Sam C. Okoroafo – Modes of Entering Foreign Markets
Okoroafo produced an article detailing a four step strategic model that firms should take into account when deciding modes of entering foreign markets. The model consists of four steps: 1.Determine the feasible modes of operation (MOO)
There are many modes of operation suggested by many different researchers; however, “Some countries may prohibit use of some MOOs for reasons related to achieving their economic objectives”. This is supported by the suggestion of barriers to entry or threat of new entrants outlined in Porter’s Five Forces model. This is a factor that should be seriously considered by any firm producing alcoholic beverages as there are more likely to be legislation against the trade of such products. However, Australia has a bilateral agreement with the EU which suggests that importing wine into the Australian market should not be hindered by any laws or legislation such as tax or refusing entry into the market. 2.Arrange modes of operation in a continuum
The identified modes of operation “need to be arranged in a continuum of increasing risk and commitment” Okoroafo suggests that the firm needs to start with the mode of entry that is the least risky and requires the last commitment. 3.Choose a mode of operation substitution pattern
There are two substitution patterns outlined in Okoroafo’s model the incremental approach or the non incremental approach. The incremental approach “can be used in markets where environmental factors and host government laws are favourable”. This would be the case for the European firm. The non-incremental approach is “when the firm analyses environmental factors and it may see imposition of mandated countertrade as prohibiting it from exporting to that market”. If this was the case the firm would have to use firm specific factors to decide their mode of entry. 4.Choose a mode of entry
Okoroafo suggested that “it is necessary to distinguish two types of variables” variables which are used to evaluate substitution of all modes “universal entry factors” or factors which influence specific entry modes, for example “Export-specific factors” and “licensing-specific factors”. As the European firm wants to import wine it is likely that they will need to consider licensing specific factors in great detail. Methods of Entry
Exporting could be considered as one of the easiest method of entering the market. The advantages to the firm of only exporting their products is that it has relatively low financial risk and low set up costs, however it should be considered as to whether the product would be cheaper to manufacture and distribute abroad due to the high costs of shipping such a heavy product as bottles of wine over to Australia from Europe. It is likely that the company will want to use a local agent to sell their product as they will have local knowledge of the market and business contacts in Australia. However this could be disadvantageous to the European firm because it is a possibility that they could lose their brand recognition and authenticity that comes with European wine. Licensing, franchising and subcontracting
Advantages of licensing, franchising and subcontracting are that that it is also relatively low cost, similarly to exporting. There is also more control over the operation and distribution of the product, the firm can decide where and how their product is going to be retailed. In franchises, the franchisee also shares the risk of failure with the original firm, and they have a direct interest into the success of the brand. This is also coupled with their local knowledge and drive to expand their business. However, licensing and franchising would mean that the European firm has less contact with their consumers than they would have if they were only exporting the products, this also means that they lose direct control of operations, such as quality control and standards....