The saturation of affluent companies in developed markets has greatly reduced their profit margins. This has led to the need for multinational companies to expand their operations beyond geographical borders and increase interest in emerging markets. Multinationals have solely been competing for the top tier of the market pyramid which is small and has been shrinking (Forsgren, 2017). Challenges faced by multinationals in entering emerging markets include: rise in corporate interest in these emerging markets, frequent unavailability of convertible currency resulting in barter and countertrade hence placing a burden on international managers to market products received in return to other consumers; Lack of protection some of the countries afford to intellectual property rights resulting in illegal copying, Lack of good quality products as many producers place emphasis on product performance neglecting style and product presentation. The importance of entry strategies on foreign markets for Shell has had major impacts on the levels of control the Multinational enterprise has over the venture. The Multinational Company with minimal risks in developing nations used exporting and licensing as a means to lower control levels in marketing and operations.
However, in developed nations, the Multinational Corporation has used varied entry modes such as full ownership of facilities and joint ventures which involve more efforts in control with added risks (Rugman & Verbeke, 2004). The company had done plenty of analysis on foreign markets and considered numerous critical issues before entry. There has been a need for the foreign business to determine the mode of foreign entry that best suit its objectives and strategic fit in the foreign business environment. The significance of a particular entry mode has been significant for Shell due to the huge amounts of funds involved.
The current strategies at Shell can be attributed to the supply patterns in the world markets and demand shifts as well as the competitive nature of these markets. The process of finding new markets, therefore, has necessitated the need for new strategies to expand foreign markets. Therefore, the organizational aspirations to operate internationally require selection of market entry strategies (Frynas & Mellahi, 2015). Firms may pursue internationalization due to a variety of reasons.
Some of the motives may be proactive while others could be reactive. In the modern times, the business environment is dynamic, complex and in continual change. The choices of foreign market entry mode greatly influence the entrant’s future performance and decision in these markets. The firm devised entry strategies to preposition them to take advantage of the opportunities in the economy in a manner that was sustainable. For an international firm to enter to the foreign market is a function of various parameters some of which are firm-specific others are influenced by the foreign business environment, while others are influenced by the very context in which the decision is being made. Entry mode was very challenging to Shell business managers, as wrong decisions on entry mode choice could have been very costly to the organizations in terms of time and resources.
One of the ways through which Shell redefined competitive advantages was by entering new market strategies. Entering a new market involves a big risk since firms cannot be certain on the outcome, but it may also result in losses for a firm not to venture in new markets (Forsgren, 2017). Among the strategies the company has adopted in its history include franchising and joint ventures. In franchising, the organization has established agency relations with the franchisees who then use the parent company trade names and processes to do business or distribute their products.
A contract is used to govern the relationship of agency the franchise and the parent company establishes. The duration of the relationship and the conditions of the agency are outlined in this contract. In this case, the Multinational Corporation has a successful brand name which franchisees require to create their opportunities to gain profits in the name of that business. Due to the difficulties in foreign economies, Shell has recently had difficulties in finding and maintaining control over franchisees. Franchising success on the international platform is based on these two factors.
Another strategy Shell has historically employed in international markets is the export strategy. The goods once produced in a given country are distributed to other countries and sold to the local customers. This was the initial foreign expansion step on the international platform (Rugman ; Verbeke, 2004). Export strategies involve the distribution and sale of goods and service in a country other than which they were produced. To facilitate the strategy, Shell has had to sign GATT with foreign governments to impose levy tariff on imports, importers, exporters, transport providers, and facilitating the operations of the local producers. This has eliminated the need for new structure establishment in such markets as since no manufacturing takes place in such locations.
The company however incurs costs in marketing activities. The business strategy in addition to requiring less international experience on operations, limited knowledge on markets is not a huge shortcoming for the business. The firm has substantially been exporting products to other countries for many years now and exports have become the best choice for international markets on the long run. The expectations on imports are that customers have to deal with shortcomings on sales and marketing (Cullen ; Parboteeah, 2013). In addition, numerous intermediates assist in the delivery process. The reliance on domestic production makes exporting products seem a relatively simpler task.
Having begun as reactive exporters, many firms realize the benefits of operating larger markets than the local in the proactive state. The success of export operations is dependent on the attention to detail of the processes involved. Among the considerations in exportation include payment terms, product preparation and documentation of export procedures, means of transportation, and any intermediaries if deemed necessary. The third alternative strategy adopted by Shell Global includes licensing local companies to use licensor property at a given exchange rate. The process utilizes the minimum amount of resources and thus requires the least amount of control (Verbeke, 2013).
Licensing involves intangible products such as production technique, trademarks, and design patents. Shell Global is able to gain higher returns on investment as a result of the arrangement involving little resources infusion. However, since the licensee is fully responsible for the production, marketing, and revenue collection of all these products, the parent company often incurs revenue losses and thus limits Shell involvement in such deals. The firm only implements such measures where a foreign country needs sustained production but company does not intend to take liabilities in the production process. In such instances, a foreign firm is given the license to operate the business on behalf of the parent company and carry out production (Frynas ; Mellahi, 2015). This eliminates the need for Shell to invest in the foreign location while sustaining the demands of foreign markets through foreign productions.
This has happened in markets where the demands are relatively low while the cost of exports or setting up a local industry far exceeds the profits that can be generated from such a market. Licensing is a simple way to promote the brand market in international markets while generating additional fees for the trademark, design patent and manufacturing process among others. Shell Corporation has also engaged in contracts in areas dealing with management especially in foreign markets. In these foreign locations, a management team may be contracted to conduct a given task within a specified time. The use of contracts as a strategy for international marketing reduces the efforts of the organizational staff in constant movements.
Contracts allow for flexibility due to the short amount of time they require to execute and revenue determination is done in advance as the contracts are offered at a fixed rate (Cullen ; Parboteeah, 2013). The only limitation is the constant need to negotiate for a new contract every now and then due their relatively short-term. Such negotiations may require cross-cultural skills, costs, and are time consuming. The differences in contract implementation may cause variations in revenues which may cause a dip in form due to the lack of a predictability pattern. Due to such shortcomings, Shell Global has introduced new strategies in the management of new markets. One such strategy involves the turnkey operations.
The project involves the transfer of capital equipment, management experts, and the export of technology. In this case, the contractor, Shell Global, signs the agreement to build the manufacturing plant for its products, supplies production inputs in addition to raw materials for the process, and offer training for operating personnel (Verbeke, 2013). The corporation having designed and erected the manufacturing plant will then transfer the operations to another person who will be in charge of production. Such however have only been adopted where there are huge markets for Shell products due to the substantial financing needed for such projects.
In addition, the running costs for such plants are estimated to be high and hence the need for ready markets to products once produced thereby reducing additional costs in storage and transportation (Frynas ; Mellahi, 2015). Such businesses in the right environment and specialized expertise have been quite profitable. The high costs of investing in such a project also limit the number of projects that can simultaneously be invested. Another strategy that the company has adopted is the foreign direct investment. This strategy requires greater utilization of resources and thus greater control over the process of production is required.
Multinational Corporations generally operate behind non-optimal tariffs on imperfectly competitive markets and therefore attenuation of the pre-existing conditions is essential for-profit taxation and export promotion schemes (Verbeke, 2013). Operating behind the non-optimal tariffs, such export promotion policies mitigate the social costs of the corporation. The strategy on foreign direct investment allows enterprise in direct investment and direct investors to experience the economic benefits from such relations. In relation to the direct investment enterprise, as the direct investor shares technology, management expertise, and capital, the markets are able to expand into new economies and new ventures. The establishment of the firm presence in foreign markets follows the acquisition of equipment, plant, labor, land, capital, and technology as an internalization strategy (Forsgren, 2017).
The management skills, technology transfer, and capital infusion are among the factors that facilitate organizational growth has resulted from the direct investment enterprise. The ownership strategy adopted for manufacturing facilities and foreign-based assembly is direct ownership under the ultimate form of foreign investment. Shell has built its own facilities in new territories and acquired property by on full interest or shared with others. Distinctive advantages of foreign production facilities result in large markets with a higher purchasing power.
In such markets, the company secures cost economies first in forms such as freights savings, investment incentives on foreign governments, raw materials, and cheap labor (Rugman ; Verbeke, 2004). The firm further strengthens its market position through the provision of new jobs, boosting economic growth, and increased domestic cost rations facilitate gains of international trade. Next, the adaptability of the products to the market is dependent on the company’s effort in establishing good relations with the suppliers, distributors, customers, and the government. The company will then retain control over the markets and thus develop policies in manufacturing and distribution directed towards the achievement of the internal goals of the company. Finally, the company has a certain level of guarantee when the market advocates for the purchase of local products to facilitate local growth (Cullen & Parboteeah, 2013).
The major shortcoming in foreign direct investment is the extent of risks the organization is exposed to such as declined markets and devalued or blocked currencies. Due to the reductions on substantial severance pay to their staff on imposition by the local government, closing down or reducing operations may be an expensive process for the company. The firm also risks effects on double taxation from both the home and host economies. Both under these new strategies, the company has adopted OPEIC programs in regions through its subsidiaries and in the process attracted more international customers.
