Chapter Nine Global Market Entry Strategies. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 9 | Slide 2 Foreign Market Entry Modes.

Chapter Nine

Global Market Entry Strategies

Copyright © Houghton Mifflin Company. All rights reserved. Chapter 9 | Slide 2

Foreign Market Entry Modes

Exporting Foreign Production

Indirect

Direct

Assembly

Full-scale Integrated Production

Distributor Alliance

Marketing

Subsidiary

Ownership Strategies

Contract Manuf.

Licensing/Franch.

Joint Venture

Strategic Alliance

Wholly Owned Sub


Two Methods of Exporting

• Indirect - Reaching markets with the use of an intermediary located in the exporter’s home country+ Leverage intermediary’s expertise+ Good for firms with little international experience- Less profit, less control, do not gain experience

curve effects


Intermediaries for Indirect Exporting

• Export Management Company (EMC)– Handles all aspects of export operations• Marketing research, patent protection, channel

credit, shipping, logistics, and actual marketing of product

– Can act as merchant (taking title of product) or as agent (receiving fee or commission on product sale)


Intermediaries for Indirect Exporting (cont’d)

• Export Agents– Individuals or firms that assist

manufacturers in exporting goods– Similar to EMCs; but tend to provide more

limited services and focus on one country or part of the world• Focus more on sale and handling of goods• Exporting firms may need to utilize several

export agents to gain adequate worldwide market coverage


Two Methods of Exporting

• Direct – Reaching markets either yourself or with the use of an intermediary located in the foreign market + More profit, greater control, able to leverage

experience curve effects- Requires more expertise, management time, and

financial resources


Some Examples of Direct Exporting Activities

• Identifying market opportunity– Product, price, place, promotion– Ensuring payment

• Distributing the product– Shipping the product

• Insurance, freight forwarding– Clearing customs– Getting it into the hands of buyers

• Warehousing, transporting to retail, etc.

• Providing after-sales support

Lots to Do!No wonder many

firms choose

an intermediary

to do this for them


Direct Export Options

• Independent Distributor– No direct cost to exporter; takes margin

on selling price of products

• Marketing Subsidiary– Initial and fixed

costs to establish and maintain subsidiary• Manager, sales

manager, clerical staff, warehousing operation, etc.

LESS PER-UNIT PROFIT

USEFUL IF VOLUME LOW

MORE PER-UNIT PROFIT

USEFUL IF VOLUME HIGH


Cooperating for Export

• Companies competing against each other in their domestic market may unite to address export markets as export consortiums– Governments may encourage and

support cooperation• Brazil’s Ministry of Development, Industry,

and Foreign Trade create export consortiums to share logistical and promotion costs of entering foreign markets


Foreign Production

• Firms may shift production to foreign markets– Gain market position• Circumvent import restrictions (quotas and tarriffs),• Communicates commitment to market

– Defend market position• Response to protectionism, currency fluctuations• Follow the customer

– Lower Costs• Cheaper production factors, decrease

transportation costs, etc.


Types of Foreign Production

• Licensing – Company assigns the right to a copyright, patent and/or trademark to another company for a fee or royalty (% sales volume)


Pros and Cons of Licensing

+ Leverage local knowledge of licensee+ Commercial and political risks absorbed by licensee+ Better for marketing adaptation strategies+ Can improve firm’s manufacturing capacity+ Enables firms to enter several markets quickly

– Possibility of creating a future competitor

– Dependence on licensee– Uncertainty of licensee’s

marketing and quality control capabilities

– Potential dilution of brand equity


Foreign Production

• Franchising – Special type of licensing where company makes total marketing plan available, including brand name, logo, products, and methods of operation.– 15,000 franchising companies worldwide– U.S. is home to the greatest number of

franchisers– Growth rates for franchising are higher in non-

U.S. markets– Master franchises – exclusive rights to a whole

city or country


McDonalds: The Big Mac of Franchising

• 30,000+ locations; 119 countries• 70% franchises, 30% company owned• New franchise cost - $500,000

– At least $100,000 cash

• McDonalds gets– Initial fee– % sales volume– McDonalds supplies:

• Pre-planning market and location research• Operations and standards training• Management training


Foreign Production

• Contract Manufacturing – Company arranges to have its products manufactured by an independent local company on a contractual basis– Avoids having to establish a factory in that

market; can help to overcome import barriers– Typically chosen for countries with low volume

potential smaller Central American, African, and Asian countries

– Appropriate only when production technology know-how is available in the market


Foreign Production

Other Options– Final-Stage Assembly – Company locates a proportion of

manufacturing process—typically last stages— in the

foreign country

– Manufacturing and Inter-firm Licensing – If taxes on

royalties are less than taxes on repatriated profits, a firm

may license its trademark or technology to its

manufacturing subsidiary



• Wholly Owned Subsidiaries – Operations fully owned by a foreign parent firm (May involve marketing, assembly, or full-scale integrated production operations)+ Profit, greater control, able to leverage

experience curve effects and economies of scale+ More easily integrated into firm’s global network- Requires substantial expertise, management

time, and financial resources



• Joint Ventures (JVs) – Foreign company invites an outside partner to share equity ownership in a new unit.– Equity participation shares may not be

equal and vary by deal– Can be successful if partners share the

same goals and if one partner accepts primary responsibility for operational matters.


Reasons to Choose JV for Foreign Market Entry

• JV may be required by local government• Each partner usually has complementary

skills or contacts of value (i.e. distribution network)

• Good for high-risk endeavors – Easier “partnership” dissolution process


Insert Table 9.1, p. 282

Why do Mexican Firms Seek U.S. Partners?


Joint Venture Divorce

• Regulations that force firms to partner may be rescinded

• Partner may turn out to be less than ideal• Partners may disagree about strategic direction

25% - 75% JVs Divorce


Partner Selection

• Get as much information as possible on partner – BEFORE COMMITTING!– Collect data from informed third parties:

Former partnersInvestment bankersIndustry analystsFormer employees

• Spend time and get to know the partner• Pilot projects


Partner Selection (cont’d)

• Always wise to have a “prenuptial agreement”– 1999 AT&T and British Telecom forge JV called

Concert– Deliberately did not sign a pre-nuptial agreement

so that both partners would remain committed to the relationship

– 2 years later, venture was losing $210 million a quarter

– Without agreement, there was no simple, agreeable way to divide Concert’s assets!!!


Strategic Alliances

• Strategic Alliances – an alliance involving two or more global firms in which each partner brings a particular skill or resource to relationship.– Technology-based– Production-based– Distribution-based

• Usually NOT an equity sharing arrangement


Entering Markets via Acquisitions

• Opening of financial markets has made acquisition of publicly traded firms much easier– During 1990s cross-border mergers and

acquisitions increased fivefold!


Pros and Cons of Acquisitions

+ Eliminates need to build manufacturing/ distribution capabilities from scratch

+ Established brands provide immediate market share

+ Attractive strategy when market dominated by established brands and saturated with competitors

+ Government might allow entry only via acquisitions to protect depressed industry from entrants

- Attractive firms may not be available for purchase

- Attractive firms may only be available at inflated prices

- Culture clashes (even worse when acquired by a foreigner!)

- Country’s animosity toward foreign ownership of previously domestic firm


Risk Versus Ownership and Control

Low

Degree of Ownership and Control

High

Low High

Ext

ent

of I

nves

tmen

t an

d R

isk

ExportingExporting

LicensingLicensing

FranchisingFranchising

Strategic AllianceStrategic Alliance

Joint VentureJoint Venture

Wholly Owned Subsidiary

Wholly Owned Subsidiary


Traditional Internationalization Stages

STAGE 1Indirect

Exporting,Licensing orFranchising

STAGE 2Direct

Exporting

STAGE 4 Local Assembly

STAGE 5Full-ScaleForeign

Production

STAGE 3 Direct Exp,.with

Foreign SalesSubsidiary

But born globals are on the rise!

Domestic

Sales

Chapter Nine Global Market Entry Strategies. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 9 | Slide 2 Foreign Market Entry Modes.

Documents

product sale slide

volume high slide

owned sub slide

experience curve effects

export markets

export companies

market opportunity product

product shipping