Foreign Operation Methods: Theory, Analysis, Strategy

Citation

Rodriguez, C.M. (2009), "Foreign Operation Methods: Theory, Analysis, Strategy", International Marketing Review, Vol. 26 No. 1, pp. 113-116. https://doi.org/10.1108/02651330910933230

There has been considerable research and effort focused on understanding the internationalization process of firms and the major steps organizations take when designing strategies that impact their performance overseas. Different perspectives on internationalization have suggested models such as the international product life cycle model (Vernon, 1966), the innovation‐related international model (Andersen, 1993), the adaptive choice model (Lam and White, 1999), and the Uppsala internationalization process model (Johanson and Vahlne, 1977). Lately, (Fletcher, 2001) has suggested a holistic approach to internationalization supported on the notion that firms internationalized by inward and outward‐driven activities. The author suggests that a complex form of behavior characterized this perspective and that decision‐making is multidimensional and multifocal.

Professors Welch, Benito, and Petersen bring to this debate the perspective of foreign operation methods of knowledge and learning and how organizations build cognitive capabilities as the firm progresses from exporting to a full commitment to overseas production. Their main proposition is: “choice of entry mode almost determines how foreign market operations will be conducted.” (p. 3). I would like to make several remarks concerning the topics discussed in this paper.

Franchising

Different modes of foreign operation are discussed in detail. Among those, franchising, joint ventures, subsidiaries, and foreign direct investment (FDI). All are illustrated having the internalization process of the firm as framework and with an emphasis on its strategic nature. Chapter 3 discussed the structure, management, and mechanics of franchising. It details the different organizational forms for franchising: master franchising, wholly owned subsidiary, joint venture, direct franchising, and area development. The most critical issues are described through well‐documented international firm examples such as Bally, Fersine, Elf Atochem, Subway, Wendys Supa Sundaes, among others. Through these examples and others, the authors illustrate the existence of a wide type of experiences preceding the move into international franchising. And when the decision to use this mode of foreign operation is made, considerations such as the degree of standardization and adaptation are critical and realistic. The treatment of franchising includes the perspectives of the franchisee and franchisor. The franchisor perspectives include the reasons for the use of international franchise: domestic use and related expansion processes, interested foreign party, encouragement from international supplier, and low capital demands for implementation. Also, the author elaborates on the criteria for the selection of franchisees and the nature of market selection, franchise package, as well as, legal and regulatory issues.

Licensing

The treatment and discussions around the topic of licensing are excellent. The authors start their presentations with a brief but meaningful description of the term and its uses. Chapter 4 provides an analysis of the typical components in a license endeavor, its forms of intellectual property, and proprietary knowledge. General important concepts are defined such as: patent, trademark, designs, mask work, copyright, trade secrets, and know how.

The perspective from the licensee to adopt licenses is critical in today's competitive global market. The pressure for developing new products, acquiring new technologies to enter new markets or developing further acquired technologies through R&D suggest firms to license as a mode to stay competitive. As license becomes the mainstream penetration model for many firms, it allows access to broad model activities. For example, license has been used to support FDI, exporting efforts, and first time attempt to test foreign markets.

Alliances

The topic of alliances is addressed in Chapter 9. This well written treatment of the topic starts with a general description of the different forms of alliances, as well as, clear definitions of alliances, types of business arrangements and the nature of inter‐firm collaboration. This description fosters distinctive factors such as equity level distribution, non‐equity alliances, and marketing alliances. More relevant is the authors' efforts to analyze the adequacy of using alliances as part of the firm's expansion strategy. The list of strategic motives includes the treatment of technology and its importance in alliance formation and share‐costs and risks particularly in situations where there are significant set‐up costs.

I particularly appreciate the inclusion of a special section on the management of alliances under a process perspective. Professors Welch, Benito, and Petersen discuss the characteristics, approaches, and mechanics typically found in alliances from the agreement between partners, the alliances establishment and functioning, and the assessment of alliance performance.

Foreign direct investment

The analysis of FDI is approached as a mode of foreign operations in combination or sequential steps in the firm's international expansion strategy. Chapter 10 discusses the role of FDI as a process rather than a single act. The authors discuss the circumstances that precede FDI decision‐making such as ownership level, acquisition vs Greenfield, acquisition targets, scale and depth of operations, and financing. Each of these themes is discussed in detail and strengths and weaknesses of each are presented.

Model combination strategies

Perhaps, one central contribution that Professors Welch, Benito, and Petersen bring to the analysis of international expansion is that different foreign operations methods (FOMs) may be combined to achieve specific foreign market penetration and other objectives. The authors follow the analytic framework proposed by (Petersen and Welch, 2002) which suggest that the selection of complementary or competing modes is a function of five rationales namely:

1. 1.

   how related business units are;

2. 2.

   how segmented the market is;

3. 3.

   value activity specialization;

4. 4.

   needs for control and commitment; and

5. 5.

   benchmarking of local operators.

More importantly, the framework stresses the importance of selecting a primary mode of entry which ensures fulfillment of the main objective(s) of the foreign operation, i.e. technology control. This primary mode is associated with other FOMs; then the coordination of several FOMs make up the firm's integrated system for international maneuver.

Importantly, the authors stressed several barriers to the design and implementation of mode combination in firms' internationalization behavior. There is an insufficient scale of foreign market value activities, high‐fixed costs of setting up multiple modes, and firms' cognitive limitations due to comfort in using traditional modes. Firms that pursue involvement with foreign markets must decide on which internationalization process and what international strategies to carry out. At the end, the authors urge managers and firms to ensure a high‐level of knowledge and expertise about the different operation modes available.

Mode switching and stretching strategies

The authors discuss inter‐mode switches; those that imply a change of organizational form or “mode”. These switches are driven by a correction of managerial misjudgments and the adaptation to new circumstances. Costs, revenue losses, and perceived barriers such as risks associated to these modes are discussed in detail. And several strategic alternatives for future switching of operation modes are presented as result of the initial negotiation approach and the path of termination or integration for operation modes.

New insights and a provocative perspective characterized this book by Professors Welch, Benito, and Petersen. As such, I appreciate their efforts and contribution to expanding our understanding of well‐designed internationalization entry strategies and foreign operation methods used by firms in their expansion strategies. More importantly, I welcome the thoroughness, depth, and illustration efforts of the material in this paper. Managers will find the framework of this book very appealing and relevant to their everyday international efforts and inquires. The book is an obligatory reading for academics and graduates in business, international marketing, and international business.