ISM - Lesson 5 - Entry Modes-Karteikarten | Quizlet

Internationalization - Definition

The process of a firm expanding its attention outside its home market (domestic market) to serve new customers in a new country

Why do companies want to internationalize?

1. Market seeking (Netflix)

2. Efficiency seeking (Tesla)

3. Resource seeking (Glencore)

4. Strategic asset seeking (Luxury goods)

Why may companies not want to internationalize?

1. Unknown markets present unknown risks and challenges of control

2. Dilution of focus on current market

3. Resources needed

Factors influencing a firm's Internationalization Process

1. Learning

2. Experience

3. Networks

4. Locational Advantages

5. Internationalization/Ownership

6. Institutional Arrangements

Entry Mode - Definition

An institutional arrangement for the entry of a company's products and services into a new foreign market

Entry Mode Types

1. Without significant partners

2. With significant partners

Direct Export - Overview

1. No intermediary

2. Direct contact with foreign customers

Direct Export - Advantages

1. Greater profits (no intermediaries)

2. High degree of control

3. Direct business relation with customers & direct customer feedback

4. Showing full commitment

5. Good protection of patents, etc.

Direct Export - Disadvantages

1. High cost & time-consuming

2. Direct responsibilty for failures/problems

3. Competitive disadvantages (local competitors: market knowledge, response time)

4. Necessity to handle complex logistics issues

Indirect Exports - Overview

1. International business through intermediary

2. No direct contact with foreign customers

Indirect Exports - Advantages

1. Low risk & minimal involvement in the export process

2. Possibility to concentrate on the home market

3. Limited responsibility for problems/failures

4. No or limited involvement in logistic issues

5. Local knowledge of local agent

Indirect Exports - Disadvantages

1. Lower profits

2. Low degree of control over the foreign business

3. No direct contact with customers & no direct customer feedback

4. Risk of creating a future competitor

Own Subsidiary - Overview

1. Owned by the parent company

2. Greenfield investment or acquisition

Own Subsidiary - Advantages

1. High degree of control over the foreign business

2. Low risk of losing IP to competitors

3. Cost synergies between parent company and subsidiary (e.g. joint marketing campaigns)

4. Rather direct contact with customers

Own Subsidiary - Disadvantages

1. High cost & large capital investment

2. Middle- or long-term commitment

3. Difficult to develop relationships with foreign customers & suppliers

4. No/limited local knowledge

Indirect vs. Direct Exports

Indirect:

1. Export Consortia

2. Freight Forwarders

3. Selling to an Exporter Client

Direct:

1. Middleman

2. Direct contact with retailers

3. Direct sales

Owned Subsidiary

1. Partly Owned:

1.1. Owns 50% or more but less than 100%

1.2. Parent company does not get full control

2. Wholly Owned:

2.1. Owns 100% of shares & controls subsidiary fully

2.2. Not a merger

Licensing - Overview

Licensor sells the right to use technologies/processes/patents/brands etc. to a licensing company

Licensing - Advantages

1. Low financial risk & low cost of market access

2. Avoiding tariffs & restrictions on foreign investments

3. Not necessary to acquire detailed market knowledge

4. Quick expansion without large investment

Licensing - Disadvantages

1. Limited market opportunities

2. Dependence on licensee, potential conflicts

3. Risk of creating a competitor

4. Incompetent licensees can produce image problems

Franchising - Overview

Franchisor sells the right to run the business under the franchisor's name to a franchisee in a foreign country

Franchisee - Advantages

1. Low financial risk & low cost of market access

2. Avoiding tariffs & restrictions on foreign investments

3. Not necessary to acquire detailed market knowledge

4. More control than in the case of licensing

Franchisee - Disdvantages

1. Limited market opportunities

2. Dependence on franchisee, potential conflicts

3. Risk of creating a competitor

4. Rather low degree of control over the foreign business

5. Incompetent licensees can produce image problems

Joint Venture - Overview

1. Cooperation between two/more local and foreign companies (equal contribution to the new entity, shared revenues/expenses/control)

2. Creation of a (third) new company

Joint Venture - Advantages

1. Benefit from local partner's knowledge

2. Shared costs/risks

3. Reduced political risk

Joint Venture - Disadvantages

1. Losing control over technologies to the partner

2. Risk of conflicts due to the necessity to cooperate

How to choose a mode of entry?

1. Naive rule

2. Pragmatic rule

3. Strategy rules

Naive rule

1. The decision-maker uses the same entry mode for all foreign markets

2. Ignores the heterogeneity of the individual foreign markets

Pragmatic rule

The decision-maker uses a workable entry mode for each foreign market

Strategy rule

This approach requires that all alternative entry modes are systematically compared and evaluated before any choice is made

Comparison of entry modes

From minimum to maximum risk, involvement & resource commitment:

1. Indirect Exporting (Intermediaries)

2. Direct Exporting

3. Licensing & Franchising

4. JV

5. Direct Investment & Foreign Manufacture

Factors influencing the choice of entry mode

1. Internal factors

2. Desired mode characteristics

3. Transaction-specific factors

4. External factors

5. Product

Internationalization - Stage Model (Uppsala Model)

Stage Model Theory - Key takeaway

Companies first gain experience from the domestic market before they foray into international market

Stage Model - Internationalization as sum of target country patterns

1. Prioritization of markets: based on market attractiveness, psychic distance & degree of difficulty

2. Constraints: Resources available, level of commitment needed, longer term firm objectives

2 paths to Internationalization

1. Slow & Steady

2. Quick & Ready (Born Global)

2 paths to Internationalization - Slow & Steady

1. Develop expertise through learning curve of business & industry

2. Consolidate domestic market first

3. Build networks that have future international relevance

4. Expand in a staged and prioritized manner

2 paths to Internationalization - Quick & Ready

1. Useful in a highly internationalized environment

2. Low differentiation in offerings across markets

3. Based on a foundation of global sourcing model -> rapid dissemination of innovation

Mode of Entry - Internal Factors

1. Costs/risks

2. Speed

3. Long-term objectives

4. Company size/flexibility

5. International experience

6. Control/managerial reasons

7. Product complexity & differentiation

8. Relationships

Mode of Entry - External Factors

1. Socio-cultural distance

2. Country risk & demand uncertainty

3. Market size & growth

4. Direct & Indirect trade barriers

5. Competitive environment

6. Small number of relevant intermediaries available

7. Laws & regulations

8. Geographical distance