Foreign Operation Methods: Theory, Analysis, Strategy

Citation

Rodriguez, C.M. (2008), "Foreign Operation Methods: Theory, Analysis, Strategy", International Marketing Review, Vol. 25 No. 6, pp. 717-720. https://doi.org/10.1108/imr.2008.25.6.717.2

There has been considerable research and effort focused on understanding firms' choices of foreign entry modes and market entry penetration strategies. The selection of foreign entry modes has been found to be related to managers backgrounds and their cognitive orientations (Herrmann and Datta, 2006), assessment of domestic industry and external environments (Rasheed, 2005), mode's effectiveness in transferring capabilities (Erramilli et al., 2003), entry timing (Papyrina, 2007), and non‐equity forms of control such as trust and market (Gao, 2004). Still, our understanding of different modes of entry and foreign operations is limited, particularly from a strategic perspective. Professors Welch, Benito, and Petersen bring to this debate the viewpoint of foreign operation methods of knowledge and learning and their impact on how organizations build cognitive capabilities as the firm progresses from exporting to a full commitment to overseas production. Their main proposition is, “the choice of entry mode almost determines how foreign market operations will be conducted” (p. 3). More importantly, in their view, the choice of entry mode requires the selection of complementary or competing modes. As such, managers need to be flexible in foreign operation model choice situations and be knowledgeable in the different modes available to the firm.

The book has three important sections. Section 1 is an introduction to the subject and the theoretical framework of foreign operation methods, which includes economic and behavioral perspectives. Section 2 discusses different modes of foreign operation such as franchising, licensing, management contracts, international subcontracting, project operations, exporting, alliances, and foreign direct investment. These sections have the internalization process of the firm as framework, which emphasizes the strategic scope. Section 3 focuses on mode switching and stretching strategies, as well as, mode combination approaches. All along, next to the discussion, the reader will enjoy the well‐thought graphics, illustrations, cases, and multiple examples used to assist in communicating the central message of the book.

Franchising is discussed in its structure, management, and mechanics. The chapter details the different organizational forms for franchising: master franchising, wholly‐owned subsidiary, joint venture, direct franchising, and area development. Most critical issues are supported by well‐documented international examples such as Bally, Fersine, Elf Atochem, Subway, Wendys Supa Sundaes, among others. Through these examples and others, the authors illustrate that there is a wide type of experiences preceding the move into international franchising. When making the decision to use this mode of foreign operation, considerations such as the degree of standardization and adaptation are critical and realistic. The description of the topic of franchising includes the perspectives of the franchisee and franchisor. From the perspective of the franchisor, international franchise is driven by it domestic maturity and related expansion processes, interested foreign party, encouragement from international supplier, and low capital demands for implementation. In addition, the criteria for the selection of franchisees are discussed and the nature of market selection, franchise package, as well as, legal and regulatory issues are analyzed in detail.

Perspectives from the licensees to adopt licenses are critical in today's competitive global market. The pressure to develop new products, acquire new technologies to enter new markets, and develop further acquired technologies through R&D suggest firms to license as a mode to stay competitive. The treatment of the topic of licensing is excellent. The authors start their presentation with a brief but meaningful description of the term and its uses. The forms of intellectual property and proprietary knowledge are analyzed and general important concepts are defined such as patent, trademark, design, mask work, copyright, trade secrets, and know how. Finally, as license becomes the mainstream penetration model for many firms, it allows access to broad model activity. For example, license has been used to support foreign direct investment, exporting efforts, and first time attempt to test foreign markets.

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 was pleased by the authors' decision to address the management of alliances under a process perspective and to provide deep insights about alliance functioning to the reader. This is a topic treated lightly in most publications. Professors Welch, Benito, and Petersen discuss the characteristics, approaches, and mechanics from the initial agreement between partners, the alliances establishment and functioning, to the assessment of alliance performance.

The analysis of foreign direct investment is approached as a mode of foreign operations in combination or sequential step 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.

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 internationalization 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: how related business units are, how segmented the market is, value activity specialization, needs for control and commitment, and 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 FOM, 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. 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 are important barriers to evaluate. At the end, the authors urge managers and firms to ensure a high level of knowledge and expertise about the different operation modes. Firms that pursue involvement with foreign markets must decide on which internationalization process and what international strategies to carry out. More importantly, the integration of international efforts within an international entrepreneurship framework may be required (Ruzzier et al., 2006).

Following a dynamic approach to mode switching and stretching strategies, the authors discuss inter‐mode switches; those that imply a change of organizational form “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 are discussed in detail. Moreover, 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 mode.

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 manuscript. Managers will find the framework of this book very appealing and relevant to their everyday international efforts and inquires. The book is an mandatory reading for academics and graduates in business, international marketing, and international business.