Internationalization Strategies

Theoretical Information

In accordance to Peng & Pleggenkuhle-Miles (2009), an international (internationalization) strategy is a strategy by which the company sells its goods or services outside its domestic market (Hitt 2009, p. 219). When the company decides to enter a foreign market, there is a variety of possible options to do it. All of them differentiate with risk, cost and control level, as well as with profits and development opportunities. Investigating and analyzing the foreign market to reveal the most applicable entry strategy is great stage of project planning and usually takes a lot of time and efforts to implement.

In case a firm succeeds with the formulation and implementation of the value-bringing strategy, it is said that a firm has a strategic competiveness. McGregor (2009) deems that byn choosing a strategy, firms make choices among competing options as the way for deciding how they will pursue strategic competitiveness. (Hitt 2009, p.4.)

In accordance to Peng & Pleggenkuhle-Miles (2009), an international (internationalization) strategy is a strategy by which the company sells its goods or services outside its domestic market (Hitt 2009, p. 219). Figure 1 presents various internationalization opportunities and a pathway to its successful outcomes.

Figure 1. Opportunities and Outcomes of International Strategy. (Hitt 2009, p.219.)

The first objective of the research is to investigate and analyse all possible Russian Occupational Healthcare Market entry modes applicable to chose two most appropriate ones for further study. The simplest and most common form of entry strategy is direct or indirect exporting (Okpara 2008). However, since the case project is aiming to operate in a sphere of occupational healthcare services, any type of export or other product-related strategies, like manufacturing contracts, assembly operations or turnkey project, will not be considered as a potential entry mode.

Licensing

Licensing can be defined as “the method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know‐how or some other skill provided by the licensor” (Carter 1997). Those rights to provide product’s or service’s concept, accumulated managerial skills, developed technology, etc. eliminates the necessity for the licensor to open a new operation overseas, because of the opportunity for the licensee to manufacture and sell in the host country a similar product or service that licensor has already been producing and selling in the home country (Mittal 2014, p. 39).

By the licence agreement, licensor earnings represent one-time payments calculated as a percent of gross revenue. The level of gained revenue depends on both parties of the agreement. The licensor’s responsibilities inlude constant monitoring, training, permits and renewal of information provided upon development of own operations. Sometimes, to ensure the competence of operations being implemented in compliance with the instructions provided, there is a spokesperson from the licensor’s company on the site. From the licensee’s side, it is mostly the high level of compliance with instructions provided, that leads to the high quality product or service providing and thus, higher revenues generation. (Mittal 2014, p. 39).

Licensing is possibly the least costly form of internationalization mode, since the licensee, as a company to which licence is granted, takes all the risks and makes the investments of own funds into the processes of manufacturing, marketing, and distributing the goods or services (Hitt 2009, p. 233). It is also extremely attractive entry mode for companies that are new in international business as a safiest first of international expansion (Mittal 2014, p. 39).

However, providing manufacturing information, processing, managerial skills and sometimes even sending representative responsible for control of licensee’s operations does not always guarantees proper compliance with the standards and thus, loss in quality of products or services provided. The main drawback of licensing as a form of market entrance is too limited participation of company, which issues the license. Loss of control of the licensee manufacture and selling operations frequently leads to deprivation of trademark quality or reputation (Mittal 2014, p. 39). Moreover, according to Okpara (2008) licensing is known as a strategy pursued primarily by manufacturing companies, whereas franchising is a strategy employed chiefly by service companies, which makes franchising more favorable option to consider for the project.

Franchising

Franchising may be perceived as another kind of licensing. “There are three critical components of the franchise system— the brand, the operating system, and the ongoing support provided by the franchisor to the franchisee” (Sherman 2003).

In franchising system business owners, known as franchisees, pay a certain fees to a parent company, known as franchisor, in return for which franchisee obtains the right to become identified with franchisor’s trademark, to use its brand name, to sell its products or services, to apply its business operating system, to receive its ongoing support and withal agrees to operate his outlet according to the franchiser's requirements. The fee usually includes initial franchise fee and regular percentage payments of franchisee’s sales (the amount of initial fee and percentage of sales are established in the franchise contract). In return franchisee gets valuable services such as market research, elaborate business system, name recognition and many other forms of assistance. (Zimmerer & Scarborough 2004.) http://wps.prenhall.com/bp_zimmerer_ess_4/17/4430/1134321.cw/index.html\ Published May 1st 2004 by Prentice Hall, Essentials of Entrepreneurship and Small Business Management (4th Edition) by Thomas W. Zimmerer Norman M. Scarborought.

Duration of franchising agreements is usually longer than licensing agreements. Moreover, compared to licensing, franchisor offers a wider range of rights and resources, such as equipment, management organizations, procedure manual, initial trainings, site approval and other types of support that are needed for the franchisee to operate its business in the same manner it is practiced by the franchisor. (Mittal 2014, p.40).

The major benefit for franchisee is the opportunity to start a business relatively quickly, and because of the brand name recognition, financial assistance, proven product and business format, a franchise often reaches the break-even point faster than an independent business would. Successful performance of franchisee’s business is obviously beneficial for franchisor as well in terms of its business expansion and enhanced brand recognition. (Mittal 2014, p.40).

The extent of franchisor’s participation in a business process is significantly higher, than licensor’s. However, franchisees are still independent businesses and franchisors cannot manage franchisees in a way they can manage their own employees. Hereof there is again a threat of deprivation of trademark quality or reputation due to the lack of participation.

What’s more, there sometimes may be a problem with getting regular percentage of franchisee’s sales, some firms may try to conceal actual sales volume to reduce the amount payable for franchisor. This may cause a conflict that leads to termination of franchise contract. Although franchising agreements prohibit franchisees from disclosing the information they received or using it outside the chain, conflicts may cause such misconduct which is quite difficult to withstand. (Encyclopedia of Small Business 2007)

Franchisees may also decide to terminate the agreement because they find it limiting or because they consider the royalty payments unjustified. If such franchisees open competing businesses with the similar system, managing organizations, operations and so on, it may affect franchisor’s business dramatically.

Date: 2015-12-17; view: 966