By the end of this section, you will be able to:
- 1 List the strategies used in global competition.
- 2 Discuss the different forms of global competition.
Ways in Which an Organization Can Enter the Global Arena
After a company has decided to enter the global marketplace, managers must determine which method of international involvement is best for the company’s strategic goals. These methods include exporting, franchising, licensing, joint ventures, strategic alliances, and direct foreign investment (see Figure 7.6). Each method represents a different level of involvement. Let’s look at each of these in more detail.
The most basic and least involved method to enter global markets is through exporting. Exporting is when a company makes a product or service in one country and sells it in others. Many companies choose this method of entry into global markets because it requires the least amount of m risk and allows the firm’s managers to learn the ins and outs of international business. For example, in the UK’s East Midlands, the county of Northampton is home to Alfred Sargent & Sons, Church’s, John Lobb, and other shoemakers. An increased emphasis on exporting allowed these dying businesses to see new life because people in other countries wanted a piece of traditional “English cobbling.”58
Franchising is a business strategy in which the owner (the franchisor) allows another person or entity (the franchisee) to operate a business using the franchisor’s products, branding, and knowledge in exchange for a fee.59 Over 90 percent of the McDonald’s around the world are franchises owned by independent local businesspeople.60 The cost to franchise a business varies. A person interested in opening a McDonald’s franchise will need $500,000 in liquid assets and $45,000 for a franchise fee and should expect to spend between $1.3 million and $2.3 million over time.61 On the other hand, franchising the exercise brand Jazzercise requires a one-time initial fee of $1,250 and liability insurance.62
Franchising rules and commitment vary by company for both home-based and international markets.
Licensing is a contract in which one organization permits another to use its name, brand, or trademark on its own items. While licensing and franchising might seem similar, franchising involves all business operations, whereas licensing applies to a specific aspect (usually trademarked) of the business.63 Licensing agreements allow the company to enter other markets without as high of a financial risk. However, with little business involvement in licensing by the licensee (the company licensing its brand), strong business relationships are critical in order to reduce the risk of the licensor damaging the brand’s reputation. With licensing, the licensee loses brand control. Licensing is common in the fashion industry, where well-known apparel brands such as Armani license their names to companies that make eyeglass frames, fragrances, and watches.
A joint venture is a business arrangement whereby two or more companies create one single enterprise or project. The joint venture can last for any length of time but typically is not permanent. The advantage of a joint venture is that the two companies share all the risks associated with the venture.64 In 2012, Kellogg’s and Wilmar International Limited announced a joint venture. Kellogg’s wanted to expand its presence in the Chinese market. Creating a joint venture with Wilmar International provided the company with an extensive distribution network. Both companies benefited from this venture: Wilmar International through its financial incentives and Kellogg’s with a way to penetrate the market.65
A strategic alliance occurs when two companies from different countries agree to invest resources in a mutually beneficial way. For example, Microsoft relies heavily on alliances when entering new markets as a way to optimize the knowledge and market identification of local companies. Uber and Spotify entered into a strategic alliance to allow Uber riders to connect to their Spotify account and stream music while catching a ride.66
Direct Foreign Investment
The most involved and riskiest way for a business to get involved in the international arena is through direct foreign investment. Foreign direct investment (FDI) involves establishing operations within a foreign country. Consider automobile manufacturers. Nearly all producers have made significant investments in manufacturing outside of their home countries. For example, Tesla invested in a Shanghai factory to produce electric vehicles (EVs), and in 2022, the company announced it is “taking steps to ramp up output in order to double its original planned annual target to 1 million cars.”67
Forms of Global Competition
Global competition can come from international firms, multinational firms, and transnational firms. Let’s look at each to better understand their impact.
Any firm that operates on a global level is classified as an international firm regardless of the intensity of the involvement. International firms can further be classified as either multinational firms or transnational firms. Often, this classification depends on the business structure and products or services offered.
The most common characteristic of a multinational firm is its centralized business structure. Consider Amazon, whose headquarters are located in Seattle, Washington.68 Amazon operates in over 50 countries across the globe.69 However, the majority of all major decisions are made at its headquarters, making it a multinational firm.
Let’s look at McDonald’s again. The company’s franchise strategy relies heavily on the brand name and similar core menu items across the globe. However, the company also allows for local responsiveness by allowing local menu items to be included in the menu. For this reason, McDonald’s is often referred to as a transnational firm, one that allows for a higher degree of localization.70
It’s time to check your knowledge on the concepts presented in this section. Refer to the Answer Key at the end of the book for feedback.