Challenges Faced By Companies In The Adaptation Of Different Modes

CHALLENGES FACED BY COMPANIES IN THE ADAPTATION OF DIFFERENT MODES OF ENTRY INTO FOREIGN MARKETS
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Context
A foreign entry mode is a crucial and important decision that companies need to make when venturing into foreign markets. The different modes discussed in this paper include international agents, exporting and joint ventures. The three relevant theoretical perspectives that are most suitable for determining the choice of entry mode include the resource-based theory, the transaction cost theory and the institutional theory. Despite that, the choice of entry mode is also determined by factors such as regulations, cultural differences and the resources that are presented in the foreign country. Companies need to choose the mode of entry based on these factors since they will influence the success of the strategy.
Introduction
This paper will argue that the entry mode chosen by organizations as they try to penetrate foreign markets is dependent on factors such as regulations, cultural differences and resources. The push for firms to venture into foreign markets has greatly been attributed to the saturation in mature markets in developed economies. Companies are turning their attention to foreign markets because they have a potential for further economic growth. Nonetheless, such ventures are often accompanied by significant challenges as the firm tries to penetrate the market. These challenges force firms to adapt new strategies. This essay, therefore, purposes to describe the different modes of entry used by organizations to penetrate foreign markets. Included in the discussion will be a description of the analytical framework which will define the theoretical perspectives that were most relevant. Thereafter, an analysis of the modes of entry will be provided together with a conclusion that restates the main points. Despite the various modes of entry that are currently present, the decision by a company to choose a certain mode is dependent on the circumstances, time and available resources.
Analytical Framework
Since the paper discusses entry into foreign markets, it would be most relevant to explain the theoretical structures that are most suitable for determining the relevant entry mode factors. The three relevant theories are the resource-based theory, the transaction cost theory, and the institutional theory (Gundersen 2012, pp. 10-11). The resource-based theory is focused on the efficient and effective use of the useful resources by the company to gain a competitive advantage (Gundersen 2012, p. 12). The transaction cost theory states that the optimal solution for the boundaries of the organization, and the entry mode, is one that maximizes the costs of transacting (Mroczek-DД…browska 2014, p. 52). Whereas, the institutional theory suggests that for a company to survive in foreign markets, it needs to conform to the procedures, norms and rules that prevail in that particular location (Ferreira & Serra 2008, p. 15). Institutional theory is important since foreign markets are considered to have weak institutions, which make them vulnerable to rise in costs of making transactions; hence the importance of the transaction cost theory. Moreover, foreign markets can present a variety of resources that can be used by a company to gain competitive advantage (Gunnarsson 2011, p. 33). The application of the resource-based theory provides a firm with knowledge on which resources are most relevant. These theories, therefore, play an important role in determining the mode of entry used by firms.
Analysis
The modes of entry into foreign markets are the channels used by organizations to enter new markets. Despite a variety of market entry modes available, the discussion includes three modes of entry. They include international agents, exporting, and joint ventures.
International Agents
Agents are organizations or individuals who are contracted by the company to market the products on their behalf. Agents rarely take ownership of the products and instead, work on commission. Increasing the commission of products is an effective method of increasing sales since it can encourage the agent to sell more products to increase their profits (Magnusson 2017, p. 18). Agents are advantageous since they reduce the costs of market entry and moderate financial risks. However, they also limit the company from being able to gain international experience which might lead to an overdependence on the agents (Wach 2014, p. 138). An example of a company that employed the mode of entry is Finom Lights. The company is a manufacturer of shade models and wanted to grow their sales by venturing into foreign markets. Despite the company’s interest, several factors acted as challenges to their market entry. The company needed to establish itself in countries whose market they wanted to exploit, which are Germany and U.S.A in this case. More so, Finom has little knowledge about the people in the two countries, their language, culture, and the potential retailers that can conduct business with the company. Also, the company’s products were not well known in Germany, and U.S.A and the price of the lamps was high since the cheapest lamp was selling at €300 (Magnusson 2017, p. 31). The high prices meant that the company would need to employ aggressive marketing strategies to convince the customers to buy their products. The selection of international agents as a mode of entry was advantageous for the company since it would be able to venture into two different markets at a low cost and the agents also had experience in these markets. Furthermore, the agents, Raija Griessler and Ulla Lange, had already pointed out the potential retailers and customers who would be greatly interested in the product because of their experiences and established relations (Magnusson 2017, p. 34). The choice of agents was, therefore, a suitable mode of entry for Finom Lights.