What are the three major types of involvement in foreign market activities?
Global sourcing has been made possible due to globalisation. The advantages of global sourcing mostly come from lower costs. Other than low costs, why would companies want to source materials and resources globally? Let's take a look. Show
Why do companies adopt global sourcing?Global sourcing is part of the internationalisation strategy. It refers to the act of buying raw materials or product components from other parts of the world, not just the local region. Nike gets organic cotton to make shoes from China, India, Turkey, and the United States. There are four main advantages to sourcing materials abroad: Cheap labour costsMany multinational companies outsource their production and assembly to developing countries with cheap labour. This reduces the production costs and results in cheaper prices for the customers. The majority of Nike shoes are manufactured in countries like China and Vietnam where labour is relatively cheap. In total, Nike has over 1 million workers worldwide in 785 contract factories producing 500,000 different products. High-quality productsSome countries produce better products or product components than others, making it the obvious choice for sourcing. For example, Brazil and Colombia grow brilliant coffee and the majority of Starbucks coffee beans are sourced from there. Global sourcing also provides the company with advanced technology and a skilled workforce which might not be available at home. Thus, they can make products cheap and with a greater quality to gain a competitive advantage. High production capacityMany companies do not have the capacity to produce a large number of products. In this case, the production can be outsourced to other countries to take advantage of the abundant space and resources. Companies also source their materials from multiple countries to ensure sufficient goods when the supplier in one country cannot make the delivery on time. Market experience in new countriesBy sourcing abroad, companies can learn how to develop foreign market expertise which may enable market entry in the future. They can also compare manufacturers in different countries to choose the best-performing ones at the lowest costs. Types of global sourcingWhen sourcing materials and components abroad, companies can choose either sole-sourcing or multi-sourcing (see Figure 1 below):
Market entry definitionMarket entry is part of the internationalisation process that extends beyond global sourcing. It is the case when the company sells its products and services to a foreign market. For a smooth entry, companies must gain expertise in international trade agreements, tariffs, barriers of entry as well as local regulations and legal requirements. They should also assess customers’ purchasing power, competition, and resources available in the foreign market. Why do companies enter a market?Like global sourcing, entering a foreign market can bring the company multiple benefits: Higher profit marginCompanies expand internationally to achieve economies of scale. As the products or services are introduced to new customer segments, companies can enjoy a greater market share and profit margin. This not only accelerates their business growth but also establishes a global image to drive out competition. Less competitionWhen the local market has become saturated, going international can give the company a fresh start. As it’s easier to introduce a new product and build brand awareness in markets where the competitors have yet to enter. New talentsMarket entry also provides the firm access to a talented workforce from different parts of the world. This can bring unique insights, ideas, and innovation to help the company improve its operation and reach a new high. IncentivesThere are also plenty of attractive incentives to businesses that extend their territory worldwide such as low production costs, advanced technology, more efficient logistics, transportation, and infrastructure. Market entry modesMarket entry modes describe the methods through which companies can enter a new market. The new market may be a foreign country, known as the host country. Based on the level of engagement in the host country, there are four different types of entry modes:
ExportingExporting is the act of sending goods and services to foreign markets. It is the simplest mode of entry and is widely adopted by SMEs. There's little risk to this approach in terms of finance and human resources. However, the company will have less control over the operations abroad. There are three main export categories:
LicensingLicensing is the case where a company (Licensor) grants permission to a licensee to distribute its products or services under a trademark. In many cases, the license is only applicable to a particular region for a certain period of time. Licensed products are not duplicate of the original product but often go through some adaptation process such as translated labels and instructions, modifications to local laws and regulations. The major advantage of this strategy is the speed of entry, especially when the firm doesn’t have enough skills and knowledge of the foreign market. However, there’s also the risk of choosing the wrong partner which affects the company’s global image. FranchisingFranchising is the case where the company (franchisor) licenses some or all of its business know-how, intellectual property, use of brand names, and business models to a franchisee and allows it to sell the branded products or services. In return, the franchisee pays the franchisor a fee. The strategy is based on trust and reciprocity. The franchisor is responsible for improving the performance of the franchise and assists the franchisee to market the product successfully. Wholly-owned venturesCompared to the other modes of entry, wholly-owned ventures are the riskiest approach as the company is directly involved in operations abroad. This strategy is further classified: greenfield investment and acquisition or a merger with an existing business. Greenfield strategyGreenfield strategy means building a subsidiary in the host country to market the company’s product. In this case, the parent company clones its organizational culture, technology, and supply chain in the foreign market. The strategy is often utilized by companies with strong technical and organizational skills. However, there are lots of risks regarding partnership building and international recruitment. Mergers and acquisitionsMergers and acquisitions are cases where a foreign company acquires a local business or merges it into its own entity. There are three forms of mergers and acquisitions:
Successful market entry examplesStarbucks entering the Chinese market For centuries, tea has been a religious drink in China. It seemed almost impossible to popularize another drink in the country and get the mainland people to embrace it. However, this is a remarkable feat Starbucks has accomplished. In 1999, the roasted coffee brand opened its first store in Beijing; 30 years later, the network has grown to over 5100 stores in more than 200 cities. The key to this massive success is Starbucks’ market entry strategy, which consists of several smart moves:
Sourcing Resources and Entering Markets - Key takeaways
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