many companies (Axford 2014). Internationalization from the concept of economics can be defined as a case where businesses get involved in the operations of international markets. For many firms operations begin nationally; however, plans that are long-term are drawn on getting entering a global market. Internationalization has changed the way business used to operate in the past leading to a dynamic market with stiff competition for firms. For most firms internationalization is the best choice since the domestic market is small due to the economies of scale and the numerous opportunities available in global markets (Chan and Cui 2013). Internationalization is one of the strategies employed by executives with the aim of cutting the costs of production where the labor is cheap in such countries.
In other companies that are facing a financial crisis, they adopt a budget that enables them to operate efficiently in emerging economies (Christofor 2008). Many methods are used in entering foreign markets (Stiebale 2011). However, the methods can be categorized into two broad parts.
In the first part, a mode that is non-equity exists and entails agreements that are contractual. The other section involves a mode of entry referred to as the equity mode and includes subsidiaries and joint ventures. From the above illustrations, it is evident that export and imports offer the minimal risks and less centralization in terms of control (Schroeder 2012). Other methods that have the highest risk level are the ones that have highest returns on investment but also great control of the market. With the acquisition and Greenfield investments, direct investment is the cornerstone and a prerequisite for investment returns.
An institution can be defined as constraints that are human-made, and they give the direction of activities in political and economic platforms. The corporate can be said to have various frameworks and structures that may affect how a contract may be enforced, security investment, copyrights and even the political landscape (Andersen, Zamberi Ahmad and Mang Chen 2014). There are three classifications in which institutions can be grouped, and that is cognitive, regulative and normative. A regulative aspect defines the rules and regulations that guide how businesses act and behave in the economy. Normative also referred to as the social aspect assumes education and occupational standards (Azuayi 2016). Cognitive on the other hand comprises the cultural aspects and entails the signs and gestures. Institutions play a strategic role in the economy by ensuring that the market dynamics operate effectively as defined by the forces of demand and supply.
According to Uppsala model, Swedish manufacturing firms use internationalization in seeking international markets. The ideology for the Uppsala is that globalization is a gradual process. It is a phase where firms seek information of the market that leads to a gradual increase in the activities of the firms leading to direct investments and sales in the foreign nation. The theory of Uppsala rests on the idea of how well the business understands the foreign market. However, it is essential to remember that the domestic market is different from the foreign market (Andersen, Zamberi Ahmad and Mang Chen 2014). Without recognizing such a difference, a firm may fail to achieve the desired dreams and goals. For a company such as Arla Foods, it would be important for it to gain knowledge of the political and economic environment as they define the success of the business. It is also necessary that a company understands how it can adapt to the foreign market (Azuayi 2016). Uppsala theory is one of the theories that are still effective and relevant to today’s operations.
According to this theory, costs incurred in creating a firm in the global market are important. It is an addition of the expenses that have been incurred in establishing an entity in a foreign nation. The explicit and implicit costs are included in the transaction cost theory (Azuayi 2016). The strategy employed in entering the international market is a very crucial issue. For manufacturing firms that are seeking to establish subsidiaries in an international market, then transactional cost analysis comes handy as it helps in explaining the integration of decisions vertically (Azuayi 2016). According to the industrial network, every organization has to ensure a lasting relationship with customers and suppliers forming a network. When deciding on the strategy to be used Arla Food should be careful and understand each strategy to choose the one that is economical as well as efficient in achieving the objectives and the goals of the company. The implicit and explicit costs are directly related to the success or failure of the company.
Internationalization is an extension of the business into the foreign markets. The idea and the logic behind internationalization are strategic decisions that may affect a firm and also its micro and macro operations (Hill 2013).Globalization is viewed as one component that affects management of the business. Current statistics reveal that the rate at which companies have evolved and engaged in global markets has increased over the decades.
However, though the concept of internationalization has become more common for most firms, it is necessary for companies to consider the motives behind internationalization. There are many reasons for globalization, but the most obvious one is the desire to exploit potential in the emerging markets and the need to have the risks diversified (Keegan and Green 2017). It is also evident that for most firms that prefer internationalization in the event of launching new products in the market.
Coca Cola saw an opportunity after they visited many countries in the world and thereby launched the bottled water. In most of the scenarios, it is the fierce competition in the domestic markets that firms consider foreign markets viable. It is for such reasons that companies such as FORD that considered internationalization almost became market leaders being ranked second after General Motors (Parlabene 2013). For the firms in the Chinese market, internationalization is considered as the best option due to the stiff and fierce competition. The other reason behind internationalization is to avoid the risks associated with operating in one market. The objective of diversifying the risks is one of the reasons firms choose internationalizing. An additional market in another nation is a mechanism used in offsetting negative impacts and also various uncertainties, for instance, the political instabilities and the economic upsurges (Azuayi 2016). Starbucks provides a good illustration, in the past decade the American economy was experiencing recession and for companies like Starbucks they were not it hard as thereby ad other markets in other markets thus giving Starbucks leverage over other companies. The foreign market compensated for the losses with the overwhelming performances in the international markets.
For other companies, they decide to go global so that they can experience a different rate of growth. It is the different markets in foreign countries that yield different growth rates and most firms in nations with slow growth rate will consider internationalization in countries with faster rates of growth (Schmidt 2013). Companies operating in the food industry have different growth rates in various markets. The variations in growth rates arise because some countries have experienced maturity faster than other nations. As such companies will look for countries that are at an advanced stage. Despite the fact that some companies operate globally to be profitable, on the other hand, companies may want gain knowledge of the foreign markets.
A good number of firms have gone global with the aim of wanting to know what the international market needs to get done regarding changing the product so that it becomes acceptable in the world market. The role of government incentives also plays a part in promoting internationalization (Azuayi 2016). Many companies consider going overseas as a result of government incentives to export some of the products produced locally. It is through government intervention that some markets that were initially inaccessible now accessible. A good example of countries providing help for their firms is the United States which provides help to massive so that they can start exporting products to foreign nations.
It is evident that companies have different reasons for going global. Therefore, different firms have different objectives that are to be met by going international. It is, therefore, true that companies adopt various strategies when penetrating specific markets (Azuayi 2016). Since there are various ideologies for going international, there is no right or wrong reason for the company going global. Many theories explain and surround the entry methods in international markets.
Most firms use export and import as one of the methods in pursuing internationalization. Export refers to the process where a company sells its products to other nations (Gillespie and Hennessey 2016).With the exports strategy, a country either employs the services of an export agent or the company sells directly to the consumers (Fabling and Sanderson 2013). The other method commonly employed is the licensing. The licensing firms give patent rights, copyrights, and royalties to the licensee. The licensee also has access to knowledge of the processes used in the production of goods and services. A licensee, on the other hand, does the production licensor’s commodities and gets the royalties from the sales of such products (Gioeli 2014). The licensing strategy is employed in countries where the public authorities feel that a new technology is relevant and needed for development of the nation. Franchising bears some similarities to licensing as another strategy employed in internationalization. The main distinguishing and unique feature with franchising is that with franchising. The firm controls the market and is also responsible for the development of a market. Franchising comprises of people who own the business partially owners and are referred to as franchisees, who in return pay a small fee to the parent company that is known as a franchise. The franchisee shares in the trademark as they are identified with the brand (Gioeli 2014). The role of the trademark is to enable the business to operate alongside the franchiser. Such a system offers the franchisee many rights and resources. However, the system has many advantages and disadvantages something that companies should consider before accepting to enter into such agreements.
According to the arguments by Kotapati, there are numerous reasons as to why firms enter into international companies, and there are many strategies that company employs in entering foreign markets for various reasons (Azuayi 2016). No single entry is preferable and efficient for all international markets. Some of the ideologies and preferences for firms going global through different strategies involve reduced rates of tariff in some countries, to enjoy reduced costs in marketing of the product. Strategies employed in internationalization include:
Export can be categorized as either direct or indirect. With the direct exporting, a company sells the commodities directly into the market of importance. With the direct export, the firm has an obligation, and the company regulates the market in a foreign nation as compared to the indirect exporting (Azuayi 2016). Piggybacking as a direct exporting strategy entails the company exporting the new products using the already existing distribution channels of the different firms. The other is consortia where the small and the medium sized firms unite and come together targeting both complimentary and substitute products in international market. Arla can sell milk as the main export agent in the Nepalese market. The firm may also use the direct export strategy by employing the services of an agent to distribute the product in the foreign market.
With licensing, a company is entitled to sell product and enjoy the revenues for certain duration. Some of the items in the licensing list include copyright, symbols, and product names. However, licensing applies to firms in the manufacturing industry where firms are entitled to use the process of technology and on the other hand royalties are paid by the licensee (Azuayi 2016). For firms that seek to expand financially, then licensing strategy is the best option. Licensing helps reduce the risk of a product falling in the black market (Azuayi 2016). Companies looking to use this strategy have to consider the future as there is the danger of information falling into the hands of the competitors. Arla Food may not employ the licensing strategy when getting into the Nepal market as there is no need for it to use the patent, trademarks in the food sector. The company is also not a manufacturing sector where the manufacturing firms require licensing dearly in their operations.
With Franchising, a single company is responsible for supplying the other firm with intangible assets. Restaurants and hotels in most cases use franchising in entering global markets . Franchising is recommended for business outlets that have a uniform outlook and is synonymous to food stalls that are easily transferable to other market segments (Azuayi 2016). The caveat required in a franchise model ensures that the brand is unique such that it can be recognized and be utilized universally. It is always fundamental that a business opting to take franchising as an entry strategy be cautious as future competitions may arise in the area of franchising.
As for Arla Foods, franchising seems a good strategy franchising offers more repeatable models as compared to other strategies. The firm may allow the investor handle the sales promotion and the sales on its premises, but Arla Food should maintain its policies.
Alliances that are strategic are a cooperative move by the firms through agreements by different firms. Firms that engage in strategic alliances are those in the technology industry as the mode is considered effective and efficient. The main objective for the strategic alliances is the need and desire to exchange technology (Hill 2013). Lastly, there is a foreign direct investment, and in this mode, there is 100 percent ownership. Direct investment ensures that a foreign market is achieved directly. With the Greenfield investment, a company directly owns a facility or an investment that has been developed by another company. The ownership can also be achieved through facility ownership in what is known as the. In this study, there is extensive analysis of internalization, the modes of entry and the factors for the type for the type of the strategy employed.
The other strategy employed by businesses in entering foreign countries is a joint venture. The joint venture creates and develops partnership between the home firm and a firm from a host nation is as compared to licensing (Glowik 2016).A joint venture presents numerous benefits to foreign nation firm as the firm gains access to management positions as well as having equity positions. In a joint venture there is integration of the foreign firms with the home country leading to a third party company (Glowik 2016). In most cases, the foreign firm gains knowledge of the local market and also has better control of the management.
From the above illustrations, it is evident that firms are operating globally due to the need for larger markets and also because of competition in the domestic market. However, the method employed in entering the global market is critical as it determines the success or failure of the company. Internationalization comes with many benefits (Azuayi 2016). However, there are disadvantages with internationalization such as unfavorable government policies making operations in the foreign market costly and can lead to continuous loss making which can lead to the closure of the company.
References
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