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In this assignment, I shall discuss on the types of strategic approaches Macs use as to gain entry through a particular market. The strategic approaches which firms use as to do business in emerging markets that shall be discussed here are through Foreign Direct Investment(Fed), Licensing and Franchising. We shall discuss each method and analyze the benefits, the risks involved and other factors which may lead to the application of the method In deferent countries around the world. But first, we must define, what Is an emerging market and how does a country fall Into that category.
The term emerging markets was coined by economist at the International Finance Corporation (AFC) in 1981 but after many years, the term had changed meanings and evolved by definition and is now defined as a new market structure arising from digitization, deregulation, globalization and open-standards, that are shifting the balance of economic power from the sellers to the buyers (Observationally, 2013) Another question which must be asked and answered before going any further Is that why should businesses invest in emerging markets, pouring in hundreds and millions of dollars in a potentially risky investment, when they can further threaten their domestic markets with the same value of money. Well the answer is simple, according to Forbes, emerging market are increasingly important on a global scale, this Is because they become the driver of global growth.
Though public Investors are still underweight In emerging markets, however, corporate profit tends to grow faster when economic growth Is highest and emerging markets of developing nations have a higher growth rate compared to already developed nations such as the US and the That being said, we are now able to analyze each strategic approach that businesses use in emerging markets. Firstly, we will study the strategic approach of Foreign Direct Investment (FED). FED can be defined as an Investment made by a company or business entity based In one country, into a company or business entity based in another. One of the forms of FED is Greenfield Investment.
Greenfield investment is when a company or firm directly invest in new facilities and or the expansion of current facilities. Though high capital investment is needed from Macs, Greenfield investment is highly sought by host country as It creates new production capacity, Jobs and transfer of technology teens matrons. (Gerard, 1996)For Instance In Hungary, It Is one of the leading its loose ownership law. According to the Investment and Trade Development Agency Of Hungry , Greenfield investment account for investments of over $450 million in 1998 alone with Japanese Investors accounting for $200 million that year. This shows the significance of Green Field Investment. Companies which made the investment were Shania,Monika and Totemic(Antenatal,2001).
However, with different countries the ball game changes dramatically, for instance the Indian Government had previously allowed foreign companies to only own 51% of Indian single brand retail Joint venture with an Indian partner (Santayana,1983) This became a major problem for companies which wanted to own more than 51% of their shares. But on the 10th of January 2012, the Indian Government had reviewed its FED policy to allow up to 100% ownership of foreign companies with terms and conditions applied. This in turn shows how political and legal factors of a country may become a risk factor or barrier of entry into an emerging market when using FED. Another example which can be cited is that of Monika.
In their pursuit to penetrate the Indian market with Monika Money, they had to face the obstacle in which Indian central bank long standing regulation prohibiting nonbinding entities from providing banking services. Thus Monika formulated a plan to work around this problem. They built an open ecosystem for payment which included many different partners from banks, merchants, boilers and technology vendors (Nava,2012) Another form of FED is through Joint ventures. Joint ventures are an official cooperation between entities and are design to boost business growth. Joint venture s the legal term to describe the relationship between parties entering into agreement to work towards a strategic goal while they still remain separate entities on their own (Bruce,2006. A clear example could be taken from the Yahoo and Channel 7 Australia Joint venture to create Yah. This Joint venture meant that both companies had come together to develop a cross-media entity which expanded content distribution networks of both internet-centric Yahoo! And broadcast corporation 7, thus combining their online teams which had launched the new name and web site Yah on January 2006. The vision for the combination was to create the best entertainment, information and communications experience for Australian Internet and mobile users. Both companies had to share their expertise and resources as they formed a new 50-50 holding company and had hoped to further increase their market share in 2006(Extent,2005).
Another recent example of Joint ventures is that of TESTS, a leading grocery brand in the I-J which have had problems penetrating the Chinese and Japanese markets. This is because ultra low cost wet markets in China are able to give tough competition. As being unable to rack the China market through Green Field strategy, TESTS now is in talks for a Joint venture with China Resource Enterprise since August 10th 2013. A shanghai-based consultant said that Tests was beaten at the market low end by wet markets and at the high end by better premium supermarkets such as Cityscape. In response to that, TESTS have now partnered with China Resource Enterprise because the premium brand of supermarket (Ole) is where the market is forecasted going in tier- one cities (Bloomberg,2013) . General Electric(GE).
GE used the concept of partnering with institutions which would alp them understand end-user needs, develop affordable solutions for the masses and make them accessible to large populations. GE in Bangladesh had partnered with Grahame Klan . They had done this as to reduce infant and also maternal mortality rates in poor rural areas. The concept was to give access of high quality diagnosis and care in that of the emerging markets. This had earned them great exposure and profit in the Bangladesh market. This grassroots delivery model of GE will be replicated in other emerging markets such as Indonesia and Vietnam( Nava, 2012) Another common form of strategic approach into emerging markets is that of Franchising.
Franchising is a business relation in which the franchiser gives the rights to individuals(franchisee) in a market, the right to market and distribute the goods and services of the franchiser and to use the business name for a fixed period of time(FCC,2013). What better way to understand franchising than to understand and study the 3rd strongest franchise in the world, McDonald’s. The franchise attributes its success in countries all over the world due to three main attributes which are, consistency, resiliency and innovation. Consistency meaning that wherever you go, if it be Washington, Osaka or even Iambi, McDonald’s will ensure that you have the same experience in all of its franchise outlets(McDonald’s,2012). This from their view meant that customers know what to expect when making their decision in each outlet wherever they may be.
McDonald’s have faced many obstacles in the form of health issues and to counter that, they have acknowledged the issues and then had dedicated in-house resources as to stay on top of the issues thus illustrating resiliency in the market. The last value is that of innovation, through innovation, McDonald’s were able to cater to foreign markets by introducing McDonald’s Chicken Rice in countries where rice is expected at every meal such as Malaysia and Indonesia (McDonald,2012). Another example of innovation is that, in 1975, a McDonald’s had introduce their first McDonald’s drive-thru in Arizona. The reason being was because they had found out that a group of potential customers at that time were soldiers and they were not permitted to leave their vehicle in their respective attire.
Thus the solution was obvious and the first McDonald’s drive-thru was created(Franchiser’s,2013) Another form of strategic approach that can be used to penetrate emerging markets is that of licensing. Licensing is the process of leasing a legally protected entities. The entity may take form as intellectual property which is used in conjunction with a product0ayachandran,2013) Companies would often use licensing as a form of entry into emerging markets due to its low risk and fast expansion rate into foreign markets in the case of leading Italian pharmaceutical and biotech companies. Companies would patent and the license their drug patent as to enable distribution in other countries via smaller companies.
This expedites expansion rate as the local companies would already have the necessary infrastructure for production and the parent company would play a role as supervisors. (Seismic,2013) There are however risks or negatives to this strategic approach. Parent companies would have lower income as compared to other entry methods, there would be a loss equality and the risk of having the trademark and reputation ruined by incompetent partners(Roar,2013) Social factor also play a huge role in emerging markets and indirectly affects licensing method of market penetration. In the emerging market of India, where there is a huge disparity of income, companies are unable to give products which are available for the masses. In doing so, they catalyst the formation of generic products in the market.
In the case of NATO, a generic dressmaker which sells patented copies of Brayer’s kidney-cancer drug known as Nectar . However, Brayer had not made the drug available to the Indian market at a sufficiently low price. (Economist,2013) Indeed it is true that with the market saturation of developed countries around the world, companies and firms must expand their business into foreign markets especially that of the emerging markets around the world. This in turn will determine the survivability and profitability of companies in the future. With much investment to be made into emerging markets, companies must decide and choose which of the strategic approach would be most suitable for them to penetrate potential markets.