case study : < https://wps.pearsoned.com.au/wps/media/objects/5060/5182227/Selecting.pdf >

Please answer the below 3 mentioned questions - including references

Questions

1. Is setting up a wholly owned subsidiary an appropriate mode of entry for ICLP to pursue in Japan? Discuss the pros and cons of pursuing such an entry strategy.

2. (a) How can a joint venture partnership benefit companies like ICLP in Japan?

(b) If a joint venture is chosen by ICLP as the preferred mode of entry in Japan, what are some of the issues that ICLP needs to be aware of when entering the joint venture agreement?

3. What are the different entry modes available to service firms? Discuss circumstances where a particular service firm is likely to choose one entry mode over another.

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CASE:

CASE STUDY 7.1 SELECTING THE MOST APPROPRIATE MODE OF ENTRY FOR A SERVICES COMPANY EXPANDING ABROAD ICLP'S ENTRY INTO THE JAPANESE MARKET Dajana Badzim and Richard Fletcher COMPANY BACKGROUNDICLP ICLP is one of the world's leading marketing loyalty companies, and currently employs more than 350 staff in 12 offices located in London, Dallas, Dubai, Hong Kong, Singapore and Sydney. The company is part of the Collinson Group, which has many associated companies across the globe in the field of travel, insurance and marketing. ICLP has extensive experience in loyalty strategy development, as well as design, development and implementation of customer loyalty programs. The company currently services more than 300 blue chip clients in over 47 countries worldwide, including Cathay Pacific Airways, Hang Seng Bank, Bank of China, Citibank, Northwest Airlines, Bass Hotels & Resorts and Virgin Atlantic Airways. The range of ICLP services offered in the marketplace include customer planning and development; program strategy, design and management; database design and maintenance; community strategy; partnership negotiations; call centre management; production and fulfilment; data analysis, customer segmentation, customer profiling; and profitability modelling. ICLP's corporate mission is to be recognised by its clients and acknowledged by its peers as the international specialist in loyalty marketing. The company is strongly committed to continuing its global growth by strategically managing its business mix. Continual expansion into foreign markets is a key objective for ICLP. One of the company's recent interests is to review the opportunities available in Japan for developing an ICLP presence and marketing its services to Japanese businesses. ICLP SERVICE OFFERING ICLP has significant experience in the establishment and management of airline membership service centres in an international context, as well as the development and implementation of points-based rewards loyalty programs for several airlines, including Cathay Pacific Airways, Northwest Airlines and Virgin Atlantic Airways. ICLP's service offering to its clients is focused on improving yield, retaining profitability, generating incremental revenue, increasing share of customer and attracting and retaining profitable customers. The business services offered by ICLP in the design, development and management of points-based rewards loyalty programs are knowledge and skill intensive rather than capital intensive. The services include: building the software used to process individual member transactions; membership database design and development; communications processing and fulfilment; administration and operations setup; and customer service management (e.g. call centre management). ICLP's competitive advantage therefore lies more in intangible assets such as human capital, firmspecific experience and technology know-how. The points-based rewards loyalty programs that have been developed by ICLP have proven to increase customer loyalty and thereby create incremental long-term revenue and profit for ICLP's clients. 322 Midland Typesetters Case Studies PART B MARKET OPPORTUNITIES FOR ICLP IN JAPAN Japan is a market which to date has not been seriously explored by the company even though it appears potentially to hold immense opportunity. ICLP has not been seriously committed to exploring the opportunities in Japan in the past, due to significant non-tariff barriers that exist in the marketplace. Some of these non-tariff barriers include:

The lack of complete and reliable data on ICLP's competitors in Japan. There is limited information publicly available to determine the suppliers who have developed and implemented points-based rewards loyalty programs for companies in Japan.

The high cost of operation in Japan (including real estate, labour, etc).

Ethnocentric tendenciesJapanese businesses are likely to prefer to use domestic suppliers to unknown foreign suppliers. Patriotism, conservatism and nationalistic feelings may thus prevent new business prospects in Japan from using ICLP (an unknown company) as their preferred supplier of a points-based rewards loyalty program.

Cultural and linguistic barriersThe need for personal interaction and the differing cultural expectations of service that exist in Japan produce the potential risk of 'cultural shock'. To develop a sensitivity to the cultural nuances that exist in Japan, ICLP will need to consider the provision of appropriate cultural training to staff and the possible use of local Japanese employees where needed. These barriers could create prohibitive costs and difficulties for ICLP in Japan. The first step in ICLP's expansion into Japan should be to assess the major obstacles that exist in the market, perform an in-depth analysis of ownership, location and internationalisation factors and then pursue strategic actions designed to overcome the barriers identified. In 1988 the Japanese government deregulated its domestic airline industry, which encouraged new competition from smaller carriers who were previously disadvantaged by the strict requirements and regulations that existed in the market. Three new carriers entered the domestic airline market as a result of the industry's deregulation, including Skymark Airlines, Hakkaiko International Airlines and Fair Inc. Until that time Japan's domestic airline industry was confined to and is still dominated by three major carriersJapan Airlines (JAL), All Nippon Airways (ANA) and Japan Air System (JAS). All offer airline passengers the opportunity to accumulate mileage reward points. As new carriers continue to enter the domestic Japanese airline market, competition for fares and for bonus perks (such as mileage reward points) is likely to intensify even further. New market entrants such as Skymark Airlines (which predominantly rely on airfare discounting to attract passengers) are faced with the challenge of creating customer loyalty in an industry where consumers are constantly lured to cheaper prices, and where competitors are prepared to match the prices of their rivals. The new carriers in Japan's domestic airline industry are unlikely to survive in a highly competitive market by merely relying on airfare discounting, as the major carriers will simply retaliate by engaging in price wars. As the major competitor airlines (JAL, ANA and JAS) concentrate on cutting costs and improving efficiency to keep ahead of declining yield, there is an opportunity for ICLP to approach Skymark Airlines to develop and implement a points-based rewards loyalty program. THE INTERNATIONAL CHALLENGE FACED BY ICLP IN JAPAN Non-tariff barriers coupled with the complex nature of service provision can prove to be a major hindrance to the internationalisation process of service firms. Obstacles such as lack of resources, little knowledge of the foreign market, inexperience in the foreign market, linguistic and cultural differences, choosing the most effective internationalisation strategy, and selecting the most appropriate mode of entry represent major challenges for service firms wanting to 323 Midland Typesetters PART B International Market Planning Process expand abroad. An internationalisation strategy is often considered more risky for service firms than for manufacturers of goods. One reason is that in many services (including ICLP's offerings), both the producer and the production facilities are part of the service and hence the service firm is required to exercise more control over its resources than may be the case for a manufacturing firm. Unlike manufacturing firms, which commonly start the internationalisation process on a minor scale using indirect export channels followed by a step-by-step move towards more direct channels, service firms tend to have to face all issues upfront. ICLP must find an entry mode and a strategy that best helps them cope with this challenge. The foreign entry modes for service firms can be categorised as either 'client following' entry modes, where service firms enter foreign markets to serve foreign subsidiaries of their domestic clients, or 'market-seeking' entry modes, where firms enter markets primarily to serve foreign clients. ICLP's entry into Japan falls into the latter category. ICLP's challenge lies in finding an efficient and successful way of making its services accessible in Japan. Once the most appropriate entry mode is chosen, a local service offering must then be developed in the Japanese market to meet the specific needs of potential new business clients such as Skymark Airlines. Since ICLP's services range from consultancy, program strategy, computer software and database design to call centre management, ICLP is faced with the challenge of finding the most appropriate mode of entry that will successfully work across all of its varied service offerings. There are five main strategies for internationalising services. These strategies are not necessarily mutually exclusive and can be used by a company simultaneously. These strategies are direct export, system export, direct entry, indirect entry and electronic marketing. The first two strategies are export strategies and relate to services such as repairs and maintenance, where firms can be based in the domestic market and venture abroad only when required to move the resources and systems needed to produce the service for the clients. Export strategies are less applicable to ICLP, due to the fact that ICLP's services can be categorised as 'soft services' as opposed to ' hard services' and require little or no local presence by the exporter. The production and consumption of 'soft services' are to a large extent simultaneous, and 'soft services' require a major local presence by the service firm. Face-to-face contact is required in the delivery of ICLP services, therefore ICLP services must establish a physical proximity (i.e. close interaction) between itself and its new business clients in Japan. With direct entry, the service firm establishes a service-producing organisation of its own in the foreign market via foreign direct investment (e.g. via the acquisition of a local firm, a joint venture with a local firm or setting up a wholly owned subsidiary). Different entry modes will vary dramatically in the level of investment required, with substantial equity participation providing the most control in comparison to other modes of direct entry. By comparison, indirect entry refers to a service firm establishing a foreign operation in the market, without being totally or partly owned by the firm (e.g. licensing or franchising). Through a licensing or franchise agreement, local service firms receive the exclusive rights to a marketing concept, which may also include rights to a certain operational mode. Indirect modes of entry provide an easier route to delivering culturally sensitive services by drawing on the knowledge of local management. It also represents the least risk to the internationalising firm; however, the firm's control over the foreign operation is limited. Another possibility is electronic marketing which, as an internationalisation strategy, relates to a firm that extends the accessibility of its services through the use of advanced electronic technology (the Internet, satellite TV, etc.). When using electronic marketing, the service firm is not bound to any particular location and the service can be administered from anywhere around the globe. Due to the nature of the services offered by ICLP, it would seem that electronic marketing is best used as a promotional and advertising tool to attract new business, rather than as a mode of entry. 324 Midland Typesetters Case Studies PART B ICLP's services can further be defined as either: 1. object serviceswhere services are embedded in a physical object (i.e. ICLP computer software), or 2. contact serviceswhere direct contact is required between the service provider and the client (i.e. ICLP systems support, ICLP systems planning, ICLP consulting and so on). Despite the overlap of the services that a particular firm may offer, different types of services require different entry mode strategies. TABLE 1 Considering the combination of services offered by ICLP, the basic choices for the company's entry into Japan appear to lie in forms of foreign investment. WHOLLY OWNED SUBSIDIARY VERSUS JOINT VENTURE VERSUS ACQUISITION OF A LOCAL COMPANY ICLP has a sound track record of developing its business around the requirements of its key clients; for example, the establishment of the offices in Hong Kong and Dubai was strongly influenced by its clients Cathay Pacific Airways and Saudi Arabian Airlines respectively. ICLP's usual approach in the past has been to deploy a specialist team to specify the requirements for, and manage the implementation of, a new service centre in a foreign market (new service centres in new markets have been established in the past by ICLP, by setting up wholly owned subsidiaries that meet the current and future needs of each client). The process of ICLP's entrance into the Japanese markets is likely to occur in an evolutionary manner, where ICPL increases its involvement gradually over time, passing through various different stages in the course of acquiring a new business client, and entering and establishing a strong presence in the marketplace. The real challenge for ICLP in Japan lies in determining the most efficient method of initial foreign investment. A joint venture with an existing local service firm has many potential advantages including the speed with which ICLP could establish a presence in the Japanese market. It also represents a lower-cost option than sole ownership. Via a joint venture, ICLP would gain access to a wealth of information concerning local market conditions, including culturally specific knowledge, and would avoid a period of loss making while establishing itself in a new market. The current uncertainty about future demand for ICLP's services in the Japanese market may make ICLP unwilling to invest substantial resources upfront to establish a wholly owned subsidiary from scratch. The preferred option may thus be to favour initially entry modes that involve a lesser resource commitment (e.g. a management contract or a joint venture involving minor equity participation). ICLP's initial mode of entry in Japan should be one which minimises company costs and reduces risks. Over time, as ICLP becomes more committed and knowledgeable about the Japanese market, and as it acquires more new business in Japan, it may be preferable to increase its ownership and local presence by acquiring a local service firm or establishing a wholly owned subsidiary. There is an obvious risk in initially setting up a wholly owned subsidiary in Japan. 325 1. Direct 2. Systems 3. Direct 4. Indirect 5. Electronic export export entry entry marketing Contact service Yes No No No Yes Object service Yes Yes Yes Yes No Midland Typesetters PART B International Market Planning Process To acquire new clients, to fend off local competition and to ensure optimum service quality in Japan ICLP must establish a presence in the market. Taking into account the types of services offered by ICLP as well as the high operational costs which are characteristic of the Japanese market, the preferred method of establishing an initial local presence in Japan may not necessarily be via a wholly owned subsidiary (as has commonly been the case for ICLP in the past when entering new foreign markets).