International Hotel Management

Lecture 3
International Hospitality Market Entry
Introduction
 Hotel companies try to achieve competitive advantages through various methods, one of which is their choice of
mode of market entry.
 This chapter will present six popular foreign market entry modes, the wholly owned subsidiary, joint venture,
strategic alliance, franchising, management contract and consortia approaches.
 We will then compare their advantages and disadvantages.
Definition of Entry Mode, and Related Degree of Control
 Entry mode has been defined as an institutional arrangement for organizing and carrying out international business
transactions, including; full equity arrangement (e.g., a wholly owned subsidiary), partial equity arrangement (e.g., a
joint venture, in which the entrant could be majority, equal, or minority partner), or a non-equity arrangement (e.g.,
franchising, licensing or management contracts).
 The decision of which entry strategy to employ depends on a large number of factors.
 Each of these modes of entry had different implications for the degree of control that an international service firm
can exercise over the foreign operation, the resources it must commit to the foreign operation, and the risks that it
must bear to expand into the foreign country.
 Thus, identifying the appropriate entry mode in a given context is a difficult and complex task.
 For example, franchising imply the lowest degree of control, and foreign direct investment with substantial equity
participation, e.g., wholly owned subsidiaries, provides the most control.
 The first type of control is management control that is mainly a function of the ownership of the business entity.
Management control is directly related to the ability and flexibility of decision making in the general area of
management such as provision of service, marketing, administration, financing, research and development, and so
forth.
 A second type of control is control of a market that is mainly a function of a firm’s competitiveness. If the cost of
controlling and coordinating foreign operations is greater than the cost of controlling and coordinating domestic
operations, and if that cost difference is correlated with the firm’s intangible capital assets, it will retard foreign
direct investment.
Benefits of Entering Foreign Markets
1. Business growth: When growth opportunities become limited in the home market, companies are often driven to
seek new international markets. A mature fast food product or standard hotel service with restricted growth in its
domestic market often has new life in another country where it will be in an earlier stage of its life cycle.
2. International branding and recognition: Loyal customers will use the same brand when they travel around the
world.
3. Economies of scale: Big companies can achieve these with higher levels of productivity and purchasing power, for
example, lower per-unit cost in global advertising campaigns.
4. High competitiveness: Multinationals can access more resources when entering foreign markets and attract labor
from within the global human resource pool.
5. Incentives: Governments in countries seeking new resources of capital and technological know-how often provide
incentives to attract multi-national corporations.
Factors Influencing Foreign Market Entry Mode
 Information Uncertainty
 The limited amount of information available about international trade in services has assisted in the mystification of
this importance and rapidly growing line of business. Unlike merchandise trade, the true volume of international
1
 services is not known. As a result, the management of service industries from a public policy and international trade
and marketing perspectives remains complex and not well understood.
 Environmental Uncertainty
 Previous researches show that level of environmental uncertainty and risk in the host country affects the choice of
entry modes. Pressures from external sources have crucial influences on the entry mode decisions and structures
that firms pursue. International service firms must deal with the environmental uncertainties and risks embodied in
the contextual environment of the host country because the operations and decisions of organizations are
inextricably bound up with the conditions of their environments.
 Cultural distance and the risk existing in the target country
The specific characteristics of each destination turn out to be essential when choosing the entry mode. In this regard,
cultural distance and the risk existing in the target country have traditionally been two of the variables most often used
in previous research works.
 Firm size
 Greater size implies greater availability of financial and managerial resources, which makes it easier to set up full-
ownership subsidiaries.
 The availability of a financial resource
 This will make the firm more likely to adopt growth strategies entailing greater resource commitment
 Other factors
 There can be political risks, economic constraints, cultural differences, and technological disadvantages that prevent
a multinational firm from effectively carrying out its international expansion plan. Economic and political conditions
and government policies are critical to the survival and profitability of a firm’s operation in a foreign country.
Types of Foreign Market Entry Strategies in the Hospitality Industry
 Wholly owned
 Joint venture
 Strategic alliance
 Licensing/franchising
 Management contracts
 Consortia
1. Wholly Owned Subsidiary (by Foreign Direct Investment-FDI)
Foreign direct investment (FDI) describes the investment flows out of the home country as companies invest in or
acquire assets in the target country. FDI allows companies to produce, sell and compete locally in key markets.
 FDI involves the transfer of resources including capital, technology and personnel. It may be made through the
acquisition of an existing entity or by the establishment of a new enterprise.
 The main advantage is that they allow tight control for the parent company.
 The main disadvantage is that they are costly to set up and require detailed knowledge of local conditions. Some
hotel chains that owned their own hotels decided that due to rising costs, it would be better to dispose of their
properties and concentrate on the operational side.
2. Joint Ventures
Joint venture is a direct investment that two or more companies make and share the ownership. The key issues to
consider in a joint venture are ownership, length of agreement, pricing, technology transfer, local firm's capabilities and
resources, and government intentions. A typical joint venture is where two partners come together and take 50%
responsibility each for running the new venture. Partners may be from different businesses,
 The advantages of joint venture are:
- Easier access to other countries' markets.
- Sharing of risks and costs. A company can limit its financial risk and exposure to political uncertainty.
2
 - Achieve synergy by combining different value chain strengths. One company with in-depth knowledge of a local
market might find a foreign partner possessing well-known brands.
- Finally, a joint venture may be the only way to enter a country if governments favor local companies, and
impose high tariffs on foreign investment or regulate the level of foreign control that is acceptable.
 The disadvantages of joint ventures are:
- Conflicts of interest may occur. The partners may not have the same priorities and the organizational culture
may be very different.
- Partners must share risks as well as rewards.
- A company incurs significant costs associated with the control and coordination issues of the joint venture.
- One of the companies may lose control over its know-how and therefore could establish a potential competitor.
3. Strategic alliances and global strategic partnerships
 A strategic partnership is an agreement between two or more competitive multinational enterprises for the purpose
of better serving a global market.
 In contrast to a joint venture where the partners may be from different businesses, companies in the same line of
business almost always form the strategic partnerships.
 Strategic alliances exhibit three characteristics:
1. Participants remain independent after the formation of the alliances.
2. Participants share the benefits of the alliance as well as control over the performance of assigned tasks.
3. Participants make ongoing contributions in technology, products and other key strategic areas.
Advantages for forming alliances and partnerships include:
1. A partnership is a quick way to develop a global strategy without incurring any great costs.
2. Providing access to national and regional markets.
3. Providing learning opportunities.
4. Enabling companies to share costs for a project.
5. Resolving lack of skills and resources within a company by forming an alliance with a company with those
resources.
Disadvantages:
1. The partners share control over the tasks, which creates a series of new management challenges.
2. There are also potential risks associated with strengthening a competitor from another country.