Mr. Kwaku Sintim is the founder and managing director of Starline Fruits Ltd. Starline is a private limited liability company, which was established six years ago. Its line of business include growing different kinds of fruits, processing and distributing them to supermarkets across the country. Mr. Sintim, together with the company’s board, has intimated on the need for the company to expand beyond its current operations in Ghana. You have been consulted by the company’s management to advice on its quest to participate in the global market.
Required:
Discuss FOUR factors that must be considered by the board of Starline Fruits and Processing Ltd. before choosing a suitable mode of entry into international markets. (12 marks)
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It is important for the management of Starline Fruits to consider many factors before deciding on which mode of entry into the international market would be suitable. The factors are discussed as follow:
i. The firm’s marketing objectives: It is important for management of Starline Fruits to consider its international marketing objectives relating to how much it wants and can sell in overseas markets – i.e. volume – the timescale and coverage of market segments. If Starline Fruits management expects overseas sales to be low in volume, or if the products are only to be on sale for a limited time period, then setting up an overseas production and distribution facility would be inappropriate. In this case, exporting might be an appropriate strategy. On the contrary, if management intends to cover a large segment of overseas markets as well as operate for a long time then establishing an overseas production and distributing outlet would be an appropriate mode of entry.
ii. The firm’s size: A small firm is less likely than a large one to possess sufficient resources to set up and run a production facility overseas. It is important for management of Starline Fruits to consider whether the resources of the company could provide the investment capital and organisational ability to set up an overseas production facility. It would also need to consider whether it can support the costs of continuing operations. If not, then overseas production facility would be precluded as an appropriate entry mode. Management would have to consider a mode of entry that requires a relatively lower investment in terms of cost and human resource ability.
iii. Mode availability: A firm might have to use different methods of entry to enter different markets. Some countries only allow a restricted level of imports, but will welcome a firm if it builds manufacturing facilities which provide jobs and limit the outflow of foreign exchange. It is important for management to consider the policies of different overseas governments through research. This will inform it of what kinds of entry modes are available for it in each oversea market it seeks to enter.
iv. Mode quality: In some cases, all modes may be possible in theory, but some are of questionable quality or practicality. The lack of suitably qualified distributors or agents, for instance, would preclude the export, direct or indirect, of high technology goods needing installation, maintenance and servicing by personnel with specialist technical skills. Whatever mode management are considering, it is important for them to put it to the practicality test.
v. Human resources requirements: Starline management would have to consider the human resource requirements for whichever mode it wants to use. HR requirements vary according to which method of entry is used. For instance, if it would be difficult for Starline Fruits Ltd. to recruit suitable international marketing staff at home or overseas, they may have to resort to indirect exporting or the use of agents based overseas, which in this case would be the only realistic option.
vi. Market feedback information: It is important for management to consider the effectiveness of receiving feedback information on its marketing efforts in overseas markets. In some cases a firm can receive feedback information about the market and its marketing effort from its sales staff or distribution channels. In these circumstances direct export or joint ventures may be preferred to indirect export.
vii. Learning curve requirements: Management of Starline needs to be clear about its future involvement in international business. If it intends a heavy future involvement in overseas markets, then it would be necessary for it to gain the experience that close involvement in an overseas market brings. They would, therefore, have to select mode(s) of entry that would offer them the opportunity to experience international business management for themselves. This argues against the use of indirect exporting as the mode of entry.
viii. Risks: There are risks involved in operating in overseas market such as the risk of expropriation, risk of political instability, etc. Management would have to assess the nature of the risks in particular overseas markets in order to inform them which mode offers the lowest risks. For instance, some firms might prefer the indirect export mode as assets are safer from expropriation.
ix. Control needs: Starline management should assess the level of control it seeks to retain over its overseas operations. For instance, production overseas by a wholly owned subsidiary gives a firm absolute control while indirect exporting offers only limited control over the marketing mix to the exporter.
(Any 4 points)