Entry Mode Essay

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An entry  mode  is the manner  in which a company decides to enter  into  foreign markets.  International market  efforts take many  forms.  There are various strategies an organization may implement once it has decided to enter  the global market. Ways to enter  a foreign  market  include  licensing, franchising,  joint ventures, exporting, and direct investment.

Licensing occurs when a target country grants the right to manufacture  and distribute  a product  under the  licenser’s trade  name  in  a target  country.  The licensee pays a fee in exchange for the rights. Small and medium-sized  companies  tend to grant licenses more often than large companies. Since there is little investment  required,  licensing  has the  potential  to provide a large return  on investment.  However, it is seen as the least profitable way to enter  the market because  most  companies  use  licensing  to  supplement  manufacturing and exporting. Licensing tends to be a viable option to enter a the market when (1) the exporter does not have sufficient capital, (2) when foreign government  import  restrictions  forbid other ways to enter the market, or (3) when a host country is not comfortable with foreign ownership.

Advantages of this method  to a multinational corporation  (MNC) are (1) there is no capital expenditure requirement, (2) it is not risky, and (3) payment is a fixed percentage of sales. Disadvantages are (1) the multinational does not have any managerial  control over the licensee because it is independent, and (2) the licensee can give the multinational’s trade secrets to a potential competitor.

Exporting is the marketing and direct sale of domestically produced  goods in another  country. It is a traditional  and established method  of reaching foreign markets. New companies tend to enter international markets through exporting. One reason may be because this type of entry does not  require  the organization  to produce  the  goods in the  targeted country,  which means  that  the organization  would not  have to invest in foreign production facilities. Marketing  expense is the biggest cost with exporting. There are two ways an organization  can make sales  in  exporting—directly   or  indirectly.  Direct sales can be made via mail order or through  offices set up abroad. Indirect sales are made via intermediaries who locate the specific markets for the organization’s products.  The four players in the exporting business are the exporter,  importer,  transport provider, and the government.  Many organizations  are able to successfully establish themselves abroad and do not have to expand beyond exporting.

Direct investment  occurs when there is direct ownership  of facilities in the  target  country,  and  it requires  a high level of resources  and a high degree of commitment. This type of market  entry  may be made via the acquisition  of an existing entity or the establishment   of a new  enterprise.  It  requires  the transfer of resources such as capital, technology, and personnel. Direct ownership can provide a high level of control  in the  operations  as well as provide  the opportunity to better  know the potential  customers and competitive environment.  MNCs may select this method when they want to (1) grow: the organization reaches a point where it realizes that it is not growing; therefore,  there in an initiative to identify new markets so that it can continue to make profit; (2) bypass protective instruments in the target country. American MNCs avoid set-up subsidiaries in order to avoid the common external tariff imposed by the European market; (3) prevent  competition:  MNCs may buy a foreign company so that it will not become a competitor; and (4) reduce costs: labor costs tend to be different in countries. Many MNCs will attempt to identify countries  that  have qualified workers that  will work for lower wages. For example, many American MNCs have outsourced  their customer  service and technology functions to India.

There  are  a number  of reasons  why a franchise may consider  going global, and  some of these  reasons include opportunities to (1) build more  brand and shareholder  value, (2) add revenue sources and growth markets, (3) reduce dependence  on the company’s home market,  (4) leverage existing corporate technology,  supply chains,  know-how,  and  intellectual property,  and  (5) grow more  franchises  in the home country by being global.

Joint ventures  occur when an organization  enters a foreign market via a partnership with one or more companies already established in the host country. In most cases, the local company provides the expertise on the  target  market  while the  exporting  company manages  and  markets  the  product.  A joint venture arrangement allows organizations  with limited capital to expand into international markets, and provides the marketers with access to its partner’s distribution channels.  Key issues in a joint  venture  are ownership, control,  length of agreement,  pricing, technology transfer, local firm capabilities and resources, and government  intentions.  Potential  problems  include (1) conflict over new investments,  (2) mistrust  over proprietary  knowledge, (3) how to split the pie, (4) lack of parent company support,  (5) cultural clashes, and (6) when and how to terminate  the relationship if it is necessary to take such action.

Bibliography:   

  1. Jean-Luc Arregle, Louis Hebert, and Paul W. Beamish, “Mode of International Entry: The Advantages of Multilevel Methods,” Management International Review (v.46/5, 2006);
  2. S. Dev, J. R. Brown, and K. Z. Zhou, “Global Brand Expansion: How to Select a Market  Entry Strategy,”  Cornell  Hospitality   Quarterly  (v.48/1,  2007);
  3. Beata Javorcik, K. Smarzynska, and Kamal Saggi, Technological Asymmetry  Among Foreign Investors and Mode of Entry (Trade, 2004);
  4. Sudha Mani, Kersi D. Antia, and Aric Rindfleisch, “Entry Mode and Equity Level: A Multilevel Examination of Foreign Direct Investment Ownership Structure,” Strategic Management  Journal (v.28/8, 2007);
  5. Simon C. Parker and C. Mirjam van Praag, The Entrepreneur’s Mode of Entry: Business Takeover or New Venture Start? (Tinbergen Institute, 2006);
  6. Arjen H.L. Slangen and Jean-François Hennart, Greenfield or Acquisition Entry: A Review of the Empirical Foreign Establishment  Mode Literature (Erasmus Research Institute of Management,  Erasmus University, 2007);
  7. Zhang, A Research Towards Service and Manufacturing MNCs International  Entry Mode Choices (Erasmus University, 2007).

Environmental Standards

Environmental standards are recommended or compulsory  policy specifications  designed  to  regulate human,  generally business, effects on the  environment,  the  surroundings in  which  an  organization operates. Compliance means conforming to a policy specification that has been clearly defined. The International  Organization  for Standardization (ISO) is the  confederation   for  environmental,   health,  and safety and quality standards, consisting of a network of the national standards institutes of 157 countries. Each member  country has one member  representative on the ISO and decisions are made via consensus. The ISO headquarters are located  in Geneva, Switzerland. The ISO is internationally  recognized as the hallmark for an audited Quality Management Control System.

Specific environmental standards  become law through  international treaties or national  standards. Many countries  have specific departments that  regulate the impact  of businesses on the environment. Also, trained, accredited environmental auditors can relate company environmental impacts against ISO or other  international or national  environmental standards while operating  under  an ethical professional code of practice.  The introduction of an accredited environmental management   system  within  a company demonstrates legal and regulatory environmental  requirements and should result in sustained improved management  of environmental risks as internal processes are constantly reviewed; however, it requires resources. Nevertheless, there are a number of reasons from a strategy perspective why companies might  voluntarily  set environmental standards  that are stricter than those set by law or recommended.

An  organization’s environment is the  surroundings in which it operates and extends from within the company to the global system. Businesses impact on the environment by using raw materials  and energy in production processes and by producing wastes and emitting  pollutants  onto the land or into waterways and the atmosphere.  For example, the combustion  of fossil fuels such as coal and petroleum  oil in power plants and many other industrial  processes has contributed  to  the  substantial  increase  in atmospheric carbon dioxide concentration over the past 50 years. There is considerable  evidence that  this increase  in carbon dioxide concentration is a factor contributing to global warming. The combustion  of fossil fuels in power plants and other  industries  can also result in the  production of other  gaseous pollutants  such as sulphur  dioxide and nitrous  oxide. These gases can have adverse effects on human  health  as well as on the environment.  Nitrous  oxides are also emitted  in the production of nylon and nitrogen-based fertilizers while use of nitrogen  fertilizers has had negative environmental effects on land, water, and the atmosphere, contributing to the eutrophication of nutrient-poor  land  habitats,  fresh waters,  estuaries,  and coastal water; a decrease  in biodiversity inside and outside  the  agricultural  systems; and  emissions  of greenhouse  gases to the  atmosphere.  Utilization  of raw materials and energy, and production of pollutants, is not related only to large industries. With few exceptions, all businesses require electricity or gas for lighting, heating, and running  of appliances and also produce waste.

Different countries can have different environmental standards  and environmental standards  can vary between different parts of a country. For example, in the  United  Kingdom,  environmental standards  can be different in Scotland than in England or Wales. In the  United  States, environmental standards  can  be different in different states. The ISO has developed international environmental standards  addressing  a broad array of subjects and new standards  are published annually. These standards are generic in nature and are periodically updated. Initially such standards were quite inflexible to diverse business operations. In response  to growing credible criticisms, the ISO responded  by modifying standards  to accommodate different  organizational  operations,  while maintaining its fundamental  principles.

The ISO 14000  Series

The ISO publishes the ISO 14000 Series Environmental Management  systems, which is a series of international standards on environmental management.  The fundamental principle of the ISO 14000 Environmental Management  Standard is to provide a framework of  reference  for  organizations  to  reduce/minimize their commercial processes that negatively affect their internal and external environment; adhere to relevant legislation; add further  environmental requirements as necessary; and demonstrate continuous  improvement  of environmental procedures.  The ISO 14000 series specifies the actual requirements for the development   of  an  environmental  management   system and its supporting audit program to be carried out by a company. It applies to those environmental aspects over which a company has control.

The major parts of the ISO 14000 series are ISO 14001 and ISO 14004. ISO 14001 is the international specification for an environmental management  system; it provides details of the requirements of a company  in  establishing  an  environmental policy. ISO 14001 identifies the activities of an organization  that impact the environment,  sets measurable  targets for improvement,  and details a management  program to achieve these targets. The process involves continual checking and management review with the implementation of corrective action if required. ISO 14004 is a guidance document  for ISO 14001 giving more detail on the  establishment  of an environmental management system, the setting of measurable environmental targets for improvement,  and the implementation of checks and controls. It also provides details on the coordination of an environmental management  system  with other  management  systems such as those related to health and safety, and quality.

Environmental  management  standards  are  akin to quality management  standards. They focus on the outcome  of the  production process  as opposed  to the  product/item, utilizing  the  concept  of “cleaner production.” Their fundamental  aim is to design and control  an auditable procedure  aimed at minimizing adverse  environmental “aspects,” for example,  production  of waste, spillage of chemicals, and carbon dioxide emissions. An “aspect” is an element  of an organization’s activities or products  or services that can interact  with the environment.  ISO 14001 identifies suitable methodologies/tools to interpret  such aspects and to assess their impact. ISO 14001 is a set of standards  against which all organizations  can be assessed. As of 2008, over 100,000 companies worldwide have been certified to ISO 14001 standard.

Assessment

Environmental  impacts fall broadly into two classifications, direct  and indirect  impacts. Direct impacts are effects that are the immediate result of the actions or operations  of an organization,  for example, waste production and  carbon  dioxide  emissions.  Indirect impacts are the effects that occur upstream  or downstream  of the organizational  activities, for example, extraction  of raw materials  that  are transported to, then  utilized by, a company. The ultimate  aim is to formulate realistic proactive remedies for sustainable continuous  improvement.

Tried  and  tested  aspect  assessment  approaches that can be utilized within a company can fall under three  methodologies: the risk-based  scoring methodology, environmental and commercial  qualitative methodology,  and criteria-based  methodology.  The risk-based scoring methodology adopts a numerical cut-off value. The likelihood of breaches in organizational systems (A) are multiplied by severity of environmental impact  (C). Both A and C are allocated criteria  and ranking  such that  the  significance figures fall between 1 and 50. Those risk-based activities that  are allocated above 20 points  are deemed “significant” and  need  to  be addressed.  The environmental  and  commercial  qualitative  methodology adopts  a traffic-light  scheme.  Color  codes are allocated to specific aspects that  are benchmarked against predetermined criteria, for example, legal requirements,  cost  savings,  and  customer   views. The criteria  based methodology  identifies key yes/no answerable questions. The largest number  of yes responses represents  the highest significance.

Many countries  have specific governmental,  publicly-funded departments/agencies that  regulate  the impact of businesses on the environment.  For example, the  United  States  has  the  U.S. Environmental Protection  Agency; Australia has the Department of the Environment,  Water  Heritage and the Arts; and England  and  Wales,  the  Department for  Environment, Food and Rural Affairs (DEFRA). These organizations  provide guidance to businesses in relation to meeting  environmental standards.  Also, in some cases, they have the power to issue improvement or prohibition  notices which may lead to the prosecution of businesses that breach environmental regulations. Convicted organizations are fined and listed on governmental  Web sites and, as a result, can suffer long-term  difficulties in retaining or sourcing supply chain clients. This is one of the primary  reasons  to ensure environmental conformance.

Trained,  accredited  environmental first-, second-, and third-party auditors can assess company environmental impacts against environmental standards, for example, ISO 14001 or other international or national standards  while operating  under  an  ethical/professional code of practice. First-party auditors carry out audits  within  their  own  department. Second-party auditors  can  be from  within  the  company  but  are outside  the department being assessed or are independent consultants. It is considered best practice for internal  auditors  to audit outside their formal management  line, in order  to maintain  a neutral  assessment. Third-party auditors come from an accrediting body that  carries out official audits. The role of the third-party auditor  is to  identify  nonconformance, and the organization must identify corrective action.

EMAS

Within  the  European  Union,  the  Eco-Management and Audit Scheme (EMAS) is a voluntary  initiative designed to improve companies’ environmental performance.  EMAS is more rigorous than  ISO 14001. It aims to recognize and reward those organizations that go beyond minimum  legal compliance and continuously improve their environmental performance. For example, EMAS requires  the  completion  of an initial  environmental  review  that  is  an  assessable part of the environmental management  system. ISO 14001 recommends an initial environmental review if an organization  does not have an existing environmental  management  system but it is not  a requirement.  Also, EMAS requires  a maximum  three-year audit cycle and the publication  of an environmental statement  by the company that reports on their environmental   performance,  while ISO 14001 requires “periodic” environmental management  system audits and that  an organization  should “consider” external communication.

EMAS has very specific requirements in the type of environmental aspects  that  should  be addressed within the environmental management  system and it is possible that ISO 14001 does not cover some of these areas. The European  Union has formally recognized that ISO 14001 satisfies many of the requirements of EMAS and has set out steps on how to implement EMAS if a company  is already ISO 14001 certified. Auditors require additional competencies to award EMAS in comparison with ISO 14001 accreditation.

The Institute  of Environmental  Management  and Assessment  (IEMA) is a not-for-profit professional membership  body that supports environmental auditors internationally  and provides training courses for them. As of 2008, the IEMA had over 12,500 members in 87 countries.

Certification

Organizations wishing to apply for accreditation from an official environmental standards body are assessed against the standards  and, if successful, are awarded certification.  Certification  is not  indefinite;  organizations must undergo reaccreditation periodically. Successful organizations  maintain  accreditation, while those who exhibit noncompliance are issued a report that addresses the audit findings. Such findings may include “observations,” “action requests,” “noncompliances,” and specify a period  to correct  those highlighted issues. If significant noncompliances  are discovered or the previous audit report recommendations were not addressed, accreditation may be suspended or, in extreme cases, withdrawn.

Generally, a company  is responsible  for environmental aspects over which it has control and this can encompass procedures  outside the company site. For example, in relation to waste management, in England and Wales, the producers of waste are responsible for its correct  disposal. Here, a company  must  develop and maintain  a waste inventory, listing the date the waste was produced,  the  source,  type and  amount of waste produced,  the medium  (land, air, or water) affected by the waste, and how the waste was dealt with, for example, by controlled  disposal via skip to landfill or special disposal such as incineration.  Also, the person responsible for the waste disposal must be stated. Then, in relation to the transfer  of waste offsite, the company must ensure that carriers and waste sites have the proper  licenses to deal with the waste produced.  In  relation  to  the  transfer  of hazardous waste, the company must pre-notify the Environment Agency, a nondepartmental public body of DEFRA, when it intends  to transfer  this offsite and complete consignment  notes that must be kept for three years.

As a further check, there are waste acceptance procedures  that  must  be carried  out  by waste disposal companies.  For example,  a waste disposal  company operator must inspect the waste at the entrance to the landfill and at the point of deposit in order  to verify that it matches  the description  given on the relevant documentation from  the  company  that  produced  it and from the company that transported it. The operator must keep a register of the date the waste was delivered, the origin of the waste (company that produced it and company that transported it), and type and quantity of waste. With respect to hazardous waste, the precise location of the site in which it was deposited must be recorded. Thus all waste deposited should be traceable to the activity that resulted in its production.

Accredited   environmental  management  systems within  companies  require  commitment and  can  be costly. Time  and  funding  must  be  allocated  to  the development  and  maintenance of  the  system.  This would  involve staff training  to  develop  a companywide culture  of environmental awareness. Nevertheless, some  companies  have made  a commitment to operate policies that are more rigorous than the environmental standards  set. There are a number  of reasons from a strategy perspective as to why companies might  voluntarily  set  environmental  standards  that are stricter  than  those  set by law or recommended. For example, every organization  has complex involvement with stakeholders, all groups or individuals that are affected by or can affect an organization’s objectives. Stakeholders are a critical factor in determining the success or failure of a business. By matching  and concentrating on the interests  of various stakeholder groups, managers  can increase the efficiency of their organizations’ adaptation to external demands. Setting environmental standards  that are more rigorous than required could lead to greater stakeholder satisfaction. If this satisfaction  were felt by customers,  this could lead to increased sales. Thus from a cost-benefit framework perspective, commitment of a company to more rigorous environmental standards than required could increase consumer  demands  for its products.  Also, it could improve corporate reputation in the market and enhance  relations  with regulating  agencies, community, nongovernmental organizations, and media.

In marketing  terms,  implementation of environmental standards  more rigorous than recommended or required by law could give a company a competitive advantage over rival companies,  assuming the environmental  standards  set by these other companies is less rigorous. Also, this advantage could be sustained if a company continuously  analyzes and responds  to changes in the environment.

Bibliography:   

  1. David P. Angel, Trina Hamilton, and Matthew T. Huber, “Global Environmental Standards for Industry,”  Annual  Review of Environment  and  Resources (32, 2007);
  2. Europa-European Commission, “EMAS—The Eco-Management    and   Audit   Scheme,”   ec.europa.eu (cited March 2009);
  3. Steven Ferrey, Environmental Law: Examples and Explanations (Wolters Kluwer Law & Business/Aspen Publishers, 2007);
  4. IEMA—International Organization for Standardization, “IEMA Training,” www.iema.net  (cited  March  2009);
  5. International Organization for Standardization,  “Management Standards,” www.iso.org (cited March 2009);
  6. National Research Council (U.S.), Estimating Mortality  Risk Reduction  and  Economic Benefits from Controlling Ozone Air Pollution (National Academies Press, 2008);
  7. Michael Schmidt, Standards and Thresholds for Impact Assessment. Environmental Protection in the European Union, vol. 3 (Springer, 2008);
  8. United Nations Economic Commission for Europe Secretariat, Environmental Policy and International  Competitiveness in a Globalizing World: Challenges for Low-Income Countries in the UNECE Region:  Note (UN, 2007);
  9. United States, Implementation of the Existing Particulate Matter  and Ozone Air Quality Standards: Hearing Before the Subcommittee on Clean Air, Climate Change, and Nuclear Safety of the Committee  on Environment and Public Works, United States Senate, One Hundred Ninth Congress, First Session, November 10, 2005 (U.S. G.P.O., 2008);
  10. Franz Wirl and Juergen Noll, “Voluntary (Environmental) Standards,” Journal of Economics and Business (v.59/4, 2007).

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