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International entry mode for fast food companies

List of Figures 1 Introduction Internationalization of economy is one of the most important topics of recent times. As a consequence the question arises how companies follow their expansion strategies. A central issue linked to this question is the entry mode decision, because it is essential for the success of the globalization activities of a company. One possible entry mode is called franchising which is used by a lot of well-known companies worldwide. The focus of this term paper is to evaluate this type of entry mode based on the example of Subway, an international operating fast food chain.

To accomplish this purpose, the theory of market entry modes is explained in the beginning.

Master Franchising as Foreign Entry Mode: Evidences from the Spanish Franchise System

Further an overview of the different entry modes is given in order to highlight the international entry mode for fast food companies between them. After that franchising as a mode of entry is explained in detail. As a result of presenting the theory a profile of Subway follows. Furthermore the market entry strategy of Subway is analyzed regarding the fact how franchising influenced the expansion of the company in general.

After that the market entry into the Chinese market and its challenges is explained. Additionally the choice of market entry mode determines to a large extent the level of involvement in the chosen country.

In the following the differences are highlighted in order to understand the special attributes of franchising as a mode of entry into a foreign market. The different entry modes can be classified by degrees of resource commitment, risk exposure, control and profit return. The following figure shows the different entry modes divided into three groups: The export, contractual and investment modes.

Overview of the different entry modes illustration not visible in this excerpt The given categories can be broken down into several distinctive entry modes. The first group of the export modes permits a market entry through exporting which describes the process of sending goods from one country to another for distribution, sale and service. Within the direct export the company sells its products directly to the customer, while the indirect export is performed with the help of a distributor between the seller and the customer in the foreign target market.

Generally speaking this group of entry modes is characterized by a low degree of control of the activities in the foreign market, a low risk exposure and low resource commitment, because of the named direct shipping or the cooperation with an intermediary. Further the entry into foreign markets through joint ventures belongs to the contractual entry modes. A joint venture is a special form of strategic alliance which is normally made up of the creation of a new business in a foreign market by two or more partners.

Generally the contractual modes give the company a higher control over its activities while taking compared to the export modes a higher risk because of the binding contract between the firm and the agent in the foreign country.

The third group within the entry modes consists of the investment modes.

Evaluation of Franchising as a mode of entry by analyzing Subway's expansion strategy

This kind of entry modes can be described as an investment in new facilities in a foreign market or a purchase of stock of an existing company in order to exercise control over that company.

The franchisor benefits from a possible rapid growth of the company because of the fact that potential franchisees use their own capital in order to set up their facilities. Besides the advantage of the capital infusion the wider allocation of the business leads to a spread of business risk across geographical markets.

Like already mentioned the franchisee is obligated to pay a certain amount to the franchisor what generates a steady income stream for the franchisor. Additionally the know-how of the local partners can be used in order to cope with the local habits. The franchisee gains advantages from the contractual partnership, too. From his perspective one of the biggest benefits is the trade mark strength of the franchisor which gives immediate access to customers through an externally managed and well-known brand.

Additionally the franchisor supports the franchisee with technical advice and other support services. In 1974 the company started franchising in the USA and later it was international entry mode for fast food companies in order to expand globally.

An important point is that the franchising strategy is based on a strong brand, which helps to attract new franchisees. The strong brand is based on above-average customer satisfaction values, which help to retain the buyer's loyalty to the brand. In the case of Subway the first international franchise was opened in 1984 in Bahrain, because a domestic investor wanted to use the brand for his purposes and approached the company about opening a sandwich shop on the Persian Gulf Island.

A Subway store costs much less to open than other franchises. Subway opened almost 8. Further there is the profitability of Subway which is heavily influenced by the fees franchisees have to pay. In the first years Subway was faced with a challenging environment because of the fact that the local eating habits were different from the traditional countries Subway used to serve. Chinese people did not like to eat with their hands.

Eating with hands is necessary for nearly every product Subway offered and a common habit in the USA. At this point the standardized company faced difficulties with the product range.

Therefore Subway developed in cooperation with their franchisees a least one item which is tailored to Chinese tastes e. This was exactly done by using the know-how of the franchisees and brings International entry mode for fast food companies especially regarding the expansion into more rural areas where western eating habits are totally unknown in a better strategic position.

Following this approach Subway assumes that China could handle around 20. Besides that Subway had to jump some more hurdles because of weak intellectual property enforcement in China. Uncovering the secrets of the company in order to support the franchisees was connected with a high risk exposure because of the fact that many US brand had seen local companies take their names and logo and open fake, unapproved restaurants and stores.

Although there were these opportunities of franchising in China the search of adequate franchisees is still one of the most important parts of the business.

International Scholarly Research Notices

Especially in China due diligence is essential for the success of the operations in the foreign market. In the years from 1988 until 1997 Subway was the fastest growing franchise system worldwide.

Through the franchising system the company was able to use the know-how of their franchisees in order to adapt the offered products to the local requirements. Due to that the company benefits from advantages as well from the globalisation as well as from the localisation. This shows that this kind of entry mode is definitely a way towards a successful and universal market entry into different countries. In addition to that Subway managed to generate high profits by structuring its business activities based on the model of franchising.

This shows that franchising is an efficient market entry mode and definitely should be considered in the entry mode decision of a company. Subway 2015a [21] Cf. Subway 2015b [23] Cf.