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.
- 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);
- 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);
- Beata Javorcik, K. Smarzynska, and Kamal Saggi, Technological Asymmetry Among Foreign Investors and Mode of Entry (Trade, 2004);
- 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);
- Simon C. Parker and C. Mirjam van Praag, The Entrepreneur’s Mode of Entry: Business Takeover or New Venture Start? (Tinbergen Institute, 2006);
- 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);
- Zhang, A Research Towards Service and Manufacturing MNCs International Entry Mode Choices (Erasmus University, 2007).
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.
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.
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.
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.
- David P. Angel, Trina Hamilton, and Matthew T. Huber, “Global Environmental Standards for Industry,” Annual Review of Environment and Resources (32, 2007);
- Europa-European Commission, “EMAS—The Eco-Management and Audit Scheme,” ec.europa.eu (cited March 2009);
- Steven Ferrey, Environmental Law: Examples and Explanations (Wolters Kluwer Law & Business/Aspen Publishers, 2007);
- IEMA—International Organization for Standardization, “IEMA Training,” www.iema.net (cited March 2009);
- International Organization for Standardization, “Management Standards,” www.iso.org (cited March 2009);
- National Research Council (U.S.), Estimating Mortality Risk Reduction and Economic Benefits from Controlling Ozone Air Pollution (National Academies Press, 2008);
- Michael Schmidt, Standards and Thresholds for Impact Assessment. Environmental Protection in the European Union, vol. 3 (Springer, 2008);
- 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);
- 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);
- Franz Wirl and Juergen Noll, “Voluntary (Environmental) Standards,” Journal of Economics and Business (v.59/4, 2007).
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