Quiz 3 - Ch.6, Global Market Entry Modes, Intl. Mkt

International Entry Modes

Entry decisions are influenced by two key questions:

• How much of our resources are we willing to commit?

• How much control do we wish to retain?

• Many companies move from exporting to riskier modes, in effect treating these choices as a learning curve.

• Export-base entry

  • Indirect exporting

  • Direct exporting

• Contract-based entry

  • Licensing / Franchising

  • Contract manufacturing

  • Strategic alliance

• Ownership-base entry

  • Strategic alliance

  • Joint venture

  • Wholly owned subsidiary

International Entry Modes (Important Factors to Consider)

• Cultural and linguistic differences

  • Affect all relationships and interactions inside the company, with customers, and with the government.

• Political and economic issues

  • Determine the level of investment & commitment and potential earnings.

• Quality and training of local contacts and/or employees

  • Evaluating skill sets and then determining if the local staff is qualified is a key factor for success.

• Experience of the partner company

  • Experience of the local partner with the product and in dealing with other foreign companies is essential to success of the partnering.

Exporting

the marketing and direct sale of domestically produced goods in another country.

• Packaging, labelling, and pricing are the main concerns.

• Most of the costs associated with exporting take the form of marketing expenses.

  • E.g., approaching potential buyers through advertising, trade shows, or a local sales force.

• Advantages

  • Fast-entry

  • Low financial risk

  • Diversified revenue source

• Disadvantages

  • Low control (sales through a local company)

  • Low local knowledge

  • Lack of consumer insights due to cultural and language barriers

  • Transportation: costs & environmental impact

  • Complexities from export & import procedures

Indirect Exporting

Reaching markets with the use of an intermediary located in the home country

• Export Management Company (EMC)

  • Handles all aspects of export operations. E.g., marketing research, patent protection, channel credit, shipping, logistics, and actual marketing of product

• Export Agent

  • Tends to provide more limited services and focus on one country or part of the world. E.g., sale and handling of goods

Direct Exporting

Reaching markets directly or via an intermediary located in the foreign market

• Independent Distributor

  • Takes margin on selling price of products

  • Useful for low volume or when facing government restrictions on wholly owned subsidiaries

Licensing

Company (the licensor) allows a foreign company (the licensee) to use its intellectual property (e.g., patents, trademarks, copyrights) in exchange for a fee or royalty.

• Advantages

  • + Little investment is required

  • + Commercial and political risks absorbed by the licensee

  • + The licensor can enter several markets quickly

• Disadvantages

  • – Quality/brand control challenges

  • – Possibility of creating a competitor

  • – Legal and regulatory environment (IP and contract law) must be sound

Franchising

• A company (the franchiser) grants a foreign company (the franchisee) the right to operate its established business model, including brand name, logo, products, and methods of operation.

• The franchiser usually provides advertising, training, and new-product assistance

  • Ex: McDonalds, subway, Starbucks

Contract Manufacturing and Outsourcing

• The company contracts with a local company in a foreign country to manufacture a product while retaining control of product design and development and branding.

  • E.g., textile and apparel, electronic devices Contract Manufacturing and Outsourcing

• Nonmanufacturing functions can also be outsourced to nations with lower labor costs.

  • E.g., business services such as software development, accounting, insurance claims processing.

Strategic Alliances

• A strategic alliance involves a contractual agreement between two or more enterprises to pool resources in order to achieve business goals that benefit all partners.

  • Partners typically offer complementary skills and resources.

• Common purposes include

  • Enhancing marketing efforts

  • Building sales and market share

  • Improving products

  • Reducing production and distribution costs

  • Sharing technology

• For example,

  • Cisco decided to co-brand with the Fujitsu name so that it could leverage Fujitsu’s reputation in Japan for IT equipment and solutions

Joint Ventures (JVs)

• A joint venture is a business agreement in which parties agree to develop a new entity and new assets by contributing equity.

  • Participants exercise control over the enterprise and consequently share revenues, expenses and assets.

  • In some cases, management control may not correlate with equity participation.

• Why?

  • JV may be required by local government

  • Partner may have important skills or contacts of value

    •  E.g., local manufacturing or excellent government/distribution contact

• Challenges

  • Integration problems between different corporation cultures

  • Risk of sharing sensitive information (know-how) → local partners can be future rivals

  • Lack of full control

Wholly Owned Subsidiaries

• The formal establishment of business operations in foreign soil – the building of factories, sales offices, and distribution networks to serve local markets.

  • Achieved by either greenfield venture or acquisition.

• Advantages

  • Full control over the operations.

  • Can be seen as an insider who employs locals.

  • More easily integrated into firm’s global network

• Disadvantages

  • High initial investment

  • Longer time to establish operations.